Crackdown on 'Insider Trading 2.0'

JPMorgan, Goldman, and 16 other firms agree to end analyst previews for elite clients.

JPMorgan Chase & Co. and Goldman Sachs Group Inc. were among 18 financial firms that agreed to stop participating in some surveys of analyst sentiment while New York investigates early access to the information.

The firms will stop answering analyst surveys by “certain elite, technologically sophisticated clients” seeking to use the information for trading, according to New York Attorney General Eric Schneiderman. The interim pacts are part of efforts to combat advantages secured by investors that get to see potentially market-moving data before other traders.

Schneiderman requested that the firms stop participating in these surveys while he conducts an industrywide investigation into early access to analyst sentiment. The deals follow an accord last month with BlackRock Inc., the world’s largest asset manager, to end a program in which it systematically surveyed analysts on companies they cover.

“Our markets will only be fair and healthy if everyone plays by the same rules, which is why we will continue to take action against those who provide unfair advantages to elite traders at the expense of the rest of us,” Schneiderman said in an e-mailed statement yesterday.

In January, Schneiderman’s investigation into BlackRock’s survey revealed that some questions were worded to capture analysts’ views about management, competitive position, earnings, and other aspects of companies, according to the statement. His office determined that the design, timing, and structure of the surveys allowed BlackRock to obtain information from analysts that could be used to front-run future analyst revisions.  

 

Agreements Reached

The interim deals reached by Schneiderman apply to coverage of companies listed on U.S. exchanges, according to the statement.

Other firms that reached agreements included Bank of America Corp.’s Merrill Lynch, UBS Securities LLC, Barclays Plc, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Morgan Stanley & Co., Deutsche Bank Securities Inc., Jefferies LLC, Stifel, Nicolaus & Co., Sanford C. Bernstein & Co., Keefe, Bruyette & Woods Inc., Thomas Weisel Partners, Macquarie Group, Vertical Research Partners, FBR Capital Markets & Co., and Wolfe Research, according to the statement.

Marie Cheung, a Hong Kong-based spokeswoman for JPMorgan, said she couldn’t immediately comment on the agreements. Noel Cheung, a Credit Suisse Group AG spokeswoman in Hong Kong; Leslie Shribman, a New York-based spokeswoman at Goldman Sachs; and James Griffiths, a Hong Kong-based spokesman at Citigroup Inc., also declined to comment. Mark Lake, a New York-based spokesman for Morgan Stanley; Jeremy Hughes, a Singapore-based spokesman for Deutsche Bank AG; and Julie Yeo, a Singapore-based spokeswoman at UBS AG, also declined to comment. Richard Khaleel, a spokesman for Jefferies, didn’t immediately reply to an e-mail. Kerrie Cohen, a New York-based spokeswoman for Barclays, and Bill Halldin, a spokesman for Bank of America, declined to comment.

BlackRock’s program was developed by Scientific Active Equities, an investment group within Barclays Global Investors, which BlackRock acquired in 2009.

The program relied on the willingness of analysts to provide advance information. According to statements cited in the Jan. 8 accord, analysts had an incentive to provide answers to a large client that made up a “huge chunk” of their pay.

The conduct “does not fit into the classic framework of insider trading,” Schneiderman said at the time in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “It’s something we’re now calling insider trading 2.0. This is stuff that is not hard information. It’s just front-running what the analysts are saying.”

Under the BlackRock survey, data sought included analyst views on the likelihood of a surprise to their forecast earnings estimate and the possibility a company they cover would be acquired in a merger, according to the agreement.

The New York Attorney General’s office said analysts gave earnings predictions they had yet to make public, and that from 2009 to 2013, the survey collected about 60,000 responses indicating an earnings surprise direction other than neutral.

BlackRock agreed to pay the state $400,000 to cover the cost of the investigation, according to the settlement. BlackRock didn’t admit or deny the attorney general’s findings.

 

‘Any Impropriety’

Brian Beades, a spokesman for BlackRock, said in an e-mailed statement in January that the survey was initiated by Barclays Global Investors before BlackRock acquired it and its use was being discontinued “to avoid even the appearance of any impropriety.”

Schneiderman announced his initiative into high-speed trading and early access to information at the Bloomberg Markets 50 Summit in New York in September. He said that early access to market-moving data, combined with high-speed trading systems, unfairly allows small groups of investors to reap enormous profits.

Schneiderman said in September that his office was using the nine-decade-old Martin Act, a state law granting the New York attorney general special authority to pursue financial fraud cases, to go after the early release of data.

In July, Thomson Reuters Corp. agreed to suspend its early release of the Thomson Reuters/University of Michigan index of consumer sentiment to high-frequency traders two seconds ahead of other subscribers while the New York attorney general continues the probe. Thomson Reuters competes with Bloomberg LP, the parent of Bloomberg News.

A spokeswoman for Reuters, Yvonne Diaz, didn’t immediately respond to a request for comment today.

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