Earlier this week, the Wall Street Journal published what
should have been a fairly explosive
story implicating Goldman Sachs and its favored hedge fund
clients in yet more market miscreancy. Predictably, though, this
story did not have what journalists call “legs.” No
other mainstream media outlets picked it up. There was no outrage.
And there is, of course, no indication that anyone in the
government plans to do anything about it.
So allow me to do my small part by reprinting the relevant
passage:
“Goldman
Sachs Group Inc. research analyst Marc Irizarry’s published
rating on mutual-fund manager Janus Capital Group Inc. was a
lackluster ‘neutral’ in early April 2008. But at an
internal meeting that month, the analyst told dozens of
Goldman’s traders the stock was likely to head higher,
company documents show.
“The next day,
research-department employees at Goldman called about 50 favored
clients of the big securities firm with the same tip, including
hedge-fund companies Citadel Investment Group and SAC Capital
Advisors, the documents indicate. Readers of Mr. Irizarry’s
research didn’t find out he was bullish until his written
report was issued six days later, after Janus shares had jumped
5.8%.”
The story goes on to suggest that this is standard operating
procedure at Goldman. Every week, Goldman analysts exchange stock
tips with each other at a gathering the firm calls the
“trading huddle.” After the huddle, the tips are
conveyed to as few as six, and no more than 60 preferred clients
– presumably all high paying hedge funds, such as the
above-mentioned SAC Capital.
The Journal quotes Goldman spokesman Edward Canaday as saying
that the tips are nothing more than “market color” and
are “always consistent with the fundamental analysis”
in published reports. As for the retail investors who might benefit
from this “market color,” they are out of luck.
Goldman’s spokesman says, “We are not in the business
of serving thousands of retail customers.”
No, of course, Goldman is not in the business of serving retail
customers. Goldman is in the business of serving SAC Capital, which
is known to pay more and higher commissions than any firm on Wall
Street (a
model pioneered by Michael Steinhardt). And, apparently, one of
Goldman’s services is to give SAC Capital advance notice of
the contents of its research reports, so that SAC Capital can trade
on that inside information, effectively transferring money from the
accounts of average investors into the bank account of Steve Cohen,
whom BusinessWeek magazine has called “the most powerful
trader on Wall Street.”
For those who do not know, Steve Cohen is the proprietor of SAC
Capital. He spent his formative years as the top trader for Gruntal
& Company, a brokerage that stood firmly on “The Shabby
Side of the Street” – as Fortune magazine described it.
Gruntal was staffed largely by criminals, some with ties to the
Mafia. In the 1990s, Gruntal’s management was implicated in
what was then the biggest case of embezzlement in the history of
Wall Street.
During his time at Gruntal, Cohen was investigated by the SEC
for trading on inside information provided to him by Michael
Milken, the most famous – and most destructive –
financial criminal the world has ever known. Today, Cohen maintains
close business relationships with Milken’s cronies and with
former Gruntal managers, such as Howard Silverman, who somehow
avoided prosecution, and now operates a “dark pool”
platform that allows Cohen to process trades without public
scrutiny.
Cohen is no doubt a mathematical whiz (after all, he’s a
hedge fund manager). But, with some effort, I have cracked his
trading strategy. I’m sure this strategy has some algorithmic
expression, but for the sake of simplicity, let us just call it,
“cheating.”
First, it was trading on inside information from Michael Milken.
Then, a few years ago, it emerged in sworn
affidavits
that SAC was authoring,
and trading ahead of, the so-called “independent”
financial research published by an outfit called Gradient
Analytics. The SEC’s staff launched an official investigation
of Gradient, and began to probe its relationship with Cohen, but
ultimately SEC leadership intervened, and the matter was
dropped.
This tends to happen — the SEC’s leadership
intervenes when its staffers step on the toes of powerful hedge
fund managers.
Last December, Deep Capture reporter Judd Bagley
broke the news that SAC Capital and Kynikos Associates received
advanced copies of reports published by Morgan Keegan, another
“independent” financial research shop. It is clear that
SAC Capital and Kynikos traded ahead of these reports, which is
trading on material, non-public information. The SEC is supposedly
investigating Kynikos, but don’t expect any resolution to
that case, or any action against Steve Cohen, who is, after all,
“the most powerful trader on Wall Street.”
If it seems that nobody much cares that Goldman has been
providing such tips to SAC Capital and others, some of the blame
must go to the Wall Street Journal, which is a
“respectable” publication with a reputation for
“balance,” and therefore refrains from saying much of
anything at all. The Journal’s story about Goldman could have
been the sort of investigative blockbuster that would spur the
government to action, but it is so politely worded and so
“balanced” that it is possible to read the thing and
think that Goldman did nothing wrong.
The Journal reports that “Canaday [the Goldman spokesman]
says that analysts are told that any comment at a meeting that
could result in a change in a rating, earnings estimate or
stock-price target ‘must be published and disseminated
broadly to all clients.’ He adds, however, that it is rare
that tips arising from the meetings reach that threshold. He says
ratings changes after the meets also are rare.”
Elsewhere in the story, the Journal provides two vivid examples
that show Canady’s statement to be blatantly false, and yet
nowhere does the Journal state (even politely) that Canady spends
his days issuing mealy-mouthed platitudes to cover up
Goldman’s improprieties. And nowhere is it noted that
Goldman’s spokesmen regularly describe the bank’s
critics as “conspiracy theorists” or people “who
just don’t understand how the markets work,” the
implicit threat being that any journalist who asks too many
questions will be made to look foolish.
The Journal story states that Goldman provided a
“tip” to SAC Capital. It states that this
“tip” was articulated in published research report six
days later, after the stock had gained more than 5%. But not once
does the story state the obvious: that SAC Capital was given
advance notice of the contents of Goldman research – a clear
violation of law. And, of course, nowhere in the story are we
reminded that this is serial behavior. Nowhere are we given any
reason to be particularly pissed off.
So what we have is a significant addition to a long list of
atrocities, in a story that will, unfortunately, be forgotten.
Mark Mitchell is a
reporter for DeepCapture.com. He
previously worked as an editorial page writer for The Wall Street
Journal in Europe, a business correspondent for Time magazine
in Asia, and as an assistant managing editor responsible for the
Columbia Journalism Review’s online critique of business
journalism. He holds an MBA from the Kellogg Graduate School of
Management at Northwestern University. Email:
mitch0033@gmail.com