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Salomon to Pay $290 Million in Securities Fraud

TIMES STAFF WRITER

In one of the largest Wall Street fraud settlements ever, Salomon Bros., the venerable investment house, will pay $290 million stemming from charges that former employees tried to corner the market in Treasury securities, federal officials announced Wednesday.

The punishment, which also bars Salomon from selling Treasury securities to customers for two months, stopped short of the ultimate government sanction of dropping Salomon from the small group of primary dealers.

This inner-circle of dealers engages in the more than $2.2-trillion-a-year business of buying Treasury securities and selling them to institutions and the public. The federal government issues Treasury securities on a regular basis to finance the budget deficit, that part of government operations not financed by tax revenues.

The financial penalties are among the biggest ever levied by the Securities and Exchange Commission, exceeded only by the $600-million payment by junk bond king Michael Milken, and the $650-million settlement with Milken’s former firm, Drexel Burnham Lambert.

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The $290-million punishment includes $100 million for a fund to pay investors who can prove they lost money because of Salomon’s misconduct between August, 1989, and May, 1991.

The payments and the temporary ban imposed on Salomon are “adequate to deal with the harm done and large enough to hurt,” U.S. Atty. Otto Obermaier said in New York, explaining why he declined to seek criminal indictments against the firm. “We concluded that $290 million was enough to say ‘Ouch.’ ” However, individuals are still under investigation by the Justice Department.

Salomon “has already suffered significant loss of revenue and departures of employees,” and criminal penalties “could result negatively on the company’s innocent employees and shareholders,” Obermaier said. Wednesday’s settlement covers both Salomon Bros., the investment banking and trading firm, and the parent Salomon Inc.

Salomon’s punishment, “although painful, should be fully absorbable by the firm,” SEC Chairman Richard C. Breeden told a news conference. Salomon has $2 billion in capital and had already set aside a reserve of $200 million for this case, he noted. The company will now add $90 million more to the special reserve.

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Barring Salomon Bros. from dealing in Treasury securities could have spelled financial doom for the New York firm. The end of the investigation gave a healthy boost to the stock of Salomon Inc., which closed Wednesday at $33.50, up $2.875 a share.

Interim Chairman Warren E. Buffett, a major investor who agreed to run Salomon after the scandal erupted last summer, issued a succinct statement that summed up the feelings of relief: “All’s well that ends.”

Because Salomon fired the employees involved and cooperated fully with the investigation, the company has been restored to its position as “a normal member of the securities markets,” Breeden said.

Stock market analysts said the conclusion of the case was good news for Salomon Bros.

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“The $290 million in penalties was more than we were expecting, but the settlement puts all the problems behind,” said Philip M. Zahn, an analyst with Duff & Phelps, a Chicago firm. “The big questions were size of the fine, whether there would be criminal charges and whether Salomon would retain its primary dealership with the Fed. Salomon can move forward and rebuild the parts of the firm that have been really hurt: investment banking and equity underwriting.”

The penalties include $122 million in civil fines to the Treasury, $68 million in fines to the Justice Department and $100 million for the special claims fund for investors who sue Salomon.

Separately, Salomon also faces substantial penalties from the Internal Revenue Service for underpaying its 1986 federal income taxes. As part of the complaint and settlement announced Wednesday, the SEC disclosed for the first time that Salomon Bros. used phony securities trades to generate phony losses to cut its tax bill.

Salomon had prearranged trades with other firms “to create fictitious trading losses for tax purposes,” the SEC said. The “sham payment trades” created $168 million in trading losses, most of which was claimed as losses on the firm’s 1986 tax return, according to the complaint.

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The SEC settlement charged that Salomon Bros. had submitted 10 false bids in nine separate Treasury auctions. The firm acquired more than $9.5 billion worth of Treasury securities in violation of the rule that says a single bidder cannot buy more than 35% of any individual issue of securities offered in an auction. In one auction, in July, 1990, the company tried to buy 100% of the securities issued.

Paul Mozer, the hard-driving executive who directed trading in Treasury securities for Salomon, ordered bids submitted in the names of Salomon customers without their permission. He was fired by the firm.

Another casualty was Salomon Chairman John H. Gutfruend, once one of the most influential men on Wall Street. He and other top managers were slow to report the violations by Mozer’s traders to the SEC. Gutfruend was forced to resign and is now arguing with Salomon over his demands for more than $10 million in salary and deferred compensation.

Other top executives at Salomon also quit, as Buffett, the billionaire investor from Omaha, directed a purge of the top ranks of the firm. This action helped persuade federal officials to avoid seeking criminal penalties against Salomon Bros.

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Times staff writer Linda Grant in New York contributed to this story.

Salomon’s Settlement

THE MISCONDUCT

The Salomon Bros. scandal surfaced last August when the brokerage admitted to bidding beyond government limits in a number of Treasury auctions, as well as falsifying customer orders. Salomon allegedly sought to control the market in May, 1993, Treasury notes. The Justice Department said the action was intended to raise prices of the securities by withholding supply.

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THE PUNISHMENT

* $122 million in civil fines to the Treasury.

* $68 million in fines to the Justice Department.

* $100 million in a claims fund for investors in the securities market who lost money because of Salomon’s misconduct.

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* Salomon barred from dealing with the New York Fed on behalf of customers from June 1 through Aug. 1.

THE BACKGROUND

The government could have dropped Salomon from the small group of primary dealers engaged in the lucrative business of buying Treasury securities and selling them to institutions and the public. It did not.

The government could have filed criminal charges against Salomon in the settlement. Salomon was spared criminal charges because it had cooperated in the investigation and restructured management to prevent future misconduct.

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