The latest development in the Galleon story makes Wall Street banks, like Morgan Stanley (MS) and Goldman Sachs (GS), look pretty bad.
FT: Although bank policies often prohibit employees from divulging specific information about orders, executives who dealt with Galleon said it regularly received “colour” on market developments, frequently delivered in Wall Street slang. One example would be traders discussing a “page one seller” of shares – a reference to the first page of the Bloomberg list of top holders of listed companies.
One executive who dealt with Galleon said: “They wanted anything the public did not have. They got various pieces and put them together and that was their edge.” A former Goldman executive who provided services to funds including Galleon said: “They were tough and aggressive. They cared about short-term returns and cared a lot about the impact of their trading and the costs. They expected a lot of market information.”
Market “colour” has not usually figured in insider-trading enforcement. Prosecutions – including the charges in the Galleon case – have focused on leaked corporate information.
This sounds a lot like what came out a few months ago, when Goldman came under pressure over “huddles” it had with top clients. It’s really important to figure out what is going on here. If Galleon’s bankers were giving the firm extra info on other bank clients, then that sounds like frontrunning, a serious violation, and a serious reason not to have those banks as your prime brokerage, if you’re a hedge fund. If those banks were giving Galleon private info on the company, that’s also bad.
This may be the plotline to watch to see how the regulatory response takes shape, and what the fallout will be for the major banks.