The regulatory arm of the New York Stock Exchange has censured and fined Citigroup Inc.'s Smith Barney unit $50 million for improper trading practices, including deceptive market timing by its brokers.
The penalty includes $40 million in customer compensation, NYSE Regulation said on Tuesday. The money will be put into a fund for customers who invested in affected mutual funds.
Of the $50 million total, $5 million will go to the state of New Jersey in connection with a separate regulatory matter arising out the same conduct. The remaining $5 million will be paid to NYSE Regulation.
NYSE Regulation said the Citigroup unit, an NYSE member firm, violated rules by failing to supervise trading of mutual funds and maintain adequate records.
Between January 2000 and September 2003, Citigroup failed to supervise the activity of some financial consultants who engaged in deceptive market timing trades, enabling them and their customers to evade detection by mutual funds.
NYSE Regulation said more than 150 financial consultants engaged in about 250,000 market timing trades in 1,500 accounts on behalf of more than 1,100 customers, generating gross revenues of $32.5 million.
These consultants concealed their identities or the identities of their timing customers to avoid trading limits on mutual funds, and traded excessively, NYSE Regulation said. Deceptive practices included using multiple identification numbers, multiple tax ID numbers, and multiple customer accounts to execute these trades.
Market timing is the frequent trading of mutual fund shares to exploit inefficiencies in pricing or market movements. The practice is not illegal unless deception is used, but can be harmful to mutual fund investors because it dilutes the value of their shares and creates extra costs for the funds due to excessive trading, NYSE Regulation said.
We cooperated fully with the regulators and are very pleased to resolved these matters, said Susan Thomson, a Citigroup spokeswoman, in an e-mailed statement.
Since 2003, the Smith Barney unit has completed the implementation of relevant business practices that meet or exceed industry standards, Thomson said.
Citigroup neither admitted nor denied guilt, NYSE Regulation said.
Citigroup shares were down 82 cents, or 1.6 percent, at $50.03 in morning trade on the New York Stock Exchange.
The NYSE is a unit of trans-Atlantic exchange operator NYSE Euronext.
(Reporting by Anupreeta Das)