June 5, 2023

DealBook Column: On Wall Street, a Culture of Greed Won’t Let Go

Jordan A. Thomas, a Labaton Sucharow partner, sought the report on Wall Street ethics.Jordan A. Thomas, a Labaton Sucharow partner, sought the report on Wall Street ethics.

Ethics. Values. Integrity.

Wall Street firms spend a lot of time using those catchwords when talking about developing the right culture. Bank chief executives often discuss how much effort they devote to instilling a sense of integrity at their institutions. The firms all have painstakingly written codes of conduct, boasting, “Our integrity and reputation depend on our ability to do the right thing, even when it’s not the easy thing,” as JPMorgan Chase’s says, or, “No financial incentive or opportunity — regardless of the bottom line — justifies a departure from our values,” as Goldman Sachs says.

And yet a new report on industry insiders about ethical conduct, to be released on Tuesday, disturbingly suggests that Wall Street’s high-minded words may largely still be lip service.

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Of 250 industry insiders from dozens of financial companies who responded to questions — traders, portfolio managers, investment bankers, hedge fund professionals, financial analysts, investment advisers, among others — 23 percent said that “they had observed or had firsthand knowledge of wrongdoing in the workplace.”

If that’s not attention-grabbing enough, consider this: 24 percent said they would “engage in insider trading to make $10 million if they could get away with it.”

As we approach the fifth anniversary of the onset of the financial crisis this September, it appears memories are shorter than ever. If the report is accurate, the insidious culture of greed is back — or maybe it never left.

The questions were posed last month by the law firm Labaton Sucharow at the behest of one of its partners, Jordan A. Thomas, a former assistant director and assistant chief litigation counsel in the enforcement division of the Securities and Exchange Commission. The results are a telling reminder of the continued challenges the industry faces, challenges that appear endemic.

While the results may not be scientific, they are stark. For example, 26 percent of respondents said they “believed the compensation plans or bonus structures in place at their companies incentivize employees to compromise ethical standards or violate the law.”

There is a view that the ethical problems come from the very top: 17 percent said they expected “their leaders were likely to look the other way if they suspected a top performer engaged in insider trading.” It gets even more troubling: “15 percent doubted that their leadership, upon learning of a top performer’s crime, would report it to the authorities.”

There is nothing acceptable about these responses.

Wall Street has a very real problem, whether the leaders of the industry want to believe it or not.

It is often said that it is unfair to paint an entire industry with a broad brush, and it is. There are clearly good people out there doing good work. A large majority falls in that category. But the numbers presented in the report reflect an unsettling reality that there may be more than just a few bad apples in the industry, too. It should be considered a red flag when insiders say this: “28 percent of respondents felt that the financial services industry does not put the interests of clients first.”

Perhaps oddly, the problem is most pronounced among the youngest employees in finance, the next generation of leadership on Wall Street.

Remember the question about whether an executive would commit insider trading for $10 million if there were no repercussions? Well, if you parse the numbers by seniority in the industry, respondents with under 10 years of experience were even more likely to break the law: 38 percent said they would commit insider trading for $10 million if they wouldn’t be caught.

That result is particularly striking since I would have expected the next generation of financiers to be the most interested in helping to build a new, anti-Gordon Gekko culture on Wall Street.

Virtually every top M.B.A. program in the country now teaches ethics classes, many of them required. In 2008, a coalition of students started the MBA Oath, a voluntary pledge among students to “create value responsibly and ethically.” So far, more than 6,000 students have signed the pledge.

And yet, the report and other anecdotal evidence suggest that whatever is being done both in the classroom and on the job is not enough. According to a controversial study called “Economics Education and Greed” that was published in 2011 by professors at Harvard and Northwestern, an education in economics surprisingly may be making the problem worse.

“The results show that economics education is consistently associated with positive attitudes towards greed,” the authors wrote. “The uncontested dominance of self-interest maximization as the primary (if not sole) logic of exchange, in business schools and corporate settings alike, may lead people to be more tolerant of what other people see as morally reprehensible.”

The problem is compounded by a trait shared by everyone, no matter their industry. “People predict that they will behave more ethically than they actually do,” according to a 2007 study led by Ann E. Tenbrunsel, a professor at Notre Dame. “They then believe they behaved ethically when they didn’t. It is no surprise, then, that most individuals erroneously believe they are more ethical than the majority of their peers.”

That may help explain why, in the Labaton Sucharow report, 52 percent said they “believed it was likely that their competitors have engaged in illegal or unethical activity in order to be successful.”

It may also explain why 89 percent of respondents “indicated a willingness to report wrongdoing” yet so few do.

As part of the Dodd-Frank financial overhaul law, the S.E.C. developed a $500 million whistle-blower program that pays 10 to 30 percent of penalties collected to the whistle-blower. The fund still has some $450 million in it, despite recent remarks by Stephen L. Cohen, associate director of the S.E.C.’s enforcement division, that we should expect bigger payouts soon. Mr. Thomas of Labaton Sucharow helped develop the whistle-blower program when he was at the S.E.C., and he now represents whistle-blowers.

“We are seeing a culture of silence,” he said. “There’s an unwillingness to come forward.”

Greed, for far too many, is still good, apparently. There’s still much work to be done before the catchwords become the culture.

Andrew Ross Sorkin is the editor-at-large of DealBook. Twitter: @andrewrsorkin

This post has been revised to reflect the following correction:

Correction: July 17, 2013

The DealBook column on Tuesday, about Wall Street ethics, misstated the university affiliation of Ann E. Tenbrunsel, who conducted a study on the perception of ethics. She is a professor at Notre Dame, not Harvard. The column also misstated the date of the study. It came out in 2007, not 2000.

A version of this article appeared in print on 07/16/2013, on page B1 of the NewYork edition with the headline: On Wall St., A Culture Of Greed Won’t Let Go.

Article source: http://dealbook.nytimes.com/2013/07/15/on-wall-st-a-culture-of-greed-wont-let-go/?partner=rss&emc=rss

Markets Dragged Down by Holiday Sales Decline

Stocks fell for a third straight day on Wednesday, dragged down by retail stocks after a report showed a decline from last year’s holiday shopping.

Trading was light, with volume well below this year’s daily average. The day’s volume was the lightest full day of trading in 2012. Many senior traders were still on vacation during this holiday-shortened week, and major European markets were closed for the day.

Many investors said concerns about the United States budget discussions and the possibility of tax increases kept shoppers away from stores, suggesting markets may struggle to gain any ground until that issue is resolved. The CBOE Volatility Index, a barometer of investor anxiety, rose 4.46 percent, closing above 19 for the first time since Nov. 7.

A number of 2012’s strongest performers advanced, a sign that portfolio managers may be buying securities with big gains to improve the appearance of their holdings before presenting the results to clients. Bank of America, which has more than doubled in 2012, added 2.6 percent, rising to $11.54 on Wednesday.

Holiday-related sales rose 0.7 percent from Oct. 28 through Dec. 24, in contrast to a 2 percent increase last year, according to data from MasterCard Advisors SpendingPulse. The Morgan Stanley retail index fell 1.8 percent, while the SPDR SP Retail Trust slipped 1.7 percent.

“With the ‘fiscal cliff’ hanging over our heads, it was hard to convince people to shop, and now it’s hard to convince investors that there’s any reason to buy going into year-end,” said Rick Fier, director of trading at Conifer Securities in New York.

President Obama is due back in Washington early Thursday for a final effort to negotiate a deal with Congress to bridge a series of tax increases and government spending cuts set to begin next week, the so-called fiscal cliff many economists worry could push the nation’s economy into recession if it takes effect.

Coach fell 5.9 percent to $54.13 as the biggest decliner in Standard Poor’s 500-stock index, followed by Amazon.com, down 3.9 percent at $248.63, and Abercrombie Fitch, off 3.5 percent at $45.44. Ralph Lauren, Limited Brands and Gap also ranked among the S. P. 500’s biggest decliners.

The Dow Jones industrial average slipped 24.49 points, or 0.19 percent, to 13,114.59. The S. P. 500 lost 6.83 points, or 0.48 percent, to 1,419.83. The Nasdaq composite index dropped 22.44 points, or 0.74 percent, to 2,990.16.

J. C. Penney was a notable exception to the weakness in retail stocks, surging 4.4 percent to $20.75 as the S. P. 500’s biggest gainer. It was followed closely by Bank of America and Genworth Financial, which each gained nearly 3 percent for the day.

“People want to show they own names like these, making them prime window-dressing candidates,” said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

“Bank of America keeps going up even though it’s overbought and you’d expect a pullback at these levels,” he said. “No one wanted it when it was under $10 a share, but they want it now.”

The S. P. 500 has fallen 1.5 percent over the last three sessions, the worst three-day decline since mid-November. The Dow Jones transportation average, viewed as a proxy for business activity, fell 0.6 percent.

“While it’s unlikely there could be a budget deal at any time, no one wants to get in front of that trade,” said Mr. Fier of Conifer. “Investors can easily make up for any gains when there’s more action in 2013.”

Data showed that single-family home prices rose in October, reinforcing the view that the domestic real estate market was improving, as the S. P./Case-Shiller composite index of 20 metropolitan areas gained 0.7 percent in October on a seasonally adjusted basis.

Article source: http://www.nytimes.com/2012/12/27/business/daily-stock-market-activity.html?partner=rss&emc=rss

DealBook: Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others

Geoffrey Tomes, who left JPMorgan last year, said he had sold some weakly performing funds merely to enrich the company.Librado Romero/The New York TimesGeoffrey Tomes, who left JPMorgan last year, said he had sold some weakly performing funds merely to enrich the company.

Facing a slump after the financial crisis, JPMorgan Chase turned to ordinary investors to make up for the lost profit.

But as the bank became one of the nation’s largest mutual fund managers, some current and former brokers say it emphasized its sales over clients’ needs.

These financial advisers say they were encouraged, at times, to favor JPMorgan’s own products even when competitors had better-performing or cheaper options. With one crucial offering, the bank exaggerated the returns of what it was selling in marketing materials, according to JPMorgan documents reviewed by The New York Times.

The benefit to JPMorgan is clear. The more money investors plow into the bank’s funds, the more fees it collects for managing them. The aggressive sales push has allowed JPMorgan to buck an industry trend. Amid the market volatility, ordinary investors are leaving stock funds in droves.

In contrast, JPMorgan is gathering assets in its stock funds at a rapid rate, despite having only a small group of top-performing mutual funds that are run by portfolio managers. Over the last three years, roughly 42 percent of its funds failed to beat the average performance of funds that make similar investments, according to Morningstar, a fund researcher.

“I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm,” said Geoffrey Tomes, who left JPMorgan last year and is now an adviser at Urso Investment Management. “I couldn’t call myself objective.”

JPMorgan, with its army of financial advisers and nearly $160 billion in fund assets, is not the only bank to build an advisory business that caters to mom and pop investors. Morgan Stanley and UBS have redoubled their efforts, drawn by steadier returns than those on trading desks.

But JPMorgan has taken a different tack by focusing on selling funds that it creates. It is a controversial practice, and many companies have backed away from offering their own funds because of the perceived conflicts.

Morgan Stanley and Citigroup have largely exited the business. Last year, JPMorgan was the only bank among the 10 largest fund companies, according to the research firm Strategic Insights.

“It said financial adviser on my business card, but that’s not what JPMorgan actually let me be,” said Mathew Goldberg, a former broker who now works at the Manhattan Wealth Management Group. “I had to be a salesman even if what I was selling wasn’t that great.”

JPMorgan has previously run into trouble for pushing its own funds. In a 2011 arbitration case, it was ordered to pay $373 million for favoring its products, despite an agreement to sell alternatives from American Century.

JPMorgan defends its strategy, saying it has “in-house expertise,” and customers want access to proprietary funds. “We always place our clients first in every decision,” said Melissa Shuffield, a bank spokeswoman. She said advisers from other companies accounted for a large percentage of the sales of JPMorgan funds.

At first, JPMorgan’s chief, Jamie Dimon, balked at the idea of pushing the bank’s investments, according to two company executives who spoke on the condition of anonymity because the discussions were not public. Several years ago, Mr. Dimon wanted to allow brokers to sell a range of products and move away from its own funds. Jes Staley, then the head of asset management, argued that the company should emphasize proprietary funds. They compromised, building out the fund group while allowing brokers to sell outside products.

Now, JPMorgan is devoting more resources to the business, even as other parts of the bank are shrinking. Since 2008, JPMorgan has added hundreds of brokers in its branches, bringing its total to roughly 3,100. At the core of JPMorgan’s push are products like the Chase Strategic Portfolio. The investment combines roughly 15 mutual funds, some developed by JPMorgan and some not. It is intended to offer ordinary investors holdings in stocks and bonds, with six main models that vary the level of risk.

The product has been a boon for JPMorgan. Begun four years ago, the Chase Strategic Portfolio has roughly $20 billion in assets, according to internal documents reviewed by The Times.

Off the top, the bank levies an annual fee as high as 1.6 percent of assets in the Chase Strategic Portfolio. An independent financial planner who caters to ordinary investors generally charges 1 percent to manage assets.

The bank also earns a fee on the underlying JPMorgan funds. When Neuberger Berman bundles funds, it typically waives expenses on its own funds.

Given the level of fees, one worry is that JPMorgan may recommend internal funds for profit reasons rather than client needs. “There is a real concern about conflicts of interest,” said Andrew Metrick, a professor at the Yale School of Management.

There is also concern that investors may not have a clear sense of what they are buying. While traditional mutual funds update their returns daily, marketing documents for the Chase Strategic Portfolio highlight theoretical returns. The real performance, provided to The Times by JPMorgan, is much weaker.

Marketing materials for the balanced portfolio show a hypothetical annual return of 15.39 percent after fees for three years through March 31. Those returns beat a JPMorgan-created benchmark, or standard of comparison, by 0.73 percentage point a year.

The actual return was 13.87 percent a year, trailing the hypothetical performance and the benchmark. All four models with three-year records were lower than the hypothetical performance and the benchmarks.

JPMorgan says the models in the Chase Strategic Portfolio, after fees, gained 11 to 19 percent a year on average since 2009. “Objectively this is a competitive return,” said Ms. Shuffield.

The bank said it did not provide actual results for the investment models in the Chase Strategic Portfolio because it was standard practice in the industry to wait until all the parts of the portfolio had a three-year return before citing performance in marketing materials. She said the bank was preparing to put actual returns in the materials.

Regulators tend to discourage the use of hypothetical returns. “Regulators frown on using hypothetical returns because they are typically very sunny,” said Michael S. Caccese, a lawyer for KL Gates.

While brokers do not receive extra bonuses or commissions on the Chase Strategic Portfolio, some advisers said they had felt pressure to recommend such internal products as part of the intense sales culture. A supervisor in a New Jersey branch recently sent a congratulatory note with the header “KABOOM” to an adviser who had persuaded a client to put $75,000 into the Chase Strategic Portfolio. “Nice to know someone is taking advantage of the best selling day of the week!” he wrote.

JPMorgan also circulates a list of brokers whose clients collectively have with the largest amounts in the Chase Strategic Portfolio. Top advisers have nearly $200 million of assets in the program.

“It was all about the money, not the client,” said Warren Rockmacher, a broker who recently left the company. He said that if he did not persuade a customer to invest in the Chase Strategic Portfolio, a manager would ask him why he had selected something else.

Cheryl Gold said she got the hard sell when she stopped by her local Chase branch in New York last year and an adviser approached her about the Chase Strategic Portfolio.

“They pitched this product to me, and I just laughed,” said Ms. Gold. “I saw it as a way for them to make money at my expense.”

Article source: http://dealbook.nytimes.com/2012/07/02/ex-brokers-say-jpmorgan-favored-selling-banks-own-funds-over-others/?partner=rss&emc=rss

DealBook: Grassley Investigating Trades Made by SAC Capital

Senator Charles E. Grassley, Republican of Iowa, is examining 20 stock trades by the hedge fund SAC Capital Advisors, a spokesman for the lawmaker said Saturday.

The inquiry is the result of a letter sent by Mr. Grassley on April 26 to the Financial Industry Regulatory Authority asking it to provide information on the “potential scope of suspicious trading activity” at SAC, the hedge fund run by the billionaire investor Steven A. Cohen.

Mr. Cohen’s firm, one of the largest hedge funds in the world, has become ensnared by the government’s vast investigation into insider trading at hedge funds. The investigation resulted in the conviction earlier this month of Raj Rajaratnam, the head of the Galleon Group.

As part of an investigation separate from the one involving Mr. Rajaratnam, two SAC portfolio managers have pleaded guilty to making illegal trades based on secret corporate information. Neither SAC nor Mr. Cohen has been charged with any wrongdoing. A firm spokesman has said that SAC was “outraged” by the conduct of the two portfolio managers, Noah Freeman and Donald Longueuil.

Steven A. CohenSteve Marcus/Reuters SAC Capital Advisors, run by Steven A. Cohen, is one of the largest hedge funds in the world.

In his letter to the financial authority, known as Finra, Mr. Grassley, the ranking Republican on the Senate Judiciary Committee, said that “while SAC Capital itself has not been charged, these allegations raise serious questions about the corporate culture at SAC Capital and undercut investor confidence in a fair and balanced playing field.”

Finra provided Mr. Grassley with details of SAC’s trading last week. The stock transactions were made over the last decade and previously were referred to the Securities and Exchange Commission. They included trades made around the time of merger announcements or other market-moving events.

News of the SAC trades that Finra provided to Mr. Grassley was first reported by The Wall Street Journal.
Earlier this month, SAC executives, including Peter Nussbaum, the firm’s top lawyer, and its outside counsel met with staff members in Mr. Grassley’s office to discuss his inquiry.

“We welcomed the opportunity to meet with the staff to educate them about the firm and our compliance efforts, and had an entirely appropriate, professional and cordial meeting. We will continue to cooperate in any way we can,” SAC said in a statement provided Saturday by a firm spokesman.

Mr. Grassley’s aggressive stance toward SAC follows the senator’s past criticism of the S.E.C. for not being vigilant enough in its pursuit of illegal activity on Wall Street, including its failure to uncover frauds including Bernard L. Madoff’s Ponzi scheme. Now Mr. Grassley’s attention has turned to insider trading.

“The use of nonpublic information for insider trading purposes is sadly alive and well in our nation’s financial markets,” Mr. Grassley wrote in his letter to Finra. “More must be done to investigate and bring these criminals to justice.”

Article source: http://feeds.nytimes.com/click.phdo?i=db0db0306c233454d1df7f8460641096