Kidder probe cites failure of management

August 05, 1994|By New York Times News Service

NEW YORK -- A three-month internal investigation of the bond trading scandal at Kidder, Peabody & Co. says that the firm's head bond trader acted alone and deliberately in creating $350 million of phony profits.

It also said that his trading scheme started much earlier and went on for much longer than previously thought.

The report said that the trader, Joseph Jett, who had been hailed as a star performer, never actually made money for the brokerage firm.

But it heaps most of the blame for one of Wall Street's biggest frauds on a complete breakdown in the firm's system of supervision and on two of its senior executives.

In the first detailed account of the scandal that has rocked Kidder and forced the resignations of three top executives, the report said that Mr. Jett began his phantom trading almost immediately after arriving at the firm in 1991. And while Mr. Jett racked up $349.7 million in phony trades over the next 2 1/2 years, he actually lost $85.4 million.

The report, which was released yesterday, concludes, as Kidder has contended since the scandal was discovered in April, that Mr. Jett acted alone.

But it still casts a harsh spotlight on management's failures, especially those of Mr. Jett's two immediate bosses. And it paints a stunning portrait of how greed and myopia overcame good judgment, prudence and responsibility at Kidder, a Wall Street firm that prided itself on integrity.

And the management failures were not limited to the top executives. The report says that in Kidder's profit-oriented environment, employees throughout the firm were unwilling to ask tough questions when money was being made.

"The door to Jett's abuses was opened as much by human failings as by inadequate formal systems," the report concluded.

While the report does not cast its eye on the rest of Wall Street, the fact that Kidder's management, audit and accounting systems failed to detect a scheme that grew to reach nearly $350 million in phantom profits suggests that it could happen elsewhere if profits and annual bonuses are the only trading numbers on which management concentrates.

The 90-page report -- which some said should be a warning to Wall Street executives that they would be held responsible for wrongdoing by their biggest stars -- was prepared by Gary G. Lynch, the former enforcement chief of the Securities and Exchange Commission and a partner in Kidder's outside law firm, Davis Polk & Wardwell.

Auditors from General Electric Co., the parent of Kidder, also participated in the investigation, including the reconstruction of Mr. Jett's trades.

The report represents Mr. Lynch's conclusions about the scandal and makes recommendations of changes that Kidder can make in its supervisory procedures.

No criminal or civil charges have been brought in the case so far, but a person close to the investigation who had reviewed the report said Mr. Lynch's findings were being viewed as a guide for continuing investigations by the U.S. attorney, the SEC and the New York Stock Exchange.

Mr. Lynch's devastatingly detailed critique of the firm's hapless efforts to keep track of a rising star could arm angry shareholders who have already sued GE.

But, by the same token, the report -- and the fact that Kidder has already acted to punish the guilty and change procedures -- could win the firm some breaks when it comes to fines and other penalties that regulators may impose.

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