Goldman Settles Insider Trading Charges
Goldman Sachs Group Inc. agreed Thursday to pay $9.3 million to settle charges related to a former economist accused of using inside information to help the investment bank make millions of dollars trading in government bonds.
Goldman’s settlement with securities regulators stemmed from charges that it failed to properly oversee John Youngdahl, a one-time economist with the firm, who was charged Thursday by prosecutors with insider trading and perjury.
James Comey, U.S. attorney for the Southern District of New York, unveiled a seven-count indictment of Youngdahl alleging insider trading, making false statements, perjury and other charges.
Goldman agreed to pay a $5-million fine and disgorge $4.3 million of illegal trading profits.
“A scheme to steal confidential information from the Treasury Department and tip off others shakes the confidence of the investing public,” Comey said. “It is not to be tolerated.”
Comey also said Peter Davis Jr., a Washington consultant, pleaded guilty to charges of insider trading and conspiracy relating to the bond trading case.
At issue in the case is the Treasury’s historic announcement on Oct. 31, 2001, that it would no longer issue 30-year bonds. The news ignited a powerful bond rally, and prosecutors charged that Davis and Youngdahl conspired to trade on the information before it was public.
The Securities and Exchange Commission brought related civil charges against Davis, Youngdahl and Steven Nothern, a former bond fund manager for Massachusetts Financial Services Co., a unit of Sun Life Financial Services of Canada Inc.
Massachusetts Financial declined to comment on Nothern. His attorney, Nicholas Theodorou, said: “Mr. Nothern intends to vigorously defend himself in this case.”
Youngdahl’s attorney, Alan Levine, said in a statement that the case was not about insider trading, but bad information management.
“The government’s case relies on the notion that the Treasury Department can release information in a less-than-confidential manner and that the Justice Department can then prosecute individuals, such as Mr. Youngdahl, when that information finds its way to the financial markets,” he said.
Davis’ attorney was unavailable for comment.
For its part, Massachusetts Financial agreed to pay a fine of almost $200,000 and return more than $700,000 in trading profits. “MFS is pleased to have resolved this matter. MFS voluntarily reported to the SEC that we traded in 30-year Treasury bonds on Oct. 31, 2001, and cooperated fully with the SEC investigation,” said Massachusetts Financial spokesman John Reilly.
Prosecutors charge that Davis regularly attended the quarterly news conferences where Treasury officials announced debt financing plans for the months ahead. Information was given with the understanding participants would embargo it for later release to ensure that the news outlets attending would all be able to report the information at the same time.
In the summer of 2001, the indictment says, Youngdahl and Davis had agreed that “Davis would misappropriate, convert and steal confidential, material, nonpublic information obtained at the quarterly refunding press conferences and convey it to Youngdahl before the embargo was lifted.”
At the Oct. 31, 2001, event, participants including Davis were told the Treasury would no longer issue 30-year U.S. Treasury bonds. Davis then called Youngdahl before the embargo expired and told him about the market-moving information, the indictment says.
After taking Davis’ call, Youngdahl passed on the information to Goldman traders, allowing them to make at least $3.5 million in illegal profits when 30-year bond prices soared after the market learned of the bond’s cancellation, the indictment says.
“We find this entire matter extremely embarrassing,” said Goldman Sachs spokesman Lucas Van Praag. “It’s a dark day for Goldman Sachs and serves to highlight that a single act has potential to undermine the best efforts of everyone at the firm.”
