Sleazy Wall Street practices continue

Monday’s Wall Street Journal carried a story about a sleazy practice on the part of Goldman Sachs. The piece states that Goldman analysts regularly report stock tips at “trading huddles” in advance of a public declaration in research reports. This would not be a big deal but frequently the Firm’s traders are in attendance at these meetings and they often call Goldman’s very best (read biggest) clients with these tips well in advance of public disclosure. These tips often take the form of a change in the analyst’s rating about a company.

To me it’s clear that Goldman’s big clients have an unfair advantage relative to the rest of its clientele. The fact is that changes in analysts’ opinions does have an effect on the performance of stocks covered by analysts. This is the sort of sleazy practice that is clearly in violation of securities law and that requires the attention of regulators. Unfortunately, in my experience this practice is so pervasive that monitoring the activity requires a Herculean regulatory effort. Budgets at regulatory agencies just are not big enough to allow for an even playing field to be ensured. So the regulators, including the NYSE and the NASD rely upon self-regulation and trust that investment banks like Goldman Sachs will behave ethically. But is such an outcome really possible? I don’t think so.

Jason