Goldman Sachs Buys And Sales U.S.Natural Gas,Aided SEC Rumor-Lie That Their Shares Were 'Naked Shorted' In 2008 While Enriching Themselves Shorting Fannie Mae,Freddie Mac Etc
SEC Enhances Investor Protections Against Naked Short ... - SEC.gov
Jul 15, 2008 - SEC Enhances Investor Protections Against Naked Short Selling ... markets, and promote capital formation is more important now than it has ever been," said SEC Chairman Christopher Cox. ... Goldman, Sachs Group Inc, GS.
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Goldman Sachs Buys And Sales U.S.Natural Gas
Goldman Sachs emerges as vast natural gas player
Gregory Meyer in New YorkFinancial Times
Goldman Sachs has quietly overtaken Chevron and ExxonMobil to become one of the biggest natural gas merchants in North America, expanding in physical commodities trading even as other banks pull back.
The Wall Street institution last year bought and sold 1.2tn cubic feet of physical gas in the US — equal to a quarter of the country's residential consumption and more than twice its volumes in 2013, a recent regulatory filing revealed. Goldman is now the seventh-largest gas marketer in North America, according to Natural Gas Intelligence.
The gas utility serving households in Buffalo, New York last year purchased 11 per cent of its supply from Goldman, a securities filing showed. Power plants that produce electricity for copper mines in northern Mexico also buy gas from the bank, according to government reports and industry executives. Goldman's commodities division, known as J Aron, is listed as a shipper on huge pipelines including the Texas Eastern, which last month ruptured into a fireball that critically injured a man.
Goldman has grown the business even as banks await fresh rules on handling physical commodities such as oil, gas and aluminium. The Federal Reserve has said lethal gas explosions illustrate the risks banks face.
Dealing in physical commodities is exempt from the Volcker rule ban on banks' proprietary trading passed after the financial crisis. In a letter to the Fed in 2014, Goldman said the physical market, not financially settled derivatives, was the main way gas was traded at certain locations.
While the bank has sold off infrastructure such as power plants and metals warehouses, its rise as a gas middleman highlights a commitment to commodities. Prominent Goldman leaders including Lloyd Blankfein, chief executive, are J Aron alumni.
"The fact that J Aron's business is growing in the face of low volatility in physical natural gas markets is noteworthy. Many players have downsized," said Tom Russo, an energy consultant and former official at the Federal Energy Regulatory Commission. Goldman declined to comment.
Goldman moved into the gas merchant business when it acquired the North American natural gas marketing operations of Nexen, a Canadian oil company, in 2010. After dealing 3.42bn cu ft per day in 2011, its North American volumes rose 71 per cent to 5.86bn cu ft/d in 2015, according to NGI. The average US household that heats with natural gas uses 50,000 cu ft of gas in a year, according to the Energy Information Administration.
"Historically, J Aron in natural gas was more of a financial player. The Nexen acquisition really allowed them to enter the physical space" by taking over supply contracts with customers, said a former Goldman commodities employee.
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The power and gas business is led by Owen West, a Goldman partner who has authored novels, served combat tours in Iraq as a US Marine and climbed 28,000 feet up the north face of Mount Everest.
"I hate to use this word, but Owen is very 'Zen'," a colleague once told the New York Times. "When some traders start losing money they get nervous. Owen stays very relaxed."
While Goldman's commodities business reported weaker results in the first quarter, the physical gas division has been lucrative. One deal involved supplying the plants powering mines owned by Grupo Mexico in the Mexican state of Sonora, two people familiar with the transaction said. Goldman exported 22bn cu ft of US gas to the operation in 2015, according to figures published Wednesday.
The contract gave Goldman the option to sell gas to the plants at either the monthly average price or the price at the close of each month, to be decided at the end of the month, said people with knowledge of its terms. Given the extent to which gas prices move up and down, Goldman's option was worth $120m, they added.
When a polar vortex ushered frigid air into the northern US two years ago, utilities scrambled to obtain gas. Goldman, which has storage contracts in states including Michigan, profited as regional gas prices soared, according to people familiar with the matter.
In February the ANR Pipeline Company sought permission to allow Goldman to park more gas in its vast underground storage facilities. The proposed agreement deviated from the norm in that it required Goldman to keep gas stored for 12 months until March 2017, then withdraw it in April 2017.
The FERC raised questions, saying the agreement "could create a substantial risk of undue discrimination" against other customers, and ordered the pipeline to offer the same terms to all. A person close to Goldman said the deal was structured at the pipeline company's request to allow it to satisfy obligations to customers.
Other US banks, including JPMorgan Chase and Bank of America, have sharply scaled back in physical gas. Only Australia-based Macquarie, which is not overseen by the Fed, maintains a bank-owned North American gas business bigger than Goldman's.
Underscoring its commitment, Goldman recently completed a deal to deliver gas to a rural district of Alabama for the next 30 years.
Sheldon Day, mayor of Thomasville, Alabama, said the transaction allowed municipal utilities to cut customers' gas prices.
"We're very fortunate and glad that there are folks that want to do these deals because they're extremely important to us and the viability of our businesses," he said. "If an elderly lady sitting next to a gas heater in her house is in our district, her rate just went down by 8.5 per cent last month."
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Case Sheds Light on Goldman’s Role as Lender in Short Sales
It would be easy to overlook the case against Goldman Sachs filed by the Securities and Exchange Commission on Jan. 14. It involved a complex piece of Wall Street plumbing, led to a minuscule $15 million fine and came on the same day that Goldman agreed to pay up to $5 billion to settle prosecutors’ claims that it sold faulty mortgage securities to investors.
But the smaller settlement merits close study because it sheds light on one of Wall Street’s most secretive and profitable arenas: securities lending and short-selling.
Although the firm settled the matter without admitting to or denying the S.E.C.’s allegations, some of Goldman’s customers may now be able to recover damages from the firm, securities lawyers say.
Essentially the regulator said Goldman advised its clients that it had performed crucial services for them when it often had not. Customers who paid handsomely for those services may want their money back.
The $15 million punishment is just petty cash for Goldman, but this case tells us a lot about one of the most important duties that Wall Street firms perform for their clients — executing trades for hedge funds and other large investors. When these clients want to bet against a company’s stock, known as selling it short, they rely on brokerage firms to locate the shares they must borrow and deliver to a buyer.
Selling stock short without first locating the shares for delivery is known as naked shorting. It is a violation of Regulation SHO, a 2005 S.E.C. rule. Goldman’s failure meant that some of its clients were unknowingly breaching this important rule.
The S.E.C. has said that naked shorting can be abusive and may drive down a company’s shares. Therefore, brokerage firms are barred from accepting orders for short sales unless they have borrowed the stock or have “reasonable grounds” to believe it can be secured. This is known as the “locate” requirement.Continue reading the main story
Goldman violated the rule from November 2008 through mid-2013, the S.E.C. said. Through that period, which included the market decline of early 2009, the firm was “improperly providing locates to customers where it had not performed an adequate review of the securities to be located.”
Nor was the firm helpful when the S.E.C. staff questioned its practices. For example, Goldman “created the incorrect impression” with the regulator that it had in fact conducted an individualized review for all locate requests, the order noted. Goldman’s “incomplete and unclear responses” hampered and prolonged the inquiry, the S.E.C. said.
How might Goldman be liable beyond the $15 million fine? While the firm was improperly advising customers that it had located shares for their transactions, some of those customers were very likely paying for a service the firm wasn’t providing.
Costs to borrow shares can be considerable under normal circumstances, but they rocket when there is more demand by investors to short a company’s stock than there is stock to borrow. Clients may have to pay 25 percent or more of the trade’s value to secure the shares.
If Goldman charged borrowing fees when it had not actually located the shares, its customers might well try to recover those costs, said Lewis D. Lowenfels, an expert in securities law in New York and an adjunct professor at Seton Hall University Law School.
“Goldman Sachs employees performed inadequate reviews in response to customer requests to locate stocks for short sales, according to the S.E.C.’s order,” Mr. Lowenfels said. “Depending upon the specific factual circumstances, Goldman could incur private damage liabilities to its customers for these actions.”
It’s unclear how many customers may have been affected by Goldman’s failures. The S.E.C. order is silent on that; it noted that the firm was “generally able to meet its settlement obligations” during the five-and-a-half-year period.
“The S.E.C. settlement concerns the provision of locates,” said Michael DuVally, a Goldman spokesman, “and Goldman does not charge its clients for locates. As is common industry practice, clients are only charged if they establish a short position. The S.E.C. order noted that Goldman’s rate of fails to deliver remained low.”
This case is not the only one related to securities lending that the S.E.C. has brought against Goldman. In 2010, the regulator sued the firm, saying it had violated Regulation SHO in December 2008 and January 2009 “by failing to deliver certain securities or immediately purchase or borrow securities” to close out positions properly. The firm paid $225,000 to settle, again neither admitting nor denying the allegations.
Some market participants have long suspected that big brokerage firms were charging high fees to short-selling customers while not actually locating the shares these investors needed under the rules.
A 2006 antitrust lawsuit against 11 leading Wall Street firms, including Goldman, filed in federal court in New York made such an allegation. In addition to accusing the firms of illegal price-fixing in their conduct surrounding short sales, the plaintiffs contended that the firms charged “improper fees for purportedly locating securities, when in many instances, defendants failed to locate and/or borrow the securities.” But the court dismissed that case in 2007, citing a “clear incompatibility between the securities laws and antitrust laws.”
The most famous litigation alleging violations of short-sale regulations was brought in 2007 by Overstock.com, a closeout retailer based in Salt Lake City, and a group of its shareholders. Overstock and its chief executive, Patrick M. Byrne, contended that abusive naked short-selling had driven down the company’s share price and harmed its capital-raising efforts. A slightly different group of 11 Wall Street firms, Overstock said, essentially created stock out of thin air that could be sold by investors.
Overstock shares were exceedingly hard to borrow; fees ran as high as 35 percent.
Some of the firms settled with Overstock in 2010, paying $4.4 million in total. Others were removed from the case, leaving Goldman and Merrill Lynch as defendants. The court subsequently dismissed Goldman from the suit, but the firm settled with Overstock on a refiled case last June, paying an undisclosed amount. On Thursday, Overstock announcedthat Merrill was settling the case with a $20 million payment.
The Overstock suit generated a trove of emails and other documents that shed light on questionable Wall Street practices in the securities lending arena.
For example, in a deposition in the case, which Goldman had sought to seal, Marc Cohodes, the former head of Copper River Partners, said that he had paid Goldman more than $100 million to handle its short sales over many years.
But in the deposition, he said he soon began to doubt that Goldman had actually borrowed some of those shares. Mr. Cohodes also said he suspected that Goldman’s failure to borrow the shares was behind his firm’s collapse in the financial crisis.
Goldman has disputed this contention.
I asked Mr. Cohodes, who no longer manages money, what he thought of the S.E.C.’s recent findings on Goldman. He forwarded my request to his lawyer, David W. Shapiro, in San Francisco.
In an interview, Mr. Shapiro, a former federal prosecutor and United States attorney, questioned the recent S.E.C. settlement. “I’m very curious to understand what Goldman Sachs admitted to the S.E.C.,” he said, “and why $15 million was considered to be an adequate punishment.”
Strange bedfellows: Gretchen Morgenson and Patrick Byrne
By Felix Salmon
March 26, 2012
Gretchen Morgenson, about Goldman Sachs and short selling, is notable for two things.
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Today’s story from Gretchen Morgenson, about Goldman Sachs and short selling, is notable for two things. One one front, it fails to deliver: Morgenson seems to be trying to make a case that Goldman might be guilty of naked shorting, but she doesn’t really come close. On a second front, however, it’s a great leap forwards for Morgenson.
The whole article is based on the transcript of a deposition given by a hedge-fund manager turned chicken farmer named Marc Cohodes. “His testimony, which has not been made public, was obtained by The New York Times,” writes Morgenson — and indeed “Mr. Cohodes declined to comment beyond his deposition”, which means that the deposition is the sole source for Morgenson’s story. Wonderfully, for the first time that I can remember when Morgenson was working off a non-public primary source document, she has actually posted it online.
As a result, it’s possible to read the full testimony of Cohodes, which turns out to be a very long way from a damning indictment of naked shorting on the part of Goldman Sachs. Here’s how the subject is initially broached:
Q. And did you ever come to believe that Goldman Sachs had not been borrowing stock when you were short selling stock?MR. FLOREN: Objection, vague and ambiguous.MR. SHAPIRO: Objection, lack of foundation.THE WITNESS: That’s just speculation on my part at this point in time.BY MR. SOMMER: Q. Well, I’m asking for your belief, so just tell me what your belief is one way or the other.MR. FLOREN: Same objection.MR. SHAPIRO: Don’t speculate; just say what you — answer the question about what you know. You’re here to testify, as a fact witness, what you know from seeing, hearing —THE WITNESS: I don’t know. I just don’t know. I mean, I just — I don’t know.
This sets a pattern. Questioners representing Overstock — a company extremely hostile to short-sellers of any stripe — will try to ask Cohodes whether there was naked shorting going on; Cohodes will say, at best, that he talked about the possibility, but that he had no evidence of such activity at all. Or, to put it another way: Cohodes is angry at Goldman, and Overstock is trying to use that anger to get him to accuse Goldman of naked shorting. But he never actually does so.
Indeed, it turns out that the allegation that Goldman Sachs might have been engaging in naked shorting doesn’t really originate from Cohodes, or his deposition, at all. Instead, it’s contained on page 300 of a book by a former colleague of Cohodes, Richard Sauer, which was published in April 2010. Here’s the excerpt:
This is actually a vastly better explanation of the highly-circumstantial “evidence” of naked shorting than that provided by Morgenson. Here’s her attempt:
Failing to borrow shares on behalf of customers is illegal because of concerns about market manipulation. But it can also leave a brokerage firm’s client who is short a stock dangerously exposed to an escalating price in the shares. If a stock shorted by an investor began to trade higher and the shares were not borrowed, closing out the transaction would require the fund to buy them in the open market. That could propel the already rising price of the shares even higher, adding to the costs of the trade.
This doesn’t really make any sense. If a fund which is short a certain stock needs to cover that short, then it needs to buy those shares in the open market. That’s true whether the short is naked or not. And yes, when shorts are forced to cover, that can force the price up even further. That’s known as a short squeeze, and it’s exactly what caused the downfall of Cohodes’s fund. And again, you absolutely don’t need naked shorting to have a short squeeze.
Reading the deposition, it’s clear that while Cohodes is furious at Goldman Sachs, his fury has essentially nothing to do with naked shorting. This is absolutely not clear from Morgenson’s characterization of the deposition, which is why it’s so great that she uploaded the deposition so that we can see for ourselves. Cohodes is furious at Goldman for one main reason: that after Lehman Brothers went bust, there was some very crazy price action in the market. Most stocks were plunging, but a handful of stocks — the ones he was short — were going up, rather than down. It was a classic short squeeze.
In a short squeeze, the fight is simple. The fund which is short tries to stay solvent, while the market drives up the price of the stocks in question so much that the shorts are forced to sell at the top of the market. Once they capitulate in that way, the stock tends to plunge. A fund like that being run by Cohodes, which was massively short going into Lehman’s bankruptcy, should by rights have made a lot of money: Cohodes calculates it at a cool billion dollars. All he needed to do was wait for his stocks to plunge, and then cover his short positions.
But that’s not what happened. Instead, Goldman presented him with a huge and unprecedented margin call — not the kind of margin call required by federal regulations, mind, but rather a “house call” declared unilaterally by Goldman Sachs over and above what the regulations require. As a result of that call, his fund went bust, just days before it would have made a fortune. Here’s Cohodes’s deposition:
A. I can remember Goldman closing us out of American Capital Strategies at $33 on that Monday, and when they stopped doing whatever they had to do, when the smoke cleared, we finished covering the thing four weeks later at 2, something like that. We finished covering it at 2 but they took us out of eighty percent of our position in the thirties, and when they were done, we covered at 2. They took us out of Tempur-Pedic at 16, covered that, the rest of it four weeks later, at 3. I mean, it was insane.So it’s kind of like I played the entire thing for a complete collapse, got the collapse and was closed out, closed out right before and during.Q. If Goldman Sachs & Co. had not made these house calls and had extended you more credit during this time period —A. We didn’t need more credit. All they had to do was not make the house calls.
Cohodes feels, then, with some reason, that Goldman Sachs did him in by foisting huge house calls on him during a point at which the stock market in general was going down rather than up. To make matters worse, when he tried to get out of the calls by moving his entire account to a different prime broker, UBS, Goldman wouldn’t let him do that. And when he tried to move his positions to a hedge fund with deeper pockets, Farallon Capital, he says that the CFO at Farallon got a phone call from Goldman warning him off.
So it’s easy to understand why Cohodes is very ill-disposed towards Goldman Sachs, and even suspects that Goldman’s prop desk might have been orchestrating the short squeeze. But there’s really nothing here at all to indicate that Goldman was engaging in any kind of naked shorting.
This testimony is mildly embarrassing for Goldman: no one likes seeing their former head of prime brokerage being described as “just a motherfucker”, as Cohodes describes Ravi Singh in this deposition. But Goldman’s argument for keeping the testimony sealed — “that their release would disclose trade secrets about the business” — is extremely weak. And Morgenson’s case that the deposition somehow indicates that Goldman might have been involved in naked shorting is even weaker.
Naked shorting is likely to become something of an issue in the news again soon, now that a documentary on the subject, called The Wall Street Consipracy, is being screened quite widely in finance and media circles. The documentary, like the deposition, is all part of a campaign by Overstock CEO Patrick Byrne against what he’s convinced is a massive conspiracy to bring down his company through illegal means.*
And that’s the main reason why I’m uncomfortable with Morgenson’s story: it seems to play far too neatly into the hands of Byrne, who’s really completely bonkers. But at least she posted the primary document, which is great, because it means that the rest of us can see much more clearly what the truth of the matter is.
*Update: Lewis Goldberg, the PR guy for The Wall Street Conspiracy, tells me that Patrick Byrne did not fund the movie, he just appears in it.
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