A shareholder lawsuit alleging violations of federal securities laws by Kidder, Peabody & Co. in its handling of a $350 million bond trading scandal can continue to trial, a federal judge has decided.
But Judge John F. Keenan tossed out a similar lawsuit against Kidder, Peabody's parent, General Electric Co., saying GE had no motive to participate in the bond scandal surrounding former star trader Joseph Jett.
The judge said in rulings made public Thursday that the class of shareholders "have alleged strong circumstantial evidence of Kidder's willful misbehavior or at least recklessness."
Jett was fired by Kidder Peabody in April 1994 and federal authorities are investigating the bond scandal, which contributed to GE's decision to sell Kidder to PaineWebber Group late last year.
Keenan let stand a lawsuit filed after Kidder allegedly discovered that Jett, the head of its government bond trading desk, had generated false profits to enhance his year-end, performance-based bonuses.
From late 1991 to March 1994, Jett allegedly manufactured thousands of phony trades that made it appear as if his trading activities were very profitable for Kidder. In fact, Kidder had lost more than $85 million but the false trades made it appear as if the company had made $350 million, causing Jett to receive performance-based bonuses of more than $10 million, the judge said.
The judge said he allowed the lawsuit against Kidder to continue in part because "Kidder arguably had a motive to either hide Jett's trading scheme or to recklessly disregard the warning signs of that scheme."
The motive was to report profits so they could obtain additional bank financing, the judge said.