Joseph Jett's Defense Will Look Like

A rogue trader who created $350 million in bogus profits in a scam designed to pump up his own bonus to $9 million in 1993? That is how Kidder, Peabody & Co. has portrayed Joseph Jett, whose activities are at the center of one of the biggest Wall Street scandals in years.

So far, Jett, who was dismissed from Kidder, has said little other than protesting his innocence. But the outlines of Jett's possible legal posture in any retaliatory action he might take against Kidder or in defending against possible government charges are becoming clear. Based on conversations with Wall Street experts, former Kidder employees, and other knowledgeable sources, it seems likely that Jett will strongly dispute Kidder's version of events. He is expected to charge that his supervisors, fixed-income honcho Edward A. Cerullo and fixed-income derivatives chief Melvin R. Mullin, knew all about his trading and that Jett himself was unaware he was doing anything wrong. "His defense [will] be that his trading practices were condoned and approved by" both Cerullo and Mullin, says Jeffrey L. Liddle, a New York attorney who has handled 28 cases against Kidder in the last five years.

PUPPET PLAY? More broadly, Jett is expected to portray himself as an unwitting marionette in a larger scheme by Kidder to manipulate its balance sheet to artificially boost results. General Electric Co., Kidder's parent, puts great stock in its units' financial performance.

Kidder declined comment on these potential charges on the grounds that the matter is largely in the hands of regulators. "Whatever positions Jett may take, I assume they would be directed more toward his defense in possible actions by the U.S. Attorney, the Securities & Exchange Commission, and the New York Stock Exchange," says John M. Liftin, Kidder's general counsel. GE also declined comment.

George Sard, Jett's spokesman, declined comment. Cerullo's lawyer was not available for comment. "Mel Mullin will deny any knowledge or participation in any wrongdoing by Jett," says Arthur F. Mathews, Mullin's lawyer.

To buttress his claim that he simply followed orders, Jett is expected to say he had extensive contact with the two men. Jett reported directly to Cerullo. And Mullin, Jett's first boss at Kidder from 1991 through 1993 and head of the derivatives unit, spoke to Jett every day on the trading floor, Jett is likely to claim. He will argue that his trades were listed on the daily position reports that went to management. He also may point out that he did not withdraw his multimillion-dollar bonus, which Kidder has seized and is now the subject of an arbitration dispute. "The fact that he left all that money there is indicative of someone who didn't think they were doing something wrong," says Liddle.

Cerullo and Mullin had two motives in pursuing the bogus-trade ploy, Jett will likely contend. One was that their 1993 bonuses were determined in part by Jett's performance. Cerullo's bonus was believed to be $12 million and Mullin's about $10 million.

But a broader reason for the scheme, Jett is expected to allege, was to hype Kidder's financial results. He may claim that at the end of each quarter, he was instructed by superiors to put a certain kind of government bond trade on Kidder's books--a "forward recon trade," which had the effect of temporarily shrinking Kidder's assets, some $73 billion at the end of 1993. Briefly reducing assets made the firm's return on assets at the end of the quarter appear higher. These trades would then be unwound the following day, and Kidder's balance sheet would balloon up again.

CREDIBILITY GAP? Jett may further claim that Kidder relied on this balance-sheet window dressing to obtain a $3.7 billion loan in March, 1994. Jett may allege that he was told in December by Cerullo that he should keep the firm's assets depressed for a longer period at the end of the first quarter in 1994 so that Kidder would continue to look good for its bankers, who were examining Kidder's books. It was during this period, he may claim, that auditors uncovered the scheme.

Some lawyers and observers believe it may be tough for Jett to prove these allegations if he should take or be the subject of legal action. Even if Jett can show that he didn't hide his trades, the overall effect of continually rolling over trades to generate phony profits was not necessarily discernible. And he may not be believable when he argues that his superiors knew about the phony profits scheme, while maintaining that he did not. It will probably come down to his word against his bosses'.

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