Joseph Jett created $350M in phantom bond profits — Kidder Peabody was sold months later

Joseph Jett was a bond trader at Kidder, Peabody, owned by General Electric. He discovered a flaw in the firm's trade processing system: when he executed forward reconstitutions of US Treasury bonds — buying STRIPS hedged with short Treasury bond positions — the system valued forward-dated trades as if settled immediately, ignoring the time value of money. This created instant, illusory profits that reversed into losses when the trades actually settled. To keep the phantom profits alive, Jett had to execute ever-larger trades in a pyramid scheme.

Between 1992 and early 1994, Jett booked approximately $350 million in fake profits. He received $11.4 million in bonuses based on these bogus figures. His actual trading, however, lost the firm about $75 million. The scheme was uncovered in April 1994 when GE, alarmed by the size of Jett's positions, demanded a reduction. When trades began settling and losses appeared, an internal investigation revealed that none of Jett's supposed trades had ever been consummated — he had been rolling them over before settlement. He was fired.

GE took a $210 million charge against first-quarter 1994 earnings to cover the damage. The scandal, combined with other losses, led GE to sell Kidder Peabody to Paine Webber later that year; the Kidder name was dropped. Jett was barred from the securities industry by the NYSE, and the SEC later found him guilty of securities fraud. He was ordered to forfeit $8.2 million in bonuses and banned for life. The case became a textbook example of how a computer system's accounting flaw, combined with a single determined trader, could bring down a 130-year-old investment bank.