Fixed Income Insider Trading

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As we discussed yesterday, insider trading laws and enforcement actions are not confined to equity markets.  Although not widely recognized, there is precedent for both criminal and civil insider trading enforcement in fixed income markets.  One of the cases was prosecuted by a future US Supreme Court justice.  For macro, policy and fixed income research firms, the cases illustrate that the risk of receiving inside information is not hypothetical.

Yesterday we mentioned the conviction of Steven Nothern, a fixed income portfolio manager for MFS, in an insider trading case brought by the US Securities and Exchange Commission in 2009.

In 2004, a former Goldman Sachs economist, John Youngdahl, pleaded guilty to criminal insider trading charges.  Like Nothern, he received information from an outside paid consultant that the Treasury Department would stop selling 30-year bonds.  Youngdahl passed the information to Goldman traders who bought $84 million of 30-year bonds and $233.6 million of 30-year bond futures.  Youngdahl admitted stealing confidential information about the discontinuance of the 30-year bond, in addition to counts of securities fraud and wire fraud.

Youngdahl, a respected senior economist at Goldman, had helped hire Washington-based Peter Davis for a monthly retainer of $1,500 per month.   Youngdahl also settled civil insider trading charges by the Securities and Exchange Commission, agreeing to a $240,000 fine.  Goldman Sachs agreed to pay $9.3 million to settle related SEC claims.

Youngdahl was sentenced to two years and nine months in prison.  He died in October last year from colon cancer.

In 1988, Robert Rough, a former director of the Federal Reserve Bank of New York, was indicted for tipping an investment advisory firm with nonpublic information about pending Fed discount rate changes.   According to the indictment, Rough received $47,000 in interest-deferred loans from the now defunct Bevill, Bresler & Schulman investment firm in exchange for the information.   Samuel A. Alito Jr., now a Supreme Court justice, was a prosecuting attorney on the case.  Rough pleaded guilty to one count of bank fraud and was sentenced to six months in prison.

In 1969, the SEC sanctioned a broker-dealer who traded in government securities based on non-public information gained from an insider at the Federal Reserve Bank of Philadelphia.  John G. Beutel of now defunct Beutel, Baxter and Company, a government bond dealer, consented to being barred from the association with a broker dealer or investment advisor.  Twelve others were disciplined in related actions, including bond traders at Morgan Guaranty Trust Company, Marine Midland Bank (now part of HSBC) and Blyth & Co. (ultimately merged into UBS).

In the context of increased media scrutiny and heightened criminal and civil prosecution of inside information cases, economic research, policy research and fixed income research firms need to give thought to how they might receive material non-public information during their analytic processes and ensure that they have reasonable safeguards in place that can withstand review by the media and/or regulators.

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