|
NEWARK,
NJ - Citigroup Global Markets Inc. has been
ordered to cease and desist from violations
of the New Jersey Uniform Securities Law,
and to pay the state $5 million in civil
monetary penalties under the terms of a
consent order announced today by Attorney
General Anne Milgram, Consumer Affairs Acting
Director Stephen B. Nolan and Bureau of
Securities Chief Franklin L. Widmann. The
New York Stock Exchange Regulation (“NYSE
Regulation”) settled a related matter
separately with Citigroup.
The
settlement with the Bureau of Securities
resolves allegations that Smith Barney --
a division of Citigroup -- failed to reasonably
supervise agents engaged in deceptive market
timing practices and failed to maintain
accurate books and records related to market
timing activities.
“The
alleged conduct reveals just how harmful
the consequences of market timing can be
on long-term investors in mutual funds,”
Milgram said. “We want this settlement
to provide a warning to the industry that
deceptive practices will not be tolerated,
and that we hope that it spurs other firms
to take a hard look at the adequacy and
enforcement of their own policies and procedures.”
In
the settlement with the NYSE Regulation,
Citigroup will pay $35 million in disgorgement
and $5 million in penalties to the NYSE
Regulation to be placed in a distribution
fund to compensate injured customers of
the firm who invested in the affected mutual
funds.
“Broker
dealers will be held accountable when they
fail to reasonably supervise the activities
of their agents,” said Acting Director
Nolan. “The magnitude of this settlement
should be a beacon to other industry participants
that they should put their house in order."
In
a separate settlement with Citigroup Global
Markets Inc., the Bureau last week announced
that the company agreed to pay $978,000
to resolve allegations that it failed to
supervise two agents operating out of the
Short Hills, New Jersey branch office, and
failed to maintain accurate books and records
with respect to these agents’ activities.
Under the settlement, Citigroup Global Markets
Inc. agreed to pay $500,000 in civil monetary
penalties and an additional $478,000 in
restitution.
Between
January 2000 and September 2003, certain
Smith Barney agents, using over 200 registered
representative numbers in various branch
offices engaged in approximately 250,000
market timing exchanges on behalf of over
1,100 customers, including a New Jersey-based
hedge fund. These exchanges were a detriment
to the affected mutual funds and their non-timing
shareholders, which included New Jersey
residents. As a result of this activity,
Smith Barney generated approximately $32.5
million in gross revenues.
“Market
timing” can be defined as: (i) frequent
buying and selling of shares of the same
mutual fund or (ii) buying or selling mutual
fund shares in order to exploit inefficiencies
in mutual fund pricing. Market timing, while
not illegal, can harm mutual fund shareholders
because it can dilute the value of their
shares. Market timing can also disrupt the
management of the mutual fund’s investment
portfolio and can cause the mutual fund
to incur considerable extra costs associated
with excessive trading and, as a result,
cause potential damage to other shareholders
in the funds.
“Smith
Barney failed to detect and prevent its
agents from administering deceptive market
timing practices which violated mutual fund
policies and had a damaging impact on the
mutual funds and their long-term investors,’’
said Bureau Chief Widmann. “The State
can neither allow agents to engage in, nor
allow their firms to overlook, conduct which
creates an unfair benefit for a select group
of investors, while others unwillingly suffer
direct financial harm.’’
The
Bureau of Securities found that by failing
to detect and prevent the deceptive market
timing practices of its agents, Smith Barney
failed to reasonably supervise its agents.
Also, Smith Barney failed to maintain accurate
books and records related to market timing
activities, including, order communications
and entry times for mutual fund trades and
mutual fund trade rejections and cancellations.
These failures constitute violations of
the New Jersey Uniform Securities Law, and
are grounds to seek suspension or revocation
of the broker-dealer registration of Citigroup,
assess a civil monetary penalty, and impose
other appropriate remedial measures as may
be necessary in the public interest.
Beginning
with the initial notification in December
2003, and throughout the investigation by
the Bureau, Citigroup cooperated with all
requests for information and provided periodic
briefings about the Citigroup’s internal
investigation, its findings, and its efforts
to terminate excessive trading and market
timing. Citigroup’s cooperation was
considered in connection with the determination
of an appropriate sanction.
The
consent order was entered into by Citigroup
without admitting or denying the Bureau’s
findings.
The
investigation was conducted for New Jersey
by Chief of Enforcement Richard Barry and
Investigating Attorney Peter C. Cole of
the Bureau of Securities. Deputy Attorney
General Christopher W. Gerold assisted the
Bureau on this matter.
#
# # |
