Salomon Smith Barney
(Now renamed Citigroup Global Markets)
(before the 1998 merger)

This page documents the scandals and frauds in which the various arms of Sandy Weill's companies were involved prior to the 1998 merger to form Citigroup.

CONTENTS

• Introduction
• The Early Years
  • The Maxwell Scandal London 1991
  • Bond Rigging scandal - Wall Street 1991
  • Employing brokers who cheat customers 1992
  • Municipal bond yield burning 1994
  • Securities fraud, price fixing, collusion 1994-99

Introduction

If we examine the second arm, the group managed by Sandy Weill, a more focussed and driving task master, we get a rather different picture to Citicorp. This web page describes the issues at Salomon Brothers and Smith Barney before and after their merger with Weill's insurance company Travellers.

Investment bankers and the analysts they employ both work in areas where there are tensions between the profit mission and social responsibility.

The prime interest here is Salomon Smith Barney. It was to play a major role in the Dotcom/technology scandals and in health care.

The Early Years

I have not studied the large Wall Street fraud scandals of the 1980s when several fraudsters went to prison. I do not know if Salomon Brothers or Smith Barney were implicated.

The Maxwell Scandal London 1991

Ten years after the Maxwell scandal in the UK the government's report criticised Salmon brothers involvement.

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MGN was unfit for flotation and that the prospectus prepared ahead of listing was flawed.
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Some mild criticism is also believed to be levelled at some bankers at Salomon Brothers International, which acted as underwriters to the overseas part of the placing. Broad criticism likely in Maxwell report Financial Times (London,England) March 28, 2001

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There was a large Wall Street scandal involving collusion and price fixing at government bond auctions over a 10 year period. Salomon brothers, then an independent group were the ring leaders and were lucky to survive. They admitted the conduct and fired senior staff blaming them. Other groups including Citicorp were then investigated.

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The letter (to about 40 firms) seeks information dating back a year - well before the first violation admitted by Salomon - and appears to be an attempt to substantiate allegations that leading Wall Street firms have been fixing prices in the $2,300bn ( pounds 1,400bn) Treasury market for more than a decade.
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Salomon said that nine lawsuits for unspecified damages had been filed against the firm by investors alleging misdeeds by its bond trading unit, SEC widens investigation into bid-rigging in Treasuries market The Independent (London) August 21, 1991

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Salomon Brothers revealed ''trading irregularities'' in its bidding at US Treasury auctions that have since turned out to be the biggest bid-rigging scandal Wall Street has known.
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No one in the US bond market really believes the dubious bidding methods were limited to Salomon; ''coups'', as the practice is known, have routinely and publicly been attributed to other primary dealers, including Merrill Lynch, Goldman Sachs and First Boston, for the better part of a decade. View From Manhattan: More scandal is on the cards The Independent (London) September 7, 1991

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Several of the biggest investment houses including Smith Barney were subjected to an inquiry following exposure of brokerage practices in the LA Times. This is an early pointer to the massive scandal which erupted 10 years later.

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THE Securities and Exchange Commission has launched an enquiry into whether Wall Street firms retain stockbrokers who allegedly cheat customers, because they bring in large volumes of business.
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This is believed to be the first SEC probe aimed at discovering how broking houses treat small investors. SEC investigates brokers' methods The Times August 3, 1992

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During 1994 Mr. Lissack, worked as an investment banker in the municipal bond department at Smith Barney. He lodged a Qui Tam action to blow the whistle in regard to industry wide fraud in the "$1.2 trillion municipal bond market". Smith Barney played a major part in this. He himself participated in that fraud while working for them. He paid a $30,000 fine for his part but received over US $ 35 million as his share of the US $250 million fine paid by the companies. Smith Barney paid $40 million, the largest individual fine. Lissack indicated that he would keep only US $4 million and donate the rest.

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More than a dozen Wall Street securities firms, led by the Salomon Smith Barney unit of Citigroup, have agreed to pay more than $120 million.
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Mr. Lissack became a pariah in the municipal bond business after he went public with his allegations that investment banks were overcharging for the Treasuries that municipal governments used to refinance their debt. After Smith Barney fired him, he filed suit against a group of investment banks under the federal False Claims Act. That law provides for whistle-blowers to receive 15 percent to 25 percent of amounts recovered from defendants. Settlement Reported in Bond-Pricing Cas The New York Times April 6, 2000

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In several lawsuits filed against investment banks in the 1990's, regulators and municipal officials contended that the banks charged artificially high prices for Treasury securities, which lowered, or "burned down," the yield, or rate of interest, those securities paid. Yield moves in the opposite direction from the price.
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Under federal whistle-blower laws, he received at least 15 percent of the $250 million that the various houses paid federal, state and local governments. UPDATE/MICHAEL R. LISSACK; The New York Times April 14, 2002

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Smith Barney was one of 31 banks involved in a large fraud scandal involving price fixing and other collusive practices. This was an ongoing and ever widening fraud investigation that started in 1994 "when an academic study claimed that patterns of trading suggested "tacit collusion" between market participants" The reports indicated 3 phases. A justice department settlement in 1996 which included regulatory changes, a US $1 billion civil settlement in 1997, and a SEC settlement in January 1999. There were complaints that the civil settlement was too low because so many millions of investors lost money.

This does not seem to have been the end of the matter because following the private class action the Justice department took up the matter again in May 1999 with Smith Barney still in its sights. Several class actions were still in progress.

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Robert Skirnick, one of the lawyers, said: "The evidence is strong to support the conclusion that never before in the history of stock trading have so few people taken so much money from so many."
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Goldman Sachs, Merril Lynch, Morgan Stanley, Credit Suisse First Boston and Salomon Smith Barney are among the banks involved in the case that began in 1994 after a stock manipulation ring was exposed.
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Traders . . . . are charged with harassing and refusing to trade with brokers who offered investors better stock prices.

The traders are also said to have colluded to fix specific share prices. They delayed reporting big trades where it benefited their positions and exchanged company news before public announcements, calling themselves "friendly competitors". Wall Street banks close to settling $ 1bn claim The Times December 24, 1997

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THE Securities & Exchange Commission will today fine some of the biggest Wall Street brokers millions of dollars over a price-fixing scandal on the Nasdaq market.

The fines come as part of a settlement agreed by Merrill Lynch, Morgan Stanley, Salomon Smith Barney and others that will conclude one of the darkest chapters in Wall Street's recent history. The brokers allegedly conspired to manipulate Nasdaq, the world's biggest electronic stock market, to widen the spread between bid and offer prices, which represents their profit margin.

The SEC negotiated the settlement with 24 brokerages after a two-year investigation, one of the biggest in US financial history.
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The charges against some of the 5,000-plus Nasdaq traders first surfaced in 1994 when an academic study claimed that patterns of trading suggested "tacit collusion" between market participants.

The academic study triggered an investigation of trading practices and in 1996 Nasdaq increased supervision as part of a Justice Department settlement. But late last year investors who had been hurt by the trading practices sued several banks and were paid about $ 1 billion (Pounds 600 million) in an out of-court settlement.

Traders face a $ 7,500 penalty for every time they illegally consulted a rival trader about a share price or spread. If a customer was hurt by these actions, the trader will be fined an additional $ 15,000 for each violation. Nasdaq scandal brokers to be fined by SEC The Times (London) January 11, 1999

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- - - justice department has asked it (Goldman Sachs) for information as part of an inquiry into alleged price-fixing by Wall Street underwriting syndicates.

Similar requests, called civil investigative demands, are believed to have been received in the past few days by other Wall Street firms, including Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, Lehman Brothers and Hambrecht & Quist.

The departments request comes on the heels of private class action litigation.
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A justice spokesman says the department is looking at the possibility of anticompetitive practices in underwriting services for initial public offerings.

More than 25 securities firms are defendants in several class actions brought in the US district court, southern district of New York, by purchasers of public offerings, who claim that the defendants engaged in conspiracies in violation of federal antitrust laws in connection with these offerings. WALL STREET SYNDICATES UNDER PRICE-FIXING SCRUTINY Business Day (South Africa) May 3, 1999

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This page created January 2004 by Michael Wynne