Kidder Peabody

In 1865 Henry P. Kidder and the brothers Francis H. Peabody and Oliver W. Peabody formed the Boston banking partnership Kidder, Peabody & Co. Francis H. Peabody had earlier worked with his brother Oliver at the Boston banking house John E. Thayer & Brother.⁠[1][2]

After several difficult years, Kidder, Peabody & Co. was reorganized in March 1931, when a new three-member partnership succeeded the old firm; the partners were Chandler Hovey, his nephew Edwin Sibley Webster Jr. and Albert Gordon.⁠[2]

In April 1986 General Electric (GE), based in Fairfield, Connecticut, announced its intent to buy 80% of Kidder, Peabody & Co. for an estimated $600 million, with Kidder’s management keeping the remaining 20% and GE contributing $130 million at closing. Kidder was then one of Wall Street’s oldest privately held securities firms; its president was Ralph D. DeNunzio.⁠[3]

In February 1987 former Kidder employees Richard B. Wigton and Timothy L. Tabor were arrested on alleged insider trading charges; Martin Siegel, also a former Kidder employee, had pleaded guilty to securities violations and implicated the two men.⁠[4]

GE, as the parent company, then carried out an internal investigation of Kidder that found problems with its internal management and financial controls. Kidder chairman and chief executive Ralph DeNunzio and two other top executives stepped down as of June 1, 1987, and were succeeded by Silas Cathcart, a GE director and former chairman of Illinois Tool Works; Kidder was also negotiating a settlement with the U.S. Securities and Exchange Commission (SEC).⁠[4]

Orlando Joseph Jett was a government bond trader at Kidder who was promoted to managing director of the government desk in February 1993. From November 1991 to March 1994 he used strip exchanges and forward reconstitutions with the Federal Reserve to book profits through an anomaly in Kidder’s trading records system; Kidder’s reports showed profits of more than $264 million from his trading, while the SEC found that the trading actually caused losses of $74.7 million.⁠[5][6]

Kidder fired Jett on April 17, 1994. GE took a one-time pre-tax charge of $350 million against its first-quarter 1994 earnings in connection with the matter.⁠[5]

In June 1994 GE installed a new management team at Kidder, having put about $550 million of capital into the firm since April. In July Edward Cerullo, Kidder’s second-highest executive and Jett’s supervisor, stepped down; in GE’s results for the period, Kidder itself posted a loss of $29 million.⁠[7]

On October 17, 1994, GE announced the sale of most of Kidder to PaineWebber in a largely stock transaction valued at around $670 million. Under the asset purchase agreement dated that day, Kidder was to receive 21,500,000 shares of Paine Webber Group common stock plus convertible and redeemable preferred stock, giving GE indirect ownership of about 22.2% of PaineWebber’s outstanding common stock. Kidder then had about 4,500 employees, including a retail brokerage staff of about 1,100; analysts estimated that as many as half could be laid off.⁠[8][9]

PaineWebber’s purchase of the Kidder businesses closed in stages: the real estate business on December 9, 1994, the Eurobond business on December 16, the retail brokerage business on January 30, 1995, and the asset management business in two parts on January 30 and February 13, 1995. PaineWebber paid in cash and in common and preferred stock, including 21.5 million common shares, convertible preferred stock with a $100 million stated value and redeemable preferred stock with a $250 million stated value; after the first closings GE owned approximately 25% of PaineWebber’s common stock on a fully diluted basis.⁠[10][11]

The SEC brought administrative proceedings against Jett. On July 21, 1998, an administrative law judge found that Jett had not violated the antifraud provisions but had caused and aided and abetted Kidder’s recordkeeping violations. On review, the Commission found on March 5, 2004, that Jett had defrauded the firm and violated the antifraud provisions; it ordered him to cease and desist, barred him from association with any broker or dealer, and ordered disgorgement of $8.21 million and a civil penalty of $200,000.⁠[5]

On September 7, 2007, the U.S. District Court for the Southern District of New York entered a judgment enforcing the SEC’s 2004 order, holding that Jett could not challenge the merits of the order in the enforcement action because he had not filed a timely appeal to the court of appeals.⁠[6]