People think Goldman Sachs broke one of the most important rules in finance

Goldman Sachs raised eyebrows Wednesday for two moves the bank made involving electric carmaker Tesla.

On Wednesday morning, a note was released by Goldman Sachs analyst Patrick Archambault upgrading Tesla's stock to a buy with a price target of $250 a share.

Just a few hours later, news broke that Tesla was offering a sale of roughly $2 billion worth of stock, and one of the two main banks assisting with the sale was Goldman Sachs.

This did not look good for Goldman.

The research and underwriting arms of banks are supposed to be divided by what's called the "Chinese Wall." This is a regulatory requirement that investment bankers who deal with companies and research analysts who publish research to investors do not know about each others' work.

The original Chinese wall began in 1929, when regulators forced the separation of investment banks and brokerage operations. In 1961, the Cady Roberts decision by the Securities and Exchange Commission established rules against insider trading, where investors or banks use information not known to the general public to profit on stocks.

In 1968, following a settlement of insider trading accusations at Merrill Lynch, the SEC urged the industry to erect formal internal standards to discourage the exchange of information between analysis and investment banking side.

More recently the issue has been raised during settlements following the dotcom bubble and the financial crisis. 

The basic worry is that analysts will try and pump up the share price of companies that the bank is hoping to do business with, thus netting the bank profit, and it's this behavior that observers were concerned about regarding the timing of the two events Wednesday.

 

 

The implication is that Goldman's analysts knew about the forthcoming deal, and held the report until the morning it was going to happen. While nothing has been proven, and it's likely there was no intentional wrongdoing, it does look bad for Goldman Sachs (as Business Insider's Myles Udland delved into)

Other astute observers mentioned that some banks that did not get a position underwriting the Tesla sale, including JP Morgan and Barclays, have analysts with underperform or sell ratings on Tesla stock.

 

So there are a lot of questions about whether the "Chinese Wall" is intact or just a revolving door.