Citigroup Global Markets settles more SEC charges

A Citigroup unit that joined a $180 million fraud-charge settlement earlier this month has been charged with failing to enforce policies and procedures to prevent and detect securities transactions that could involve the misuse of material, nonpublic information.

Citigroup Global Markets also failed to adopt and implement policies and procedures to prevent and detect principal transactions conducted by an affiliate, the US Securities and Exchange Commission said in an Aug. 19 press release, and has agreed to pay a $15 million penalty.

“We are pleased to have resolved this matter,” Citigroup said in response to a request for comment.

The Global Markets unit, together with Citigroup Alternative Investments, agreed to to settle charges they defrauded investors in two crisis-era hedge funds by claiming they were safe, the SEC said Aug. 17.

Because broker-dealer employees routinely have access to material nonpublic information, the federal securities laws require every firm to take reasonable steps to prevent the misuse of that information, the SEC said. Its investigation found that Citigroup did not review thousands of trades executed by several of its trading desks during a 10-year period. Personnel used electronically generated reports to review trades on a daily basis, but technological errors caused the reports to omit several sources of information about thousands of relevant trades.

“Today’s high-speed markets require that broker-dealers and investment advisers manage the convergence of technology and compliance,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “Firms must ensure that they have devoted sufficient attention and resources to trade surveillance and other compliance systems.”

According to the SEC’s order instituting a settled administrative proceeding:

The compliance and surveillance failures occurred from 2002 to 2012.
Citigroup also inadvertently routed more than 467,000 transactions on behalf of advisory clients to an affiliated market maker, which then executed the transactions on a principal basis by buying or selling to the clients from its own account.
Citigroup’s policies and procedures to avoid such occurrences were not reasonably designed or implemented and failed to divert certain advisory orders away from this affiliate.
Citigroup’s trade surveillance failed to detect these principal transactions for more than two years because the firm relied upon a report that was not reasonably designed to capture the principal transactions executed through this affiliate.
Citigroup voluntarily paid $2.5 million (its total profits from the principal transactions) to the affected advisory client accounts.

The SEC’s order finds that Citigroup violated Section 15(g) of the Securities Exchange Act of 1934, which requires brokers and dealers to establish, maintain, and enforce policies and procedures to prevent the misuse of material, nonpublic information. Citigroup also violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-(7), which require registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.

Without admitting or denying the findings, Citigroup consented to the SEC’s order that censures the firm and requires it to cease and desist from committing or causing these violations. It has also agreed to retain a consultant to review and recommend improvements to its trade surveillance and advisory account order handling and routing.