The US Department of the Treasury is promising a quick decision on whether to refer suspicious trading in the 30-year bond Wednesday morning to government lawyers, after an investment consultant admitted telling clients the security was to be eliminated. \nPete Davis said he provided clients with details of the decision based on a press briefing he attended at 9am Wednesday, before public release of the news sparked the biggest rally in 14 years. \nThe price on the benchmark Treasury bond rose from 102 1/2 at 9:30am, when the meeting with the press ended, to 104 at 10am. By contrast, between 9am. and 9:30am, the bond traded within a range of 1/8 point. \n"My office is looking into it," said David Aufhauser, Treasury's general counsel. "I will confirm that we've been made aware of assertions of suspected trading activity." \nThe Treasury "will make referrals to appropriate authorities at the conclusion of the investigation," Aufhauser said. He added that a decision would come "almost immediately." \nThose authorities may include the Securities and Exchange Commission and the US Attorney's offices in New York and Washington, he said. \n"There is a potential insider trading issue here," said Karl Groskaufmanis, a partner at the Fried, Frank, Harris, Shriver & Jacobson law firm in Washington who has been involved in insider trading investigations. \n"If there's been illegal insider trading, the SEC would have the capacity to prosecute," Groskaufmanis said. "This would be unusual, but not completely unprecedented. There have been isolated instances in which the SEC has initiated insider trading cases involving either government, municipal or corporate debt securities." \nSEC Chairman Harvey Pitt was a partner at Fried, Frank before assuming the agency's helm this year. \nPress conference \nDavis, a former congressional aide who regularly attends Treasury press conferences, was in a meeting of reporters who were advised of the decision to eliminate the bond by Undersecretary of Treasury for Domestic Finance Peter Fisher, on condition they not release the information until 10am. \nDavis said he disclosed what he learned to representatives of Stone & McCarthy Research Associates and Capra Asset Management. \nJames Capra, president of Capra Asset Management, is chairman of the Bond Market Advisory committee. \n"I thought I was dealing with people who were writing analytical pieces who would honor the embargo for release time," Davis, president of Davis Capital Investment Ideas, said in an interview. \nWard McCarthy, managing partner of the firm that bears his name, said he and his staff honored the embargo. "We were informed of these details and we abided by Pete Davis' request to hold onto the information until after the embargo and been lifted and that's what we did," McCarthy said in a telephone interview. \nCapra declined comment on his role in the release, although he pointed out that the largest pre-announcement move in price was just 9/32, between 9:55am and 10am. "As a bond practitioner and analyst, that's not much," he said. \nThe premature release of the information raises questions about the Treasury's practice, McCarthy and others said. \n"The way the government disseminates information should be made state of the art, and in my mind that means having a specific release date, a release time and to put it out over the Internet so the general public can access this information all at the same time," he said. \nThe government's decision to halt sales of the 30-year bond surprised investors, because the announcement followed speculation that a shrinking budget surplus would lead the government to delay a plan to eliminate the securities. \nAny trader who had advance knowledge of the step would have had an advantage on a day when bonds posted their biggest move since the October 1987 stock market crash. The 5 3/8 percent Treasury bond maturing in 2031 gained 5 5/32 points, pushing down its yield 33 basis points to 4.87 percent. \nGovernment blunder \n"Did the Treasury make a mistake? Apparently it did," said James Keller, a portfolio manager at Pacific Investment Management Co in Newport Beach, California, which has US$240 billion under management. \nDaily trading in the Treasury market dwarfs the stock market, with more than US$300 billion of average daily trades last week, compared with about US$75 billion for the New York Stock Exchange and NASDAQ Stock Market. \n"It would be extremely troubling to market participants that information of a market-moving nature was prematurely and unevenly released," said Micah Green, president of the Bond Market Association, which represents bond dealers. \nDavis worked 11 years on Capitol Hill as an economist with the Joint Committee on Taxation, the Senate Budget Committee, and for Democratic Senator Robert Byrd. In the private sector, he has worked for Prudential Bache Securities Inc. and Ernst & Young, establishing his own firm in 1992 to advise institutional investors on government policy. \n"My 11 years on Capitol Hill and 16 years advising Wall Street clients have taught me how to get Washington information ahead of the media," Davis said on his Web site. \nMany federal agencies, including the Treasury, often brief reporters under embargo in order to provide for an orderly release of information. Other departments, including Commerce, Labor, and Agriculture provide information to reporters in a locked room with no telephone access ahead of release time, which prevents any early disclosure. \n"This guy cheated big time," said John Poole, who manages US$10 billion in bonds at Mellon Private Asset Management in Boston. \n"It's too bad, especially for the ones who were short on 30-year Treasuries," he said. "But it's not the first time strange or illegal things happen with the bond markets." \nThe Treasury itself leaked its own announcement by inadvertently posting a statement on its Web site around 9:50am. \nThe department's Office of Public Affairs issued a statement Wednesday evening confirming what it called an "inadvertent" leak. "Treasury regrets this occurred and will work to ensure the integrity of the announcement process," the statement said. \n"The Treasury needs to be a little bit more protective about how everything is released," said Pimco's Keller, a member of the Treasury's Borrowing Advisory Committee, which advises the department on how best to manage the government's debt. \nGroskaufmanis said Treasury's premature release of the information on its Web site might be an argument in defense of insider trading charges.
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