Exchange Act Release No. 34-31554 Securities Exchange Act of 1934 IN THE MATTER OF JOHN H. GUTFREUND, THOMAS W. STRAUSS, AND JOHN W. MERIWETHER, RESPONDENTS ADMINISTRATIVE PROCEEDING File No. 3-7930 December 3, 1992 ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND REPORT OF INVESTIGATION PURSUANT TO SECTION 21(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I. The Commission deems it appropriate and in the public interest that public administrative proceedings be and they hereby are instituted against John H. Gutfreund, Thomas W. Strauss, and John W. Meriwether pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act"). II. In anticipation of the institution of these administrative proceedings, Gutfreund, Strauss, and Meriwether have each submitted Offers of Settlement which the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, and without admitting or denying the facts, findings, or conclusions herein, Gutfreund, Strauss, and Meriwether each consent to entry of the findings, and the imposition of the remedial sanctions, set forth below. III. The Commission also deems it appropriate and in the public interest that a report of investigation be issued pursuant to Section 21(a) of the Exchange Act [FN1] with respect to the supervisory responsibilities of brokerage firm employees in certain circumstances. Donald M. Feuerstein consents to the issuance of this Report, without admitting or denying any of the statements contained herein. IV. On the basis of this Order and the Respondents' Offers of Settlement, the Commission finds the following: [FN2] A. FACTS 1. Brokerage Firm Involved Salomon Brothers Inc ("Salomon") is a Delaware corporation with its principal place of business in New York, New York. At all times relevant to this proceeding, Salomon was registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. Salomon has been a government- designated dealer in U.S. Treasury securities since 1939 and aExchange Act Release No. 34-31554 primary dealer since 1961. 2. Respondents John H. Gutfreund was the Chairman and Chief Executive Officer of Salomon from 1983 to August 18, 1991. He had worked at Salomon since 1953. Thomas W. Strauss was the President of Salomon from 1986 to August 18, 1991. During that time period, Strauss reported to Gutfreund. He had worked at Salomon since 1963. John W. Meriwether was a Vice Chairman of Salomon and in charge of all fixed income trading activities of the firm from 1988 to August 18, 1991. During that period, Meriwether reported to Strauss. During the same period, Paul W. Mozer, a managing director and the head of Salomon's Government Trading Desk, reported directly to Meriwether. 3. Other Individual Donald M. Feuerstein was the chief legal officer of Salomon Inc and the head of the Legal Department of Salomon until August 23, 1991. From 1987 until August 23, 1991, the head of Salomon's Compliance Department reported directly to Feuerstein. 4. Summary In late April of 1991, three members of the senior management of Salomon-- John Gutfreund, Thomas Strauss, and John Meriwether--were informed that Paul Mozer, the head of the firm's Government Trading Desk, had submitted a false bid in the amount of $3.15 billion in an auction of U.S. Treasury securities on February 21, 1991. The executives were also informed by Donald Feuerstein, the firm's chief legal officer, that the submission of the false bid appeared to be a criminal act and, although not legally required, should be reported to the government. Gutfreund and Strauss agreed to report the matter to the Federal Reserve Bank of New York. Mozer was told that his actions might threaten his future with the firm and would be reported to the government. However, for a period of months, none of the executives took action to investigate the matter or to discipline or impose limitations on Mozer. The information was also not reported to the government for a period of months. During that same period, Mozer committed additional violations of the federal securities laws in connection with two subsequent auctions of U.S. Treasury securities. The Respondents in this proceeding are not being charged with any participation in the underlying violations. However, as set forth herein, the Commission believes that the Respondents' supervision was deficient and that this failure was compounded by the delay in reporting the matter to the government. 5. The Submission of Two False Bids in the February 21, 1991 Five-Year U.S. Treasury Note Auction For a considerable period of time prior to the February 21, 1991 auction, the Treasury Department had limited the maximum bid that any one bidder could submit in an auction of U.S. Treasury securities at any one yield to 35% of the auction amount. On February 21, 1991, the Treasury Department auctioned $9 billion of five-year U.S. Treasury notes. Salomon submitted a bid in its own name in that auction at a yield of 7.51% in the amount of $3.15 billion, or 35% of the auction amount. [FN3] In the same auction, Salomon submitted two additional $3.15 billion bids at the same yield in the names of two customers: Quantum Fund and Mercury Asset Management. [FN4] Both accounts were those of established customers of Salomon, but the bids were submitted without the knowledge or authorization of either customer. Both bids were in fact false bids intended to secure additional securities for Salomon. Each of the three $3.15 billion bids was prorated 54% and Salomon received a total of $5.103 billion of the five-year notes from the auction, or 56.7% of the total amount of securities sold at that auction.Exchange Act Release No. 34-31554 After the auction results were announced, Paul Mozer, then a managing director in charge of Salomon's Government Trading Desk, directed a clerk to write trade tickets "selling" the $1.701 billion auction allocations received in response to the two unauthorized bids to customer accounts in the names of Mercury Asset Management and Quantum Fund at the auction price. Mozer at the same time directed the clerk to write trade tickets "selling" the same amounts from those accounts back to Salomon at the