Joseph Jett - Regulatory Organization Charges and Decisions

Regulatory Organization Charges and Decisions

The Securities and Exchange Commission, the National Association of Securities Dealers, and the New York Stock Exchange all were involved in the various actions around the Jett case, since they all had some regulatory authority over Kidder Peabody.

The New York Stock Exchange acted first, by banishing Jett from trading securities or working for any employer affiliated with the exchange.

The NASD was involved in the dispute over Jett's bonuses, which were frozen in an account held by Kidder Peabody. In 1996, a NASD arbitration panel rejected Kidder Peabody's monetary claims against Jett and ordered the funds from Jett's personal accounts to be released. Kidder had sought $8.2 million for undeserved bonuses and $74.6 million for trading losses incurred by Kidder. The $74.6 million sought by Kidder was the amount of the actual losses, rather than the total false gains of $350 million. Although the bonuses from Jett's trading had totaled $11.4 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. In a Salon.com interview from 1999, Jett said that ultimately $4.5 million was returned to him in 1998.

The Securities and Exchange Commission investigated the losses from 1994 onward, and in 1998 released an initial ruling that Jett did not commit securities fraud, but charged him with a lesser record-keeping violation.

"This Initial Decision finds that, for over two years, Mr. Jett exploited an anomaly in Kidder’s software, in the manner of a pyramid scheme, that credited him on Kidder’s books with enormous, but illusory, profits. He did this with intent to defraud."

The SEC ordered Jett to forfeit his $8.2 million in bonuses associated with the false profits, fined him $200,000, and bars him from any future association with a securities broker or dealer.

Both Jett and the SEC's Enforcement Division appealed the decision. In March 2004 the Securities and Exchange Commission finally ruled on the appeal, and concluded that, in addition to upholding the record-keeping violation, Jett had also committed securities fraud. Specifically, they found that Jett committed fraud by deliberately exploiting weaknesses in Kidder Peabody's automated trading records system in order to book fake profits of about $264 million (when he had actually lost the firm about $75 million). The Commission re-affirmed the penalty that Jett forfeit $8.2 million in fraudulently-obtained bonuses, plus the fine of $200,000 and a lifetime bar from the industry.

Jett never appealed the 2004 SEC decision, even though he had the right to do so. In 2006, when the SEC was seeking an enforcement action against Jett in the United States District Court for the 2004 decision, Jett sent a memorandum to the court saying that he had never received notice from the SEC as to their 2004 decision since the order had been sent to his old address. He sent another filing saying he was unaware of the 2004 decision being made and therefore had no chance to appeal. The District Court rejected this when they found that Jett had been quoted in a New York Times article shortly after the 2004 decision was announced, saying that he was unconcerned with the SEC action since he was still legal to trade securities offshore.

The SEC released an enforcement action against Jett in 2007, ordering him to pay the fines due.

The US Attorney's office investigated Jett, but no criminal charges were ever filed.