Citigroup recently faced three disparate disciplinary actions from the Financial Industry Regulatory Authority, according to its February report of disciplinary actions.
Citigroup Global Markets Inc. submitted a letter of acceptance, waiver and consent to FINRA in which the firm was censured and fined $850,000.
According to FINRA, Citigroup failed to implement a reasonable supervisory system or procedure to ensure that its methodology for verifying trader prices on securities was applied consistently throughout the firm.
The findings stated that the firm's product control group verified the accuracy of prices used by its traders when a security did not have an easily identifiable market price. In doing so, the firm's product control group compared the trader's marks to prices derived from market data through a variety of sources, including its market making desks, vendor prices, exchange prices and other internal pricing data.
Consequently, different departments within the firm separately priced the same securities using the same market data, but applied the data in different ways, resulting in the same hard-to-value securities being priced differently for different purposes.
Separately, FINRA also found that the firm's Financial and Operational Combined Uniform Single Report (FOCUS) Haircut System, used to automatically apply haircuts to its mortgage-backed securities (MBS) positions in order to calculate its net capital, at times applied incorrect haircuts to those positions.
In one instance, this caused the firm to overstate its net capital by approximately $26 million. Similarly, on other occasions, the firm overstated its net capital by up to $14.8 million because it applied incorrect haircuts to certain MBS positions.
Citigroup submitted another letter of acceptance, waiver and consent in which the firm was censured, fined $250,000, and required to revise its written supervisory procedures.
According to FINRA, Citigroup failed to submit interest rate reset information for 251,507 weekly-reset variable rate demand obligation (VRDO) securities to the Municipal Securities Rulemaking Board's (MSRB) Short-Term Obligation Rate Transparency (SHORT) System within the prescribed time requirements.
The findings stated that the firm also failed to submit accurate rate reset dates and times to the MSRB's SHORT System for these VRDO securities. Specifically, the determination dates the firm submitted to SHORT were actually the effective dates for the rates.
In another disciplinary action, Citi International Financial Services – which is a part of Citigroup that provides clients with access to financial products and services with an international perspective and global reach – submitted a letter of acceptance, waiver, and consent in which the firm was censured, fined $5.75 million. Citi International Financial Services also agreed to submit to FINRA, within 180 days of issuance of the AWC, a written certification that the firm has developed and implemented written policies, procedures and internal controls reasonably designed to address its shortcomings.
According to FINRA, the Puerto Rico-based firm's anti-money laundering program was not reasonably designed to achieve and monitor compliance with the requirements of the Bank Secrecy Act.
The findings stated that among other things, despite having conducted substantially all of its business in a geographic region generally considered to present elevated AML risk, and despite having handled a number of customer securities transactions of a kind often associated with elevated AML risk, the firm relied primarily on manual supervisory review of securities transactions that was not sufficiently focused on AML risks and was otherwise insufficient to satisfy the firm's AML compliance obligations.
Given the volume and nature of transactions the firm processed, as well as the particular risks associated with its business model, the firm lacked an adequate system to monitor transactions for purposes of detecting potentially suspicious activity and evaluating whether transactions should be elevated for closer AML scrutiny and potential reporting.
Purported Real Estate Investment Manager Settles Fraud Charges
The Securities and Exchange Commission announced that a "purported real estate investment manager" agreed to pay more than a half-million dollars to settle charges that he pocketed investor money in an investment scheme.
The SEC alleges that James P. Toner Jr. of Scottsdale, Arizona, siphoned $51,000 from investors who were falsely told that he would personally manage some of the real estate projects in which they were purchasing interests. The stated purpose of each investor offering was to purchase a residential property in the Phoenix area, renovate that property and then sell it for a profit.
