Citigroup/Smith Barney Pays $5 Million to State of New Jersey for Failure to
Supervise Certain Agents Engaged in Deceptive Market Timing Activities
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.