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Archive for the ‘Citigroup’ Category

FINRA Sanctions Citigroup Global Markets Inc. $11.5 Million for Inaccurate Research Ratings

FINRA announced that it has fined Citigroup Global Markets Inc. (CGMI) $5.5 million and required the firm to pay at least $6 million in compensation to retail customers for displaying inaccurate research ratings for numerous equity securities during a nearly five-year period, and for related supervisory violations.

An equity research rating reflects a firm’s opinion of the future performance of a public security. CGMI disseminated its research ratings to customers on account statements, email alerts and an online portal. CGMI brokers and supervisors, meanwhile, relied on internally disseminated research ratings to make security recommendations and to monitor customer transactions and portfolio allocations.

FINRA found that from February 2011 through December 2015, CGMI displayed to its brokers, retail customers and supervisors inaccurate research ratings for more than 1,800 equity securities —more than 38 percent of those covered by the firm. Because of errors in the electronic feed of ratings data that the firm provided to its clearing firm, the firm either displayed the wrong rating for some covered securities (e.g., “buy” instead of “sell”), displayed ratings for other securities that CGMI did not cover or failed to display ratings for securities that CGMI, in fact, rated. The firm’s actual research reports, which were available to brokers, and the research ratings appearing in those reports, were not affected by these errors.

The inaccuracies in the research ratings feed had widespread, adverse consequences. As a result of the errors, CGMI brokers solicited thousands of transactions inconsistent with the firm’s actual ratings and negligently made inaccurate statements to customers about those ratings. They also solicited transactions that violated certain firm-managed portfolio guidelines, which were premised on CGMI research ratings. For example, the portfolios were prohibited from containing equity securities the firm had rated “sell.” Because CGMI brokers relied on inaccurately displayed ratings, many customers’ portfolios improperly included “sell”-rated securities. CGMI supervisors, relying on those same inaccurate ratings, failed to detect and prevent a substantial number of transactions that were actually inconsistent with CGMI research or portfolio guidelines. The firm also made materially inaccurate statements and omissions regarding more than 19,000 research ratings on customer account statements, sent more than 1,000 customer email alerts with inaccurate ratings, and displayed inaccurate ratings on online portals available to customers.

The firm failed to timely correct the inaccurately displayed ratings, despite numerous red flags alerting the firm to ratings inaccuracies for several securities. The firm also failed to conduct testing reasonably designed to verify the accuracy of research ratings data that it used and distributed.

Citi fined $1.2 million by FINRA over bond markups

The Financial Industry Regulatory Authority said it ordered Citigroup Inc. (C) to pay more than $1.2 million in fines, restitution and interest related to alleged excessive markups and markdowns on corporate and agency bond transactions.

Finra said that from July 2007 to September 2010, Citi International Financial Services LLC, a subsidiary of the global bank, charged bond markups and markdowns that Finra found to be excessive compared to market conditions, the value of the service rendered and other factors. Also, from April 2009 through June 2009, the unit allegedly failed to use reasonable diligence in buying and selling corporate bonds, so the resulting prices to its customers weren’t as favorable as possible under market conditions, Finra said.

The subsidiary’s supervisory system was found to have significant deficiencies relating to the markdowns and markups, the amounts taken from a selling price or added to a buying price, respectively, Finra said

Citigroup to pay $158 million in mortgage fraud settlement

Citigroup Inc has agreed to pay $158.3 million to settle U.S. civil claims that it defrauded the government into insuring thousands of risky home loans made by its CitiMortgage unit.  Wednesday’s settlement resolves claims under the federal False Claims Act against the third-largest U.S. bank, and arose from a “whistleblower” lawsuit brought by Sherry Hunt, a CitiMortgage employee in Missouri.

CitiMortgage “admits, acknowledges and accepts responsibility” for misleading the government into insuring risky home loans, according to settlement papers filed in U.S. District Court in New York. Investigators said the misconduct lasted for more than six years.

The civil fraud case is part of a crackdown by the Department of Justice against lenders it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.  Whistleblowers can receive up to 25 percent of settlements reached with the government in such cases, depending on how much work they contributed.

Citigroup, JP Morgan and others pay California $2.3 million in muni investigation

Citigroup Inc., JPMorgan Chase & Co. and 15 other underwriters reimbursed California $2.3 million last year after a regulatory probe found they used taxpayer funds to pay fees to their lobbyists.

Citigroup, the third-biggest U.S. bank by assets, returned $479,994, while Bank of America Merrill Lynch repaid a combined $456,482 and JPMorgan paid $490,449 for itself and Bear Stearns Cos., which it acquired, according to a spreadsheet California Treasurer Bill Lockyer’s office sent to the Financial Industry Regulatory Authority. The documents were obtained by Bloomberg News through a California Public Records Act request.

The repayments were about 50 percent more than Lockyer had estimated was owed a year ago, when the practice was uncovered in a Finra investigation of the California Public Securities Association, which lobbies state officials for the municipal- bond industry.

SEC Appeals Judge Rakoff’s Rejection of Citigroup Settlement

The U.S. Securities and Exchange Commission appealed a federal judge’s decision to reject its proposed $285 million settlement with Citigroup.  

The appeal, filed today in the US Court of Appeals in New York, challenged U.S. District Judge Jed Rakoff’s rejection last month of the settlement, which involved claims that Citigroup misled investors in a $1 billion financial product linked to risky mortgages.  “We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits,” SEC Enforcement Director Khuzami said today in a statement.

Rakoff criticized the agency’s practice of resolving cases without requiring the subject of the allegations to admit wrongdoing. In his ruling, Rakoff said the settlement didn’t provide him with “any proven or admitted facts” to inform his judgment.  Khuzami said the judge’s decision “is at odds with decades of court decisions that have upheld similar settlements.”. Rakoff’s approach “could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors,” he said in the statement.

Citigroup Settlement with SEC blocked by Federal Judge

A federal judge in New York on Monday threw out a settlement between the Securities and Exchange Commission and Citigroup over a 2007 mortgage derivatives deal, saying that the S.E.C.’s policy of settling cases by allowing a company to neither admit nor deny the agency’s allegations did not satisfy the law.

The judge, Jed S. Rakoff of United States District Court in Manhattan, ruled that the S.E.C.’s $285 million settlement announced last month, is “neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court with evidence on which to judge the settlement.

The order could throw the S.E.C.’s enforcement efforts into chaos, because a majority of the fraud cases and other actions that the agency brings against Wall Street firms are settled out of court, most often with a condition that the defendant does not admit that it violated the law while also promising not to deny it.

Citigroup To Pay $285 Million to Settle SEC Charges For Misleading Investors About CDO Company

The Securities and Exchange Commission (SEC) today charged Citigroup Global Markets Inc. (Citigroup), the principal U.S. broker-dealer subsidiary of Citigroup Inc., with misleading investors about a $1 billion collateralized debt obligation (CDO) called Class V Funding III (Class V III). At a time when the U.S. housing market was showing signs of distress, Citigroup structured and marketed Class V III and exercised significant influence over the selection of $500 million of the assets included in the CDO. Citigroup then took a proprietary short position with respect to those $500 million of assets. That short position would provide profits to Citigroup in the event of a downturn in the United States housing market and gave Citigroup economic interests in the Class V III transaction that were adverse to the interests of investors. Citigroup did not disclose to investors the role that it played in the asset selection process or the short position that it took with respect to the assets that it helped select. Without admitting or denying the SEC’s allegations, Citigroup has consented to settle the Commission’s action.

The SEC today also brought a litigated civil action against Brian Stoker (Stoker) and instituted settled administrative proceedings against Credit Suisse Asset Alternative Capital, LLC (formerly known as Credit Suisse Alternative Capital, Inc.) (CSAC), Credit Suisse Asset Management, LLC (CSAM), and Samir H. Bhatt (Bhatt), based on their conduct in the Class V III transaction. Stoker was the Citigroup employee primarily responsible for structuring the Class V III transaction. CSAM is the successor in interest to CSAC, which was the collateral manager for the Class V III transaction, and Bhatt was the portfolio manager at CSAC primarily responsible for the Class V III transaction. Without admitting or denying the Commission’s findings, CSAM, CSAC, and Bhatt have agreed to settle the Commission’s proceedings.

Citigroup Global Markets and Brian Stoker


 According to the SEC’s complaints, filed in the U.S. District Court for the Southern District of New York (SDNY), in or around October 2006, personnel from Citigroup’s CDO trading and structuring desks had discussions about possibly having the trading desk establish a short position in a specific group of assets by using credit default swaps (CDS) to buy protection on those assets from a CDO that Citigroup would structure and market. Following the institution of discussions with CSAC about having CSAC act as the collateral manager for a proposed CDO transaction, Stoker sent an e-mail to his supervisor in which he stated that he hoped that the transaction would go forward and described the transaction as the Citigroup trading desk head’s “prop trade (don’t tell CSAC). CSAC agreed to terms even though they don’t get to pick the assets.”

As further set forth in the complaints, Citigroup and CSAC agreed to proceed with the Class V III transaction. During the time when the transaction was being structured, CSAC allowed Citigroup to exercise significant influence over the selection of assets included in the Class V III portfolio. The Class V III transaction marketed primarily through a pitch book and an offering circular. Stoker was primarily responsible for these documents. Both the pitch book and the offering circular included disclosures that CSAC, the collateral manager, had selected the collateral for the Class V III portfolio and that Citigroup would act as the initial CDS counterparty. The disclosures, however, did not provide any information about the extent of Citigroup’s interest in the negative performance of the Class V III collateral or that, by the times when the pitch book and the offering circular were prepared, Citigroup already had short positions in $500 million of the collateral. The pitch book and the offering circular were materially misleading because they failed to disclose that Citigroup had played a substantial role in selecting the assets for Class V III, Citigroup had taken a $500 million short position in the Class V III collateral for its own account, and Citigroup’s short position was comprised of names it had been allowed to select, while Citigroup did not short names that it had no role in selecting. Nothing in the disclosures put investors on notice Citigroup had interests that were adverse to the interests of investors.

According to the complaints, the Class V III transaction closed on February 28, 2007. One experienced CDO trader characterized the Class V III portfolio as “dogsh!t” and “possibly the best short EVER!” and an experienced collateral manager commented that “the portfolio is horrible.” On November 7, 2007, a credit rating agency downgraded every tranche of Class V III, and on November 19, 2007, Class V III was declared to be in an Event of Default. The approximately 15 investors in the Class V III transaction lost their entire investments in Class V III. Citigroup received fees of approximately $34 million for structuring and marketing the transaction and realized net profits of at least $160 million from its short position on $500 million of the collateral.

Messing With J.R., Take Four

Not so fast, J.R.

Larry Hagman, who played the rapacious oil tycoon J.R. Ewing in the 1980s hit TV series “Dallas,” recently won $11.6 million in a securities arbitration case against Citigroup. As DealBook reported last month, it was the largest arbitration award an individual investor received this year and the ninth largest award ever, according to the Financial Industry Regulatory Authority, or Finra, which oversaw the arbitration.

But Citi Global Markets is now crying foul.

The California-based law firm of Munger, Tolles & Olson has filed a motion to dismiss the award in Los Angeles Superior Court, alleging that the chairman of the arbitration panel failed to disclose a potential conflict of interest. Such motions are rarely successful.

A Citi spokesman, Alex Samuelson, said, “We are pursuing our legal options.”

Citi’s petition cited a Finra rule requiring arbitrators to disclose “any circumstances which might preclude the arbitrator from rendering an objective and impartial determination.”

According to Citi’s petition, the lead arbitrator had a potential conflict because he was once a plaintiff in a lawsuit “involving the same claims and the same subject matter involved in this arbitration proceeding.”

Same claims? You be the judge.

Mr. Hagman, 79, and his wife Maj, 82, accused Citi of, among other things, fraud and breach of fiduciary duty. The couple contended that they sustained losses on stocks and bonds and a life insurance policy they held with Citi.

Two years earlier, the lead Finra arbitrator sued his real estate investment partner for fraud and breach of fiduciary duty, according to Citi’s petition. The arbitrator “alleged that he and his wife had ‘trusted and relied upon’ the investment advice of their former real estate partner with respect to ‘almost all their life savings,’” Citi’s petition said.

O.K., but were the subject matters the same?

According to a recent memo that Mr. Hagman’s lawyers filed with the court, the arbitrator’s suit against his real estate partner was “unrelated” to Mr. Hagman’s case.

The memo noted that the arbitrator’s case “did not involve a securities investment” nor did the two cases involve the same facts or parties.

The memo called Citi’s petition a “last-ditch effort.”

In its petition, Citi also said “the arbitrators refused to postpone the hearing to allow Citigroup’s key witness — the Hagmans’ financial adviser — to testify.” The panel ultimately allowed the broker, who was having surgery during the hearing, to testify about a month after the arbitration ended.

“It is noteworthy that she testified after having the opportunity to review the entire record, which was a strategic advantage,” the memo said.

Philip M. Aidikoff, a lawyer for Mr. Hagman, declined comment. So did a spokeswoman for Finra.

A hearing in Los Angeles Superior Court is scheduled for Dec. 17.

Meanwhile, Citigroup is on the hook for paying 10 percent interest on Mr. Hagman’s award. That is good news for charity: The Finra arbitration panel demanded that Citi pay $1.1 million in compensatory damages for Mr. Hagman and $10 million in punitive damages to be donated to the charities of his choice.

Messing With J.R., the Postscript

Many people on Wall Street were surprised when an arbitration panel awarded Larry Hagman, who played the rapacious oil baron J.R. Ewing in the 1980s hit series “Dallas,” won $11.6 million in a securities arbitration case against Citigroup.

His broker, Lisa Detanna, was also surprised. She recently sent a letter about the case to hundreds of clients at Morgan Stanley Smith Barney, where she now works. Citigroup sold a controlling stake in its brokerage arm to Morgan Stanley in 2009.

“Nothing to me is more important to me than the trust and confidence of my clients,” she wrote last week. “Even if there is no appeal, I want you to know that I, too, am deeply disappointed and astonished by the ruling.”

The ruling against Citigroup Global Markets, released earlier this month, includes $1.1 million in compensatory damages for Mr. Hagman and his wife and $10 million in punitive damages to be donated to the charities of Mr. Hagman’s choice. Citigroup must also pay about $460,000 in legal fees and other costs. It is the largest award given to an individual this year, according to the Financial Industry Regulatory Authority, or Finra, which oversaw the arbitration.

According to a recent column by Gretchen Morgenson, a DealBook colleague, Mr. Hagman and his wife moved their account to Ms. Detanna in 2005.

Ms. Morgenson wrote that documents produced in the Hagmans’ case show Ms. Detanna began upending the couple’s portfolio, taking it from a conservative blend of 25 percent stocks and 75 percent fixed income and cash to the opposite: 75 percent stocks and the rest cash and bonds.

This happened even though the Hagmans told her that they needed income-producing investments that would preserve their principal, according to the documents. Ms. Detanna also sold Mr. Hagman a $4 million life insurance policy that required onerous annual premium payments of $168,000.

When the market fell, Mr. Hagman’s lawyer Philip M. Aidikoff argued that the account’s losses were far larger than they would have been had Ms. Detanna maintained the conservative portfolio. And the life insurance policy, which Mr. Hagman did not need and was therefore unsuitable according to his lawyer, generated losses of almost $437,000 when sold, Ms. Morgenson reported. The losses included an exit fee of $168,610, which Citigroup extracted when Mr. Hagman sold the policy.

A Morgan Stanley spokeswoman declined to comment on the letter and said Ms. Detanna was not available to comment.

A Citigroup spokesman said: “We are disappointed and disagree with the panel’s finding, and we are reviewing our options.”

Federal Judge Accepts SEC Settlment with Citigroup

A federal judge said Friday that she would accept the $75 million settlement between the Securities and Exchange Commission and Citigroup over the bank’s failure to adequately disclose its exposure to subprime mortgage debt in 2007, The New York Times’s Edward Wyatt reports from Washington.

But Judge Ellen Segal Huvelle of Federal District Court for the District of Columbia told lawyers for the government that she wanted the S.E.C. to certify that the remedies Citigroup claimed to have put in place to prevent a similar failure were adequate and would remain for a given period of time.

The judge also directed that the settlement agreement be reworded to make clear that the $75 million would be used to compensate shareholders who suffered losses because of Citigroup’s misstatements, and she told the S.E.C. and the bank to return in two weeks with new language that did that.

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