Federal prosecutors filed a seven-count indictment against a former vice president and a senior economist at

Goldman Sachs

(GS) - Get Report

, charging them with insider trading in U.S. government bonds.

James Comey, U.S. attorney for the Southern District of New York -- who has also indicted the likes of Martha Stewart and CS First Boston banker Frank Quattrone -- accused Goldman economist John Youngdahl and Wall Street adviser Peter Davis of conspiracy, securities fraud and other offenses Thursday, alleging trading on inside information that the U.S. Treasury would stop selling 30-year bonds.

"Youngdahl and Davis agreed that Davis would misappropriate, convert, and steal confidential, material, non-public information obtained at quarterly refunding press conferences and convey it to Youngdahl before the embargo was lifted," according to the indictment.

Goldman Sachs, meanwhile, has agreed to return $4.3 million in trading profits and pay a $5 million fine to settle civil charges with the

Securities and Exchange Commission

.

Insider trading in government Treasuries is almost unheard of because market-moving news typically comes from the government, not from specific companies. This case stems from a news conference held by the Treasury at 9 a.m. EDT on Oct. 31, 2001, when it announced it was ending sales of 30-year government bonds.

Reporters were told that they could not release the information to the public until 10 a.m. But Davis, a consultant for Goldman, began telling Youngdahl, and at least one person at MFS Investment Management, about the decision by about 9:35 a.m., regulators allege. MFS is a unit of Sun Life Financial Services of Canada Inc.

Youngdahl then passed on the news to several Goldman traders who started to buy 30-year bonds and bond futures. Between 9:35 and 9:43 a.m., when the Treasury Department inadvertently disclosed the information on its Web site, Goldman traders bought $84 million worth of 30-year bonds, netting profits of $1.5 million for Goldman's own account, prosecutors said. Traders also purchased $233.6 million worth of bond futures, reaping a profit of at least $2.3 million.

MFS portfolio managers bought $65 million worth of 30-year bonds for funds that they managed, generating approximately $3.1 million in profits.

By 10 a.m., the long bond had jumped to 104 from 102 1/2 at 9:30 a.m., when the conference ended. By the end of the day, the 30-year bond had risen 5 9/32, the largest one-day price move since October 1987.

The SEC said Davis has entered into a settlement with the commission while Steven Nothern, a former senior vice president and manager of seven fixed income mutual funds for MFS, and Youngdahl are contesting the charges.

MFS will pay a penalty of $200,000 and will reimburse another firm for more than $700,000 in trading losses incurred by selling to MFS the bonds that Nothern and the other fund managers purchased.

"Acting quickly on market-sensitive news after it becomes fully public is one thing; tipping by a recipient of embargoed news, and trading based on such a tip, is quite another," said Stephen Cutler, director of the SEC's Division of Enforcement.