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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Thursday, October 13, 2011

Goldman Sachs and Hedge Fund Recruiting

Two articles in DealBook by Susanne Craig and Azam Ahmed relate how Goldman Sachs and other banks have become recruiters for hedge fund clients. What stands out is the opportunity for numerous conflicts of interest such a relationship offers. Goldman has often been surrounded by, enmeshed and entangled with, conflicts of interest in the past. These "talent introductions" as Goldman refers to them can be an opportunity for poaching or competing for employees and can provide preferential treatment to a bank that offers such help. There is the potential for screwing the client. Of course, Goldman promises to obey all the rules but GS is also known for interpreting rules in ways that favor its actions and is not known for its voluntary disclosure policy.

However, Massachusetts has asked the banks to disclose a list of the firms, since 2009, that GS and other banks have assisted in this manner. William Galvin, the financial regulator in Massachusetts is examining the relationships between banks and their recruiting of financial professionals for hedge funds. Problems he may look at include receipt of gifts, disclosures and violations of securities laws.

Here are excerpts from the two articles:

Wall St. Banks Help Hedge Funds Recruit
By Susanne Craig and Azam Ahmed - DealBook

Wall Street banks often boast that they hire the best and the brightest. Now, scrambling to bolster profits, they have become full-time headhunters for some of their biggest hedge fund clients, a role that is rife with potential conflicts.

Big banks have long provided extra benefits to hedge funds, including finding office space for firms and raising money for new portfolios. They have even acted like informal recruiters for their premier clients by passing along résumés or making introductions to industry professionals.

But those once-ancillary placement services have become established practices as Wall Street struggles to make up for profit centers that have been lost to new regulations and a weak economy. Since the financial crisis, Goldman Sachs, Morgan Stanley, Deutsche Bank, Bank of America and others have become powerful recruiting forces for hedge funds. In an effort to secure lucrative brokerage and trading business, the banks scout finance executives, accountants and receptionists free. Goldman calls the practice “talent introduction.”

Without the necessary disclosures and appropriate restrictions, the staffing services could prove controversial.

For one, Wall Street firms risk provoking the ire of a client if they poach hedge fund talent or compete for the same potential employees. It also raises a question of loyalty; hedge fund executives may be swayed to direct business to the Wall Street firm that hired them rather than the bank that makes the best sense for investors.

“We get put in this situation every day,” said Stuart Hendel, global head of prime brokerage at Bank of America Merrill Lynch, which offers recruiting as part of its hedge fund services. The banks, he said, have “to walk a tight rope.”

Banks say they have strict rules to prevent conflicts. Bank of America says it will not poach active employees of a current client.

“All we’re doing is providing a clearinghouse for managers to meet prospective employees,” Mr. Hendel said. “We don’t go looking for people, people seem to find us. And we make it very clear we’re not providing recommendations.”

Goldman said it disclosed its consulting services to clients and had “robust policies and procedures” to prevent conflicts of interest. “We are not in the headhunting business,” a spokeswoman for the firm, Andrea Raphael, said. “We do not solicit employees of one client to work at another client.”

Read the rest of the article here

Massachusetts Asks Banks for Details on Recruiting

By Susanne Craig and Azam Ahmed - DealBook

In a letter of inquiry sent to Bank of America, Goldman Sachs, Deutsche Bank, UBS and Morgan Stanley, William F. Galvin, the secretary of the commonwealth of Massachusetts, asked the firms to give a list of the clients they had provided employment referrals to since January 2009. Mr. Galvin said his letter was aimed at putting the firms “on notice that these are issues that need to be explored.”

The request comes the day after an article in The New York Times explained how Wall Street firms had established staffing services in an effort to attract and retain brokerage and trading business.

Press officers for Goldman, Morgan Stanley, UBS, Bank of America and Deutsche Bank declined to comment about the inquiry.

As hedge funds have become more prominent, they have become a significant driver of banks’ earnings. The industry accounts for as much as 35 percent of all trading revenue on Wall Street, according to the research firm Sanford C. Bernstein & Company.

In the wake of the financial crisis, such profit centers have proved all the more important, prompting Wall Street banks to sweeten their services. Big banks, previously informal recruiters, now have entrenched practices to help hedge funds find financial executives, accountants and other professionals.

Mr. Galvin is exploring the scope of the relationships. While he does not yet know what direction the inquiry may take, if any, he already sees some potential avenues of exploration. For instance, he said firms might be offering the service only to select hedge funds, which could violate Massachusetts securities laws.

He also said he planned to look at whether the Wall Street recruiting broke rules regarding gift-giving. These laws prohibit Wall Street firms from giving gifts valued at more than $100 a year to individuals who are in a position to direct business to them.

The staffing services could also raise questions about disclosure. It is unclear whether hedge funds detail the nature of the relationships to their investors. The concern is that the money managers could be directing business to banks in exchange for recruiting, at the expense of their investors.

Earlier this year, Mr. Galvin’s department fined Goldman Sachs $10 million for hosting so-called trading huddles in its stock research department. At these meetings, analysts developed short-term trading ideas to share with the biggest clients.

Read the rest of the article here


Joyce said...

Here are some of the best signs from Occupy Wall Street:

Chopchop said...

"Moral Obligation" to JP Morgan and Bondholders? Please be Serious!

I am not in favor of a "moral obligation" to bondholders, especially JP
Morgan, especially when I believe JP Morgan's actions with Jefferson
county constituted fraud.

Flashback May 23, 2008: Fraud, Antitrust Investigation Involving JPMorgan, Jefferson County

The county wanted to declare bankruptcy but misguided fools in the
Alabama legislature chose to bail out JP Morgan and bondholders instead
of doing the right thing.

Keep_protesting said...

Corporate Lobbying Reduces FRAUD Detection



This paper examines the relation
between corporate lobbying and fraud detection. Using data on corporate
lobbying expenses between 1998 and 2004, and a sample of large frauds
detected during the same period, we find that firms’ lobbying activities
make a significant difference in fraud detection: compared to
non-lobbying firms, firms that lobby on average have a significantly
lower hazard rate of being detected for fraud, evade fraud detection 117
days longer, and are 38% less likely to be detected by regulators. In
addition, fraudulent firms on average spend 77% more on lobbying than
non-fraudulent firms, and spend 29% more on lobbying during their fraud
periods than during their non-fraud periods. The delay in detection
allows managers to postpone the negative market reaction and to sell
more of their shares.

Memories said...

Italians have long memories...

Italians claim country run by Goldman Sachs

Italians grumble that Goldman Sachs runs their country, much as the Jesuits ran countries during the Counter-Reformation.

Premier Romano Prodi is an ex-Goldman Sachs man, as is central bank
president Mario Draghi and the deputy treasury chief Massimo Tononi.

The price paid for having so many friends at court is that the elite
bank inevitably becomes entangled in the financial scandals that so
often swirl around the Italian political class.


Italian Students Storm Milan Goldman Sachs Office

Anon said...

Open Letter to that 53% Guy

I understand that a prosperous America needs people with money to
invest, and I’ve got no problem with that.  All other things being
equal, I want all the rich people to keep being rich.  And clever
financiers who find ways to get more money into the hands of promising
entrepreneurs should be rewarded for their contributions as well.

I think Wall Street has an important job to do, I just don’t think
they’ve been doing it.  And I resent their sense of entitlement – their
sense that they are special and deserve to be rewarded extravagantly
even when they screw everything up.

Come on, it was only three years ago, kid.  Remember?  Those assholes
almost destroyed our economy.  Do you remember the feeling of panic?
 John McCain wanted to suspend the presidential campaign so that
everybody could focus on the crisis.  Hallowed financial institutions
like Lehman Brothers and Merrill Lynch went belly up.  The government
started intervening with bailouts, not because anybody thought “private
profits and socialized losses” was fair, but because we were afraid not
to intervene -  we were afraid our whole economy might come crashing
down around us if we didn’t prop up companies that were “too big to

Gini out of bottle said...

Shine a Light

By Jim Rickards, Sr. Managing Dir. Tangent Capital

October 14 (King World News) - In America, we generally go about our private business and rely on elected officials and appointed bureaucrats to take care of the government. When protest arises, it’s a sign that government is not doing its job or not doing it in a way that serves the people. Elections are fine for gradual change but sometimes immediate change is called for when government fails the people utterly and repeatedly in important ways. Protests are a way to signal that change is needed now – not in the next election cycle. Such is the case with the Occupy Wall Street movement and its “Occupy” variations in cities around the country and around the world. Governments have failed to stop the concentration of wealth, the concentration of financial power, the proliferation of derivatives and the metastasizing of systemic risk facilitated by unethical, self-absorbed and shortsighted bankers. So the people respond.

JEHR said...

Once again, thank you to all the observant people that comment on this blog.  I learn something new everyday and each link is more mind-boggling than the last.

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