Goldman Sachs needs to hire compliance staff to monitor its compliance staff from insider trading abuse

Perhaps Goldman Sachs needs to hire compliance staff to monitor its compliance staff.


That’s the takeaway after reading insider tradingcharges the Securities and Exchange Commission has leveled against a former associate in Goldman’s compliance division, who monitored activity in the firm’s vaunted investment banking unit. Instead of using their seat at Goldman to defend against potential illegal activity amid today’s steady clip of merger deals, the associate is accused of using it to commit crimes.


On Wednesday, the SEC chargedYue Han, an associate in Goldman’s Surveillance Analytics unit, a piece of its wider compliance department, with misappropriating information on the pending takeovers of Zulily,KLA-Tencor KLAC +0.00%, Yodlee and Rentrack to buy out-of-the money call options contracts on those companies, which paid off when they were acquired.


Han, who also goes by John Han and left Goldman in early October, is accused by the SEC of using his compliance access to read bankers’ emails on the pending deals and using that material non-public information to make $450,000 in illicit profits. The SEC has frozen the trading accounts of Han and a relative who also made trades that benefited from inside info. However, Han appears to have left Goldman shortly after a year of putting on his trades. And weeks after resigning from Goldman, he appears to have fled the country for China.


Nowhere in the SEC’s complaint is there indication Goldman spotted Han’s allegedly illegal activity. Han may have evaded Goldman’s standard employee surveillance by not to registering the brokerage he accounts he then used to make the insider trades.


If the allegations are true, Han violated our trust and ignored extensive training that he received so we are pleased that the authorities are pursuing action against him,” said Michael DuVally, a Goldman Sachs spokesperson.


The SEC’s charge comes just weeks after Goldman paid a $50 million fine and admitted it failed to supervise an investment banking employee who used contacts at his former employer, the Federal Reserve Bank of New York, to get confidential regulatory information about his clients and use it to advise them. When Goldman realized the employee gained the regulatory information illegally it alerted authorities and he was fired. The employee, Rohit Bansal, has since pleaded guilty to criminal charges.


Although the alleged criminal activity inside of Goldman is anecdotal, it should be concerning for the firm.


For years, Goldman has been the de facto investment bank to call for advice on capital raisings and merger and acquisition activity.


However, if clients begin to believe their private information is being misappropriated, they may look elsewhere.


Worse yet, Goldman has long prided itself as having a culture that champions its clients and stands apart from the competition on Wall Street. But using clients as a means to make illegal profits is perhaps the biggest betrayal. And at a bank that’s privy to much of the activity in today’s marketplace, its compliance has to be bulletproof. When those employees are instead engaging in illegal activity, questions have to be raised.


Much of a recent spate in insider trading cases against investment bankers – Evercore for instance — involve newer employees who may not be steeped in a firm’s culture, or are not as wedded to the profession. Perhaps, the flurry of charges in recent years indicates an erosion of culture inside Wall Street’s biggest investment banks amid competition from the buy side and a continued post crisis retrenchment that’s leading to shrinking bonuses. Starting in July, he began trading regularly on insider information he obtained while monitoring coded Goldman emails that discussed pending deals. He built up to $60,000 cash pile on shares of takeover targets Yodlee and Zulily, for whom Goldman had been the main adviser, A month-and-a-half later, the broker shut down the account in which the suspicious trades took place, But Han set up a new account under a relative's names and witin two weeks made by far his biggest trade - puffing nearly all of his gains into call options in shares of KLA, which was involved in merger talks with Goldman client Lam Research.


The trading records for Han showed how he moved quickly  to stay ahead of the paper trail he created with his suspicious trades and move his cash before authorities could act.  Here is the timeline of his year at Goldman Schs:  


  • Early December 2014 – The recent Binghamton University PhD computer science graduate is hired by Goldman Sachs for its Surveillance Analytics Group. 
  • Early December 2014 - Han opens outside brokerage account in violation of code of ethics he signed when he started work. 
  • Late December 2014 – Han begins shuttling between Newark and New York Goldman offices setting working on compliance surveillance team.
  • January 2015 – Hans work makes him aware that Goldman has been retained by Yodlee as adviser for the a possible sale. His unit assigns code words and protocols for handling confidential emails. 
  • April-July 2015 – Han learns of three other pending takeover deals Goldman has worked on, including Zulily, Yodlee and KLA. Han begins acquiring shares.
  • August 2015 – Yodlee is acquired and the $8,700 Han invested in Yodlee shares and options generates $27,000 in profit. 
  • Mid-August 2015 – Han takes profit of $36,000 when Zulily deal is announced. 
  • Mid-September 2015 – After two suspicious trades, broker handling Han's trades shuts his account.
  • Late September 2015 – Han sets up account at different broker under the name of Wei Han, a relative in China. (The SEC gives the man's age as 55 but has no further details.) He begins transferring funds to new accounts and makes one small trade on Rentrak, another Goldman-advised deal, that nets $8,000.
  • Late September-Early October 2015 - Under scrutiny by one, and perhaps two brokers, Han quickly begins putting $40,000 in gains into a single large options position in takeover candidate KLA, a target of Goldman-advised Lam Research.
  • Mid-October 2015 – Lam Research deal announced and Han nets profit of $395,000 on KLA position. He cashes out options in the account of the Chinese national, Wei Han. 
  • Late October 2015 – Yue Han flees the country and is believed to be in Shanghai.


In an email, HanHan responded with message saying "there is a lot of misunderstanding and what they sued against me is not true."

"I have received the SEC's legal documents," he said. "I will have my lawyer to deal with this." 


On Han's LinkedIn profile, it says he still is employed at Goldman, though the SEC's suit and the bank say this is no longer the case.

Han is believed to be in Shanghai, according to the SEC. The SEC says it froze assets in brokerage accounts owned by Han.


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