US settlements bare the ‘off-channel’ world of bankers

For months, US regulators have been investigating leading Wall Street banks and brokerages, searching for evidence that traders and dealmakers have been using unofficial messaging channels like WhatsApp and Signal to evade rules requiring them to preserve work communications.

This week, the world learned the price tag to resolve the probe: about $2bn. In addition to a $200mn settlement reached with JPMorgan Chase in December, the Securities and Exchange Commission and Commodity Futures Trading Commission said on Tuesday that Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Credit Suisse, UBS, Barclays, Deutsche Bank, Nomura, Jefferies and Cantor Fitzgerald — would pay an additional $1.8bn.

Those are sizeable sums. But as big settlements go, it left a lot unsettled.

The regulators essentially admitted how difficult it has become to keep tabs on Wall Street during a tumultuous period marked by the growing use of encrypted communications channels by the technologically savvy and the flight from the office triggered by the Covid-19 pandemic.

Technically speaking, the cases resolved involve the violation of electronic record-keeping rules, under which communications sent through company-approved channels are supposed to be monitored and, when appropriate, archived. But these misdeeds raise the possibility that some folks in finance were trying to avoid scrutiny by the cops on the Wall Street beat. The regulators said they found that tens upon tens of thousands of messages were sent through unapproved communications channels in recent years.

At Bank of America, one trading desk “had a longstanding practice of using unapproved methods to communicate about business on their personal devices”, the CFTC alleged. In March 2021, when the bank was aware of a CFTC investigation into “certain trading” on that desk, the “desk head instructed three of his subordinates to delete messages from their personal devices”, the regulator said. BofA — which agreed to pay the SEC and the CFTC a total $225mn, the biggest fine of all the banks — did not admit or deny these allegations.

Some Nomura traders “intentionally deleted certain of their personal device communications after receiving a preservation notice” from the CFTC, the regulator alleged. One trader, who was employed by Nomura affiliates in the UK and Japan, deleted messages and then “made false statements to the commission about his compliance”, the CFTC claimed. As part of its settlement with the regulator, Nomura did not admit or deny those allegations.

What regulators now know is how much they have to learn about what happened in financial markets in the years leading up to and including the pandemic. The SEC said it was “likely deprived” of material in “various” investigations.

Tellingly, Gurbir Grewal, SEC enforcement director, described US record-keeping requirements as “sacrosanct” in a statement that was issued along with Tuesday’s settlements, adding: “If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened.”

To be sure, the bad actors of finance were able to do their thing before they wielded iPhones as weapons. Conversations could be conducted on street corners or in bars. In primitive times, miscreants in realms ranging from Wall Street to the mafia used an early telecommunications device called the payphone to avoid surveillance.

Modern communication methods simply make misbehaviour easier. From January 2018 to September 2021, a single senior Goldman Sachs banker “sent and received tens of thousands of off-channel text messages” that “concerned among other things, the broker-dealer’s business”, the SEC said in a statement acknowledged as fact by the bank.

From my experience, Goldman hires some very energetic people, but it is hard to imagine one of them leaving their desk at work and making so many payphone calls during a similar period without raising concerns about bladder-control issues or something like that.

Like so many of us, people on Wall Street have grown accustomed to chatting online in several places at once. According to Goldman’s settlement with the CFTC, they even joked about it. The regulator said one of the bank’s senior swaps traders “established a desk WhatsApp chat in April 2017 because, in his words, ‘BlackBerrys are too tedious’,” and told his team: “What is said on chat stays on chat.”

In announcing the latest settlements, Christy Goldsmith Romero, a CFTC commissioner, said regulators were “sending a zero-tolerance message that we will not allow Wall Street to undermine our law enforcement by obfuscating or deleting communications surrounding trading”. It is anyone’s guess whether the furtive wheeler-dealers of finance will stop texting for long enough to get that message.

gary.silverman@ft.com