WASHINGTON -- Federal authorities yesterday wrapped up their probe of Salomon Brothers Inc. by announcing a $290 million settlement that clears the way for the firm to return to the government securities market as a regular primary dealer in early August.
The settlement, which was outlined by Securities and Exchange Commission Chairman Richard C. Breeden and officials from the Federal Reserve, the Justice Department, and the Treasury Department, completes a 10-month investigation of Salomon trading activities that began last August.
Treasury issued a statement saying it will drop sanctions against Salomon by allowing the firm to resume bidding on behalf of customers for government securities on Aug. 3. The firm has been restricted to submitting bids on its own account since Aug. 18.
E. Gerald Corrigan, the president of the Federal Reserve Bank of New York, said Salomon will be allowed to retain its status as a primary dealer, authorized to buy and sell Treasury securities directly from the Fed.
However, Salomon will be suspended from participating in open-market operations with the bank for a 60-day period, from June 1 until Aug. 3, Mr. Corrigan said. The decision means the firm will not be used by the Fed when the central bank buys and sells securities from dealers to conduct monetary policy.
Salomon will be allowed to continue buying and selling in the secondary market and to participate in Treasury debt auctions, officials said.
When Salomon's false bidding in the government securities market first came to light, some members of Congress wanted to send a strong message to broker-dealers by removing the firm's primary dealer status.
But Mr. Corrigan called the settlement "a balanced one" and said it takes into account Salomon's swift action to set up management controls to prevent future bidding abuses. Mr. Breeden emphasized that Salomon officers and attorneys cooperated fully with federal investigators, in some cases supplying information they were not legally bound to turn over.
Under the terms of the settlement, Salomon agreed to pay $122 million to the Treasury in civil fines and $68 million in fines and forfeitures to settle claims brought by the Justice Department. In addition, the firm agreed to pay $100 million into a court-run fund to provide compensatory damages to investors.
The terms were disclosed in a filing of charges by the SEC submitted to U.S. District Court for the Southern District of New York, which is to administer the claims fund for investors.
Salomon agreed to the settlement without admitting any wrongdoing.
According to the SEC charges, Salomon either on its own or through arrangements with other firms accounted for $15.5 billion in false bids between August 1989 and May 1991. Altogether, 10 false bids were submitted that resulted in the firm getting control of $9.5 billion in Treasury securities in violation of rules.
Among the firms cited in connection with the Salomon bidding were Mercury Asset Management, S.G. Warburg, Soros Capital Management, Warburg Asset Management, Pacific Investment Management Co., and Quantum Fund.
It was not clear which, if any, firms the government is continuing to investigate for possible illegal trading. However, Mr. Breeden said the Salomon settlement covers only that firm and leaves the door open for action involving other firms and individuals.
In New York, Warren E. Buffett, Salomon's chairman and chief executive officer, issued a letter to shareholders disclosing that the firm's board of directors has decided to take a further pre-tax charge of $185 million against second-quarter earnings to meet the settlement costs. Previously, the board authorized a $200 million reserve in the first quarter.
Salomon will set aside about $50 million for legal expenses and other costs after paying the $290 million due under the settlement, Mr. Buffett said.
"We regard this as a very significant fine and very significant sanction applied against the firm," said Mr. Breeden. As painful as the fine may be to Salomon shareholders, "we believe it is pretty absorbable by the firm," he said.
The Fed's Corrigan said the impact of any improper bidding by Salomon in the government market was "very, very small" in terms of the cost to the government. But, he went on, federal officials were anxious to maintain investor confidence in what he called "the bell-wether securities market to the entire world."