Kidder accused of capital rule breach

NEW YORK - Kidder Peabody, the investment bank owned by General Electric which has been hit by a scandal on its government bond trading desk, yesterday denied a report that earlier this year it violated capital adequacy regulations, writes Michael Marray.

Yesterday's edition of the Wall Street Journal said that Joseph Jett, the former head trader on Kidder's government bond desk accused of creating hundreds of millions of dollars' worth of phony profits, has told investigators that he was instructed to liquidate trading positions in April because the firm had breached capital adequacy limits.

But a statement released by the firm said that 'Kidder has never been in violation of its capital requirements under the Securities and Exchange Commission's net capital rules at any time'.

Kidder is declining to make any further comment on the Jett case while it awaits the release this week or next of a report it has commissioned on the scandal. The internal investigation is being led by Gary Lynch, a lawyer and former director of enforcement at the SEC.

Kidder also refused to comment on claims made in Tuesday's New York Times by Edward Cerullo, the former head of fixed-income trading who was ousted from the firm last Friday. Mr Cerullo said Kidder's internal auditing procedures failed to arouse any suspicions about Mr Jett's trades, and stressed that it was he who had eventually taken the initiative to question and investigate the performance of the government bond desk.

Mr Jett was Kidder's employee of the year last year, earning a dollars 9m bonus as a result of the profits made by his trading desk. Kidder subsequently found out that the dollars 350m worth of supposed profits instead hid an estimated dollars 100m in losses. Mr Cerullo reportedly himself received a dollars 20m bonus for the year, mainly as a result of the profits being racked up by his star trader.