Salomon Admits More Bond Auction Violations : Securities: The Wall Street brokerage said the firm’s highest executives knew of the wrongdoings.

Salomon Bros., the nation’s leading trader of government securities, admitted Wednesday that its wrongdoing in Treasury auctions was much wider than previously disclosed and said the firm’s highest executives knew of violations but failed to inform regulators.

The Wall Street brokerage, investment bank and primary dealer of government securities also said in a statement that it could face criminal prosecution and possibly be suspended or barred as a securities dealer.

Regulators and government securities experts said the disclosures boost the possibility of strong disciplinary action against Salomon and could roil the government securities market. Salomon, renown for its trading prowess, has long been a dominant buyer in the $2.2-trillion government securities market.

William R. McLucas, chief of the Securities and Exchange Commission’s enforcement division, declined to say what action, if any, might be taken against the firm. But he said, “The disclosures in the (Salomon Bros.’) press release raise really serious question about conduct in connection with the particular securities issues mentioned and generally about their conduct in this market.”

A federal regulator who asked not to be identified described the disclosures as “pretty amazing stuff.”

Treasury auctions of securities are the way that the government finances the national debt. The government securities market typically involves trading worth $100 billion a day. Most of the securities are purchased by banks and other large institutions.

Last week, Salomon announced that it was suspending two officials in charge of government securities trading and two junior employees. The firm said then that in three Treasury auctions it had violated the regulation that forbids any one buyer from purchasing more than 35% of a Treasury issue. It also admitted making purchases in customers’ names without their authorization.

In the new disclosures Wednesday, Salomon admitted three additional instances of exceeding the 35% limit or falsely using customers’ names, including one instance it said came about because of a practical joke gone awry.

Salomon also disclosed for the first time that the firm had regularly misinformed the government about its sales of other securities issued by individual government agencies. Salomon said its “practice” was to overstate orders it had received from customers to ensure that the firm was allocated an adequate portion of the limited supply of these securities. “The practice has been terminated,” the firm said.

The disclosures came after Salomon’s lawyers met Wednesday in Washington with the SEC, Treasury Department and the Federal Reserve at SEC headquarters to present the results of the firm’s internal investigation. Salomon’s lawyers also had a separate meeting with Justice Department officials.

The government has been investigating the possibility of wrongdoing by Salomon since rumors surfaced in May that Salomon had carried out a “squeeze” in one Treasury auction, buying so much of the two-year note issue that it effectively cornered the market.

Wednesday’s revelations appear particularly damaging because of the admission that Salomon’s top management knew of wrongdoing beginning in April, but repeatedly failed to inform regulators.

The firm, however, gave no indication that its top three executives were involved in or knew of the wrongdoing at the time it happened. It said its board will form a committee made up of outside directors to review the internal investigation.

The firm said John H. Gutfreund, chairman and chief executive; Thomas W. Strauss, president, and John W. Meriwether, vice chairman, were informed in April by one of the firm’s managing directors that an unauthorized bid had been submitted in a February, 1991, auction of five-year notes.

“Management immediately determined that this matter must be communicated to the government; however, due to a lack of sufficient attention to the matter, this determination was not implemented promptly,” the firm said in the statement.

The wrongdoing wasn’t disclosed to the government until Aug. 9.

A few weeks after learning about the February incident, Salomon said, Gutfreund and other top executives learned of possible improprieties in buying a huge portion of two-year notes auctioned in May.

“Management increased its review of the firm’s government securities business, but despite its knowledge of clear wrongdoing in the February auction took no further action,” Salomon’s statement reported.

The firm also said that by July it had become clear that the February violation wasn’t an isolated incident, and said, “In retrospect, the firm and senior management consider that the delayed supervisory action in the face of clear wrongdoing was inappropriate.”

Salomon spokesman Robert F. Baker Jr. said no additional suspensions are planned. But he declined to comment further on the disclosures.

Officials at the Treasury and Fed, which regulate government securities trading, declined to comment.

Wall Street analysts had speculated that, because Salomon is such a major player in the government securities market, it would likely escape severe punishment. A move such as suspension of a primary dealer of government securities could upset the whole market for Treasuries, they said.

But after Wednesday’s disclosures, some analysts said severe punishment may be more likely. John Keefe of Lipper Analytical Securities called the latest disclosures “wild.” Asked if Salomon is still likely to escape with only minor punishment, he said, “I don’t know about that now.”

The SEC’s McLucas said a firm’s dominance in a particular market wouldn’t affect the agency’s decision on taking enforcement action.

In addition to the incidents it disclosed last week, Salomon said Wednesday that in the February auction of 30-year bonds, a managing director, now suspended, “persuaded a customer to attempt to perpetrate what he characterized as a practical joke on a Salomon employee.”

Salomon didn’t explain the joke, but said it involved a phony bid for $1 billion of the bonds--a bid that was actually executed by mistake. Salomon failed to disclose the purchase and that it lacked real authority from the customer. The customer’s identity wasn’t disclosed.

The firm also said that in an April auction of five-year notes, the firm bid for the maximum allowable 35% share and also entered into an improper arrangement under which it bought an additional $2.5 billion of the securities for a customer.

The firm immediately bought back $600 million of the securities from the customer. Salomon indicated that the bid for the customer was deliberately overstated so that the customer could avoid the usual uncertainty involving how much of auctioned securities individual bidders are allocated.

Salomon had previously disclosed that it obtained more than the allowable 35% in the May auction of two-year notes. The company Wednesday said that in the same auction the firm bid for $2 billion of notes for a customer and then bought back $500 million of them at the original auction price.

Salomon said there are “conflicting claims” about whether the client had authorized the original purchase of the $500 million Salomon subsequently bought back.