Jett, Joseph (1958–)

JOSEPH JETT WAS dismissed by the prestigious Wall Street firm Kidder Peabody in April 1994, accused of fraudulently booking $339 million in phony profits on bond trades in his position at the Kidder bond desk. With so many cases of rogue traders bringing down financial institutions, both on Wall Street and internationally, it was not hard to believe that the case of Jett at Kidder Peabody fit into the familiar pattern.

But Jett and some former colleagues insist that his case was different. In fact, they say, Jett, one of the few African-American traders on Wall Street, was being used as a scapegoat for larger problems at Kidder. They point out that Jett's superiors were aware of his trades, strategies, and profits, and not only allowed it, but rewarded his behavior in an effort to breed star traders, and window dress Kidder's balance sheet for Kidder's new owners at General Electric (GE).

As Saul Hensel of the New York Times states it, the central question is: “Can Jett be guilty of fraud if he hid nothing, falsified no records and was subject to several levels of oversight?” Jett and his colleagues were tasked with trying to profit on arcane trades which exploited the price differences between regular government bonds and zero-coupon bonds. Both sides agreed that more than half of the profits booked by Jett were not legitimate profits, but appeared on Kidder's computer screens due to a glitch in a complicated proprietary program that processed the stripping and reconstituting of these trades. Because of this glitch, the further out Jett set the settlement dates for these trades, the greater the profit recorded.

“By the end of 1993, Jett was made managing director, named man of the year, and awarded $9 million in bonuses on $150 million of reported trading profits,” writes Hensel. With profits rolling in, it was easy for Kidder managers to fail to question how it all worked. And it was even easier to avoid embarrassment later by blaming the fiasco on one rogue trader, rather than address real flaws in Kidder's systems and oversight policies. As at least one trader testified at the Securities and Exchange Commission (SEC) hearing, more than one accountant questioned at the time had reassured senior management that the trades were real, not just paper transactions. Kidder's own internal auditors spent 400 hours reviewing Jett's zero-coupon desk in August and September 1993, but were apparently unable to detect the problem.

Then in the late fall of 1993, GE ordered Kidder to cut back on its bond holdings, and to comply with the order. Jett actually did engage in a number of paper transactions for the sole purpose of meeting the letter of the new balance sheet restrictions. While the SEC and Kidder asserted that this trading was an attempt by Jett to hide his fraudulent [Page 461]scheme, Jett said his superiors at Kidder ordered him to engage in the trading to deceive GE. Still, in January 1994, Jett's reported profits doubled, triggering another internal investigation by Kidder accountants, who finally figured out how their own systems were booking profits on the forward reconstitutions.

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