Late last night the Financial Times broke the news that the hedge fund firm Galleon Group paid $250 million to its Wall Street banks last year in return for received market information that other investors did not get.
Those banks need to come forward immediately and explain what information they were selling to Galleon
The FT’s report didn’t specify which banks provided the information but noted that Morgan Stanley and Goldman Sachs were Galleon’s top providers of hedge fund services and prime brokerage. Both declined to comment on the story. But the allegations are so explosive that both firms are going to have to start talking.
The problem is that Galleon allegedly got more than just “market colour” or advanced looks at analyst views through market “huddles.” The firm was known for pushing its contacts at banks for hints about big buy and sell orders. If either Goldman or Morgan Stanley were supplying this, it sounds like they were allowing the fund to front-run their other clients.
We expect that both Goldman and Morgan Stanley will explain that their employees are barred from divulging details about clients’ trading orders to other clients. But this does not go far enough. They need to explain exactly what “edge” was being given to Galleon if they want to maintain their credibility. Right now the continued silence looks like an admission.
We expect that lots of calls are being made right now to Goldman Sachs and Morgan Stanley from clients demanding to know exactly what Galleon was told.
If the worst suspicions turn out to be true–that either Goldman or Morgan Stanley were tipping off Galleon about big client orders–there will have to be individuals held accountable and a clearing of the decks in the prime brokerage units. Any hedge fund or institutional investor doing business with these firms will demand to know that whoever was leaking order information to Galleon is no longer in a position to keep leaking to favoured clients.
Another question that needs to be answered is if any other high-velocity hedge fund clients are getting this high-definition version of market colour. Competition for prime brokerage business is fierce, and we can imagine how tempting it must be too offer big clients “extras” in order to keep them from defecting to rivals. Everyone would love to have a Galleon or an SAC Capital trading through their desk.
Goldman and Morgan Stanley are probably scrambling now to figure out what their reputational exposure to the Galleon case is. They’d better move fast. Because when it comes to allegations of betraying client trust, silence equals death.