Goldman May Be Charged Over Bond Trading, People Say (Update1)
By Vicky Stamas
Washington, March 29 (Bloomberg) -- Goldman Sachs Group Inc. has been notified that the Securities and Exchange Commission enforcement staff plans to pursue a case against the third-biggest securities firm for trading Treasury bonds based on inside information, a person familiar with the case said.
The agency began investigating Goldman after a consultant the firm had hired gave traders advance warning Oct. 31 that the U.S. Treasury Department would stop selling 30-year bonds. The $3 trillion Treasury market rallied, with the 30-year bond having its biggest one-day gain in 14 years.
The SEC notification, called a ``Wells notice,'' is one of the last steps before the agency's staff asks the commission to discipline a securities firm by filing a civil lawsuit or administrative proceeding.
``It means the staff has reached a conclusion, subject to your persuading them otherwise, that your client ought to be charged with some violation of the federal securities laws,'' said John Olson, senior partner at Gibson Dunn & Crutcher in Washington.
A case against Goldman would be the first insider-trading bond case in memory, some lawyers said. ``I'm not certain I can recall a single case involving bonds, but there's absolutely no reason that a case could not involve bonds,'' said Joel Seligman, dean of the Washington University School of Law. ``It can involve any security.''
Lucas Van Praag, a Goldman spokesman in New York, declined to comment, as did SEC enforcement chief Stephen M. Cutler and Treasury spokeswoman Betsy Holahan. The consultant hired by Goldman, Peter Davis, president of Davis Capital Investment Ideas, had no comment.
Davis also received a Wells notice, according to the person familiar with the case.
Explaining a Surge
Goldman spokesman Peter Dietlmaier said Nov. 12 that the firm was among the companies told of the Treasury's decision before the government announcement. The firm didn't engage in wrongful behavior and will assist authorities with an investigation, he said at the time.
The firm, the third largest by capital, wouldn't comment then on whether its traders tried to benefit from the information by buying bonds before the government's announcement. Securities laws prohibit trading on non-public information.
Davis said he told clients of the Treasury's decision to stop selling bonds, based on a press briefing he attended at 9 a.m. on Oct. 31, before the department made the announcement at 10 a.m. Government officials held the briefing, intended for reporters, on condition that the media not release the information until 10 a.m.
The Treasury itself posted the news on its Web site at 9:43 a.m., 17 minutes before the embargo ended.
The Davis leak helped explain a rise in prices that at the time dumbfounded traders and investors in the bond market, where $300 billion of securities trade daily.
The benchmark Treasury bond price jumped from 102 1/2 at 9:30 a.m. New York time, when the meeting with the press ended, to 104 at 10 a.m. By contrast, between 9 a.m. and 9:30 a.m., the bond traded within a range of 1/8 point.
Treasuries had fallen on an 8:30 a.m. report that showed U.S. growth in the third quarter exceeded expectations. Traders scaled back bets that the Federal Reserve would lower its target interest rate by half a percentage point.
Buying soon overwhelmed those who were selling on the economic report. The rising bond price sent its yield down 9 basis points in the 12 minutes before 10 a.m.
Falling Yields
The price surge wreaked havoc among bond traders, many of whom were locked into bets that yields on 30-year bonds would rise relative to short-term debt, such as two-year notes, traders said.
Instead, the bond buying shrank the two- to 30-year yield gap by 30 basis points in a few hours, marking the reversal of the strategy that had proven profitable for almost a year.
By day's end, the Treasury's announcement had sparked the biggest one-day gain in 14 years, and pushed the yields to levels not seen since Russia's debt default and the collapse of hedge fund Long Term Capital Management in 1998.
U.S. Treasury General Counsel David Aufhauser said in November that his agency would ask the SEC to investigate the matter.
Davis said he also disclosed the Treasury's decision to Stone & McCarthy Research Associates and Capra Asset Management. Ray Stone, a managing partner of Stone & McCarthy, declined to comment.
James Capra, president of Capra, didn't return a call. He chairs the Treasury Advisory Borrowing Committee, a group that advises the government on the mix of debt securities it sells. The group had recommended the elimination of the 30-year bond in January 2000, when surpluses were projected to continue growing. Traders hadn't expected the bond to be eliminated because a return to budget deficits meant an increased borrowing need.
The SEC has authority to determine whether insider-trading laws have been violated. It can subpoena trading records to see if Wall Street firms were given advance notice of the Treasury's decision. |
