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Kidder's Jett Is Sanctioned but Cleared of Fraud
By Michael Siconolfi
Staff Reporter of The Wall Street Journal
The Wall Street Journal
(Copyright (c) 1998, Dow Jones & Company, Inc.)
NEW YORK -- Joseph Jett, the central figure in one of Wall Street's
most high-profile trading scandals, has been cleared of the most serious
charge against him.
A Securities and Exchange Commission administrative law judge
yesterday ruled that Mr. Jett, the former Kidder, Peabody & Co.
government-bond chief, didn't commit securities fraud in the 1994
bond-trading scandal that ultimately brought down Kidder. That was the
most significant charge in the SEC's civil case; Mr. Jett has never been
charged in a separate criminal investigation of the scandal.
The judge, Carol Fox Foelak, said Mr. Jett's actions didn't
constitute fraud because they weren't "in connection with the purchase
or sale of any security." But she concluded that Mr. Jett had an "intent
to defraud" Kidder and sanctioned the former trader on a lesser
books-and-records violations charge. Mr. Jett also was barred from
associating with any brokerage firm, fined $200,000 and ordered to
disgorge $8.21 million in allegedly false profits.
The 54-page decision caps one of the final chapters in Mr. Jett's
long-running saga. Kidder fired Mr. Jett in April 1994 and accused him
of creating $348 million in fake profit on government-strips trades that
masked losses of nearly $100 million over 2 1/2 years, allegedly to
boost his performance-based bonus. Strips are created by splitting the
interest and principal portions of bonds into two separately traded
The ruling, if it stands, means that nobody at Kidder will be held
legally accountable for securities fraud in the Wall Street scandal,
though Mr. Jett's two superiors lost their jobs and Kidder itself was
sold in the wake of the scandal to PaineWebber Group Inc. in 1994.
Mr. Jett's superiors, Edward Cerullo and Melvin Mullin, in 1996
separately settled SEC civil charges of failing to supervise Mr. Jett
and were temporarily suspended from supervisory positions on Wall Street
and fined. No criminal charges have been brought against anyone by the
Manhattan U.S. Attorney's office in a separate investigation of the
The decision surprised some executives on Wall Street. It was widely
expected that Judge Foelak would accept the SEC's allegations against
Mr. Jett after 19 hearings held more than two years ago. Indeed, the
ruling underscores how SEC administrative law judges, once viewed as
rubber stamps in SEC civil cases, increasingly are ruling against the
commission's enforcement staff. Though there are no current statistics
on the propensity of administrative law judges to rule in favor of the
SEC, "the world has certainly changed," says Richard Walker, the SEC's
Neither the SEC nor Mr. Jett, 40 years old, was totally satisfied
with the split ruling. "The decision correctly clears Mr. Jett of fraud
charges, but it is illogical and wrong to sanction him for a
books-and-records violation when he scrupulously followed all of
Kidder's record-keeping procedures and Kidder itself was never even
charged with a books-and-records violation," Kenneth E. Warner, Mr.
Jett's lawyer, said in a statement. "We will definitely appeal."
The SEC, for its part, called Judge Foelak's ruling on the
securities-fraud charge a technicality and is considering appealing.
"She imposed serious sanctions against Jett, but more extreme sanctions
are appropriate," said Carmen Lawrence, the SEC's Northeast regional
director. Finding no securities fraud "was obviously not adequate in the
commission's opinion," she said.
Despite the fact that the SEC sought a total of more than $22 million
in penalties and disgorgement, Ms. Lawrence said the commission "for the
most part was pleased" with the decision.
Mr. Walker, the SEC's enforcement chief, called the ruling "a
resounding rejection of [Mr. Jett's] defense." As for Mr. Jett being
cleared of securities-fraud charges, Mr. Walker said: "What's implicated
here is a very narrow legal issue." He said the SEC "could" appeal; it
has 21 days to do so. "The issue is up for grabs at the appellate
level," he added.
In her decision, Judge Foelak said "Mr. Jett's actions did not
violate the antifraud provisions because they were not `in connection
with the purchase or sale of any security' within the meaning of the
securities laws." But the judge concluded that Mr. Jett "exploited an
anomaly in Kidder's software, in the manner of a pyramid scheme, that
credited him on Kidder's books with enormous, but illusory, profits. He
did this with an intent to defraud."
The judge rejected Mr. Jett's claims during the five-week hearing
that his superiors directed his trading, and that his woes stemmed from
Kidder's move in 1993 to change its accounting system on how the firm
calculated its trading profit.
"I find that Kidder management did not affirmatively approve" the
allegedly fraudulent bond-trading scheme "and the associated unrealized
profits," Judge Foelak wrote. "The evidence shows only that Kidder
failed to follow up on questions that were raised" on the allegedly
Mr. Cerullo and Mr. Mullin have denied any knowledge of Mr. Jett's
actions. The two executives settled the SEC failure-to-supervise charges
without admitting or denying wrongdoing.
An arbitration panel of the National Association of Securities
Dealers in 1996 dismissed $82.8 million in claims that Kidder had filed
against Mr. Jett.
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
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