Goldman Sachs Group agreed on to pay a $10 million fine to settle charges by the Massachusetts' securities regulator that stemmed from an investigation of the firm's research department.  As part of the agreement, Goldman also agreed to stop giving favored clients trading ideas developed at internal gatherings known as "trading huddles - attended by and featuring traders and research analysts.

"The real issue is fairness in the marketplace.  Certain customers were preferenced over other customers and we regard that as unethical behavior. This is a recurring theme in the securities industry, where some customers get special inside information and others do not."  - - William Galvin, Mass. Secretary of the Commonwealth. 

Stephen Cohen, a Goldman spokesman, said the firm is pleased to settle the matter, which includes no admission of fraud.

Trading Huddles Exposed.  Trading huddles were the focus of a Wall Street Journal article in August 2009.   After the story ran both Mr. Galvin and FINRA began investigations into trading huddles.  FINRA is close to concluding its investigation, according to a person familiar with the investigation but not authorized to speak on the record.

Every week, Goldman analysts would offer stock tips to clients and firm traders at trading huddle meetings.  At these gatherings, the researchers would identify stocks they thought were likely to rise or fall because of near-term earnings announcements, the direction of the overall market or other short-term developments.

But some of their recommendations differed from ratings printed in Goldman’s widely circulated reports. After the meetings, Goldman analysts would call some of the firm’s biggest clients and give them their short-term views. Critics complained that the limited distribution of certain ideas was unfair to those clients who were not given the same information.

Powerhouse Accounts.  According to a consent order, the huddles began in 2006.  Analysts were expected to follow "Rules of the Road" that included a ban on "selective disclosure" of pending changes in stock ratings, earnings forecasts and share price targets.   But by 2009, Goldman ranked clients into four tiers and let those in the top two tiers get calls in which analysts discussed ideas from the huddles.

"Tier 1" clients were considered "powerhouse accounts" capable of generating higher commissions. They included several hedge funds that conduct high frequency trading, and an asset manager and mutual fund each based in Massachusetts. None was named in the consent order. 

The Tier 1 clients would get calls from senior analysts, while Tier 2 clients would get calls from junior analysts, the order said. Tier 3 and Tier 4 clients had no such access.

Goldman has been accused before of treating some clients unfairly.   It's one of 10 Wall Street banks to join a $1.4 billion settlement in 2003 to resolve allegations they issued optimistic stock research to win investment banking business.   Like the other banks, Goldman instituted procedures designed to eliminate bias in stock research.   [NYT Dealbook, Reuters, 6/9/11]