By Lauren Tara LaCapra
Aug 17 Goldman Sachs Group Inc has given
up trying to sell research from independent analysts to its
institutional clients, after spending millions of dollars on
distribution only to find that big money managers had little
The bank has laid off or reassigned the dozen or so
employees at its Hudson Street Services unit, which offered data
and independent research to investors. Goldman also sold its
minority stakes in most firms that were producing the research,
generating an overall profit in the process.
Hudson Street's failure is the latest sign of how difficult
it is for smaller research houses to thrive in a market where
everyone from the big Wall Street banks to major mutual fund
firms are seeking to cut costs.
It is also a sign that major investors may no longer be
prepared to pay for a diversity of opinion about the markets.
It wasn't always that way. Independent research was all the
rage on Wall Street after a $1.4 billion settlement in 2003
between Wall Street banks and regulators led by then-New York
Attorney General Eliot Spitzer concerning allegedly tainted
"It was like a big gold rush when everybody wanted to be an
independent research provider," said Sanford Bragg, Chief
Executive of Integrity Research, which tracks the independent
research industry. "But all the hoopla around independent
research in 2003-2004 has died down."
The settlement followed accusations by Spitzer and other
regulators that securities analysts at some major banks were
glorified shills for companies' shares, instead of providing the
objective advice they claimed to offer. Analysts often got
bigger bonuses if their positive ratings, or help on sales
calls, allowed a bank to win investment banking business.
As part of the agreement, a dozen banks had to spend $460
million to furnish clients with independent research for a
five-year period that ended in 2009 for most banks.
As that requirement fell away, independent firms had less
revenue to rely on. Spending on such research will be down 24
percent this year compared with 2008, according to Integrity
Hudson Street was not created to comply with the
settlement's independent-research requirement, but because of
industry trends that were sparked by the settlement.
In the end, customers did not want to buy what Goldman was
selling. Research firms said they gained just a handful of
clients from the platform. In a statement for this article,
Goldman said, "Hudson Street no longer exists for the simple
reason that weak demand from our clients did not warrant
continuing the effort."
Spitzer compared the independent research industry's current
dilemma with that of media companies battling against free news
articles on the web. "People want the content, they don't want
to pay for it," he said in a recent interview with Reuters.
A NEW WORLD FOR RESEARCH
The settlement forced Wall Street banks to restructure their
research departments. Banks could no longer pay analysts more
for winning investment banking revenue, so analysts' pay
Many responded by leaving banks and setting up their own
independent research firms. Investors, after learning more
tawdry details about how banks' investment research was made,
grew increasingly willing to work with independent analysts.
Goldman Sachs began looking for ways to profit from the new
world of research, and Hudson Street was a central pillar of
The unit was the brainchild of two then-Goldman executives:
Thomas Conigliaro, who was hired from Merrill Lynch in 2003 to
develop Goldman's independent research business, and J. Michael
Sanders, a Goldman veteran who was a managing director and
co-head of its U.S. institutional sales operation.
The two men decided the platform should sell research from
independent analysts to Goldman's vast array of institutional
clients, including mutual funds, hedge funds and pensions. For
every sale Hudson Street made, it received a commission. Goldman
also made minority investments in the firms whose research it
Conigliaro and Sanders spent a year working with Goldman's
principal strategic investments group - the bank's internal
private equity arm - and an outside consultant to figure out
which research firms to distribute. They sifted through more
than 300 firms, and ended up with 11 that met their standards.
They named the business "Hudson Street" for a street near
Goldman's headquarters in Lower Manhattan.
Some of the bigger names were TrimTabs, which keeps track of
supply and demand dynamics for stocks and exchange-traded funds,
and Medley Global Advisors, which speaks to central bank
officials and government employees globally to do macroeconomic
research. Asset4, which was later acquired by Thomson Reuters
Corp, Investars and iSuppli also joined.
Once Goldman invested in the firms and set up commission
agreements, its sales force went to work introducing Hudson
Street to important institutional clients, first in the United
States and then globally. The bank set up 500 client meetings
related to Hudson Street in 2007 alone, a source said.
The head of one research firm said Goldman told him he could
double or even quadruple revenue, because the bank knows nearly
every major investor globally and has a legendary sales force.
That growth never materialized.
"The distribution arrangement was a disappointment, in the
sense that it didn't lead to the jump in sales that we
expected," said Paul Warme, the chief executive of Lusight Ltd,
an emerging-markets research firm that had been part of Hudson
Street until 2009.
A Goldman source echoed that sentiment.
"We realized - and maybe this is the fundamental flaw in the
business model - that in order for clients to pay for a product,
it couldn't be a 'nice to have,' it had to be a 'have to have' -
the kind of product that clients can't live without," said the
Hudson Street's failure is a modest setback for Goldman as
it tries to reinvent itself in a post-financial crisis world.
Investors have some faith that whatever happens, Goldman will
find a way to build a profitable business. Its shares are still
trading at among the highest valuations for banks with big
investment banking businesses.
Even though the business itself performed poorly, Goldman
managed to make a profit on Hudson Street by selling off the
stakes it bought.
Goldman would not comment on specific transactions, but
sources familiar with the business said that revenue from just a
couple of asset sales more than offset losses on other
money-losing deals, as well as the money Goldman put into
building the overall business.
One company that was part of Hudson Street, Epocrates Inc
, provided the most details about its Goldman
partnership through public securities filings. Its story
highlights the kind of troubles that independent research firms
can run into by partnering with big Wall Street banks.
Epocrates, which sells software and technology to
physicians, sold Goldman 3 million shares for $40 million in
2007. As part of the Hudson Street pipeline, the company
collected data from its vast network of doctors and distributed
the information to institutional investors who analyzed
When the company went public in February 2011, Goldman sold
some shares into the IPO. The stock soared on its first day of
trading, and Goldman's remaining stake was worth more than $60
million. Since then, the company's shares have plunged 62
percent, and Goldman has overall lost more than $15 million on
Epocrates has had other problems. Three weeks after its IPO,
the U.S. Securities and Exchange Commission subpoenaed the
company for information and documents related to Hudson Street
as part of its broader look at expert networks, which had become
one focus of an insider trading investigation. In January 2012,
the SEC told Epocrates that it had closed its inquiry without
recommending enforcement actions.
A former executive said that the inquiry cost the company a
significant amount of time and money, and made some regret
having entered the investor-data business because it never
became a substantial source of revenue.
Many of Goldman's other Hudson Street stakes were sold at a
loss, either back to the companies or to third parties that
acquired the firms.
People at independent research firms said that the inherent
flaw in Hudson Street was not the product, but the partnership
"If you're going to be independent, you want to really be
independent," said Barbara Steiner, founding partner and head of
institutional sales at the independent research firm Portales
Partners. Portales was not distributed on Hudson Street.
"As an adjunct to a bank, or another very large broker,
whether you say you're independent or not, you're not perceived