Goldman Avoids Class Suit Over T-Bond Trades

CHICAGO (CN) - The 7th Circuit lay to rest a class action against Goldman Sachs over insider trading of government securities in 2001, affirming a $200,000 settlement to only one plaintiff.

The criminal conduct at issue occurred almost 10 years ago, on Oct. 31, 2001. That morning, at a Treasury Department meeting, Goldman consultant Peter Davis Jr. learned that the government was suspending the sale of new 30-year bonds.

The meeting ended at 9:25 a.m. Attendees learned that the information was embargoed until 10 a.m. Davis, however, passed the tip on to some of his clients, including former Goldman Vice President John Youngdahl.

At 9:35 a.m., Sachs traders began to buy futures contracts for 30-year treasury securities, expecting the price to rise. When the Treasury posted the news on its website at 9:43 a.m., bond prices jumped at the largest one-day increase in 14 years.

The Treasury did not issue 30-year bonds again until 2006.

But abnormal trading patterns just before the announcement attracted an investigation by the Securities Exchange Commission, which resulted in a civil complaint filed against Davis, Youngdahl and Goldman in September 2003.

Denying that its traders knew the information was embargoed, Goldman settled to avoid litigation. Davis cooperated with prosecutors and avoided an indictment. Youngdahl was charged with fraud and sentenced to 33 months in prison.

In March 2004, Premium Plus Partners filed a class action against Goldman on behalf all traders who had held short positions in futures contracts on Oct. 31, 2001. Short position holders borrow shares and immediately sell, hoping the price will go down so that they can return the shares and keep the difference in price. When the price of securities went up, the short holders lost money.

"Economists would say that the reason for the price increase was the fact that a desirable asset, the 30-year Treasury bond, had become scarcer," Chief Judge Frank Easterbrook wrote. "But Premium Plus blamed the increase on Goldman Sachs's trading, which it described as giving Goldman Sachs market power through an excessively large position."

The court never reached the merits of these allegations.

U.S. District Judge Samuel Der-Yeghiayan declined to certify a class, but also refused to grant summary judgment for the bank. Goldman settled with the only remaining plaintiff, Premium Plus, agreeing to pay $200,000 plus interest.

At the same time, George Tomlinson, as well as four other short-holders, filed suit on the same grounds. His case was dismissed by U.S. District Judge Elaine Bucklo as outside the statute of limitations.

With both claims extinguished, the suit appeared to have ended. But Premium Plus sought to certify another class, seeking to spread litigation costs among other investors and increasing the size of its award. That motion was denied.

Premium Plus and Tomlinson both appealed, but found no relief at the Chicago-based federal appeals court.

"Tomlinson would be a bad representative for the class because he litigated and lost; Premium Plus Partners is a bad representative because it litigated and won," Easterbrook wrote.

Only an intervening party could have kept the class action alive, the court ruled.

"But Premium Plus does not want to keep the case going long enough for someone else to intervene; the only 'someone' who stepped forward was Tomlinson. Premium Plus proposes to be the representative itself, even though its claim has been resolved. No decision of which we are aware allows that."

The court affirmed the judgments, but ordered the settlement to include compound interest dating back to Oct. 31, 2001.

"An award of [compound interest] simply returns both the money, and the time value of its use, to Premium Plus," Easterbrook wrote. "That the interest comes to more than 50% of the principal reflects the length of time that Goldman Sachs has had the money."

Premium Plus can still file a claim for attorneys' fees.

Premium Plus was represented by Anthony Fata of Cafferty Faucher. Goldman Sachs was represented by Winston & Strawn.

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