Salomon Bros. Says It Broke Treasury Rules

Salomon Bros. Inc. raised the prospect of a new Wall Street scandal Friday by disclosing that it has flouted the rules in Treasury debt auctions, snapping up more issues than any single bidder is permitted to buy.

The giant investment firm, the biggest participant in the federal government’s sales of notes and bonds for many years, said it had suspended two unidentified managing directors and two other unidentified employees in connection with the irregularities.

Federal law enforcers in Washington confirmed that they were looking into the matter, including the possibility that the brokerage may have monopolized the market for one of the most important categories of securities.

“The irregularities resulted from actions of individuals, acting as such, without the knowledge of management,” said Salomon spokesman Robert F. Baker. Nonetheless, the news jolted the financial world by introducing at least the possibility of another trading scandal in the U.S. markets, last tainted in a profound way by the insider trading stock scandals of the late 1980s that brought down financier Michael Milken and Drexel Burnham Lambert Inc.

It also sent securities prices briefly lower as investors sold holdings out of fear that Salomon might cleanse its own inventory of improperly purchased Treasury issues. The market later ended mixed, but Salomon’s own stock dropped $1.875 to $34.75 in New York Stock Exchange trading.

Salomon maintains billions of dollars worth of government securities and has the potential to influence prices enormously through the purchase and sale of large holdings.

In a terse two-page statement, the brokerage outlined violations in the bidding procedure in a December, 1990, Treasury auction of four-year notes, a February, 1991, auction of five-year notes and a May, 1991, auction of two-year notes.

Salomon said in each case, the brokerage improperly breached the 35% limit on the purchase of a Treasury issue by a single bidder. The rule is designed to prevent a single buyer from gaining a monopoly and dictating the price.

In the four- and five-year auctions, Salomon said unauthorized persons made bids from the brokerage. In the two-year auction, Salomon said it bid for 35% of the issue after failing to disclose an earlier order for the same issue.

Federal law enforcers in Washington said they were scrutinizing the Salomon dealings.

Anne Kelly Williams, a spokeswoman for the Treasury Department, said the agency was examining in conjunction with the Securities and Exchange Commission and Federal Reserve “the disclosure by Salomon of irregularities and rule violations with its submission of bids in past auctions of Treasury securities.”