A telecommunications analyst at Goldman Sachs admitted that “investment banking considerations” meant he was unable to cut his investment rating on AT&T and WorldCom in August 2000, as share prices in the sector fell steeply.
Another Goldman analyst, asked to list his three most important goals for 2000, replied: “1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue.”
In April 2001, two Goldman analysts agreed not to change their investment recommendation on 360 Networks, even though one of them said the company “is worth 0”, because “it may look like a belated ratings change” and be highlighted in the media.
In an assessment of a colleague, a Goldman analyst admitted: “I realise bringing in the banking bucks is primary to an [analyst’s] success and actually being able to pick a stock takes second”
These were among the details released by prosecutors on Monday of conflicts of interest between research and investment banking at Goldman. They are telling examples of how the conflicts prevented Wall Street research analysts from acting on their best judgments to raise or cut their investment ratings.
Goldman has agreed to pay $110m in fines and other payments for engaging “in acts and practices that created and/or maintained inappropriate influence by investment banking over research analysts and therefore imposed conflicts of interest on its research analysts”. The bank neither admitted nor denied the allegations.
In its 22-page “letter of acceptance, waiver and consent”, the NASD, a regulatory body, highlighted instances, mostly using Goldman’s e-mails, where analysts agreed on the importance of the investment banking relationship and appeared to subordinate their investment rating judgements to that end.
The document does not name individual analysts. But the conflicts of interest were particularly egregious in the telecoms sector. At the time, Goldman employed two of the most high-profile telecoms sector analysts, Frank Governali and James Golob.
In August 2000, the head of European telecoms told his US counterpart about “the anomalous situation” where most telecoms stocks were still on the bank’s recommended list – its highest investment rating even though stock prices had been “tanking for 3-4 months.”
He said that, in Europe, “we have found that honour is preserved” if a company was taken off the recommended list and made a “market outperform”, the bank’s next-highest rating.
In May 2001 the head of the US telecoms research team told his European counterpart that he “would have loved to have cut ratings long ago.” Referring to AT&T and WorldCom, he added: “Unfortunately we can’t cut [AT&T] because we’re essentially restricted there. And without cutting AT&T there is no consistency in cutting WCOM [stock symbol for WorldCom].”
In another assessment, an analyst said a colleague “has been in the incredibly awkward position of having the investment bankers have a stronghold over his written work”, and referred to his work on Storage Networks and Loudcloud, two client companies, as “embarrassments”.