3 in Sanwa Bank Bond Trading Unit Replaced

In the latest surprise to hit the U.S. government securities market, Sanwa Bank Ltd. said Tuesday that it replaced three top officials at its New York bond trading subsidiary.

Coming amid a widening federal investigation of dealings in the Treasury market, the abrupt move prompted intense speculation on Wall Street that the changes might be linked to the inquiries. But Sanwa, one of Japan’s three largest banks, called the changes at its Sanwa-BGK unit a “restructuring,” and a spokesman in Tokyo strongly denied that they had any connection to the investigation by the Securities and Exchange Commission and other agencies.

The spokesman declined, however, to give a detailed explanation for the changes.

Sanwa-BGK is one of 39 primary dealers of U.S. government securities. All 39 are under subpoena by the SEC in an investigation touched off by Salomon Bros.’ admission of wrongdoing in Treasury auctions.

Separately, another foreign-owned primary dealer, UBS Securities, disclosed Tuesday that it had discovered an “isolated” problem in its bond trading department and had notified “proper authorities.” UBS is a unit of Union Bank of Switzerland.

At Sanwa-BGK, the departures included E. Craig Coats Jr., the head trader, who in the late 1980s headed government securities trading at Salomon Bros. The others were Sanwa-BGK’s president, Kenneth Gestal, and a senior managing director, Robert Graustein.

Sanwa said Gestal and Graustein had “left the firm to pursue other interests.” The bank gave no explanation for Coats’ departure. None of the three could immediately be reached for comment.

Toshiharu Ukegawa, a managing director of Sanwa Bank and head of its capital markets group in Tokyo, said in a written statement that “this restructuring confirms Sanwa Bank’s continued commitment to the U.S. government securities business and positions Sanwa-BGK strongly to face the challenges and opportunities in this market.”

Sanwa said John L. Knight, a founder of the unit, and Shizuo Kato, now general manager of Sanwa-BGK, were named co-presidents of the unit. Sanwa said its Sanwa-BGK unit ranks as the eighth-largest primary dealer in the United States, based on its share of the government securities market.

Inquiries by several government agencies into the activities of the primary dealers were sparked by Salomon Bros.’ admission that it violated the rules in Treasury auctions by buying more than its maximum allowed allotment of securities and by placing bids in the names of customers who hadn’t authorized them. The venerable investment firm’s chairman and two other top executives quit last month after acknowledging that they knew of improper bids in Treasury auctions for months without notifying regulators.

Primary dealers play a pivotal role in the U.S. government securities market by trading Treasury securities directly with the Federal Reserve, the nation’s central bank.

At UBS, a spokesman denied that the “isolated trading irregularity” it reported to U.S. authorities Tuesday was related to the firm’s U.S. government securities operation. The spokesman, however, declined to give any details of what occurred.

Sources close to UBS said the New York Stock Exchange and the New York Federal Reserve Bank had been notified of the incident, and that one New York employee of UBS may face suspension.

A spokesman for the New York Fed declined to comment, and a NYSE spokeswoman late Tuesday said she couldn’t immediately confirm if the exchange had been contacted by UBS.

The UBS spokesman, Hannes Frey, said “all remedial action has been taken,” adding: “There has been no financial harm to either clients of the firm or the firm itself.”