SEC seeks more illegal activity in securities

August 20, 1991|By Kurt Eichenwald | Kurt Eichenwald,New York Times News Service

NEW YORK -- The scandal that has rocked Salomon Bros. Inc. widened yesterday as the Securities and Exchange Commission began requesting documents from dozens of other firms, seeking evidence of possible collusion, fraud and other illegal practices in the $2.2 trillion market for U.S. Treasury issues, people who have been briefed on the inquiry said.

The far-reaching requests began to go out over the weekend, providing the first indication that government investigators suspect that illegal bidding practices of the sort disclosed at Salomon Brothers may have been more widespread than previously thought.

All primary dealers, which are the institutions authorized to trade directly with the Federal Reserve, are being asked to provide documents in the inquiry, these people, who spoke on condition that they not be identified, said.

The requests were issued after a formal order of investigation was approved by the SEC's commissioners. People involved in the case said that the government's official name of the investigation did not even mention Salomon Brothers; it is called "In the Matter of Certain Treasury Notes."

Naming the securities and not Salomon would seem to indicate that the commission believes the illegal activities might not be limited to those disclosed by the firm earlier this month.

The SEC has not yet subpoenaed other firms. "They expect voluntary compliance," one person involved in the case said. "If they don't get it, they will send subpoenas right away."

The broadening of the scandal came as Salomon Brothers, deeply troubled, continued to move to restore order.

Warren E. Buffett, the Omaha investor who was named chairman and chief executive of the firm Sunday, flew to Washington yesterday to meet with a series of regulators who are investigating the firm.

Mr. Buffett, whose company, Berkshire Hathaway Inc., put $700 million into Salomon in 1987 as the firm was fighting off a hostile takeover, replaced John H. Gutfreund, who resigned as chairman and chief executive Sunday.

Salomon is under investigation by the SEC, the Treasury, the Federal Reserve and the Justice Department for its illegal bidding during the Treasury auctions.

Salomon has admitted illegally purchasing more Treasury securities than the 35 percent maximum allowed any one firm, as well as other violations.

Wall Street executives said that such actions could create the perception that a leading force in the Treasuries market was dishonest and could damage market credibility worldwide.

The changes at Salomon have not yet solved the firm's problems with its customers. The California Public Employees' Retirement System, the nation's largest state pension fund, met yesterday to decide what actions it should take because of the scandal.

"The question of whether or not to impose any sanctions on Salomon is currently under discussion," said Gray Davis, the California state comptroller. "Clearly we have a fiduciary obligation to our beneficiaries in this."

Seeking to further distance itself from the scandal, Salomon moved rapidly yesterday to replace two senior executives who were dismissed Sunday for their role in the unfolding scandal.

Salomon told its employees that Eric R. Rosenfeld, 38, a managing director and co-head of fixed-income arbitrage, would interim head of the government trading desk.

Hans Ulrich Hufschmid, 35, a vice president and manager of the foreign exchange desk in London, was named head of foreign exchange in New York.

The two men replace Paul Mozer and Thomas Murphy, the two former top traders on the government desk, who were dismissed for their roles in submitting illegal bids during several Treasury auctions since December.

The appointments came as Salomon's new senior management moved swiftly to try to contain the damage, both in Washington and at the firm.

As Mr. Buffett worked in Washington, Deryck C. Maughan, the former co-head of investment banking who was named chief operating officer Sunday, took the firm's reins, seeking to calm executives at the New York office.

In a series of morning meetings, Mr. Maughan repeatedly told the firm's executives and employees that

he believed that Salomon should now turn back to its business.

The statements were given at 8 a.m. at a meeting of the sales and trading departments and were repeated at a meeting of the investment banking division at about 8:35 a.m.

"He said that we have hit bottom and we are going to go up from here," one executive said.

How government securities market works

To finance the national debt, the government periodically borrows money from the public by issuing IOUs in the form of bonds, notes and bills. The only difference between the three is the length of time the government takes to repay the money. Bonds mature in 10 to 30 years; notes come due in two to 10 years; and bills are issued with three-, six- and 12-month maturities.

Forty brokerages, of which Salomon Bros. is the largest, are allowed to buy the securities wholesale directly from the government at auctions. Those firms, called "primary dealers," can turn around and sell the securities for a profit in the secondary market to investors or other firms.

Primary dealers are the only ones allowed to bid. In return, they agree to buy whatever amount the government wants to sell.

What Salomon did is buy more than its share of securities from the government. By buying more than the 35 percent limit of securities auctioned by the government, Salomon could control enough of the market to charge high prices when reselling the securities. The firm was able to gather more than its share of the auction by submitting bids under the names of customers without authorization.

#SOURCE: Associated Press

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