FINRA fined Citi Global Markets $1.85 million for best execution and supervisory violations, and ordered the firm to make restitution to clients of $638,000.
The SEC, meanwhile, charged a telecom firm and two former executives for revenue recognition and fraud, an investor relations firm executive for insider trading based on client news announcements and two information technology execs with mischaracterizing resale transactions.
FINRA Fines Citi Global Markets, Orders Restitution
Citi Global Markets was fined $1.85 million by FINRA and ordered to make restitution of $638,000 to clients after it failed to provide best execution in approximately 22,000 customer transactions involving nonconvertible preferred securities, and for related supervisory deficiencies that persisted for more than three years.
According to the agency, one of Citigroup's trading desks employed a manual pricing methodology for nonconvertible preferred securities that failed to appropriately incorporate the National Best Bid and Offer (NBBO) for those securities. Because of that, Citigroup priced more than 14,800 customer transactions inferior to the NBBO.
Also, Citigroup priced more than 7,200 customer transactions inferior to the NBBO because the firm's proprietary BondsDirect order execution system used a faulty pricing logic that only incorporated the primary listing exchange's quotation for each nonconvertible preferred security. Since multiple exchanges trade securities, that meant that, because Citigroup failed to look beyond the primary listing exchange, it missed the possibility of a better price.
FINRA also found that the firm's supervisory system and written supervisory procedures for best execution in nonconvertible preferred securities were deficient. Citigroup failed to review any customer transactions in nonconvertible preferred securities whether executed on BondsDirect or manually by the trading desk, to make sure they complied with the firm's best execution obligations. This was despite the fact that the firm had received several inquiry letters from FINRA staff.
Not only that, while many of the transactions at issue were identified on FINRA's best execution report cards, the firm only attempted to access its best execution report cards once during the relevant period.
Citigroup neither admitted nor denied the charges, but consented to the findings. SEC Charges Telecom Firm, Two Former Execs on Revenue Scheme, Fraud
Newport Beach, California-based AirTouch Communications Inc., its former president and CEO Hideyuki Kanakubo, and former CFO Jerome Kaiser were charged by the SEC with improperly recognizing as revenue more than a million dollars' worth of inventory that was shipped to a Florida warehouse but not actually sold.
They are also charged with defrauding an investor from whom they secured a $2 million loan for the company based on phony information connected to the inventory shipments.
According to the agency, the company and execs put together a revenue recognition scheme that violated generally accepted accounting principles (GAAP), which establish that revenue cannot be recognized unless it is "realized or realizable" and "earned."
Included in the net revenues of a little over $1.03 million reported by AirTouch in its quarterly report for Q3 2012 was approximately $1.24 million in inventory that had been shipped to a company in Florida that agreed to warehouse AirTouch's products in anticipation of future sales.
AirTouch develops and sells telecommunications equipment, including a product called the U250 SmartLinx that was designed in early 2012 for sale to Mexico's largest provider of landline telephone services. During that year, AirTouch discussed with the Florida company the possibility of it warehousing U250 SmartLinx units for potential future sale to the Mexican entity or other AirTouch customers.
The Florida company's CEO told Kanakubo that, while it wouldn't buy the SmartLinx units, it would warehouse them and provide logistics for eventual delivery when the products were sold. But once the products were shipped, Kanakubo and Kaiser reported them as sold, although they never were, and recorded the value of the items as revenue, then signed certification statements falsely claiming the company's financial results were accurate.
If it hadn't accounted for those shipments as revenue from the Florida company, AirTouch would have had zero revenue to report for the quarter.
The firm also managed to con an investor out of a $2 million short-term bridge loan by representing the shipment as a sale. Two days after the loan funds came in, Kanakubo authorized $15,000 payments to himself and to Kaiser.
