Salomon Brothers Chairman John Gutfreund and President Thomas Strauss announced their resignations Friday in the midst of the worst scandal in the history of the prestigious 81-year-old investment firm.
The resignations come after the investment firm admitted it made illegal bids in Treasury note auctions and that the executives did not report the wrongdoing to the government for months.Gutfreund and Strauss said in a company statement they would tender their resignations at a special board meeting called for Sunday "in order to give the Salomon Inc. board of directors maximum flexibility" in dealing with the company crisis.
Warren Buffett, who owns 13 percent of Salomon, is prepared to become chairman and chief executive officer on an interim basis, the statement said.
The investment firm also said its board "will consider the status of John W. Meriwether, vice chairman, at that time as well as the steps that have been and will be taken to address the management control failures that have occurred."
Gutfreund and Strauss said, "We are not aware of any problems other than those already disclosed.
"We cannot allow our unfortunate mistake of not taking prompt action, when in April we learned of one unauthorized bid at a February Treasury action, to harm the firm. We are taking this action to protect the firm, its 9,000 people and its clients. We are confident that Salomon will continue its pre-eminent position as one of the world's leading investment banks," The statement from the two executives added.
The Federal Reserve Bank of New York said Friday it "has been closely reviewing developments at Salomon Brothers.
Gutfreund learned in April the investment firm had made an illegal bid in a Treasury note auction, but the executives didn't report the wrongdoing to the government for months.
Salomon said it could face criminal fines and civil damages for the violations, which took place during four Treasury Department sales by the firm using customers' names to make bids without authorization.
Salomon disclosed a week ago it had violated Treasury auction rules and that it was under investigation by the Securities and Exchange Commission, the Justice Department and the Treasury.
In a December 1990 sale, the firm said, it submitted a 35 percent bid for its own account and another bid of $1 billion using a customer's name without authorization. The combined bids represented 46 percent of the issue. The maximum allowable purchase at the auction was 35 percent.
In the February 1991 five-year note sale, the firm said it had submitted three 35-percent bids - one on its own account and two on unauthorized customer accounts. The firm ended up buying 57 percent of the issue.
Salomon's disclosure could lead to wide changes in government regulation of the $2.2 trillion U.S. government securities market. It is one of the most lightly regulated U.S. securities markets.