Kidder Scandal Widens As Disgraced Trader Implicates Management
CALL it the little scandal that won't go away. Just when it looked as if General Electric Company finally had the trading scandal at its investment subsidiary, Kidder, Peabody & Co., under control, Kidder is back on the business pages.
Some new allegations, it is felt here, are serious enough to prompt federal regulators to widen the scope of their original inquiry into Kidder.
In June, General Electric brought in a new management team to run Kidder, following allegations that the company's top government bond trader created up to $350 million in bogus profits to mask trading losses of $100 million.
According to the Wall Street Journal, the trader, Joseph Jett, is now telling federal investigators that in early April, two top Kidder officials told him to start liquidating government-backed bonds because of the firm's inability to sell financially hard-pressed mortgage-backed bonds.
Mr. Jett allegedly said that in making such a request, Kidder knowingly violated rules requiring financial houses to maintain a set ratio of net capital to support total assets. Kidder has reportedly denied Jett's charges.
The allegations are only the latest act in the Kidder drama. Last week, Edward Cerullo, Kidder's second-highest executive and Jett's supervisor, stepped down. Other top executives are believed to be seeking work elsewhere.
``Any time you have a firm under public scrutiny like this, morale gets battered,'' says Joan Zimmerman, executive vice president with GZ Stephens Inc., a Wall Street executive recruiting firm.
Ironically, the latest brouhaha about Kidder comes just after the release of an upbeat financial report by General Electric. Last week, GE reported record earnings for the second quarter of 1994. Nine of GE's 12 divisions had earnings gains, including GE Capital Services, the unit that includes Kidder. Earnings for GE Capital were up 12 percent, to $463 million, although Kidder itself posted a loss of $29 million.