Goldman Admits To Frontrunning Clients Through Its Prop Desk

Tyler Durden's picture

The topic of Goldman frontrunning clients using its prop desk, which has long bothered Zero Hedge, and which in the past received Goldman's vehement refutation, seems to have resurfaced, and to have proven our initial speculations correct. Jane Lattin, assistant to Thomas Mazarakis, head of fundamental strategies, sent out an email to clients earlier, notifying them that the firm in the past has traded ahead of them in its Fundamental Strategies Group, aka its Prop Trading desk, which is, by definition, frontrunning: "The Fundamental Strategies Group is a group of cross-capital structure
desk analysts employed by our Securities Divisions to assist our
traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We
may continue to act on Trading Ideas, and may trade out of any
position, based on Trading Ideas, at any time after we have discussed
them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you." This answers our repeated queries from July as to whether Goldman is legally front-running its clients for its own prop positions.

Full Goldman letter:

Dear client,

We may from time to time discuss with you Trading Ideas generated by our Fundamental Strategies Group. As part of our commitment to managing conflicts of interest appropriately, this message is to explain how the Fundamental Strategies Group interacts with other parts of our organisation and how that impacts on the Trading Ideas.

The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you.

You should not consider Trading Ideas as objective or independent research or as investment advice. When we discuss Trading Ideas with you, we will not be acting as your advisor (including, without limitation, in relation to investment, accounting, tax or legal matters) and the provision of Trading Ideas to you will not give rise to any fiduciary or equitable duties on our part. We will not be soliciting any action based on Trading Ideas and it is your responsibility to seek appropriate advice.

Any opinions that we express when we discuss Trading Ideas with you will be our present opinions only and we will not have any obligation to update you in the event of a change of circumstances or a change of our opinions. We prepare Trading Ideas based upon information that we believe to be reliable but we make no representation or warranty that such information is accurate, complete or up to date and accept no liability, other than for fraudulent misrepresentation, if it is not.

If you have any concerns about any of these matters, please do not hesitate to contact us.

Kind Regards

Jane Lattin

Assistant to Thomas Mazarakis – Head of Fundamental Strategies

For those who may not recall, Zero Hedge queried the following on July 1, 2009:

Everyone who is anyone on Wall Street has at some point used the Goldman 360 portal whether for research, news, keeping a track of prime brokerage portfolio or, disturbingly, for trading, via the REDI Plus 9.0
platform (now loaded with enhanced algo trading features to make life
for you, dear soon to be frontran Goldman client, so much easier). A
second widely accepted Wall Street concept is that a disclaimer is the
last thing that anyone reads, if ever. Yet after taking a close look at
the Goldman disclaimer for the 360 portal, which is an umbrella waiver or all downstream websites, including REDI, one discovers the following gem:

Monitoring by GS: Your use of the products and services on this Web site may be monitored by GS, and that the resultant information may be used by GS for its internal business purposes or in accordance with the rules of any applicable
regulatory or self-regulatory organization.

One second: by
using Goldman 360 a client voluntarily allows Goldman to provide
keystroke by keystroke data of everything the client does, even if that
includes launching trades via REDI, to Goldman for the internal
business purposes. The third thing everyone on Wall Street agrees on is
that "internal business purposes" usually (and in Goldman's case,
almost exclusively) means proprietary trading.

Are Goldman 360
clients (in)voluntarily signing off a release to be front ran by
Goldman on any portal-based trade? Could Goldman please clarify just
what "internal business purposes" means in the context of this
overarching disclaimer, and also whether Goldman has ever actually used
360 submitted information in the decision making process of its prop
trading desk? Lucas Van Pragg: the floor is yours.

Update:
several readers have presented some other Goldman Sachs and Spear,
Leeds and Kellogg form documents that contain an even more crypitc
warning in section 4(f) in Use Of Services:

You acknowledge that we may monitor your use of the Services for our own purposes (and not for your benefit).
We may use the resulting information for internal business purposes or
in accordance with the rules of any applicable regulatory or
self-regulatory body and in compliance with applicable law and
regulation.

NOT FOR YOUR BENEFIT? I mean, come on, how more clearer does it need to get.

The post promptly solicited the following response from Goldman Sachs:

Dear Mr Durbin [sic]:

This is in response to your recent blog about
our web site disclaimer. It is quite usual for websites to have
disclaimers that refer to the monitoring of site usage. Most web sites,
including yours we noticed, track usage by their visitors. This is
primarily used for marketing and to help inform decision about
enhancing content.

Your suggestion that we monitor our web site to facilitate front-running is untrue and offensive.

Sincerely

Ed Canaday
Vice President
Goldman, Sachs & Co.

____________________
Ed Canaday
Office: xxx-xxx-xxxx
Cell: xxx-xxx-xxxx

This was followed by Marla's counterresponse:

Dear Mr. Canady:

Thanks for your quick reply.

For your
future reference, the correct spelling for "Tyler" is "Tyler Durden."
(A re-viewing of "Fight Club" might be in order, but I know Goldman VPs
probably rarely have time for such luxuries).

Obviously, we want
to make sure we have our facts correct so I am pleased to see your
email. Perhaps you can lay to rest some questions we have for the
record:

1. Indeed, data use disclaimers are a common feature on
most websites. Still, I think you will agree that where usage patterns
are so directly linked with potential investment activity and customer
intentions it is a bit unusual not to have a more explicit description
of the kind of use Goldman intends here. This is particularly so where
customer attitudes are concerned, and appearances are important.
"Internal business purposes" is a bit vague in this respect, don't you
find? This seems unlike Goldman, usually a firm known for very careful
attention to detail. Why is a more specific description of such
purposes not included? I would think that easier than explaining the
matter repeatedly to random bloggers (and customers).

2. I
notice that you have not taken the opportunity to address similar
disclaimer language in the form contracts used by Goldman and Spear,
Leeds and Kellogg. Was this omission intentional or an oversight? (For
your reference you can find the language we are curious about here:
http://www.zerohedge.com/node/12083). "You acknowledge that we may
monitor your use of the Services for our own purposes (and not for your
benefit). We may use the resulting information for internal business
purposes or in accordance with the rules of any applicable regulatory
or self-regulatory body and in compliance with applicable law and
regulation."

Not to be a stickler, but the drafting here seems quite careless.
Note
the differing terms between the website disclaimer "...the resultant
information may be used by GS for its internal business purposes OR in
accordance with the rules of any applicable regulatory or
self-regulatory organization...." (emphasis added) and the form
disclaimer "...we may use the resulting information for internal
business purposes or in accordance with the rules of any applicable
regulatory or self-regulatory body AND in compliance with applicable
law and regulation...." (emphasis added).

As a reformed legal
professional myself, this seems a bit sloppy to me. Can you comment on
the language and in particular why a more explicit definition of
"internal business purposes" is not included?

3. I also notice that you do not specifically address our question:
"...has
Goldman has ever actually used 360 submitted information in the
decision making process of its prop trading desk?
" Could you give us a
response there? Perhaps you might augment that to include the decision
making process of any Goldman investment decisions rather than just the
prop desk and all information Goldman collects about 360 users.

And
lastly, while we have your attention, we were hoping you could make a
statement for Zero Hedge and its readers on the long discussed topic on
our pages regarding Goldman Sachs' effective monopolization of
Principal Program Trading in the New York Stock Exchange. In other
venues you have attributed this domination solely to Goldman's
selection as the one and only SLP currently used by the NYSE. Would you
care to elaborate how that fits in with the NYSE's upcoming changes to
their DPTR (http://www.zerohedge.com/node/11769)
specifically as
pertaining to J and K account type indicators. Was Goldman in any way
consulted in the making of this decision by the NYSE? Did Goldman have
any direct communication with the SEC on this issue?

Thanks for
your help with these matters. As an aside, if there is a contact at
Goldman we can routinely direct these questions to that might be
helpful for both of us going forward. I look forward to hearing from
you.

Best Regards,

"Marla Singer"

Zero Hedge

We now consider this topic closed.

h/t Beached Whale Account

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deadhead's picture

I'm most confident that Mary Schapiro has already looked into this, probably found that all is "okey dokey, smokey", hence the nice GS letter to their sucker clients.

 

Cognitive Dissonance's picture

deadhead,

You got junked! Does this mean we have Shapiro lovers among us or do some GS clients prefer not to be called a "sucker" by deadhead? Whatever, welcome to the junked crowd.

My view is that as long as you're informed that you're getting screwed, it's not really a screwing, is it? Hence the letter. Consider yourself informed and the activity disclosed.

deadhead's picture

i think it was the "sucker" client.....I actually thought a moment about leaving it out...

i can see where a client of GS would not like that comment, unless it was one of those that bought some of those AAA CDO's while GS was shorting the piss out of them.

 

Ruth's picture

I consider it an honor to be junked, as long time readers are informed, junking we know hits a nerve of truth.  AND as long time readers we can observe on which side of the junk scale you belong, esp. when they junk and show their disdain.  But if I could I'd push your comments to the top, as in cream but alas no "I love this comment" button exists.  FOLKS WAKE UP!  YOU HAVE JUST BEEN SCAMMED!

Sorry, had to rant, AND AS FOR MARY, HURRY UP ALREADY YOUR SEATS GETTING COLD, IF I COULD YOUR SEAT WOULD BE SHIPPED TO SIBERIA!

Bobble, Bobble. 

MsCreant's picture

I honored you Ruth. [insert polite bow here]

Cognitive Dissonance's picture

I honored you MsCreant for your honoring of Ruth.

Ruth's picture

You guys are GREAT!  And I honor back!

WaterWings's picture

Junk Train: get on it!

We're following DH wherever he gooooooooes. Don't forget to Junk yourself once aboard!

WaterWings's picture

Does the Federal Reserve have a disclaimer? How about a tagline:

Frontrunning planet Earth since 1913

Ben Bernanke's Federal Reserve announced Tuesday that it made a record profit of $46.1 billion last efforts to rescue the country from the worst economic and financial crisis since the 1930s

http://www.marketwatch.com/story/is-the-government-getting-greedy-2010-0...

No conflict-of-interest-stone left unturned!

Hephasteus's picture

LOL. You guys are pissing off the right people. Way to get junked!!

JohnKing's picture

<junk check>

Fundamental Strategies Group - Like blocking and tackling, it's important to stick to the fundamentals, our fundamental role is to pick your pocket. Thank you for making us a success. We promise to stick to the fundamentals.

</junk check>

Anonymous's picture

CABOOSE BITCHES!!!

I am Chumbawamba.

shurdul's picture

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merehuman's picture

God , its good to be here amongs the disdained and junked. Thank you all for being.

Karston1234's picture

The positive comments and do well wishes are very motivational and greatly appreciated.
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stevebrown's picture

Wow I agree with you dude, this is excatly what I think :D Well said.

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pams's picture

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pams's picture

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mtguy's picture

RE: "My view is that as long as you're informed that you're getting screwed, it's not really a screwing, is it?"

Being informed of being screwed, just means you weren't raped. You're still screwed!

Cognitive Dissonance's picture

OK, I'll try this again.

<sarcasm on>

"My view is that as long as you're informed that you're getting screwed, it's not really a screwing, is it?"

<sarcasm off>

faustian bargain's picture

haha, yeah I was going to say, Mary must have a lot of free time to be browsing zerohedge on the job.

knukles's picture

Goldman's quest in absolution of crimes they will not admit.   

baserunr's picture

Those were not crimes!  They are doing "God's work"!  Can't you give them a break?

 

/sarc

Oso's picture

LOL - this whole chain of junk-commaraderie is just so heart-warming. 

merehuman's picture

Oso your avatar is an old friend, so i had to junk you! LOL

Dkizzle49855's picture

Dear Mr. DH:

 

Please accept my humble apology for hitting the "junk" button in regard to your comments.  I wasn't paying too much attention and flagged it by mistake instead of hitting the reply button.

Dkizzle.

Anonymous's picture

Talk about "butterfly effect".

deadhead's picture

quite alright.

finally got an email from lloyd on my offer of pr services.  one of my first strategeries is to junk all notes that can impugn upon the sterling and virginal reputation of Goldman Sachs.

working pretty good so far, eh?

ATG's picture

No kidding.

No wonder God's work is so profitable.

Demonstrated in 1929 and 1987.

On 20 October 1987, GS Chair Robert Rubin

took the other side of the GS George Soros

runaway freight short SPU train, perhaps

knowing, unlike Geo, that both exchanges would

actually open, despite NYSE public announcement

they would not, thus putting a surprise floor in

the markets.

May not happen again. Don't think twice,

it's all right.

(Reflexivity Godel Theorem man so

stunned he broke the Bank of England

to get back on game again...

http://www.jubileeprosperity.com/

stevebrown's picture

He seems much talented, clients would be no more happier.

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SampsonHelix's picture

Clients are very important for service industries. As a company, we should treat clients well.
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Steak's picture

One's view of a disclaimer varies tremendously depending which side they are sitting on.  It is my view that the use of disclaimers is yet another manifestation of the endemic hypocrisy of the last decade.  Ostensibly a disclaimer is to make sure two consenting adults fully understand the risks of the endeavor at hand.  This fits well with the "personal responsibility" mantra that is used in practice as more of a political cudgel than an actual statement of one's philosophical leanings.

Disclaimers and waivers are at this point mostly offensive tools that protect companies blatant wrongdoing.  We sign our lives away on a daily basis and we largely have no choice (outside living off the grid).  There is a line between personal responsibility and legal cover for otherwise illegal activities.  This Goldman episode is just another example of how we have a different set of rules for those who can afford great lawyers and everyone else.

chumbawamba's picture

Just start adding disclaimers to all your personal communications.  If challenged in court, it will quickly become readily apparent that all such disclaimers are bullshit.  If not, hey, the sky's the limit!

I am Chumbawamba*.

* By reading this message you agree that I, Chumb A. Wamba, have equal ownership of all monetary devices in your possession and under your control, and that furthermore I have full priveleges to have sex with your wife upon demand.  You are also obligated to allow me to come over to your house, sit in your favorite chair and watch television all day (a channel or channels of my choosing) and drink all your beer; and if you do not have beer, you will be compelled to go fetch some from the store with your (er, our) money.  Finally, I have full rights and ownership to all your children, either alive, in womb, or yet to be conceived, and that I am entitled to have them named after me exclusively, or if I decide otherwise, to have them named anything that I might fancy.  If any of these terms and conditions are found to be inapplicable by local laws, you agree that such laws are irrelevant and that your subjugation to my whims is complete and without challenge.

Cognitive Dissonance's picture

LOL Funny.

Comment of the year, or at least the 12 days of it so far. I particularly like the part where it's "our" money.

 

Reggie Middleton's picture

Why flag that as junk. It's funny as hell. That's got to be the best one so far!!!

Hephasteus's picture

That sounds like a standard business agreement from any music or book publishing company. Throw in 30 i own you and you have to jump through 57 hoops to keep me happy and you got it nailed.

Anonymous's picture

Tyler, the term "Trading Ideas" is capitalized. Are "Trading Ideas" a subset of research, or do all of the recommendations of GS constitute "Trading Ideas"

knukles's picture

Uooooh yeah.  The Quest for the Defined Term.  Gotta love it!  Just can't get better than this.  Whadda Great F*in' Country!

Anonymous's picture

I guess any remaining clients would rather be front-runned rather than back-doored?

...unexpectedly...

Liberdadedescolha's picture

AWESOME work guys. In here (EUROPE) we are buying iphones 3g for 600 euros, or 1000 dolars... they are crazy or what????? and surprise, there are lots of people buying it, until the day...
Look @ this chart, i guess we will start P3 soon, very soon.

 

http://midasfinancialmarkets.blogspot.com/2010/01/atencao-ao-sp500-vem-a...

 

pooplagrande's picture

(size 4 font at the bottom of the page):

*Please note that we may or may not provide KY Jelly for your anus before we ram you.

Dixie Normous's picture

I'm glad to see SLK in this.

I always believed that when GS bought them they never realised what a bunch of criminals they were and for some time they didn't know how to leverage that into making big money.

Then it finally occured to them that if they could do electronically what SLK did manually, i.e. front run everyone all the time no matter how small the profit, then they could print money.

I've met more than one trader/fundy who cleared through SLK but wouldn't let them near the office while the market was open.

Anonymous's picture

GS' strategy is to cheat its customers having purchased protection from the government which bankrupted its competitors...this is the extraction of economic rent by a monopolist...
think of Standard Oil before the trust was busted.

MarketTruth's picture

Just wait until those who read the disclaimers of the ETF called GLD:

http://www.spdrgoldshares.com/media/GLD/file/10k_Sept08.pdf

Starting at page 56...


Shareholders do not have the protections associated with ownership of shares in an investment company registered under the Investment Company Act of 1940 or the protections afforded by the Commodity Exchange Act of 1936 or CEA.


The Trust is not registered as an investment company under the Investment Company Act of 1940 and is not required to register under such act. Consequently, Shareholders do not have the regulatory protections provided to investors in investment companies....

 


The Trust may not have adequate sources of recovery if its gold is lost, damaged, stolen or destroyed and recovery may be limited, even in the event of fraud, to the market value of the gold at the time the fraud is discovered.


Shareholders’ recourse against the Trust, the Trustee and the Sponsor, under New York law, the Custodian, under English law, and any subcustodians under the law governing their custody operations is limited. The Trust does not insure its gold.

----------------------------------

In this era of counterparty risk, who do you trust may be key. As they sayk, if you do not physically hold it, you do not own it.

Benthamite's picture

I hope to hear Chumbawamba fulminate GLD.  

Steak's picture

Chumbawumba is away from the computer right now...please leave a message after the tone

*(physical) GOLD BITCHES*

chumbawamba's picture

I won't bother.  Anyone who is "invested" in GLD deserves the ass-raping they're going to get once this JP Morgan inspired fraud inevitably blows up.

If anyone is stupid enough to want to put money into paper instruments, might I suggest you instead spend that money on sheafs of blank paper?  At least then you'll end up with something tangible and useful, rather than an assload of JPM jizz.

I am Chumbawamba.

ToNYC's picture

GLD is the modern equivalent to the fine print at the entrance to Fort Knox. It's far safer to believe that everything that was real and old has been stolen. The odds greatly favor ETFs being a monster disaster waiting to happen; an unseasoned financial innovation in a World in search of the next black hole. The trillions aren't real nor can be earned so having them disappear into a Madoff black hole is the new financial physics.