Only central bank dishoarding is keeping the gold price down


12:30a ET Monday, June 6, 2005

Dear Friend of GATA and Gold:

Here's a wonderful story from The Wall Street Journal
that, ever so tentatively and politely, illustrates the
vast potential of the big Wall Street financial houses
-- in this case, Goldman Sachs -- for rigging markets
and bestowing the most lucrative favors on certain
clients while ripping off less favored clients. It's a
reminder that financial houses can get bigger than the
markets they trade in.

Sometimes this bothers the government -- but of
course not when the financial houses are rigging
markets in directions the government likes, as with
the rigging of the gold market.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Sensitive Boundaries:
Goldman Faces New Tensions
In Trading, Serving Hedge Funds

Salesmen Both Advised Clients
Of Firm and Influenced
Its Own Bets on Market

Word of a Stock Sale Leaks

By Anita Raghavan
The Wall Street Journal
Monday, june 6, 2005

LONDON -- One day two years ago, as Goldman Sachs Group was readying
a sale of millions of shares held by German industrial giant Siemens
AG's pension arm, the stock started falling, suggesting that word of
the deal had leaked. Early word of it would have given an investor
valuable information that the stock was about to face downward

When Goldman investigated, it found that a managing director in its
London office had tipped off an important hedge-fund client of the
firm. While it didn't appear the tip had caused the stock's fall,
Goldman fired the managing director.

The incident opened a window on new tensions inside investment banks
as their business models shift. When stock markets are flush, as in
the 1990s, big securities firms like Goldman rake in cash by
underwriting numerous new stock offerings for corporate clients and
collecting commissions from stock investors. The bursting of the
stock-market bubble in 2000 hurt both of those traditional
mainstays. Goldman and its rivals have since looked increasingly to
other activities that could still offer rich profits.

One of these is playing the markets with their own money, known as
proprietary trading. Another is serving the one set of clients that
still provides lush trading commissions: hedge funds, or lightly
regulated investment pools for institutions and the rich. In the
increasing focus on these lines, new possibilities for conflicts of
interest arise. The tensions are well illustrated at Goldman's stock-
trading operation in London, which has been aggressive in pursuit of
these activities.

Goldman hasn't drawn any regulatory flak for its practices here. But
in some cases it has faced questions about its practices from within
its own ranks. It also has discontinued some of them. Goldman says
employee concerns weren't the reason, while adding that it always
investigates such concerns.

A look at the London stock operation shows how the big securities
firm has periodically reassessed its practices as it seeks to find
the proper boundaries. "Changing market dynamics bring new
challenges," says a Goldman spokesman, "and we are particularly
mindful of the way in which we conduct business."

In 2002, the London office set up a small group of stock traders,
taking proprietary positions, who sat near the salesmen and traders
who handled transactions for clients. Many securities firms
physically isolate their proprietary traders, to make sure they
don't overhear clients' orders and take unfair advantage of the

Goldman, for a time, also gave this set of traders access to a
computer system that showed client buy orders and sell orders.
(Client names were usually omitted.) No rules bar such access. But
some former Goldman traders and salesmen say this practice posed a
risk that the traders would be tempted to jump in with their own
orders ahead of clients. That could put the investment bank in the
position of profiting from trades that in turn drive up the cost
paid by clients.

"It's only logical that banks would use information they glean from
clients such as trading intentions ... to support their own
proprietary-trading activities," says Richard Kramer, a former top-
ranked Goldman analyst now at Arete Research in London. Indeed, he
says, "we think proprietary trading could be the next scandal" in
financial services.

In another move, Goldman allowed stock salesmen who gave investment
ideas to an important hedge-fund client to contribute some of the
same ideas to Goldman traders taking proprietary positions. Here,
one concern was that Goldman and the hedge fund could benefit at the
expense of less-favored clients who might be pitched these same
ideas later.

In later discontinuing these practices, Goldman says it found no
evidence its traders had acted improperly. It also said its reason
for putting traders who took proprietary positions adjacent to
salesmen wasn't to overhear client orders.

For hedge funds, Goldman and other major securities firms offer a
wide array of services: executing hedge funds' many trades; lending
them money; lending them shares to "short" when they want to bet on
a stock to fall; sometimes investing in the funds; and providing
them with research and investment ideas for sometimes-complex trades.

Wall Street and hedge funds "are feeding off each other -- the
broker-dealer needs the order flow from the hedge fund and the hedge
fund needs the information," says Matthew Nestor, a former
Massachusetts securities regulator. Goldman got more than a third of
its stock revenue last year by doing business with hedge funds,
according to a Merrill Lynch & Co. analyst's estimate. Goldman has
no comment on that.

At the forefront in nurturing Goldman's ties to hedge funds in
London is Phillip Hylander, chief of its European stock-products
group and head trader in Europe.

Until Mr. Hylander arrived at the London office in 2002, its top
traders -- the people who actually execute trades -- shied away from
speaking to clients during market hours. Client interaction was left
to stock salespeople.

Direct trader-client contact is risky, says Gary Williams, who was
Goldman's European stock-trading chief until the end of 2001. The
reason is that each side often has information the other would like
to know, but some of this may be confidential, such as how a
competitor's deal is faring or insight into the placing of a block
of stock. "Head traders are privy to information that neither
clients nor those speaking to clients should know," Mr. Williams

But one of Mr. Hylander's strengths when Goldman hired him as a
trading executive was his close relationships with hedge funds.
Colleagues say they often heard him on the trading floor chatting
with clients, using his cellphone. And after the botched 2003 stock
sale for Siemens, Goldman investigated whether Mr. Hylander might
have used his cellphone to tip a client to the impending sale. It
concluded he hadn't.

Goldman says it's no longer out of the ordinary for traders, at
Goldman or elsewhere, to talk to investment clients. "Our clients
want to talk to traders to get a sense of the market," says J.
Michael Evans, co-head of Goldman's global securities division. Mr.
Hylander, for his part, says he talks to clients because "they
demand it. It would be a mark against you if you didn't."

Mr. Hylander, 36 years old, was behind some of the proprietary-
trading initiatives, such as setting up a small group of traders who
sat on the mammoth stock-trading floor and made bets with the firm's
own money. He encouraged stock salesmen to tell the proprietary
traders if they had gleaned "useful information" from dealing with
clients, according to three people familiar with the situation.

Asked about this, Mr. Hylander said, "There is a very pure reason
for people to talk to each other, and that was the context for this
remark." A Goldman spokesman, Lucas van Praag, elaborated,
saying, "An important component of every broking business is open
debate about investment ideas ... internally with colleagues and
externally with clients. ... Needless to say, this sharing of
information does not include anything price-sensitive or otherwise

This group of traders was known as the Risk Unit. Mr. Hylander says
it had been set up not just to do proprietary trading but primarily
to "manage franchise risk," and for that reason it needed access to
client orders.

Still, the firm took away the Risk Unit's access to client orders in
October 2003, a year after giving it access. Goldman did so
to "avoid any perception of impropriety," its spokesman says.
Several months later, in 2004, it closed the Risk Unit altogether.
Mr. Evans says this was because "it wasn't making money."

Mr. Hylander also gave salesmen -- the people who pitch investment
ideas to clients -- a say in investing a small amount of Goldman's
own money. They could contribute ideas to proprietary-trading
portfolios that bore their initials.

...'I Just Tipped It'

One of Mr. Hylander's client relationships was with a London hedge
fund called Marshall Wace Asset Management. Colleagues tell of
hearing him chatting on the trading floor with a founder of the
fund, Ian Wace. Mr. Hylander and Mr. Wace, through spokesmen,
describe their conversations as infrequent.

Mr. Hylander set up one proprietary portfolio that traded in some of
the stocks Goldman salesmen had recommended to Marshall Wace. The
portfolio was called MW TIPS. After making a recommendation to the
fund, a Goldman salesman would sometimes tell a proprietary trader
what the recommendation was, saying, "I just tipped it," according
to people familiar with the situation.

An arrangement like this can disadvantage other investors, says John
Wheeler, head trader at the American Century mutual-fund
family. "Any time someone you rely on to provide investment advice
contributes to [proprietary] investments in similar securities,
there is an inherent conflict," he says. One risk is that the firm
would later promote the same stocks to less-favored clients -- whose
subsequent buying would boost the value of holdings for the
securities firm or its favored hedge-fund client.

Mr. van Praag, the Goldman spokesman, says the firm didn't "sequence
our sales ideas" to favor any one client, such as Marshall Wace. He
says Goldman required traders who'd been told of a recommendation to
Marshall Wace to wait 30 minutes before making a trade for Goldman's
account in the same security. One reason was to give clients time to
act on the trading idea first.

He adds that there was no direct correlation, in either timing or
the direction of trades, between ideas recommended to Marshall Wace
and trades made in the MW TIPS proprietary portfolio. Indeed, the
Goldman spokesman says in an email, at times a Goldman "salesman
might have suggested MW buy the stock [and] our traders might have
shorted it."

A spokesman for Marshall Wace says it "does not and cannot prevent
or monitor securities firms trading on their own ideas."

One Goldman trader, Boris Pilichowski, complained of being
uncomfortable trading for the MW TIPS account, say people familiar
with the matter. Besides sharing the concern Mr. Wheeler describes,
Mr. Pilichowski had an additional one: That some trades might be
based on information about other clients' intentions. He suggested
that ideas from salesmen be sent to traders electronically, creating
a record of where they originated and forcing salesmen to be
sensitive to any possible impropriety.

Mr. Hylander raised the trader's concerns with compliance officials.
Goldman says it looked into them and found no evidence of any
abuses. It also says it assured Mr. Pilichowski, who moved to Morgan
Stanley this year, that he had total discretion about whether to do
trades proposed by the stock salesmen.

Goldman didn't adopt his suggestion about sending ideas
electronically. It disbanded the MW TIPS account in May 2004. One
reason was a new United Kingdom rule that said ideas from salesmen
could potentially be viewed as research, which securities firms
generally can't trade on until it's published.

Another Goldman trader raised concerns about how the firm behaved
when approached by an institutional client that wanted to buy or
sell a basket of stocks. Such a client will often ask firms to bid
to handle the deal, without naming the stocks or saying whether it
wants to buy or sell. But securities firms can often guess, based on
their knowledge of the client and on questions the client asks about
a particular sector. The securities firms then sometimes quickly
start loading up on -- or dumping -- the stock. The practice is
known as "pre-hedging."

Goldman sometimes pre-hedges. It says it doesn't do so if clients

Last year, according to people familiar with the situation, Goldman
trader Geoffroy Houlot told Mr. Hylander he thought pre-hedging hurt
clients, because it could move stocks' prices before clients' trades
took place. Goldman says Mr. Hylander raised Mr. Houlot's concerns
with the compliance department, which found no impropriety. Mr.
Houlot left to rejoin his old firm, Morgan Stanley, last year.

Following questions this year from The Wall Street Journal, Goldman
retained a law firm to review activities of its London stock group.
The law firm, Freshfields Bruckhaus Deringer, declines to comment.

...Sale for Siemens

The loudest internal complaints concerned the stock sale for Siemens
on March 18, 2003. Siemens had decided to sell 36 million shares its
pension arm held in a firm called Infineon Technologies. Goldman's
role was to buy the Infineon stock from Siemens in a block,
unloading it to other investors later.

That morning, the two sides discussed a possible price in a moving
market. But shortly before 3 p.m., with the sale approaching,
Infineon shares started to slide. On the Deutsche Brse's
Xetra exchange, they traded around 7.55 at 2:52 p.m. By 3:39
when the sale was announced, they were down 5% to 7.15. The
Siemens got several million dollars less than it had expected.
Goldman itself lost millions of dollars, because after it had become
the owner of the shares, they continued to decline.

Goldman later said in a regulatory filing that a managing director
of the firm named Andrea Casati had alerted a client about the
imminent offering. "We reviewed people's taped lines and discovered
that he had shared this information with a client just before the
trade was launched," says Goldman's Mr. Evans.

Yet he adds that the "conversation didn't seem to have had any
effect on the price" of Infineon's stock. That left the cause of the
drop still unknown. Goldman told regulators that the tip occurred
less than two minutes before the Infineon sale, and that the client
said it hadn't acted on the tip. The client, hedge fund GLG
Partners, declines to comment.

Goldman discharged Mr. Casati, a top-producing stock salesman, for
violating policy. It reported the matter to the U.K.'s Financial
Services Authority and other regulators. Mr. Casati, now at UBS AG,
declined several requests for comment on Goldman's account.

...Cellphone Logs

Goldman says it investigated all involved in the trade, including
Mr. Hylander, the top trader who often used a cellphone on the
floor. A Goldman executive says there was "whispering, rumors of
people pointing fingers at a number of people, including Phil, over
this trade." The executive says the firm sifted through cellphone
logs and other records and found "absolutely nothing" to suggest Mr.
Hylander behaved improperly.

Mr. Hylander says that on the day of the Siemens deal he used his
cellphone to talk to his senior management, not to clients. He and a
Goldman spokesman say Mr. Hylander, far from tipping off an outsider
who could profit from knowledge of the sale, urged that the sale be
aborted when Infineon shares started falling.

The internal inquiry couldn't delve into stock-exchange records that
would have pointed to who was selling Infineon shares at the time in
question. Only regulators have access to such records.

One Goldman executive questioned whether the firm really did a
thorough probe. Christian Meissner, concerned about Siemens's
unhappiness with the stock sale, pushed for a fuller inquiry, says
someone familiar with the matter. This person says Mr. Meissner --
then co-head of European stock capital markets for Goldman and now
working at Lehman Brothers -- pressed Goldman's compliance
department to examine cellphone records more carefully. The person
says Goldman lawyers rebuffed Mr. Meissner and told him to let the
matter go.

A Goldman executive acknowledges telling people inside the firm
to "let it go," adding that "there was a lot of whispering and
gossiping that I thought was destabilizing." The executive says the
firm did a complete investigation, including a full look at mobile-
phone records.

Actually, Goldman had a policy barring traders from using mobile
phones to talk business with clients. Many firms encourage use of
land lines, since their calls can be taped. After its inquiry,
Goldman reiterated its policy against using mobile phones on the
trading floor to talk business with clients. Later, it barred all
use of mobile phones on the trading floor.

Mr. Hylander says he has a duty to lead by example, and is following
the newest mobile-phone policy. Without that ban, he says, "we were
putting ourselves in a place that we didn't want to be."


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