LITIGATION RELEASE NO. 18322 / SEPTEMBER 4, 2003
SEC BRINGS ENFORCEMENT ACTIONS AGAINST THREE INDIVIDUALS, GOLDMAN SACHS, AND MASSACHUSETTS FINANCIAL SERVICES COMPANY RELATED TO TRADING BASED ON NON-PUBLIC INFORMATION ABOUT THE TREASURY'S DECISION TO CEASE ISSUANCE OF THE 30-YEAR BOND
SECURITIES AND EXCHANGE COMMISSION v. PETER J. DAVIS, JR., JOHN M. YOUNGDAHL and STEVEN E. NOTHERN (United States District Court for the Southern District of New York, Civil Action No. 03-CV6672(NRB))
The Securities and Exchange Commission ("Commission") today announced three related enforcement actions arising from trading in U.S. Treasury 30-year bonds minutes before the Treasury Department announced, on October 31, 2001, that it would no longer issue such bonds. The Treasury Department's announcement had a dramatic market impact, causing the largest one-day price movement in the 30-year bond since October 1987. Goldman Sachs & Company ("Goldman Sachs"), Massachusetts Financial Services Company ("MFS"), and Peter J. Davis, Jr., the individual who misappropriated the Treasury Department information that was subject to a news embargo, will pay a total of over $10.3 million to settle the Commission's actions.
In a civil suit in federal court in New York, the Commission filed securities fraud charges against:
- Peter J. Davis, Jr., a Washington, D.C.-based consultant and sole proprietor of Davis Capital Investment Ideas. The Commission's complaint alleges that Davis attended the Treasury Department's quarterly refunding press conference on the morning of October 31, 2001, where he learned of the Treasury's decision to cease issuance of the 30-year bond, known colloquially as "the long bond." In violation of an explicit agreement with the Treasury Department, Davis called numerous clients and tipped them to news about the cancellation of the long bond before the Treasury Department's news embargo was lifted and the news was made generally available to the public.
- John M. Youngdahl, a resident of Summit, New Jersey, and formerly a Vice President and Senior Economist at Goldman, Sachs & Co. The Commission's complaint alleges that, in July 2001, Youngdahl and Davis agreed that Davis would provide Youngdahl with confidential information he learned at Treasury Department refunding press conferences. The complaint further alleges that, after receiving Davis' call on the morning of October 31, 2001, Youngdahl tipped traders on Goldman Sachs' U.S. Treasury Desk to the news about Treasury's decision to cease issuance of the long bond. While the news was still nonpublic, the traders purchased $84 million in par value of 30-year bonds for Goldman Sachs' own accounts, generating illegal profits of over $1.5 million.
- Steven E. Nothern, a resident of Scituate, Massachusetts, and formerly a Senior Vice President and manager of seven fixed income mutual funds for MFS. The Commission's complaint alleges that, after Nothern heard the news of the Treasury's decision to cease issuance of the long bond in a voice mail from Davis on the morning of October 31, 2001, and before the news became public, Nothern and other MFS portfolio managers bought $65 million in par value of 30-year bonds for funds that they managed, generating approximately $3.1 million in illegal profits.
Davis has entered into a settlement with the Commission. Youngdahl and Nothern are contesting the charges.
Based on its former employee Youngdahl's conduct and on the bond trading that occurred as a result, Goldman Sachs has consented to a Commission administrative order finding that the firm violated the anti-fraud laws applicable to broker-dealers and government securities broker-dealers. The Commission's order also finds that Goldman Sachs lacked adequate safeguards to prevent the misuse of material nonpublic information obtained from paid consultants. Goldman Sachs will pay over $9.3 million in disgorgement of trading profits, interest, and penalties. The order also recognizes that Goldman Sachs promptly notified the Commission staff about the trading that occurred and cooperated with the Commission's investigation.
MFS has consented to a Commission administrative order finding that the firm lacked adequate safeguards to prevent the misuse of material nonpublic information obtained from paid consultants. MFS will pay a penalty of $200,000 and will reimburse another firm for over $700,000 in trading losses incurred by selling to MFS the bonds that Nothern and the other fund managers purchased. The Commission's order also recognizes that MFS promptly notified the Commission staff about the trading that occurred and cooperated with the Commission's investigation.
The Commission's complaint against Davis, Youngdahl and Nothern alleges that Davis marketed himself to Wall Street clients by claiming special access that enabled him "to get Washington information ahead of the media," and by promising clients "the first call on investment issues they care about." MFS retained Davis as a consultant sometime between 1995-1997, and Goldman Sachs retained Davis beginning in the spring of 2001. Youngdahl, who advised Treasury Desk traders on economic and political developments, was Davis' primary contact at Goldman Sachs. Nothern, who managed seven fixed income mutual funds for MFS, was Davis' primary contact at MFS.
The complaint alleges that, since 1994, Davis had attended the Treasury Department's quarterly refunding press conferences under an explicit agreement that he would honor the news embargo that Treasury imposed until the designated public announcement time. At these press conferences, the Treasury Department announced the Federal Government's financing requirements for the coming quarter. Notwithstanding his agreement to abide by the news embargo, the complaint alleges that, in July 2001, Davis and Youngdahl agreed in a series of e-mails that Davis would provide Youngdahl with confidential information from the Treasury Department's quarterly refunding press conferences prior to the expiration of the embargo. Davis had previously conveyed confidential refunding information to Youngdahl in May 2001, and, pursuant to their July agreement, did so again in August 2001.
The complaint further alleges that, at the October 31, 2001, refunding press conference, Treasury Department officials announced three times that the information being made available was embargoed until 10:00 a.m. The press conference ended at approximately 9:25 a.m. Then, Davis, despite the officials' warnings, and in violation of his prior explicit agreement to abide by the embargo, placed a series of cell phone calls to his clients, including Youngdahl and Nothern, beginning at 9:28 a.m., and told them that the Treasury Department was suspending future long bond issuances. The complaint alleges that Youngdahl knew that Davis, pursuant to their July agreement, was tipping him with confidential Treasury Department information before the information was released to the public. The complaint also alleges that Nothern knew, from a voice mail which Davis left him and which he listened to, that Davis had learned about the suspension of 30-year bond issuances directly from the Treasury Department, and that the news was embargoed until a scheduled 10:00 a.m. press announcement.
The Commission's complaint charges Davis, Youngdahl, and Nothern with violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, and seeks injunctions, disgorgement, and civil money penalties. Prior to the filing of the action, Davis consented, without admitting or denying the allegations of the complaint, to the entry of a permanent injunction from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and a court order that he disgorge $29,598, which represents the amount of consulting fees he received from Goldman Sachs and MFS plus prejudgment interest, and pay a penalty of $120,000.
The Commission's administrative order against Goldman Sachs finds that, because of Youngdahl's conduct and the trading that ensued, Goldman Sachs willfully violated Sections 15(c)(1)(A) and 15(c)(1(C) of the Exchange Act and Rule 15c1-2 thereunder, the provisions that prohibit fraud by broker-dealers and government securities dealers. The order also finds that Goldman Sachs willfully violated Section 15(f) of the Exchange Act because it did not have written policies and procedures reasonably designed, taking into consideration the nature of the firm's business, to prevent the misuse of material nonpublic information. During the relevant period, Goldman Sachs, and the Treasury Desk in particular, employed numerous paid consultants who provided a wide range of information and analysis. Although Goldman Sachs did have written policies on the proper handling and use of material, confidential information, these policies did not expressly address the use of such consultants or the handling of information obtained from them.
Goldman Sachs consented to the Commission's order without admitting or denying the Commission's findings. The order censures Goldman Sachs, orders the firm to cease and desist from committing or causing future violations, and orders Goldman Sachs to disgorge $1,742,642 in bond trading profits and prejudgment interest, and to pay a penalty of $5,000,000. In addition Goldman Sachs is undertaking to disgorge $2,562,740 in bond futures trading profits and prejudgment interest. The Commission's order also requires Goldman Sachs' Legal Department to do a review of the firm's policies and procedures and to implement corrective measures to prevent any possible future abuse of material nonpublic information with respect to the use of consultants.
The Commission's Order against MFS finds that MFS willfully violated Section 204A of the Investment Advisers Act of 1940 because it lacked adequate safeguards to prevent the misuse of material nonpublic information with respect to information obtained from consultants. Although MFS retained numerous paid consultants like Peter Davis, the firm's written materials on the use of nonpublic information only referenced inside information received from company insiders or their agents, and did not discuss the potential that paid consultants might provide such information. Without admitting or denying the Commission's findings, MFS consented to the entry of the Commission's order, which censures MFS, requires MFS to cease and desist from committing or causing future violations, and orders MFS to pay a penalty of $200,000. The order also requires MFS' General Counsel's office to do a review of the firm's policies and procedures and to implement corrective measures to prevent any possible future abuse of material nonpublic information with respect to the use of consultants. In addition, MFS is undertaking to reimburse the broker-dealer that sold MFS the 30-year bonds $717,858, representing losses by the broker-dealer from selling 30-year bonds to MFS on October 31, 2001, and prejudgment interest on that amount.
The Commission has investigated this matter -- which remains open-- in coordination with, and acknowledges the cooperation and assistance of, the United States Attorney's Office for the Southern District of New York, which has entered into a plea agreement with Peter Davis and obtained the indictment of John Youngdahl. The Commission also acknowledges the cooperation and assistance of the Commodity Futures Trading Commission, the United States Department of the Treasury, the Federal Reserve Bank of New York, and the United States Postal Inspection Service throughout this investigation.
