Kidder, Peabody Case Impels a Closer Look At Securities Industry

WALL STREET ETHICS

THE multibillion-dollar securities industry is finding itself in its least favorite setting: in the glare of media attention. This is thanks to increasing concerns about ethical standards within the industry, as well as more tepid growth in both corporate earnings and the United States national economy.

Last week, General Electric Company removed the top management of its investment-house subsidiary, Kidder, Peabody & Co., bringing in a new team of GE officials. Kidder's chief executive officer, Michael Carpenter, is out. GE's chief financial officer, Dennis Dammerman, is in. Mr. Dammerman will run Kidder in the summer and through part of the fall; Denis Nayden, also a top GE official, will take over the investment house later in the fall.

The changes at Kidder come after the firm's top government bond trader, Joseph Jett, was fired. Mr. Jett allegedly conducted up to $350 million in bogus trades at Kidder. GE investigators are trying to determine whether Jett acted alone or in concert with other Kidder employees.

Although brokerage-house officials are reluctant to comment publicly on the case, the changes at Kidder clearly have sent repercussions throughout the industry. ``Every firm will tighten its [ethics] compliance programs because of what's happened at Kidder,'' says Dean Eberling, who follows the securities industry for investment house Prudential Securities Inc. in New York.

``The Kidder [scandal] raises questions, not so much about compliance programs per se, but internal accounting systems,'' says veteran Wall Street analyst Perrin Long Jr., an official of First of Michigan Corporation. ``Compliance programs have been gradually tightened now for the past decade.''

Mr. Long recalls the insider-trading scandals of the mid-to-late 1980s. ``In addition, investment houses have tightened their [ethics] programs because of the increasing number of arbitration suits'' brought against securities firms by clients who feel that they have not received full earnings or profits on their investments.

Many of the past junk-bond and insider-trading scandals involved what were considered ``go-go investment houses,'' including Drexel Burnham Lambert, and E. F. Hutton and Company. But the Kidder case, Long says, suggests that even in relatively conservative houses such as that one, there may be problems with the reliability - if not accuracy - of internal accounting departments and systems.

Kidder is expected to post losses of around $30 million in the second quarter of 1994. GE acquired Kidder in 1986.

ANOTHER prominent financial firm is also in the spotlight but for other reasons. This week, Kemper Corporation announced that it would accept a $3.2 billion takeover offer from Conseco Inc., a life-insurance company in Carmel, Ind. GE had made an earlier, unsuccessful bid to acquire Kemper, which owns two life-insurance companies, real estate holdings, a mutual-fund business, and an investment firm.

Assuming the takeover is completed, Conseco is expected to sell Kemper's insurance firms and retain its successful mutual fund/investment business.

While the acquisition of Kemper is unusual, given its large size, the takeover illustrates the changes sweeping the securities industry, Mr. Eberling says. ``While I don't expect any additional mergers or takeovers involving large firms like Kemper, smaller firms will continue to be merged or acquired.''

The securities industry has watched its own stock prices skid downward in the past several quarters, reflecting economic uncertainties and rising interest rates.

Eberling says ``the more diversified houses'' should continue to post good earnings returns during the remainder of 1994. Trading volume, he notes, continues to be heavy.

Merger and acquisition activity is expected to rebound in the US and Europe later this year. And retail-brokerage activity should hold fairly steady, in part because of the strength of the mutual-fund industry.

Still, some jobs within the industry are expected to disappear as smaller firms merge or consolidate, he says. Moreover, many firms continue to modernize their clerical ``back office'' departments.

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