SEC Staff Says Kidder Misused $145 Million in Securities
NEW YORK (AP) _ The Securities and Exchange Commission opened administrative proceedings Wednesday against Kidder, Peabody & Co., charging that the nation’s 15th- largest brokerage firm misused at least $145 million of customers’ securities.
In the year ended in September 1984, Kidder used at least $90 million of customer securities to arrange repurchase agreements and pledged an additional $55 million in stocks and bonds as collateral for various bank loans, the SEC staff charged.
In both types of transactions, Kidder allegedly violated rules which require it to safeguard customer assets by placing them in segregated accounts. In effect, the commission staff is charging that Kidder used its customers’ stocks and bonds in order to raise money for its own purposes.
Hugh Covington, Kidder’s vice president for marketing, read from a prepared statement saying the proceeding involves ″differing interpretations’ ′ of ″technical rules.″
″We disagree with the SEC staff that our bookkeeping practices in March and April of last year violated these rules,″ Covington said. ″At no time were our customers inadequately protected against loss.″
Also named in the case was Gerard A. Miller, a Kidder vice president and the firm’s director of operations. A man answering the telephone in Miller’s office Wednesday said Miller was not in.
Commission rules give the company 15 days to file papers responding to the charges. An administrative law judge will then hold hearings to decide if the charges are valid and, if they are, will decide what penalty to impose. Penalties can range from a simple censure to suspension or revocation of the company’s broker-dealer license. Individuals can also be barred from working in the securities industry.
The administrative judge’s decision can be appealed to the full SEC and, from there, to the federal Court of Appeals in Washington.
The commission staff also charged Kidder with failing to keep required records of stockholder accounts and with incorrectly computing its reserve requirements, and said Miller ″wilfully aided and abetted″ the firm’s activities.
The charges were brought by the SEC regional office in New York. The head of that office, Ira Lee Sorkin, declined to discuss the possibility of a settlement except to acknowledge that settlements can occur in such cases. Covington answered ″no comment″ when asked about a possible settlement.
The $145 million in transactions detailed by the SEC occurred in March and April 1984. The commission did not give specifics of any other alleged misconduct in the 13-month time period it cited.
Repurchase agreements, the major element in the SEC charges, have been involved in several broker-dealer failures in recent years that rocked Wall Street even though they involved firms far smaller than Kidder.
In such agreements, a borrower such as Kidder sells a security to a lender, agreeing to buy back the security at a later date and at a higher price. The difference between the initial selling price and the higher repurchase price represents interest.
Borrowers hope to earn more by investing the cash from the initial sale than it will cost them to complete the repurchase. But if the borrower miscalculates and suffers a loss instead, he may not be able to complete the repurchase. The lender then keeps the securities.
There was no indication in the commission charges that Kidder was ever in danger of defaulting on the repurchase obligations. But the fact that customers’ securities were involved might mean that those securities were, at least technically, at risk. SEC accounting rules are designed to prevent that.
The nation’s big brokerage houses have been under close scrutiny for most of this year after E.F. Hutton pleaded guilty to 2,000 counts stemming from a scheme to write huge overdrafts on its bank checking accounts. No such conduct is involved in the Kidder case.
But Kidder, Peabody became involved in controversy in early 1984 when it was revealed that its top stockbroker, Peter N. Brant, had received tips about forthcoming stories from Wall Street Journal reporter R. Foster Winans. Brant later pleaded guilty, admitting that he used the tips to profit on stock market reaction when the stories were published. Winans and another Kidder broker, Kenneth Felis, were later convicted of conspiracy and fraud in the scheme.
In the Brant-Winans case there was no indication that Kidder officials knew or approved of the scheme. In fact, a Kidder lawyer testified that he ordered Brant and Felis to stop the questionable stock trading, and that the two circumvented the order by trading through a Swiss corporation.
Kidder, Peabody has 65 offices nationwide and 6 abroad; it employs almost 6,000