Speech by SEC Staff:
Remarks To Announce the Filing of Actions Related to Trading Based on Non-Public Information About the Treasury's Decision To Cease Issuance of the 30-Year Bond
Stephen M. Cutler
Director, Division of Enforcement
U.S. Securities & Exchange Commission
New York, New York
September 4, 2003
Today, the SEC filed three related enforcement actions arising from trading in the U.S. Treasury 30-year bond-the long bond-minutes before the Treasury Department publicly announced that it had decided to stop selling any more of the long bonds. The Treasury Department's announcement on Oct. 31, 2001 had a dramatic market impact, causing the largest one-day price and yield movements in the long bond since October 1987.
To settle their portions of the Commission's actions, Goldman Sachs and Co., Massachusetts Financial Services Company, and consultant Peter J. Davis, Jr.-the individual who tipped employees of Goldman Sachs and MFS about the forthcoming Treasury Department announcement before the Treasury lifted its news embargo-will pay a total of over $10.3 million. There are two other defendants, John M. Youngdahl and Steven E. Nothern. They are the former employees of Goldman Sachs and MFS, respectively, who we allege received Davis' tips and are responsible for the firms' trading. They have not settled with us.
What messages do these cases send? Acting quickly on market-moving news after it becomes fully public is one thing; tipping by a recipient of embargoed news, and trading based on such a tip, is quite another. The federal securities laws prohibit trafficking in confidential, market-sensitive information about government securities as well as corporate securities. And if broker-dealers and investment advisers arrange to get potentially material information from outside sources, they must have specific policies and procedures in place to prevent illegal trading on that information.
Let me briefly describe the three cases. In the first, filed in federal court in New York, the Commission charged three individuals-Washington D.C.-based consultant Peter Davis, former Goldman economist John Youngdahl, and former MFS portfolio manager Steven Nothern. The complaint alleges that Davis attended the Treasury Department's quarterly refunding press conference on the morning of Oct. 31, 2001, where he learned of the Treasury's decision to stop selling any more of the long bond. This news was embargoed-to be kept confidential-until later that morning. But before the embargo was lifted and the news was made generally available to the public, Davis called numerous clients, including Goldman Sachs and MFS, and tipped them about the decision to cease issuance of the long bond.
John Youngdahl was the recipient of Davis' call to Goldman Sachs. The Commission's complaint alleges that some months before, in July 2001, Davis had agreed to provide Youngdahl, at the time a Vice President sitting on Goldman's Treasury trading desk, with confidential information he learned at Treasury Department refunding press conferences. The complaint further alleges that, after receiving Davis' call on the morning of Oct. 31, 2001, Youngdahl tipped traders on Goldman Sachs' treasury desk with the news about the Treasury's decision to stop selling the long bond. Before the news became public, the Goldman Sachs traders purchased $84 million worth of 30-year bonds for Goldman Sachs' own accounts, generating illegal profits of over $1.5 million. The traders also generated profits of over $2.3 million on purchases of 2,336 bond futures contracts.
Steven Nothern was the recipient of Davis' call to MFS. At the time, Nothern was Senior Vice President for MFS and managed seven fixed income mutual funds with a combined value of approximately $4 billion. The Commission's complaint alleges that, after Nothern listened to Davis' voicemail message informing him of the Treasury's decision to stop selling the long bond, and before that news became public, Nothern and other MFS portfolio managers bought $65 million worth of 30-year bonds for funds that they managed.
Davis has entered into a settlement with the Commission. He has consented to the entry of a permanent injunction, and a court order that he pay a penalty of $120,000 and disgorgement of $29,598, which represents all the consulting fees he received from Goldman Sachs and from MFS for 2001 plus prejudgment interest.
The other two actions taken by the Commission today are settled administrative proceedings, one against Goldman Sachs and the other against MFS.
As to Goldman Sachs, based on its former employee Youngdahl's conduct and on the bond trading that occurred as a result, the Commission's order finds that the firm violated the anti-fraud laws applicable to broker-dealers and government securities broker-dealers. The order also finds that the firm 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.
As to MFS, the Commission's order finds 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 reimburse another firm for over $700,000 in trading losses incurred when the other firm sold MFS the bonds its fund managers purchased after Nothern received Davis's voicemail. 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 has investigated this matter-which remains open-in coordination with 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 is grateful for that office's cooperation and assistance. I would specifically like to thank United States Attorney James Comey, Assistant US Attorney Richard Owens, co-chief of the Southern District's Securities and Commodities Fraud Unit, and Assistant US Attorneys Brian Coad and Robert Hotz.
I'd like to recognize the outstanding work of Brian Ochs, Mark Kreitman, Andrew Sporkin, John Rossetti, Rosemary Filou, Max Hathaway and Joshua Ravitz at the Commission, who investigated this matter and will be litigating it for the Commission.
Finally, I would also like to acknowledge the cooperation and assistance we received throughout this investigation from the Commodity Futures Trading Commission, the United States Department of the Treasury, the United States Postal Inspection Service and the Federal Reserve Bank of New York.