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SEC Charges Kidder With Funds Misuse : Says Brokerage Used Clients' Money for Its Own Investments

October 10, 1985|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — In what appears to be the biggest such case on record, the Securities and Exchange Commission on Wednesday charged the brokerage firm of Kidder, Peabody & Co. with illegally using $145 million of its customers' money to back the firm's own investments.

Kidder, Peabody is the nation's 15th-largest securities firm with more than $307 million in capital.

Charged with aiding and abetting the scheme, which allegedly took place between March 1 and April 13, 1984, was Gerard A. Miller, the firm's director of operations.

The firm and Miller face maximum penalties of suspension or revocation of their licenses to work in the securities business.

In a prepared statement issued from its headquarters, Kidder attributed the charges to disagreements between itself and the SEC staff over "technical operational rules (that) govern the manner in which customers' securities are accounted for on the firm's books."

Kidder Statement

"We disagree with the SEC staff that our bookkeeping practices in March and April of last year violated these rules. At no time were our customers inadequately protected against loss," the statement said.

Miller could not be reached for comment.

According to the administrative complaint filed by the SEC's regional office here, Kidder violated one of the primary rules governing a brokerage's handling of clients' funds, the requirement that the money be kept thoroughly segregated from the firm's capital.

Between March 1 and April 13, 1984, the complaint states, Kidder pledged $90 million in customer funds as collateral for a number of "repurchase" agreements.

Those agreements involve the firm's loan of securities--generally Treasury securities--to borrowers on the understanding that they will be repurchased at a given date in the future. The goal is to profit from interim changes in interest rates.

Collateral for Bank Loans

During the same period, the SEC contends, Kidder used another $55 million of customer funds as collateral on bank loans.

The customer funds were in the form of securities owned by the customers but held by the firm, as well as excess margin securities--securities on which the customers' equity exceeded the minimum 50% of market value required by law. In effect, the agency charged, the firm pledged its customers' capital to conduct its business while protecting its own funds.

Ira Lee Sorkin, SEC regional administrator, would not say whether there is any evidence that customer funds were lost in the transactions.

Early this year, the agency charged the New York City brokerage firm of Thomson McKinnon Securities Inc. with misusing $38 million in customer funds to help finance the firm's stock transactions.

The Kidder charge is believed to be the largest in magnitude of any such charge brought against a major securities house.

If it is not settled privately, the complaint will be heard by an SEC administrative law judge, whose ruling may be appealed to the full commission and, beyond that, to the federal appeals courts.

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