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My understanding has been that insider trading is illegal in securities,
but not in bonds. At least that was they way it was a few years ago,
unless the laws have changed.
-----Original Message-----
From: tv [mailto:tonyvare@xxxxxxxx]
Sent: Monday, November 12, 2001 7:32 AM
To: realtraders@xxxxxxxxxxxxxxx; omega-list@xxxxxxxxxx
Subject: Goldman Received Early Word of Paln to End Bond Sales
The Treasury bond-trading investigation has drawn in one of Wall
Street's giants.
Goldman Sachs has confirmed to authorities that it was among the
companies tipped off by an industry consultant to the surprise
announcement that the Treasury Department was about to stop selling the
30-year bond. The information, which was released by the consultant
before a government-imposed embargo, may have helped the firm decide its
trading strategy for Treasury bonds before the news was officially
announced on Oct. 31, according to people familiar with the matter.
It isn't known whether Goldman made any profit through its access to the
information. Nor is it clear that trading on such information violates
any existing securities laws.
But the fact that Goldman, one of the most prestigious securities firms
on Wall Street, had access to the leaked information and may have used
it as part of its trading strategy suggests that the unauthorized
information was more widely shared throughout the bond market than was
initially known, and could lead to the most wide-ranging investigation
of the bond business in years.
The Treasury's announcement Oct. 31 that it would kill the long bond
sparked the biggest bond-market rally in 14 years, with bond prices
starting to jump well before the news was made public at 10 a.m. The
department last week determined that Pete Davis, a longtime industry
consultant, had attended a 9 a.m. briefing that day for the press in
which Treasury officials outlined their plans. Though the information
was embargoed for 10 a.m., Mr. Davis acknowledges that he tipped off
some of his clients to the news before then, though he said he informed
them of the government embargo.
Mr. Davis has named only two of the clients who received the
information, neither of whom is among the top tier of Wall Street
bond-trading activities. That changes with the involvement now of
Goldman, which has in recent days disclosed to investigators that it is
a client of Mr. Davis's and that it also received a call from him on the
morning of Oct. 31 with news of the Treasury move.
Last Monday, after reading news reports about the leak, Goldman
contacted the Securities and Exchange Commission and the Treasury
Department to discuss the matter. The SEC has launched an inquiry into
the firm's activities, as well as those of other firms, and Goldman is
sharing trading and phone records with the investigators.
"When we became aware of this situation, we contacted the appropriate
authorities to inform them of Mr. Davis' call and provide them with any
and all information that might be of assistance to them in connection
with any review they wished to conduct," said a Goldman statement. "We
do not believe we have engaged in any wrongful behavior."
While Goldman is the biggest firm to acknowledge receiving the tip ahead
of the Treasury's announcement, industry experts say other firms could
yet be caught up in the fallout. The SEC has confirmed that it is in the
middle of a probe into the activities of several bond-trading firms that
received news of the Treasury's move from Mr. Davis before the official
announcement. The identities of the other firms aren't known, nor is it
clear whether they traded on the information.
A spokesman for the SEC didn't return telephone calls seeking comment.
Before Treasury announced its plans on Oct. 31, Goldman's various
Treasury trading desks held positions that were somewhat bearish on the
30-year bond and long-term Treasurys in general, according to traders at
other firms who traded with Goldman. In effect, the firm was betting
that the price of the 30-year bond would fall.
But that stance changed that morning, according to these traders, after
Goldman received a call from Mr. Davis shortly after the news conference
ended at 9:30 a.m., telling the firm that the 30-year bond would be
discontinued. According to traders in the market, Goldman stepped up its
trading after 9:30 a.m., buying 30-year bonds and adding to positions in
the futures market. The traders say the firm's transactions took place
before the Treasury Department inadvertently put the announcement on its
own Web site prematurely at around 9:49 a.m.
Goldman didn't receive its call from Mr. Davis until after 9:30 that
morning. That means the firm had no more than 19 minutes to trade on the
news before it was disclosed on the Treasury Web site, raising questions
in some quarters about how extensive the firm's trading activity could
have been. And there may be other reasons Goldman was buying bonds.
Mr. Davis has said that he informed those clients whom he called before
the official announcement that the information he was passing on was to
be embargoed until the department's official announcement at 10 a.m. If
Goldman wasn't told that the information it was receiving was embargoed,
and that the firm wasn't supposed to be trading on it, there may not
have been any insider trading committed, securities lawyers say.
Regulators could argue, however, that it was well known in the bond
market that the news embargo would last until 10 a.m. And even if the
embargo was detailed by Mr. Davis, it isn't clear if trading on
embargoed information from Treasury falls under the category of insider
trading.
What is clear is that bond prices jumped well before the 10 a.m.
official announcement, and even before the Web-site posting, amid a
flurry of activity. From 9:30 a.m. -- about when the news conference
ended -- to the Web-site posting, the 30-year bond rose about
one-quarter of a point, or $2.50 for each $1,000 face value, after
trading from 9 a.m. to 9:30 a.m. within a much narrower range of about
one-eighth of a point. By 10 a.m., the price on the long bond rose by
more than 1 1/2 points, or $15 for each $1,000 face value, to 104.
Since the morning when the department's announcement was made, that
spurt of trading before the announcement has raised eyebrows on Wall
Street.
The Treasury's 10 a.m. announcement came as part of its regular
quarterly statement detailing how many bonds it planned to sell in the
coming quarter. Wall Street bond traders usually do little trading for
their own accounts before such an important announcement, which
sometimes affects prices. So when activity picked up on that morning,
and prices moved higher in the hour or so before the official
announcement, it raised suspicions on trading desks.
"There was strong activity buying the bond, well before the leak on the
[Treasury's] Web site," says Bill King, a strategist at M. Ramsey King
Securities in Chicago. "No one understood what was going on."
By the end of the day, the 30-year Treasury soared, helping traders
across Wall Street make -- and lose -- hundreds of millions of dollars.
The price on the 30-year bond jumped 5 9/32 points, or $52.81 for a bond
with $1,000 face value, to 107 21/32, the biggest move for the bond
since 1987 and about three times the previous biggest jump this year.
The move sent the bond's yield, which moves in the opposite direction,
to 4.88% from 5.22% on Tuesday, the lowest level in three years.
Until Goldman's acknowledgment, only two other firms had acknowledged
they received word from Mr. Davis of the Treasury news before it was
announced, Stone & McCarthy Associates, a bond-research firm, and Capra
Asset Management Inc., a hedge fund. Both firms have said they didn't do
any trading on the morning before the Treasury announcement, despite the
tip from Mr. Davis.
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