Kidder Probe Says Jett Acted Alone : Securities: But report also faults supervisors for not detecting the phony-profits scheme.
An in-house probe by Kidder, Peabody & Co. blames Joseph Jett, its former chief bond trader who was fired in April, as the mastermind and sole culprit in a trading scam to create $350 million in phantom profits.
But the 85-page report, ordered by Kidder parent General Electric Co. and released Thursday, says the scheme went undetected for nearly three years because of startling lapses in oversight by Kidder supervisors and a breakdown in internal Kidder controls.
The report describes repeated instances when Jett’s superiors only glanced at his trading records and could have detected the fraud if they had scrutinized basic details such as trading dates.
When the fraud was discovered, the inquiry found, Jett had amassed nearly $90 billion worth of Treasury securities on Kidder’s books, an astounding amount nearly equivalent in size to Brazil’s foreign debt.
The inquiry, led by former Securities and Exchange Commission enforcement chief Gary Lynch, is the latest attempt by GE and its brokerage unit to contain the fallout from the alleged scheme by Jett to create the bogus trading profits.
Kidder also said Thursday that it fired one of Jett’s former supervisors, Melvin Mullin. Mullin, cited in the report for inadequately supervising Jett, is the fourth top-level Kidder figure to lose his job in the scandal.
In addition, Kidder said it demoted David Bernstein and Charles Fiumefreddo, two fixed-income employees who were temporarily reassigned in April when Jett was fired. Four other fixed-income employees reassigned at the time were reprimanded and reinstated, the firm said.
Jett was dismissed April 17 after Kidder accused him of generating the phantom bond profits in a trading scheme aimed at hiding about $100 million in trading losses. Kidder charged that Jett had also inflated his bonus.
An attorney for Jett, Kenneth Warner, vigorously disputed the findings of the inquiry. Jett was not interviewed by the probe’s investigators.
“Had Jett’s account of what really happened been considered, the conclusions of this report would necessarily have been dramatically different,” Warner said in a statement.
Mullin is the latest high-level casualty of the problems at Kidder.
Last month, another Jett supervisor, Edward Cerullo, resigned as chief of Kidder’s fixed-income division. In addition, GE ousted Michael Carpenter, Kidder’s chairman and chief executive, and replaced him with two top GE executives.
Jett, who has denied any wrongdoing, has contended that Cerullo devised the bond trading scheme and ordered him to carry it out as part of an effort to pare down the firm’s assets at the end of each quarter.
However, the report concludes that Jett’s transactions “could not have been used to reduce the balance sheet.” It rejected Jett’s argument that Kidder management was aware of and approved of his trading deals.
