## Facts

- Salomon Brothers Inc. was a registered broker-dealer and a primary dealer in U.S. Treasury securities.
- Paul W. Mozer, head of Salomon’s Government Trading Desk, submitted a false $3.15 billion bid in a February 21, 1991 U.S. Treasury auction, including bids placed in customer names without authorization.
- Salomon’s chief legal officer, Donald M. Feuerstein, advised senior management that the conduct appeared to constitute a criminal act and recommended notifying appropriate authorities.
- John H. Gutfreund (Chairman/CEO), Thomas W. Strauss (President), and John W. Meriwether (Vice Chairman overseeing fixed income and Mozer’s direct supervisor) learned of the apparent misconduct.
- Despite this knowledge, for months the executives did not ensure a prompt, adequate internal investigation, did not discipline Mozer or restrict his trading/auction activities, and did not ensure timely reporting to government authorities.
- During the delay, Mozer committed additional violations in subsequent Treasury auctions.
- The SEC instituted administrative proceedings against Gutfreund, Strauss, and Meriwether for failure to supervise and simultaneously issued a report of investigation addressing supervisory responsibilities, including for legal and compliance personnel.
- The three executives settled on a without-admitting-or-denying basis; Feuerstein was not charged, and the SEC addressed his status only in the report.

## Issues

1. Whether senior executives of a broker-dealer violate Exchange Act § 15(b) by failing to take reasonable supervisory steps after learning of serious employee misconduct, thereby allowing further violations.
2. Under what circumstances a legal or compliance officer is a “supervisor” for purposes of Exchange Act failure-to-supervise liability.

## Decision

- The SEC found Gutfreund, Strauss, and Meriwether failed reasonably to supervise Mozer with a view to preventing securities law violations after learning of the false-bid conduct.
- The SEC concluded their supervisory failures included not ensuring an adequate investigation, not disciplining or limiting Mozer’s activities, and not ensuring timely disclosure to appropriate authorities, which permitted further violations.
- The SEC imposed remedial sanctions pursuant to the accepted settlements, including limitations on association in supervisory capacities and civil money penalties.
- In the report of investigation, the SEC stated that supervisory status for legal/compliance personnel depends on functional authority and concluded Feuerstein was not Mozer’s supervisor on these facts.

## Legal Principles

- A broker-dealer supervisor breaches Exchange Act § 15(b) when, after learning of apparent securities law violations by a subordinate, the supervisor fails to take reasonable steps—such as investigating, disciplining, and restricting activities—to prevent recurrence.
- Unreasonable inaction after notice of potential violations can constitute a failure to supervise “with a view to preventing” further violations.
- “Supervisor” status is determined by facts and circumstances, not title alone; a person may be a supervisor if they have responsibility, ability, or authority to affect the employee’s conduct.
- Legal and compliance personnel are not automatically supervisors; they may be treated as supervisors when their role and authority in the firm’s structure provide power to control or direct line conduct relevant to the violations.

## Conclusion

The SEC held senior Salomon executives liable for failing to act after learning of Treasury auction misconduct and used the accompanying report to establish a functional, authority-based test for identifying when legal and compliance personnel may be treated as supervisors under the Exchange Act.


In re John H. Gutfreund, Exchange Act Release No. 34-31554, 51 S.E.C. 93 (1992)