‘Practical Joke’ Backfires, Costs Salomon a Client : Securities: Pacific Investment Management Co. of Newport Beach is the latest of the brokerage’s customers to halt dealings with the firm.

The investment company involved in a $1-billion “practical joke” bond transaction with Salomon Bros. Inc. on Monday suspended its Treasury bond business with the scandal-tarnished firm.

Pacific Investment Management Co. is the latest Salomon customer to halt dealings with the firm because of admissions that it violated federal rules governing auctions for government bonds.

The Newport Beach-based money manager, known as Pimco, participated in an attempted “joke” that a Salomon bond executive wanted to play on a retiring saleswoman. But the joke flubbed and a bid for $1 billion in government bonds was made in Pimco’s name.

In a separate development, Salomon Chairman Warren E. Buffett continued efforts to restore the firm’s reputation by announcing Monday that it no longer will do business with the Switzerland-based commodities firm Marc Rich & Co. The Swiss firm is owned by Marc Rich, who is a fugitive wanted on U.S. criminal charges. Salomon’s Phibro Energy Inc. unit had used Marc Rich & Co. as a broker.

As Salomon continued efforts to contain damage from the scandal, a Justice Department official confirmed reports that the government’s investigation into Salomon and the Treasury bond market appeared to be widening.

The official, who requested anonymity, said federal prosecutors were conducting civil and criminal investigations along with the Federal Reserve Board, Securities and Exchange Commission and Treasury Department.

The investigation initially was led by the Justice Department’s antitrust division to examine whether traders colluded to “squeeze” the market, or control enough securities to increase profits from their sale to investors.

Now, however, the U.S. attorney’s office in Manhattan and the Justice Department’s criminal division are involved in the case, the official said.

A published report Monday said prosecutors were studying the possibility of charges of securities fraud, mail fraud and conspiracy against Salomon. A Salomon spokesman declined to comment on the investigations.

John Carroll, head of securities and commodities fraud unit at the U.S. attorney’s office, also declined to comment.

Salomon last month admitted that it violated federal rules at five separate Treasury auctions since December. Top executives, including former Chairman John H. Gutfreund, have resigned in an overhaul of Salomon management.

Pimco suspended Salomon from government bond dealings indefinitely but plans to continue trading with the firm in other areas, including corporate bonds, mortgage-backed securities and equities. Pimco manages $32 billion for investors.

“We respect their decision. We hope when they look at the extraordinary steps new management has taken they’ll see fit to reinstate us when the time is right,” Salomon spokesman Robert F. Baker Jr. said.

Pimco has admitted that it played a role in the bid. William Gross, a Pimco managing director, did not return several telephone calls seeking comment.

In addition to Pimco, at least six states and several big customers, including the World Bank, have suspended dealings with Salomon.

Salomon said in a report to Congress last week that it made an inadvertent bid for $1 billion in 30-year bonds in Pimco’s name during a Feb. 7 Treasury auction.