For Kidder, Peabody & Co., the 1980s ended on a very sour note. Its star banker, Marty Siegel, was at the center of the Ivan Boesky scandal that blew up in 1987. General Electric Co. (GE) became the parent company to Kidder Peabody when it acquired the bank in 1986 and was required to pay $26 million in fines as part of a settlement with then-U.S. Attorney Rudy Giuliani. Slowly, Kidder Peabody built itself back into profitability under the management of Si Cathcart and his successor Mike Carpenter.

Unfortunately for Kidder Peabody, the internal problems were not over. Joseph Jett was a bond trader on its government bond desk. His job was to make a profit from price differences in plain-vanilla government bonds and 澳洲幸运5官方开奖结果体彩网:zero-coupon bonds. Jett's job involved stripping and/or reconstituting bonds to take advantage of 澳洲幸运5官方开奖结果体彩网:arbitrage opportunities. But Jett had discovered a glitch in Kidder's computer system; it would record profits on a forward reconstitution daily, even if the trades would be worthless upon settlement.

Joseph Jett's Fraudulent Transactions

Kidder Peabody's system was designed to tally profits while allowing time for trades to settle. By moving his trades forward, again and again, Joseph Jett was able to keep profits building while delaying the final transaction that would necessarily cause a loss equal to the false profits.

An upgrade of the system on the same faulty grounds allowed him to enter more false trades, which kept them floating longer. GE noticed Kidder's portfolio was becoming extremely heavy and overextended in bonds. GE told Kidder to reduce its stake, whereupon Jett's scam was revealed.

Around $350 million in false trades were made, and $8 million in performance bonuses on false trades were paid to Jett. Jett's bonuses made him the prime target of an SEC investigation. Interestingly, Jett denied concealing the trades and put the blame on Kidder Peabody management, stating that the company knowingly engaged in fraud in an attempt to wrest control of t꧂he fiℱrm back from GE. His most serious charges were overturned on appeal.

Kidder Peabody untangled from GE when the parent company sold the investment bank to PaineWebber, presumably out of anger at having to deal with two high-profile trading scandals during the short time it owned it.

The Bottom Line

When the scandal was revealed, Kidder Peabody hired lawyer Gary G. Lynch, the former enforcement chief of the SEC, to conduct an internal investigation. The result was an extensive document, released in August 1994, that became known as the Lynch Report. The report concluded that Jett acted alone and deliberately when he faked $350 million of profits. It also concluded that he had begun faking trades much earlier than had been previously thought.