U.S. Treasury bond scandal in 1991

자료 1: Wikipedia, http://en.wikipedia.org/wiki/Salomon_Brothers#Treasury_Bond_scandal

Treasury Bond scandal

In 1991, Salomon trader Paul Mozer was caught submitting false bids to the U.S. Treasury by Deputy Assistant Secretary Mike Basham, in an attempt to purchase more Treasury bonds than permitted by one buyer between December 1990 and May 1991. Salomon was fined $290 million, the largest fine ever levied on an investment bank at the time, weakening it and eventually leading to its acquisition by Travelers Group. CEO Gutfreund left the company in August 1991; a U.S. Securities and Exchange Commission(SEC) settlement resulted in a fine of $100,000 and his being barred from serving as a chief executive of a brokerage firm.^[3] The scandal is covered extensively in the 1993 book Nightmare on Wall Street.

After the acquisition, the parent company (Travelers Group, and later Citigroup) proved culturally averse to the volatile profits and losses caused by proprietary trading, instead preferring slower and more steady growth. Salomon suffered a $100 million loss when it incorrectly bet that MCI Communications would merge with Sprint instead of Worldcom. Subsequently, most of its proprietary trading business was disbanded.

For some time after the mergers the combined investment banking operations were known as "Salomon Smith Barney", but reorganization has renamed this entity as "Citigroup Global Markets Inc." The Salomon Brothers name, like the Smith Barney name, is now a division and service mark of Citigroup Global Markets.

[edit]Liar's Poker

Salomon Brothers' success and then decline in the 1980s is documented in Michael Lewis' 1989 book, Liar's Poker. Lewis went through Salomon's training program and then became a bond salesman at Salomon Brothers in London. In the work, Lewis portrays the 1980s as an era where government deregulation allowed unscrupulous people on Wall Street to take advantage of others' ignorance, and thus grow extremely wealthy.

He traces the rise of Salomon Brothers through mortgage trading, when deregulation by the U.S. Congress suddenly allowed Savings and Loans managers to start selling mortgages as bonds. Lewis Ranieri, a Salomon Brothers' employee, had created the only viable mortgage trading section, so when the law passed, it became a windfall for the firm. However, Lewis believed that Salomon Brothers became too complacent in their new-found wealth and took to unwise expansion and massive displays of conspicuous consumption. When the rest of Wall Street wised up to the market, the firm lost its advantage.

Likewise, Lewis argued that Salomon Brothers improperly tried to "professionalize" itself. As he notes, Ranieri and his fellow traders lacked college degrees; one of the traders only had an eighth-grade education. Despite this lack of credentials, the group was extremely successful financially. However, the firm, in order to improve its "image," began to hire graduates of prestigious business and economics programs (a group which included Lewis himself). Because of his uncouth manners, Ranieri (along with many of his Italian colleagues) was eventually fired. By relying more on diplomas than on raw trading skill, Lewis argued that Salomon crumbled.

After mortgage bonds, Lewis examined junk bonds and how Michael Milken built junk bonds from nothing to a multi-trillion-dollar market. Because the demand for junk bonds was higher than its supply, Lewis argues that corporate raiders began to attack otherwise sound companies in order to create more junk bonds.

Lewis remarked in his conclusion that the 1980s marked a time where anyone could make millions, provided they were at the right place at the right time, as exemplified by Ranieri's success. (생략/ abbr.)

자료 2: New York Times: December 3, 1992

TWO SUED BY S.E.C. IN BIDDING SCANDAL AT SALOMON BROS

By KURT EICHENWALD
Published: Thursday, December 3, 1992

Correction Appended

After more than a year of investigation, the Government yesterday brought its first legal action against former Salomon Brothers executives involved in the firm's illegal bidding in Treasury auctions, charging a series of securities law violations that included insider trading.

The civil suit, brought by the Securities and Exchange Commission, accused two former managing directors, Paul W. Mozer and Thomas F. Murphy, of systematically submitting billions of dollars in phony bids in Treasury auctions held to finance the public debt.

Both men were accused of securities fraud for submitting the false bids and with creating false books and records at Salomon during Treasury auctions from August 1989 to May 1991. Mr. Mozer, the former head of the Government trading desk at Salomon, was also accused of insider trading and engaging in illegal trades to win Salomon phony tax losses. No Officials Named

The suit, which is being contested by both men, does not name any higher-ranking executives at the firm. John H. Gutfreund, the former chairman and chief executive, and other executives are being investigated by the S.E.C. for failing to supervise their employees. A complaint or a settlement is expected soon.

The scandal involved billions of dollars of illegal bids in the multitrillion-dollar Treasury market. By making such bids, Salomon was able to exert unusual control over the marketplace, even though the profits from those activities were comparatively negligible.

The firm said last year that its profits from the illegal bids were $3.3 million to $4.6 million, less than many of what the firm's traders earned in a single year.

Stanley Arkin, a lawyer for Mr. Mozer, said his client planned to fight the charges vigorously and asserted that the commission had taken the complaint too far.

"Their allegations are overreaching and reflective of the piling on that has characterized this investigation vis-a-vis Mr. Mozer since its inception," he said. "My view is that many of the charges have no substantiation."

Charles Carberry, a lawyer for Mr. Murphy, who was Mr. Mozer's top aide on the government trading desk, did not return a telephone call seeking comment. A spokesman for Salomon said the firm had no comment.

In its suit, the Government is seeking unspecified fines and injunctions that would prohibit the two men from committing further securities law violations. The Government is also seeking the return of about $1.7 million that it contends Mr. Mozer made in profits on the inside trading, as well as other fines. Possible Criminal Indictments

Both former Salomon executives face possible criminal indictments in the case. Mr. Mozer has offered information to the Government, including information that helped lead to the S.E.C.'s charge against him about tax trades, in an effort to avoid indictment and settle the charges. Mr. Arkin declined to comment on the criminal case.

The Treasury market scandal emerged in August 1991, after Salomon Brothers first announced that it was dismissing Mr. Mozer and Mr. Murphy for submitting false bids and bids in the names of customers without authorization in order to buy more than the 35 percent of the securities offered that the firm was allowed to buy.

The admission led Government officials to worry openly that questionable trading practices could discourage investors from participating in the Treasury market, where securities are sold by the Government in part to finance the budget deficit. With fewer investors, the costs of Government borrowing could go up, but those fears have proved unwarranted.

The scandal widened within days of the firm's announcement, when Salomon made a subsequent admission that three senior executives, including Mr. Gutfreund; Thomas W. Strauss, the firm's president, and John W. Meriwether, a vice chairman, had all been informed of one of the illegal bids but had failed to inform the Government. Led to Resignations

That led to the resignation of the top officers, and the replacement of Mr. Gutfreund by Warren E. Buffett, the Omaha investor who is Salomon's largest shareholder. Since then, Salomon succeeded in settling all charges against it stemming from the scandal by agreeing to pay $290 million in fines and penalties. Mr. Buffett has since turned the reins of the trading house over to Deryck C. Maughan, a longtime Salomon employee, who has worked to rebuild the firm's strength in trading.

After an initial rush at reforming the lightly regulated Treasuries market, Congress failed to adopt changes last year.

While yesterday's charges did not involve new disclosures, some members of Congress said the S.E.C. complaint might nudge Congress to pass legislation next year. The action "once again underscores the need for Congress to pass broad legislation that directly attacks the weakest areas of regulatory oversight," said Representative Edward M. Markey, Democrat of Massachusetts.

The commission is also continuing to investigate a number of others outside of Salomon, including some clients of the firm, regarding their actions in the Treasury market auctions. William R. McLucas, the head of enforcement for the S.E.C., said yesterday that "the investigation is continuing in a whole lot of different directions."

The insider trading charge against Mr. Mozer stemmed from his sale on Aug. 6, 1991, of 46,000 shares of Salomon stock, at prices ranging from $35.75 to $36.125 a share, realizing a total of more than $1.6 million. The first disclosure of Salomon's actions came on Aug. 9, and within two weeks the share price had fallen to $23.75, amid speculation that the scandal might destroy the firm. It has since recovered, and yesterday closed at $37.50, down 12.5 cents.

The S.E.C. said Mr. Mozer knew of the internal investigation into the Treasury bond bidding practices and was thus in possession of "material nonpublic information" that made it illegal for him to trade.

The Government did not specify how much Mr. Mozer saved by selling when he did, but it asked the court to force him to return that money and pay a penalty in addition. Such a penalty would normally be equal to the amount saved as a result of the trade.

After the scandal erupted, Salomon officials noted the trade and froze Mr. Mozer's account. As a result, he has never received the money from the trade.

The charges against Mr. Mozer relating to the tax violation referred to events in 1986 and are related to the Treasury bond scandal only because they came out in the subsequent investigation. Salomon admitted the tax violations in its own settlement.

The charges said that Salomon, as 1986 neared an end, had unrealized losses of $168 million stemming from having sold Treasury securities short. An unrealized loss is a loss on paper and not in actual cash. In this case, the loss was not realized because the short position had not been closed.

Salomon could have realized those losses -- and obtained a tax deduction legally -- by repurchasing the securities and closing out the position.

Instead, the S.E.C. said, Mr. Mozer engaged in pre-arranged trades with other firms to make it appear Salomon had closed the position and then re-established it by shorting the same securities.

Photo: Paul W. Mozer, a former executive at Salomon Brothers, was accused yesterday of securities fraud and insider trading by the Securities and Exchange Commission. (The New York Times) (pg. D2)
Correction: December 4, 1992, Friday A front-page headline in some copies yesterday about the Government's suit against two former executives at Salomon Brothers referred erroneously to the history of the case. The suit filed Wednesday by the Securities and Exchange Commission was the first against individuals involved in the improper bidding for Treasury securities. The Government has already settled its complaints against the firm itself.