Kidder Peabody Company's History of Controversy

Kidder, Peabody & Company has a long and complex history, marked by several instances of controversy. The firm was founded in 1842 by Joseph Peabody and Robert B. Kidder.

Kidder Peabody Company's early years were marred by a scandal involving a failed railroad venture in the 1860s. The firm was forced to restructure and rebrand in the aftermath.

One notable controversy surrounding Kidder Peabody involved its role in the 1980s junk bond market. The firm was criticized for its aggressive marketing and sale of high-risk bonds to unsuspecting investors.

In the 1990s, Kidder Peabody faced further scrutiny for its involvement in the collapse of the hedge fund Long-Term Capital Management. The firm was accused of failing to properly supervise and oversee the fund's activities.

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Kidder, Peabody & Company has a rich history that dates back to the 1970s. The firm was among the first on Wall Street to dedicate an entire department to financial research and development.

In the late 1970s, Kidder Peabody hired Yale Professor John Geanakoplos to start an R&D department, which researched and analyzed the connection between finance and mathematics.

Kidder, Peabody & Company was established in April 1865 by Henry P. Kidder, Francis H. Peabody, and Oliver W. Peabody, who formed the firm through the reorganization of their previous employer, J.E. Thayer & Brother.

The three founders had previously worked as clerks at J.E. Thayer & Brother.

Kidder Peabody acted as a commercial bank, investment bank, and merchant bank, with an active securities business dealing in treasury bonds, municipal bonds, corporate bonds, and stocks.

The firm also traded and invested in securities for its own account.

In 1931, Albert H. Gordon bought the struggling firm with financial backing from Stone & Webster, which had its own investment banking operation.

Gordon helped rebuild Kidder Peabody by focusing on niche markets, including utility finance and municipal bonds.

Stone & Webster's investment banking unit served municipally owned utilities in other offerings.

The firm was in a perilous situation after the 1929 stock market crash.

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Frank G. Webster, a senior partner of Kidder Peabody, was Edwin Webster's father, and Kidder had supported Charles A. Stone and Edwin as they started The Massachusetts Electrical Engineering Company, which later became Stone & Webster, in the 1890s.

In the 1970s, Kidder Peabody was among the first Wall Street firms to start and dedicate an entire department to financial research and development.

Kidder Peabody hired Yale Professor John Geanakoplos to start an R&D department to research and analyse the connection between finance and mathematics.

The department grew to contain 75 prominent academics, who continued to work there until Kidder Peabody's closure.

This pioneering move showed Kidder Peabody's commitment to innovation and collaboration with academia, setting a new standard for Wall Street firms.

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Kidder, Peabody & Company was involved in several scandals and controversies during its existence. The firm was implicated in a skein of insider trading scandals in the 1980s, which defined the Street of the 1980s.

A former Kidder Peabody executive, Martin Siegel, admitted to trading on inside information with super-arbitrageurs Ivan Boesky and Robert Freeman. Siegel also implicated Richard Wigton, Kidder's chief arbitrageur.

The firm's internal controls were found to be weak, allowing Siegel to move about the trading floor as he pleased and making trades with little to no questions asked. In response, GE fired several senior executives, including Ralph DeNunzio, and agreed to a $25.3 million settlement with the SEC.

The aftermath of the insider trading scandal led Jack Welch, GE chairman, to conclude that buying Kidder had been a mistake. He was appalled by the firm's outsize bonus pool, which was $40 million greater than the GE corporate pool at the time.

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Kidder and the 1980s insider trading scandal is a classic example of corporate greed and lack of oversight. The firm was implicated in a series of insider trading scandals that swept Wall Street in the 1980s.

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Gordon served as Kidder's chairman until selling it to General Electric in 1986. GE executives had felt chagrin at putting up money to finance leveraged buyouts, only to have to pay large fees to other investment banks.

A GE internal review concluded that DeNunzio and other executives had not done enough to prevent the improper sharing of information and also revealed glaring weaknesses in the firm's internal controls. This lack of oversight allowed Martin Siegel to move about the trading floor as he pleased, and Wigton and Tabor made Siegel-requested trades with almost no questions asked.

GE fired DeNunzio and two other senior executives, stopped trading for its own account, and agreed to a $25.3 million settlement with the SEC. This was a significant blow to the firm's reputation and a costly lesson in the importance of proper internal controls.

Jack Welch, GE's chairman, was appalled by the firm's outsize bonus pool, which was $40 million greater than the GE corporate pool at the time. He was also puzzled by how "mediocre people" were garnering such high bonuses.

The 1994 bond trading scandal at Kidder Peabody was a major embarrassment for the company and its parent, General Electric. It was caused by a trader named Joseph Jett, who exploited a flaw in Kidder's computer systems to generate false profits.

Jett's actions resulted in a $275 million loss, not the $275 million profit he claimed. The New York Stock Exchange (NYSE) barred Jett from securities trading and working for any firm affiliated with the exchange.

The Securities and Exchange Commission (SEC) later formalized Jett's ban from the industry, concluding that his actions were securities fraud. GE took a $210 million charge to its first-quarter earnings due to the scandal.

The negative media coverage following the scandal led GE to sell most of Kidder Peabody's assets to PaineWebber for $670 million in October 1994. The transaction closed in January 1995, and the Kidder Peabody name was retired.

GE business leaders were so shaken by the huge loss that they offered to dip into their own divisions' coffers to close the gap. However, no one at Kidder was willing to take responsibility for the debacle.

Joseph Jett's actions at Kidder Peabody were a prime example of how a flawed system can be exploited. He used the firm's system, which was designed to tally profits while allowing time for trades to settle, to his advantage.

Jett made around $350 million in false trades, which kept them floating longer due to an upgrade of the system on the same faulty grounds. This allowed him to enter more false trades.

Jett's bonuses made him the prime target of an SEC investigation, and he paid $8 million in performance bonuses on false trades.

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Joseph Jett's actions at Kidder Peabody were a prime example of fraudulent behavior. He made $350 million in false trades, which is a staggering amount.

The system at Kidder Peabody was designed to tally profits while allowing time for trades to settle. Jett exploited this loophole by moving his trades forward, again and again, to keep profits building.

Jett's scam was eventually revealed when GE noticed Kidder's portfolio was becoming extremely heavy and overextended in bonds. They told Kidder to reduce its stake, which led to the discovery of Jett's false trades.

Jett denied concealing the trades and blamed Kidder Peabody management for knowingly engaging in fraud. However, his most serious charges were overturned on appeal.

The consequences of Jett's actions were severe. He was barred from association with any registered broker-dealer and ordered to disgorge $8.21 million in bonuses.

Here are the key penalties Jett faced:

Joseph Jett has written two books about his life and experience at Kidder Peabody. These books are Black and White on Wall Street: The Untold Story of the Man Wrongly Accused of Bringing Down Kidder Peabody (1999) and Broken Bonds: My Immoderate Life of Love, Passion, War on Affirmative Action and Jack Welch's GE (2004).

Today, Jett operates a firm called Jett Capital Advisors, which is headquartered in New York. This firm specializes in capital raising and provides transaction advisory services to growth-stage companies.

Jett Capital Advisors offers expertise in capital raising, helping companies secure the funds they need to grow.

Kidder, Peabody & Company had a notable list of associated people, including Prince Abbas Hilmi, who served as the Vice President of Kidder, Peabody & Co. from 1986 to 1989.

Prince Abbas Hilmi was not the only notable figure associated with Kidder, Peabody & Company. Jack Langer, a basketball player and investment banker, was also connected to the company.

Lana Del Rey's paternal grandfather, Robert England Grant Sr., was an investment banker at Kidder, Peabody & Co. He later went on to work at Plough, Inc and Textron, and even became a venture capitalist.

Christian Gerhartsreiter, a serial impostor, had a brief stint at Kidder, Peabody & Co. under the alias "Christopher C. Crowe" in the late 1980s.

Here's a list of some of the notable people associated with Kidder, Peabody & Company:

Joseph Jett was a bond trader working for Kidder, Peabody & Co. when it was owned by General Electric Corporation.

Jett took advantage of a glitch in Kidder's computer system that allowed him to make unprofitable trades appear profitable.

Kidder Peabody's employees were likely unaware of the glitch, allowing Jett to continue his scam for a period of time.

By the time Jett's scam was revealed, around $350 million in false trades had been made.

Jett was paid $8 million in performance bonuses on false trades, which is a staggering amount.

Here are the key details of Jett's scam: