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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, June 22, 2009

SEC Announces Victory in Case Involving Trading in T-Bills

The SEC announced today that on June 22, 2009, a federal jury in Boston, Massachusetts, returned a verdict in its favor against Steven E. Nothern, a former Senior Vice President and manager of seven fixed income mutual funds for Massachusetts Financial Services Company ("MFS"). This action is one of several brought by the Commission arising from trading in U.S. Treasury 30-year bonds.

The Commission's complaint against Nothern alleged that Peter J. Davis, Jr., a Washington, D.C. based consultant, marketed himself to Wall Street clients by claiming special access that enabled him "to get Washington information ahead of the media," and by promising clients "the first call on investment issues they care about." Nothern, who managed seven fixed income mutual funds for MFS, was Davis' primary contact at MFS.

The complaint alleged that, since 1994, Davis had attended the Treasury Department's quarterly refunding press conferences under an explicit agreement that he would honor the news embargo that Treasury imposed until the designated public announcement time. At these press conferences, the Treasury Department announced the Federal Government's financing requirements for the coming quarter. The complaint further alleged that at the October 31, 2001, refunding press conference, Treasury Department officials announced three times that the information being made available was embargoed until 10:00 a.m. The press conference ended at approximately 9:25 a.m. Then, Davis, despite the officials' warnings, and in violation of his prior explicit agreement to abide by the embargo, placed a series of cell phone calls to his clients, including Nothern, and told Nothern that the Treasury Department was suspending future long bond issuances. The complaint charged that Nothern knew, from a voice mail which Davis left him and which he listened to, that Davis had learned about the suspension of 30-year bond issuances directly from the Treasury Department, and that the news was embargoed until a scheduled 10:00 a.m. press announcement.

According to the complaint, after Nothern heard the news of the Treasury's decision to cease issuance of the long bond from Davis on the morning of October 31, 2001, and before the news became public, Nothern and other MFS portfolio managers that he tipped bought $65 million in par value of 30-year bonds for funds that they managed, generating approximately $3.1 million in illegal profits.

After deliberating for three hours, the jury returned a verdict finding that Nothern violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's complaint seeks as relief a permanent injunction, disgorgement with pre-judgment interest, and a civil money penalty. The court will determine the appropriate remedies against Nothern at a later date.

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