Daniel Acker/Bloomberg News

Stock research has long been considered a big money loser on Wall Street. It costs millions to produce and most investors are unwilling to pay hard cash for it. But in 2006 Goldman Sachs came up with a plan to leverage its equity research, funneling short-term stock tips to its biggest trading clients.

On Thursday, Massachusetts regulators fined Goldman Sachs $10 million for this practice, calling it “a dishonest and unethical violation” of the state’s securities act.

“We verified that there was a preference of some customers at the expense of others,” William F. Galvin, the state’s chief financial regulator, said in an interview.

These tips were the product of meetings known as trading huddles between Goldman’s stock analysts and traders. At these gatherings, attended by client and proprietary traders, research analysts would identify stocks they thought were likely to rise or fall because of coming earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differed from ratings printed in Goldman’s widely circulated long-term reports.

After the meetings, Goldman analysts would call some of the firm’s biggest clients and give them these short-term views. The company has said these tips were nothing more than “market color” and did not go beyond what was said in Goldman’s published research. Goldman did not disclose the existence of these trading huddles in its published research, and critics complained that the limited distribution of certain ideas was unfair to those clients who were not given the same information.

As part of the settlement with Massachusetts regulators, Goldman agreed to halt its trading huddles. A Goldman spokesman said the firm was “pleased to have resolved this matter with the Massachusetts Securities Division.”

Separately, the Financial Industry Regulatory Authority,  Wall Street’s self-policing organization, is close to concluding its investigation into Goldman’s trading huddles, according to a person close to the investigation who was not authorized to speak on the record.

Stock research has long been a staple on Wall Street. Big companies that do business with firms like Goldman like to be covered because it helps increase their profile with investors. And retail investors like to read stock reports. Research is typically sold as part of “soft dollar” arrangements — a common practice in which investors obtain analysis in return for placing their trades through the firm’s brokerage desk. But there is usually a big shortfall, and over the years firms have struggled to turn stock research into a moneymaker.

In 2003, 10 firms including Goldman agreed to pay a $1.4 billion settlement to resolve accusations that Wall Street firms had been issuing overly optimistic stock research to win more lucrative investment banking business. The settlement, in which the firms did not admit or deny wrongdoing, erected walls between research and investment banking. It also stopped the subsidization of research by banking revenue.

A consent order issued Thursday by Mr. Galvin on the Goldman trading huddles painted a picture of a firm desperate to find new sources of revenue after the 2003 settlement. By delivering short-term stock tips to its top clients, Goldman hoped to increase its trading revenue. One Goldman staff member referred to the firm’s client roster as “living, breathing lists for Goldman to monetize.”

And Goldman’s research department set out to do just that. “The commercial value of these calls in the form of more revenue to GS from this set of clients is being measure and it’s very substantial,” wrote one unnamed business unit leader in research, according to the complaint. “In general we have seen about a 50 percent rise in revenue.”

The list of clients getting tips was constantly subject to change, the consent order says. “If one client on the list isn’t giving us the incremental revenue we’re expecting, we rotate in another one,” wrote another unnamed employee. Mr. Galvin said

Goldman’s system of prioritizing clients left some Massachusetts pension funds and smaller mutual funds at a disadvantage.

Trading huddles proved profitable for the firm. A November 2008 internal e-mail showed that of 115 accounts, 77 percent had “an increase in touches” after the start of the program. Of those accounts, 51 percent reported an increase in revenue.

Mr. Galvin said his regulators also concluded that many of the stock tips had come just in advance of formal rating changes and “there was a benefit to knowing ahead that things were about to change.”

Article source: http://feeds.nytimes.com/click.phdo?i=25f076bfd6f104cb73c8189ed7e8a901