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Lynch Defends His Kidder Report


Readers Report

LYNCH DEFENDS HIS KIDDER REPORT

Your article on my Kidder Peabody report "What Lynch left out" (Finance, Aug. 22) erroneously states that significant questions were left unanswered. In truth, the author of the article knew the answers to his questions because the report itself answers many of them, and the others were answered by me in an interview.

"Where were the auditors?" The report makes clear there were two audits of Joseph Jett's trading desk by Kidder's internal audit staff, neither of which discovered the phantom profits. As the article notes, the report criticizes the Kidder auditors' inexperience and their failure to discover the problem. Contrary to the article's speculation, there were no other audits of Jett's desk during the relevant period, and the author was so informed.

"Where was the cash?" The report explicitly states that one of the problems was Kidder's failure to break out realized profits and unrealized profits in accounting systems, and it recommends the systems be changed to do so.

"Why did `outside counsel' conduct a `review' of the government trading desk in October, 1992?" As the writer was told, this was a general review of the entire Fixed Income Div. and was not triggered by any specific event related to Jett's trading desk. The writer was also told that the review's purpose was to identify weaknesses in the supervisory procedures and controls of the division. I did not identify the outside counsel because I believed its identity was irrelevant. The outside counsel was, in fact, Morgan, Lewis & Bockius, one of Kidder's regular outside counsels.

"Did Cerullo's assistant say that Cerullo really knew about Jett's activities?" By citing one individual's recollection that another said that Ed Cerullo (Jett's supervisor) "was aware" of Jett's trading activities, your article implies that Cerullo may have been aware of Jett's phony scheme. Such a conclusion has no basis in evidence. The individual who reportedly said that was not aware of the false trading scheme at the time and thus could not assert that Cerullo knew about the phantom profits. Rather, he would have indicated nothing more than his belief that Cerullo was aware of what appeared to be legitimate trading by Jett. Indeed, once that individual became suspicious, he was instrumental in exposing the scheme.

"Where was Carpenter?" The report explicitly states the facts: Cerullo reported to Mike Carpenter; Carpenter did not have a background in securities trading; and, rightly or wrongly, Carpenter relied on Cerullo, an experienced trader, and did not personally probe Jett's activities.

In conclusion, the article suggests that, until the questions supposedly identified by the author are answered, the report must be viewed as a "brief for the defense." My only mandate from Kidder was to give my best assessment of what happened and why, based on the facts I found. Not only were the questions answered, but any contention the report is a brief for Kidder management is belied by the report's ultimate conclusion: Jett's phony scheme could only have grown because of lax supervision and misguided judgments on the part of Kidder's management.

Gary G. Lynch

Davis Polk & Wardwell

New York

Editor's note: We feel the points Lynch raises are not errors but matters of interpretation, particularly the adequacy of the report's discussion of whether Carpenter's actions were right or wrong. Lynch was given an opportunity to provide his point of view prior to publication. We dispute the assertion that our reporter was given pertinent information he ignored.


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