Salomon admits to violations in Treasuries bids

August 15, 1991|By Scot J. Paltrow | Scot J. Paltrow,Los Angeles Times

NEW YORK -- Salomon Brothers, the nation's leading trader of government securities, admitted yesterday that its wrongdoing in Treasury auctions was much wider than previously disclosed and said that the company's chief executive and other top executives knew of violations but failed to inform regulators.

The Wall Street brokerage, investment bank and primary dealer of government securities also said in a press release that it could face criminal prosecution and possibly be suspended or barred as a securities dealer.

Regulators and government securities experts said that the disclosures boost the possibility of strong disciplinary action against Salomon and could roil the government securities market. Salomon, renowned for its trading prowess, has long been a dominant buyer in the $2.2 trillion market.

William R. McLucas, chief of the Securities and Exchange Commission's enforcement division, declined to say what action, if any, may be taken against the company. But he said, "The disclosures in the press release raise really serious questions about conduct in connection with the particular securities issues mentioned and generally about their conduct in this market."

Treasury auctions of securities are the way the government finances the national debt. The government securities market typically involves trading worth $100 billion a day. Most of the securities are purchased by banks and large institutions.

Last week, Salomon announced that it was suspending two officials in charge of government securities trading and two junior employees. The company said then that in three Treasury auctions it had violated the regulation that forbids any one buyer from purchasing more than 35 percent of a Treasury issue. It also admitted making purchases in customers' names without their authorization.

Yesterday's revelations appear particularly damaging because of the admission that Salomon's top management knew of wrongdoing beginning in April but repeatedly failed to inform regulators.

The company, however, gave no indication that its top three executives were involved in or knew of the wrongdoing at the time it happened.

The company said that its board will form a committee made up exclusively of outside directors to review the internal investigation.

The company said that John H. Gutfreund, chairman and chief executive; Thomas W. Strauss, president; and John W. Meriwether, vice chairman, all were informed in April by one of the company's managing directors that an unauthorized bid had been submitted in a February 1991 auction of five-year notes.

"Management immediately determined that this matter must be communicated to the government; however, due to a lack of sufficient attention to the matter, this determination was not implemented promptly," the company said in the statement. The wrongdoing wasn't disclosed to the government until Aug. 9.

A few weeks after learning about the February incident, Salomon said, Mr. Gutfreund and other top executives learned of possible improprieties in buying a huge portion of two-year notes auctioned in May.

"Management increased its review of the firm's government securities business, but despite its knowledge of clear wrongdoing in the February auction took no further action," Salomon's statement reported.

In the new disclosures, Salomon admitted three additional instances of exceeding the 35 percent limit or falsely using customers' names, including one instance it said came about because of a $1 billion practical joke gone awry.

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