Phantom trading scandal at Kidder subsidiary shakes up GE

April 19, 1994|By New York Times News Service

NEW YORK -- Just when General Electric Co. thought that it had put its investment banking subsidiary, Kidder Peabody & Co., on solid footing, a seemingly rogue bond trader caused it to take a $350 million pretax charge to its first-quarter earnings.

On Sunday night, Kidder announced that it had fired Joseph Jett, the 36-year-old head of its government bond trading desk, and reassigned six other employees.

It said that Mr. Jett had engaged in a series of phantom trades related to stripped government bonds that had caused the firm to record $350 million in profits over the last year that had not been earned.

Stripped bonds are ones in which the rights to the interest payments have been sold separately from the rights to the principal.

Kidder said the alleged scheme appeared to be aimed at increasing Mr. Jett's compensation, which was $9 million last year.

The trades may also have been intended to cover losses from other trades that Kidder said may total as much as $100 million. Kidder officials would not describe how these other trades were done.

The incident comes as a challenge to John F. Welch Jr., GE's strong-willed chairman and a believer in tight, nearly obsessive internal controls.

"It's frankly surprising that a company like GE would allow something of this magnitude to happen," said Russell L. Leavitt, an analyst at Salomon Bros.

Mr. Welch, however, said in an interview last night that there were limits to the effectiveness of any control system. "When we have 220,000 employees, you can't legislate morality," he said. "Obviously we made a mistake in hiring, and obviously the

controls were not good enough to stop the clever scheme this fellow put together."

Mr. Welch added that nothing in the incident made him questio his commitment to the investment banking business and its huge salary scale. "I don't think you can compete in any business, whether networks or brokerage houses, without paying competitive wages," he said.

GE bought 80 percent of Kidder for $602 million in April 1986, giving it entree into the lucrative areas of mergers and securities underwritings. But just months after the purchase, Martin Seigel, Kidder's former top investment banker, admitted to insider trading while at Kidder. At that time, GE fired Kidder's chairman, Ralph DeNunzio, and increased its supervision of the firm.

While the insider-trading scandal and subsequent management turmoil hurt Kidder, it has rebounded since 1990, the year it lost $54 million. The firm earned $300 million in 1992 and $439 million last year.

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