The encyclopedia · Trading & Investing · Financial decision · 1990–1991
Salomon Brothers rigged US Treasury auctions — the $190M fine that ended an era
A Salomon Brothers trader submitted fake bids in Treasury auctions to exceed the 35% limit. The $190M fine brought down Wall Street's most aggressive firm.
Salomon Brothers · 1991-08
What happened
Between December 1990 and May 1991, Salomon Brothers trader Paul Mozer submitted false bids in US Treasury auctions to purchase more bonds than legally permitted. Treasury rules limited any single buyer to 35% of an issue. Mozer, with the help of Thomas Murphy, used unauthorized customer accounts to circumvent the cap. The scheme was discovered by the Treasury's Deputy Assistant Secretary Mike Basham.
The scandal forced CEO John Gutfreund — known as 'the King of Wall Street' — to resign in August 1991. Warren Buffett stepped in as interim CEO, stabilizing the firm and cooperating with regulators. Salomon was fined $190 million, and Gutfreund was barred from leading any brokerage. Mozer served four months in prison and was fined $30,000. The firm narrowly avoided criminal indictment.
The scandal marked the end of Salomon's aggressive trading culture and contributed to its weakened position. In 1997, the firm was acquired by Travelers Group for $9 billion, eventually becoming part of Citigroup. The case became a cautionary tale about unchecked risk-taking on Wall Street and led to reforms in Treasury auction monitoring.
Why it happened
- Paul Mozer submitted fake bids using unauthorized customer accounts to exceed the 35% auction cap — the scheme was discovered when the Treasury noticed Salomon's abnormal share of bond purchases.
- CEO John Gutfreund knew of the violation but failed to report it — the delay in disclosure turned a trading violation into a crisis of governance that destroyed the CEO's credibility.
- The aggressive culture at Salomon encouraged rule-bending — Mozer operated in an environment where winning mattered more than compliance, and management tolerated it until it became public.
The lesson
A trader who submits fake bids because he thinks the rules do not apply is not a rogue — he is a reflection of the culture that hired him, and the fine is the price of that culture.
Sources
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