Wall Street is the bustling home of big money, which has also seen a number of major scandals.
From Bernie Madoff’s colossal Ponzi scheme to the collapse of Lehman Brothers, bankers trying to enrich themselves at the expense of their employer has been a common occurrence. One massive scandal happened in the early 1990s at Salomon Brothers.
At the time, the bank was one of Wall Street’s top players. However, bankers decided to try to rip off the US Treasury Securities Market, which led to a massive criminal investigation. The controversy began to unfold in May 1991 when it was discovered that Salomon Brothers had repeatedly violated the rules governing the bidding process for US Treasury bonds.
The firm had submitted false bids in the names of its clients.
These included pension funds and other unsuspecting entities. This was to circumvent the Treasury’s limits on the amount a single buyer could purchase.
This practice was led by the head of the Government Bond department, Paul Mozer. It was designed to hoard more bonds than legally allowed. This meant the bank controlled a larger portion of the market and was able to manipulate stock prices to its benefit.
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Collosal fraud
The scale of the manipulation was unbelievable.
In one instance, Salomon Brothers controlled as much as 94 percent of a $12 billion Treasury bond issue, far exceeding the 35 percent limit imposed on any single bidder. The implications of such control were incredible It allowed Salomon to dictate terms in the secondary market, affecting prices paid by other investors and the yield on the bonds.
In simple terms, it gave the bank enormous power. The scandal came to light after a failed auction in which Salomon’s manipulation was too aggressive to go unnoticed. Investigations were launched by the Federal Reserve and the US Department of the Treasury, leading to public hearings and widespread media coverage.
The fallout
The fallout from the scandal was brutal. The reputational damage to Salomon Brothers was immense, prompting a quick reshuffle of its top management.
The billionaire Warren Buffett, whose Berkshire Hathaway was a major shareholder, stepped in as interim chairman to stabilize the firm. Salomon Brothers faced hefty fines and legal consequences, including a $290 million penalty as part of a settlement with federal regulators. More significantly, the scandal led to stricter regulations in the Treasury market to prevent similar abuses in the future.
These included more transparent auction procedures and enhanced surveillance and enforcement mechanisms.
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The Key Figures and Their Fate
Paul Mozer
- Role: Managing Director at Salomon Brothers and head of the government bond trading desk.
- Involvement: Mozer was the central figure in the scandal, directly involved in submitting the false bids.
- Sentence: In 1993, Paul Mozer was sentenced to four months in prison. He was fined $30,000 and permanently banned from the securities industry.
Thomas Murphy
- Role: Managing Director at Salomon Brothers.
- Involvement: Murphy was implicated alongside Mozer for his role in the bid-rigging activities.
- Sentence: Murphy received a lighter sentence of six months’ home detention, a $50,000 fine, and was also banned from the securities industry.
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John Gutfreund
The CEO of Salomon Brothers was forced to resign in the wake of the scandal. Although not criminally charged, his reputation suffered greatly, and he paid $1.2 million in penalties to settle with the Securities and Exchange Commission (SEC).
William D. Shorris
The firm’s chief legal officer resigned. He was not criminally charged but faced professional repercussions.
