Ex-Goldman Trader Admits to Hiding $8 Billion Position

Matthew Taylor, a former Goldman Sachs Group Inc. trader, pleaded guilty to concealing an unauthorized $8.3 billion trading position in 2007, causing the bank to lose $118 million.

Under an agreement with the government, Taylor, 34, pleaded guilty to a single count of wire fraud yesterday before U.S. District Judge William H. Pauley in Manhattan federal court. He told the judge he took the position to boost his standing, and his bonus, at Goldman Sachs.

Reading from a prepared statement, Taylor told Pauley that on Dec. 13, 2007, he accumulated a position 10 times the amount he was allowed to take in futures contracts tied to the Standard & Poor’s 500 Index. He said he made false entries in a manual trading system to hide the position on the CME Globex electronic-trading platform used by Goldman Sachs. He said he lied when questioned about the position by other Goldman Sachs employees.

“I accumulated this trading position and concealed it for the purpose of augmenting my reputation at Goldman and increasing my performance-based compensation,” Taylor said. “I am truly sorry.”

Before accepting the guilty plea, Pauley questioned a provision in the agreement stipulating that the loss, for sentencing purposes, was the $1 million to $2.5 million Taylor hoped to win in bonuses from the trades, instead of the $118 million loss suffered by Goldman Sachs.

Maximum Term

The maximum sentence for wire fraud is 20 years in prison. Both sides agreed that federal sentencing guidelines, which aren’t binding, call for Taylor to get 33 to 41 months in prison and pay a fine of $7,500 to $75,000.

Pauley asked why prosecutors didn’t seek a higher guideline range for Taylor for jeopardizing the safety and soundness of a financial institution.

“I want to just make it very clear to the defendant and his counsel that the court is puzzled by the lack of any enhancements in this case, with a loss of $118 million,” the judge said.

Pauley said he isn’t bound by the plea agreement and warned that Taylor can’t withdraw his guilty plea if he gets more prison time than he expected. After discussing the matter with his lawyer during a brief recess, Taylor went forward with the plea.

The judge set a July 26 sentencing date and released Taylor on a $750,000 bond.

‘Very Disappointed’

“We are very disappointed by Mr. Taylor’s unauthorized conduct and betrayal of the firm’s trust in him,” Michael DuVally, a spokesman for New York-based Goldman Sachs, said in a statement yesterday.

In a one-count charging document, prosecutors said Taylor made the unauthorized trades to compensate for losses in his trading account the previous month. Taylor’s salary in 2007 was $150,000 and he expected a $1.6 million bonus, prosecutors said.

After Taylor ran up the $8.3 billion position, which exceeded the combined limit for his 10-trader desk, he was contacted by a member of the Market Risk Management and Analysis team. He falsely claimed the trading account had a position of $65 million, rather than about $8 billion, according to the government.

Goldman Sachs lost money when it sold off the position to reduce its risk, according to prosecutors.

In November, the U.S. Commodity Futures Trading Commission filed a lawsuit accusing Taylor of concealing an $8.3 billion position. The fabricated trades and concealment violated provisions of the Commodity Exchange Act, according to the complaint.

Morgan Stanley

Morgan Stanley hired Taylor in March 2008, three months after Goldman Sachs fired him. Goldman Sachs cited “alleged conduct related to inappropriately large proprietary futures positions in a firm trading account,” in a U-5 form, according to a Financial Industry Regulatory Authority document.

Morgan Stanley had employed Taylor before he joined Goldman Sachs in 2005.

Taylor, who handled client-related equity derivative trading at New York-based Morgan Stanley, left the firm in July, the company said last year. His departure wasn’t related to the CFTC complaint, said a person familiar with the situation who asked not to be identified because the information was private.

According to the CFTC, Taylor concealed his position by bypassing Goldman Sachs’s internal system for routing trades to the Chicago Mercantile Exchange and manually entering fabricated futures trades in a different internal system.

Goldman Sachs, which wasn’t identified in the CFTC lawsuit, said at the time that Taylor made the trades while employed at the firm.

“Matthew Taylor has accepted responsibility for his conduct today,” his lawyer, Thomas Rotko, said yesterday after the plea hearing. “The unfortunate events of late 2007 were an aberration. He looks forward to the opportunity to put this behind him and resume what has otherwise been a productive and exemplary life.”

The CFTC case is U.S. Commodity Futures Trading Commission v. Taylor, 12-cv-8170, U.S. District Court, Southern District of New York (Manhattan).

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