About Salomon Brothers: Salomon Brothers & Co. was formed in January, 1910 as a partnership of three brothers – Arthur, Herbert, and Percy; and a clerk, Benjamin Levy. They continued their father’s business of money brokerage with great ambition. But, the firm faced capital crunch and in the same year, April month it merged with Martin Hutzler & Co. It was later acquired by the commodity trading firm Phibro Corporation. The joint company was named at Phibro-Salomon and then Salomon Inc. and the commodity operation were sold. Its greatest dominance came in 1980s when it became known for many innovations in Bond market and created the first “mortgage-backed security”. With time, it became the largest issuer and trader of bonds in the United States. Its dominance can be judged by the fact that in those days a bond was called liquid if it was traded by Salomon brothers.
But, the turning point for which company got so much of media attention came in 1991, when the treasure scam done by company got exposed. By this year, Salomon Brothers had taken control of the U.S. Treasury Bond market. Firm became one of the selected groups of buyers allowed to bid on government securities in the primary market. The securities purchased in the primary market were then sold to general public in secondary market. In order to ensure competition and fairness in primary market, federal regulations prohibited individuals or firms from purchasing more than 35 percent of any bond issue. On three separate occasions, however, Salomon traders exceeded the limit by unethically using the names of its clients for submitting fraudulent bids. Client’s name was used for the bidding without their authorization, cornered the Treasury bond market and firm illegally made millions of dollars of profit.
The scandal involved billions of dollars of illegal bids in the multi trillion-dollar Treasury market. By making such bids, Salomon was able to exert unusual control over the marketplace. But, soon the head of bond-trading desk at Salomon Brothers, Paul W. Mozer, was accused of manipulating the bidding at government auction of Treasury securities. The civil suit, brought by the Securities and Exchange Commission, accused two former managing directors, Paul W. Mozer and Thomas F. Murphy, of falsifying the details and improper bidding for Treasury securities. The then CEO, Mr. John H. Gutfreund and the firm’s president, Mr. Thomas W. Strauss, announced their resignation on account of not taking prompt action even after getting to know in April about the one of the unauthorized bid at a February Treasury auction.
The encouragement of reckless trading culture at the investment firm led to commitment of fraud and constituted a breach of public trust of the most serious kind. It cost Gutfreund his job and Salomon Brothers its independence, almost putting the firm out of business. The scandal is covered extensively in the book Nightmare on WallStreet.
But, the turning point for which company got so much of media attention came in 1991, when the treasure scam done by company got exposed. By this year, Salomon Brothers had taken control of the U.S. Treasury Bond market. Firm became one of the selected groups of buyers allowed to bid on government securities in the primary market. The securities purchased in the primary market were then sold to general public in secondary market. In order to ensure competition and fairness in primary market, federal regulations prohibited individuals or firms from purchasing more than 35 percent of any bond issue. On three separate occasions, however, Salomon traders exceeded the limit by unethically using the names of its clients for submitting fraudulent bids. Client’s name was used for the bidding without their authorization, cornered the Treasury bond market and firm illegally made millions of dollars of profit.
The scandal involved billions of dollars of illegal bids in the multi trillion-dollar Treasury market. By making such bids, Salomon was able to exert unusual control over the marketplace. But, soon the head of bond-trading desk at Salomon Brothers, Paul W. Mozer, was accused of manipulating the bidding at government auction of Treasury securities. The civil suit, brought by the Securities and Exchange Commission, accused two former managing directors, Paul W. Mozer and Thomas F. Murphy, of falsifying the details and improper bidding for Treasury securities. The then CEO, Mr. John H. Gutfreund and the firm’s president, Mr. Thomas W. Strauss, announced their resignation on account of not taking prompt action even after getting to know in April about the one of the unauthorized bid at a February Treasury auction.
The encouragement of reckless trading culture at the investment firm led to commitment of fraud and constituted a breach of public trust of the most serious kind. It cost Gutfreund his job and Salomon Brothers its independence, almost putting the firm out of business. The scandal is covered extensively in the book Nightmare on WallStreet.
Posts
No comments:
Post a Comment