Salomon Suspends 2 Traders, Admits Bond Violations
Salomon Bros. Inc., the Wall Street investment firm, Friday announced the suspension of two top traders amid an expanding government investigation into possible price-fixing and securities law violations in the huge Treasury securities market.
The Securities and Exchange Commission, the Federal Reserve Board and the Justice Department are conducting the investigation into bids by the Salomon firm at U.S. Treasury auctions, where the government raises billions of dollars at a time to finance its operations and cover the federal budget deficit, officials said.
A Treasury Department spokesman said the agency is “examining” possible “irregularities and rule violations” and the need for changes in auction procedures.
Government regulators had already concluded that an attempt was made to manipulate or “squeeze” the May 22 auction of $12.25 billion in two-year Treasury notes. A handful of bidders, underbidding the rest of the market, were able to sweep up a large portion of the offering of $1,000 notes, officials have said. The successful bidders then demanded that others who wanted to purchase the issue pay a higher, premium price. Fed officials have said such a squeeze play is not necessarily illegal and “not that unusual.”
The trading of government instruments is a $113-billion-a-day market, the biggest securities market in the world. Individuals may bid for newly issued Treasury securities directly from the government, but many investors make their purchases through one of the small group of government-selected “primary” dealers like Salomon. Once auctioned, Treasury securities continue to trade until they mature.
In a statement Friday, Salomon said it has suspended the two managing directors who ran its Treasury securities trading desk, and two other lower-ranking officials, pending completion of its internal investigation and the government inquiries. Salomon would not name the employees. Sources said Salomon managing directors Paul Mozer and Thomas Murphy head its trading desk. Neither could be reached for comment.
Salomon said that its inquiry uncovered that on at least three occasions it bid for and bought a higher percentage of Treasury notes at auction than Treasury rules allow. At the May 22 auction, the violation resulted from a company oversight, Salomon said. But violations at auctions in December, 1990, and February, 1991, were far more serious, it said.
At those times, Salomon officials bid for government securities on behalf of customers who had not authorized such a bid, Salomon said. Salomon then purchased the securities from the customers’ accounts. The transactions were a ruse that allowed Salomon to purchase for the firm’s account more than the 35% of the Treasury auction government rules permit any one firm to buy, it acknowledged.