Regulators Ready to File Charges Against Jett

WASHINGTON —  Federal regulators are ready to file civil charges against former Kidder Peabody bond trader Joseph Jett and two of his former bosses in connection with the firm’s 1994 bond trading scandal, sources said Monday.

The Securities and Exchange Commission could file an administrative case today against Jett, Edward Cerullo and Melvin Mullin, according to the sources, who requested anonymity. The Northeast storm delayed the filing Monday.

Jett said the agency intends to charge him with securities fraud and books and records violations. Cerullo and Mullin face charges of failing to supervise, the sources said.

SEC spokeswoman Jennifer Scardino declined to comment.

In a telephone interview, Jett reiterated a strong denial of any wrongdoing and his intention to fight the charges.

Jett said he has uncovered Kidder documents from a separate shareholder lawsuit filed against the company that he contends show his supervisors were aware of and directed large-scale trading in forward bond contracts.

The forwards--which involve purchase of bonds for delivery at a future date--were aimed at reducing Kidder’s use of capital for bond trading, Jett said.

“They are, in my opinion, the most salient documents available. They prove beyond any doubt that my managers directed my efforts,” Jett said. He charged that the SEC investigators “chose not to review” the documents.

Gary Lynch, Kidder’s outside attorney and author of an extensive report on the Jett case, disputed Jett’s characterization of the documents.

“There are no documents that support the notion that anyone was aware of his false profits scheme before it was detected in March of 1994,” Lynch said.

Lynch’s report, issued in August 1994, conflicts with Jett’s statements. The report says Jett had built up millions of dollars in false profits before September 1993, the time when Jett said his supervisors told him to engage in a multibillion-dollar trading scheme to shrink the firm’s balance sheet.

Kidder’s general counsel, John Liftin, did not return a telephone call seeking comment. Cerullo’s attorney, John Peloso, couldn’t be reached at the office because of the storm. An attorney for Mullin could not be reached.

Jett, the head of its government bond trading desk, was fired by Kidder Peabody in April 1994 amid charges that he generated $350 million in false profits to enhance his performance-based year-end bonuses.

From late 1991 to March 1994, Jett allegedly manufactured thousands of phony trades that made it appear as if his trading activities were very profitable for Kidder. The scandal contributed to General Electric’s Co.’s decision to sell Kidder to PaineWebber Group in 1994.

It’s unclear exactly what penalties Jett would face. A source said the SEC has discussed barring him from the securities industry, disgorgement of any improper profits and a civil fine.