Ex-Goldman Sachs Group Inc trader Matthew M. Taylor pleaded guilty on Wednesday to defrauding the Wall Street bank with an unauthorized $8.3 billion futures trade in 2007, saying he exceeded internal risk limits and lied to supervisors to cover up his activities.
Taylor, 34, pleaded guilty to one count of wire fraud in federal court in lower Manhattan on Wednesday morning, after voluntarily turning himself into federal authorities earlier in the day.
The Massachusetts Institute of Technology graduate pleaded guilty about four months after the Commodities Futures Trading Commission filed a civil complaint against him. The CFTC accused Taylor of fabricating trades to conceal a huge, unauthorized position in e-mini Standard & Poor’s futures contracts, which bet on the direction of the S&P 500 index.
Taylor on Wednesday told U.S. District Judge William Pauley that his trading position at Goldman exceeded risk guidelines set by his supervisors “on the order of 10 times.” He also admitted to making false statements to Goldman personnel who questioned him about the position, which led to a $118 million loss for Goldman Sachs.
“I am truly sorry,” Taylor said.
‘FAR EXCEEDED‘ RISK LIMITS
Taylor, who joined Goldman in 2005, worked in a 10-person group called the Capital Structure Franchise Trading (CSFT), and was responsible for equity derivatives trades.
After his trading profits plunged in late 2007, his supervisors told Taylor his bonus was going to be cut and instructed him to reduce risk-taking, the charging documents said.
Instead, he “amassed a position that far exceeded all trading and risk limits set by Goldman Sachs, not only for individual traders … but for the entire CSFT desk,” according to charging documents.
Taylor attempted to hide his actions by putting false information into a manual entry system, according to charging documents filed in his case. When supervisors and other employees confronted him about discrepancies compared with his actual positions, Taylor repeatedly lied, the document said.
In court, Taylor said he covertly built the position in an effort to restore his reputation and increase his bonus. He earned a $150,000 salary and expected a bonus of $1.6 million, according to court documents.
Taylor was fired from Goldman in December 2007, shortly after the incident, according to brokerage industry records. He then took a job at Morgan Stanley, where he had first worked after graduating from MIT, but left that firm again last summer.
Prosecutors are seeking a prison sentence of 33 months to 41 months and a fine of $7,500 to $75,000.
During the hearing, Pauley questioned how the government came up with its proposed sentence, given the size of Goldman’s loss. Steve Lee, a prosecutor, said it was based on Taylor’s compensation.
Pauley stressed the “court may not be bound by that calculation” come sentencing, adding that he was “puzzled” by the deal.
“He cooked Goldman’s books, and that’s not sophisticated?” Pauley asked.
A person familiar with Goldman’s equities trading business said Taylor’s trading position was significant – representing roughly 20 percent of e-mini trading volume the day it was established. The market moved against Taylor’s position, leading to the loss, said the person, who declined to be named.
For perspective, the $8.3 billion position Taylor took in the e-mini futures market was twice the size of the $4.1 billion trade the U.S. Securities and Exchange Commission highlighted in a report on the causes of the May 6, 2010, “flash crash” in which a series of e-mini trades caused the Dow Jones Industrial Average to plunge 700 points in a matter of minutes.
Taylor said he knew his actions were wrong and illegal but established the trade anyway to augment his reputation and increase his compensation.
Taylor’s bail includes a $750,000 bond with two co-signers. His sentencing hearing is set for July 26.
Taylor’s activities first came to public light in November when the CFTC sued him.
In dismissing Taylor, Goldman noted he was fired for taking an “inappropriately large proprietary futures positions in a firm trading account,” according to a filing with the Financial Industry Regulatory Authority.
But three months later, Taylor was hired by Morgan Stanley as an equity derivatives trader.
Taylor, whose criminal sentencing is set for July 26, faces a maximum of 20 years in prison.
Goldman paid $1.5 million last year to settle charges with the CFTC that it had failed to appropriately supervise Taylor.
The bank has since put in place procedures to catch wayward trading activity more quickly.
“We are very disappointed by Mr. Taylor’s unauthorized conduct and betrayal of the firm’s trust in him,” the bank said in a statement on Wednesday.
A spokesman for Morgan Stanley declined to comment on Taylor’s guilty plea.
Last year, a Morgan Stanley spokesman said he left the firm unrelated to the charges against him.
Taylor’s lawyer, Thomas Rotko, said his client accepted responsibility for his actions, which he called “an aberration.”