Joseph Jett

Joseph Jett was a government bond trader at Kidder, Peabody & Co., who was responsible for a large trading fraud involving US Treasury bond strips. Jett effectively exploited an internal flaw in the firm's accounting system which overvalued certain transactions (forward reconstitutions of treasury bonds). By trading this type of transaction in large size, over the period 1990-1994, Jett was able to book hundreds of millions of what appeared to be trading profits, that in fact were simply accounting errors.

The scheme that Jett devised was facilitate by the fact that Kidder's system valued forward-dated transactions as if they were immediately settled, rather than taking into account the time value of money for the period before settlement of the trade. By buying US Treasury bond strips (whose price increases each day due to accretion), hedged by a short treasury bond position (whose price remains relatively stable over the settlement period), Jett was able to book immediate, illusory profits. Once settlement of the trade happened, any false profits immediately were reversed as a loss. So in order to continue to appear profitable, Jett had to engage in more and more such trades, enough to both offset the losses on the settling trades plus additional trades to keep delivering profits. Therefore, for the scheme to persist, the size had to continually grow. This is what eventually brought the scheme's downfall -- Jett's trading size had become so large that General Electric, the owner of Kidder Peabody at the time, asked that he cut the size of his positions because of the bloating of GE's balance sheet. With no new trades to offset those settling and rolling off, the losses became apparent to Kidder senior management. [http://www.sec.gov/litigation/opinions/33-8395.htm]

Jett, who previously was a marginally profitable trader by Wall Street standards, started earning large bonuses once he began executing the trades that exploited the system flaw. While in 1991 Jett was paid a bonus of $5000, in 1992 and 1993 he was paid $2 million and $9 million respectively. [http://www.personal.psu.edu/sjh11/Courses/BA521/Jett/JettNYTimes97.shtml] The board of General Electric, who had owned Kidder Peabody since 1986, had to approve the $9 million outsized bonus in 1993. Later, in his autobiography "Straight from the Gut," Jack Welch would lament not personally looking into how one of his employees could become so successful so quickly.

After the scheme was discovered in 1994, Kidder reversed over $340 million in trading profits that Jett had fraudulently booked. In 2004, the Securities and Exchange Commission ordered Jett to forfeit $8.2 million in fraudulently-obtained bonuses, fined him $200,000 and barred him from any future association with financial trading. [http://www.sec.gov/litigation/opinions/33-8395.htm In the Matter of Orlando Joseph Jett] , U.S. Securities and Exchange Commission, March 5, 2004]

After firing Jett, Kidder Peabody froze the funds in Jett's personal accounts, which he had kept with the securities firm. In 1998, a NASD arbitration panel ordered the funds released to Jett, after deducting liens and attorney fees. Although the bonuses from the fraud had totalled $11 million, the accounts contained approximately $5 million due to deduction of deferred compensation (which the panel ruled, did not have to be paid to Jett) and taxes due. [http://www.sec.gov/litigation/opinions/33-8395.htm] In a Salon interview from 1999, Jett claimed that ultimately $4.5 million was returned to him in 1998.

Jett later gave the appearance of opening his own investment banking firm, by operating a website claiming to offer asset management, private equity, and other financial services. [See http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4nMEjBE5c5k] It is not clear if any such business is actually being done, as doing so would violate Jett's ban from the securities industry and would expose Jett to further criminal charges.

In the same Salon interview in 1999, Jett claimed to own an offshore hedge fund called Cambridge Matrix [ [http://www.salon.com/books/int/1999/05/27/jett/print.html Salon Interview | Wall Street lynching ] ] . However, curiously, this is also the name of the publishing house of his autobiography "Broken Bonds" [ [http://www.amazon.com/dp/097081013X Amazon.com: Broken Bonds: My Immoderate Life of Love, Passion, War on Affirmative Action and Jack Welch's Ge: Joseph Jett: Books ] ] .

In September 2007 the SEC released an enforcement action against Jett [See http://www.sec.gov/litigation/litreleases/2007/lr20273.htm] , ordering him to pay the fines due.

In July 2008, the French news channel France 24 televised an interview with Jett, where he claimed to have no money to pay the SEC fines, and was living in the basement of a friend's house in Princeton, New Jersey. He also claimed to be running an offshore financial consultancy, though the interview said that Jett did this from short-term rental office space. [http://www.france24.com/en/20080718-reporters-banking-crime-trader-joe-jett-kerviel-wall-street]

ee also

* List of trading losses

References