Citigroup Global Markets Inc., a unit of Citigroup Inc. (C) was recently fined by the Financial Industry Regulatory Authority (FINRA) for deficient supervisory procedures over its equity research analysts and one of its analysts’ involvements in two IPOs road shows. The bank has agreed upon for paying a $15 million fine for the resolution of allegations including the mishandling of important non-public information.
Though Citigroup has neither accepted nor rejected the charges, it did agree to settle the case. As per FINRA, such malfunctioning resulted from supervisory deficiencies in the period between Jan 2005 and Feb 2014.
Allegations
FINRA said that Citigroup lacked due diligence in “potential selective dissemination of non-public research to clients and sales and trading staff.” Being aware of the miscommunication by equity research analysts, Citigroup issued around 100 internal warnings, all in vain.
It took a long while to supervise and discipline the analysts for violating the bank’s policies in providing selective information and client communications. Moreover, Citigroup failed to restrict the repetition of such events.
Further, in certain "idea dinners" hosted by Citigroup’s equity research analysts and attended by some of Citigroup's institutional clients and sales and trading personnel, lack of supervision led to the discussion of stock picks by analysts, which in certain cases were dissimilar with the analysts' published research. Citigroup lacked the capability to guide its research analysts regarding interaction with the bank’s clients.
Moreover, FINRA had revealed that in 2011, one senior equity research analyst of Citigroup had helped two companies in preparing presentations for investment banking road shows. Following the incident, Citigroup’s equity research analysts were not forbidden from helping companies in preparing road show presentation materials between 2011 and 2013 even.
Similar Issues
In Aug 2014, Citigroup was fined by the FINRA for failure to give customers the best possible prices and deficient supervisory procedures. Apart from paying a $1.85 million fine, Citigroup has to compensate affected investors with an amount of $638,000, plus interest. The fine pertains to the company’s failure in providing the best possible purchase or sale prices in about 22,000 customer transactions. As per FINRA, such malfunctioning resulted from supervisory deficiencies for the period between Jan 2008 and May 2011.
In 2003, 10 investment banks including Citigroup were penalized with combined $1.4 billion on the revelation of biased research opinions by banks for their investment banking clients. Notably, Citigroup had paid $400 million out of the total amount.
In Jun 2012, FINRA penalized Merrill Lynch by $2.8 million for supervisory negligence, which resulted in nearly 95,000 customers being overcharged with unnecessary fees and failure to provide certain required trade notices. Other Wall Street biggies penalized by FINRA for various rule violations include The Goldman Sachs Group, Inc. (GS), Barclays PLC (BCS), Morgan Stanley and Wells Fargo & Co. (WFC).
Conclusion
The regulatory scenario following the financial crisis in the U.S has tightened, with litigation issues weighing heavily against Citigroup’s performance. Nevertheless, the stringent regulations prioritize investors’ security, thereby considerably reducing the chances of any financial fallout, going forward.
Citigroup currently carries a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment