Legal Mistake Sheds Light on Unscrupulous Wall Street Practices


Last week lawyers representing Goldman Sachs and Bank of America/Merrill Lynch inadvertently released embarrassing documents detailing unethical trading practices and complete disregard for the interests of smaller clients (See “Accidentally Released ? and Incredibly Embarrassing ? Documents Show How Goldman et al Engaged in ‘Naked Short Selling,'” Matt Taibbi, Rolling Stone and “Goldman, Merrill E-Mails Show Naked Shorting, Filing Says,” Karen Gullo, Bloomberg). These documents include a series of e-mails from 2005-2006 that “reflect business decisions to put profits and corporate ambition over compliance.” These e-mails were produced during a California lawsuit against these banks on charges of naked short selling Overstock shares to artificially lower Overstock’s stock price; the lawsuit was dropped in San Francisco because “none of the conduct alleged in the complaint happened in California.”

The process of naked short selling can artificially devalue a stock by lowering the cost of taking a short position and by falsely increasing the supply of the security in the market. In one of the released e-mails a Goldman executive embarrassingly admits “Two months ago 107% of the floating was short!” 2008 SEC regulations have made the practice of “abusive naked short selling” illegal. Holders of stock in a company that has been a victim of abusive naked short selling may have endured significant and undue financial damages.

The released e-mails demonstrate a lack of concern for federal compliance and the banks’ own clients. One Merrill executive in a 2005 e-mail mockingly told his colleague to ignore “the compliance area ? procedures, schmedures.” Goldman Sachs clearing unit told its largest client that “we will let you fail” in regard to whether it would clean up failed short transactions. The worst evidence sheds light on how these banks treated their own small clients; an e-mail sent by Goldman executive John Masterson included “nonpublic data concerning customer short positions in Overstock and four other hard-to-borrow stocks to Maverick Capital.” Simply stated these trusted financial institutions have been illegally giving large institutionalized hedge funds an unfair advantage over individual investors. Unfortunately, this appears to be business as usual for Wall Street these days.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.