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Ex-Goldman Sachs Economist Is Indicted

September 4, 2003

NEW YORK (AP) _ A consultant illegally tipped Goldman Sachs & Co. that the government would end sales of its benchmark bonds, leading to millions of dollars in tainted profits for the Wall Street firm, officials charged Thursday.

The consultant, Peter Davis, frantically worked his cell phone to get the information to a Goldman senior economist minutes ahead of its public release on Oct. 31, 2001, according to an indictment unsealed in Manhattan federal court.

The news that the Treasury Department would end sales of its key 30-year bonds triggered the largest single-day rally in U.S. bonds since October 1987, when the market for stocks crashed and investors fled to bonds.

On that morning in 2001, a call by Davis to Goldman economist John Youngdahl gave the firm an eight-minute edge on the rest of the market _ enough time to turn a $3.8 million profit, the indictment said.

``Goldman traders began trading like there was no tomorrow,″ U.S. Attorney James Comey told reporters. ``And in the case of the 30-year treasury bond, there was no tomorrow.″

Goldman agreed to pay more than $9.3 million to settle charges by the Securities and Exchange Commission on its role in the fraud, SEC enforcement chief Stephen Cutler said.

Davis, 53, of Washington, D.C., pleaded guilty to a criminal complaint charging him with securities fraud, wire fraud and conspiracy, and will be sentenced later. He also agreed to pay nearly $150,000 to settle SEC charges.

Youngdahl, 44, of Summit, N.J., was indicted on seven federal counts, including perjury, conspiracy, securities fraud and wire fraud. He was due in court later Thursday and also faced a lawsuit by the SEC.

The Treasury Department carefully guards its quarterly press conferences to announce specifics of its sale of government bonds. Attendees must agree to abide by an embargo _ not release the information ahead of a pre-set time.

The embargoes are designed to make sure investors get critical market news at precisely the same time, guaranteeing that no one can profit from an insider edge.

Government court papers say Davis attended the press conferences as far back as 1994 and was illegally violating the Treasury embargo as early as 1999.

On the morning when the government suspended the 30-year bond, Davis allegedly made a series of cell phone calls between 9:35 a.m., when he got the news, and 9:43 a.m., when it was posted on the Treasury Web site.

One of them was to Youngdahl, who passed the news on to traders on Goldman’s bond desk, according to the government.

Within minutes, Goldman had purchased $317 million in bonds and bond futures. The purchases later resulted in $3.8 million in profits for the firm _ $1.5 million for bonds and $2.3 million in bond futures, the government says.

Another call was to Steven Nothern, who was senior vice president at MFS Investment Management, a Boston-based investment consulting firm. The SEC also sued Nothern, claiming his firm snapped up bonds and profited from the tip. MFS will pay about $900,000 to settle SEC charges.

The government did not immediately say who else might have profited from tips from Davis, who was president of his own Washington-based firm, Davis Capital Investment Ideas. Comey did not rule out further charges.

``This matter is extremely embarrassing to us,″ Goldman spokesman Lucas Van Praag said. ``It serves to underscore the fact that a single act has the potential to undermine the best efforts of everybody working at Goldman Sachs.″

The Treasury Department declined comment.

While trading on insider information in the Treasury bond market is not unheard of, authorities say it is much more difficult than trading illegally in stocks because the government controls information.

``Acting quickly on market-moving news after it becomes fully public is one thing,″ Cutler said. ``Tipping by a recipient of embargoed news, and trading based on such a tip, is quite another.″


On the Net:

Goldman Sachs & Co.: http://www.gs.com

Securities and Exchange Commission: http://www.sec.gov

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