By Pam Martens and Russ Martens: May 6, 2022 ~
We’ve been reading SEC filings for more than 35 years. We have to sadly say that the 10-Q that Goldman Sachs filed with the SEC on May 2, for the quarter ending March 31, 2022, shocks even our well-documented assessment of Wall Street as a crime syndicate. Goldman Sachs has listed pretty much everything the firm does as a target of an ongoing investigation, notwithstanding that the company and a subsidiary were criminally charged by the U.S. Department of Justice in the looting and bribery scandal known as 1MDB in October 2020, admitted to the charges, and had to pay over $2.9 billion. The good news is that Goldman Sachs’ Dark Pools are one of the areas it lists as being under a probe.
Dark Pools (also benignly called Alternative Trading Systems or ATS) are effectively unregulated stock exchanges being run by the same megabanks on Wall Street that blew up the U.S. financial system in 2008 and received the largest taxpayer bailout in U.S. history. The radical right in the U.S. Congress apparently believes that unbridled greed and outrageously reckless conduct that craters America’s economy deserves to be rewarded with less regulatory oversight, thus Dark Pools have not been shut down.
Not only are Goldman Sachs, JPMorgan, UBS, Morgan Stanley, Merrill Lynch, and numerous others, allowed to trade hundreds of New York Stock Exchange and Nasdaq listed stocks in their own Dark Pools, but they are also allowed to trade their own bank’s stock in their own Dark Pools. We have asked the SEC for years now how it is legal for a bank to trade its own stock – possibly making a two-sided market in that stock because some of these firms own more than one Dark Pool. We’ve yet to receive an answer. (Dare we hope that this is finally being seriously investigated by Gary Gensler’s SEC?)
The name of Goldman Sachs’ Dark Pool that trades in the U.S. is called Sigma X2. It used to be called simply Sigma X. According to a publicly-available document, Sigma X is now used by Goldman Sachs to designate the Dark Pools it operates in foreign jurisdictions, which include Europe, Japan, Hong Kong and Australia.
According to a “Frequently Asked Questions” document from Goldman Sachs, under the question “Is SIGMA X a dark pool that only matches trades anonymously, without information leakage? Or will information regarding my orders be conveyed to potential liquidity providers,” Goldman says this: “The matching process for SIGMA X is completely internal, and SIGMA X will not disseminate any pre-trade information to internal trading desks or external counterparties. Executed trades are publicly reported where required by applicable rules.”
In other words, this is an unlit market where pre-trade prices are not available to the public and trades are only reported after they have occurred in darkness, if they are reported at all.
How Goldman’s Dark Pool functions was written about in the Michael Lewis bestseller, Flash Boys, and the seminal work on Dark Pools by Wall Street Journal reporter Scott Patterson, Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market.
Michael Lewis related the story in Flash Boys of how Rich Gates, the operator of a mutual fund, together with his colleagues devised a test to see if they entered an order into a Dark Pool they would get ripped off. Lewis writes as follows:
“Gates and his colleagues wound up making hundreds of such tests, with their own money, in several Wall Street dark pools. In the first half of 2010 there was only one Wall Street firm in whose dark pool the test came back positive: Goldman Sachs. In the Goldman dark pool, Sigma X, he got ripped off a bit more than half the time he ran the tests.”
Patterson writes in his book on Dark Pools that the U.S. stock market has degenerated into:
“pools within pools, all connected electronically, forming a single sloshing pool of dark electronic liquidity. By 2012, the amount of stock trading that took place in dark pools and internalizers was a whopping 40 percent of all trading volume – and it was growing every month…
“No one – no one – truly knew what was taking place inside the guts of this Frankenstein’s monster of a market.”
Clearly Patterson is an expert on Dark Pools; but for some reason the Wall Street Journal allows him to report on everything but Dark Pools.
In the early 1930s, following the stock market crash of 1929, the U.S. Senate Banking Committee issued subpoenas and conducted extensive investigations over multiple years into the trading structure and trading practices on Wall Street. The Senate investigations focused on the collusive dealings of “pools,” which have today been reincarnated as Dark Pools. The 1930s Senate investigation found the following:
“A pool, according to stock exchange officials, is an agreement between several people, usually more than three, to actively trade in a single security. The investigation has shown that the purpose of a pool generally is to raise the price of a security by concerted activity on the part of the pool members, and thereby to enable them to unload their holdings at a profit upon the public attracted by the activity or by information disseminated about the stock. Pool operations for such a purpose are incompatible with the maintenance of a free and uncontrolled market.”
The Senate Banking Committee of 1934 concluded as follows:
“The conclusion is inescapable that members of the organized exchanges who had a participation in or managed pools, while simultaneously acting as brokers for the general public, were representing irreconcilable interests and attempting to discharge conflicting functions. Yet the stock exchange authorities could perceive nothing unethical in this situation.”
As for the other areas in which Goldman Sachs is under a government investigation or named as a defendant in a lawsuit, the 10-Q filing offers this:
“[Goldman Sachs] Group Inc. and certain of its affiliates are subject to a number of other investigations and reviews by, and in some cases have received subpoenas and requests for documents and information from, various governmental and regulatory bodies and self-regulatory organizations and litigation and shareholder requests relating to various matters relating to the firm’s businesses and operations, including: “securities offering process and underwriting practices”; “firm’s investment management and financial advisory services”; “Research practices, including research independence and interactions between research analysts and other firm personnel, including investment banking personnel, as well as third parties”; “Transactions involving government-related financings and other matters, municipal securities, including wall-cross procedures and conflict of interest disclosure with respect to state and municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal offerings, political contribution rules, municipal advisory services and the possible impact of credit default swap transactions on municipal issuers”; “The offering, auction, sales, trading and clearance of corporate and government securities, currencies, commodities and other financial products and related sales and other communications and activities, as well as the firm’s supervision and controls relating to such activities, including compliance with applicable short sale rules, algorithmic, high-frequency and quantitative trading, the firm’s U.S. alternative trading system (dark pool), futures trading, options trading, when-issued trading, transaction reporting, technology systems and controls, communications recordkeeping and recording, securities lending practices, prime brokerage activities, trading and clearance of credit derivative instruments and interest rate swaps, commodities activities and metals storage, private placement practices, allocations of and trading in securities, and trading activities and communications in connection with the establishment of benchmark rates, such as currency rates”; “Insider trading, the potential misuse and dissemination of material nonpublic information regarding corporate and governmental developments and the effectiveness of the firm’s insider trading controls and information barriers.”
The above is not a complete listing, just the highlights.
The involvement of Goldman Sachs in the implosion of the family office hedge fund, Archegos Capital Management, in March of last year has not gone away either. Goldman Sachs reports the following in its 10-Q:
“GS&Co. is among the underwriters named as defendants in a putative securities class action filed on August 13, 2021 in New York Supreme Court, County of New York, relating to ViacomCBS Inc.’s (ViacomCBS) March 2021 public offerings of $1.7 billion of common stock and $1.0 billion of preferred stock. In addition to the underwriters, the defendants include ViacomCBS and certain of its officers and directors. GS&Co. underwrote 646,154 shares of common stock representing an aggregate offering price of approximately $55 million and 323,077 shares of preferred stock representing an aggregate offering price of approximately $32 million. The complaint asserts claims under the federal securities laws and alleges that the offering documents contained material misstatements and omissions, including, among other things, that the offering documents failed to disclose that Archegos Capital Management (Archegos) had substantial exposure to ViacomCBS, including through total return swaps to which certain of the underwriters, including GS&Co., were allegedly counterparties, and that such underwriters failed to disclose their exposure to Archegos. The complaint seeks rescission and compensatory damages in unspecified amounts. On November 5, 2021, the plaintiffs filed an amended complaint, and, on December 22, 2021, the defendants filed motions to dismiss the amended complaint. On January 4, 2022, the plaintiffs moved for class certification.
“[Goldman Sachs] Group Inc. is also a defendant in putative securities class actions filed beginning in October 2021 and consolidated in the U.S. District Court for the Southern District of New York. The complaints allege that Group Inc., along with another financial institution, sold shares in Baidu Inc. (Baidu), Discovery Inc. (Discovery), GSX Techedu Inc. (Gaotu), iQIYI Inc. (iQIYI), Tencent Music Entertainment Group (Tencent), ViacomCBS, and Vipshop Holdings Ltd. (Vipshop) based on material nonpublic information regarding the liquidation of Archegos’ position in Baidu, Discovery, Gaotu, iQIYI, Tencent, ViacomCBS and Vipshop, respectively. The complaints generally assert violations of Sections 10(b), 20A and 20(a) of the Exchange Act and seek unspecified damages.
“On January 24, 2022, the firm received a demand from an alleged shareholder under Section 220 of the Delaware General Corporation Law for books and records relating to, among other things, the firm’s involvement with Archegos and the firm’s controls with respect to insider trading.”
For more on the Archegos matter, see our recent report: Justice Department and SEC Portray Serially-Charged Banks on Wall Street as Hapless Victims of Archegos Fraud. Nobody’s Buying It.