Pennsylvania Joins Suits Against Salomon In First Such Action By Government Entity

Treasurer Catherine Baker Knoll of Pennsylvania has filed a class action suit against Salomon Brothers Inc. for damages resulting from the firm's admitted Treasury market rule violations, a spokesman for Ms. Knoll said yesterday.

The suit, which is the first against Salomon filed by a government or governmental body, has been consolidated with numerous others already pending in U.S. District Court in New York City, according to Michael W. Arpey, deputy general counsel for Pennsylvania.

"We feel their actions corrupted the whole marketplace," Mr. Arpey explained. "They caused us to purchase securities for more than we would have had to have paid had they not engaged in that manipulation."

A spokeswoman for Salomon said the firm "cannot comment on matters of litigation."

Salomon officials have admitted to violating bidding rules at several recent Treasury auctions, including placing bids for clients who did not authorize the purchases. That enabled the firm to exceed federal limits in the number of bonds a single entity can buy - a market "squeeze" that the suit says drove up prices on the notes.

The resulting scandal forced three top executives, including former Chairman John Gutfreund, to resign after acknowledging that they knew of the bidding violations months before Salomon notified government regulators.

Ms. Knoll said the suit is to protect pensioners and taxpayers in the state and fulfill her fiduciary obligation to obtain the best possible yield on state investments.

The Pennsylvania Treasury purchased $75 million of two-year Treasury notes at the April auction and $100 million of two-year notes at the May auction, according to the complaint. The prices the state had to pay for the bonds "were inflated and/or distorted as a result of Salomon's misconduct," the lawsuit argues.

Mr. Arpey said the bonds were not purchased through Salomon, but through another primary dealer, which he declined to name. He said the state did not specify damages in the suit because the effects of Salomon's illegal activities are still being analyzed.

Mr. Arpey said any state or government entity that purchased securities during the auctions in question would probably be included in the class action suit and would not have to file a separate action unless they wanted to pursue a more aggressive posture in the case.

Last month, securities regulators in 33 states announced a joint investigation of Salomon's violations. That investigation also is based on the allegation that the firm's manipulation of the market resulted in higher prices for securities purchased by government entities and pension funds.

In addition to seeking damages through the courts, state and local governments can choose to revoke or suspend Salomon's broker's licenses or to levy fines against the firm.

Plaintiffs of other suits include shareholders who bought Salomon stock during the time that firm executives knew of the violations and had not yet informed federal regulators. The argument in those cases is that the stock price was artificially inflated.

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