Citigroup Inc., the world's largest bank, agreed to pay $208 million to settle charges that two of its subsidiaries pocketed savings that should have been passed on to the firm's mutual fund investors.
The settlement with the Securities and Exchange Commission is the latest in a string of regulatory setbacks that have embarrassed Citigroup chief executive Charles O. Prince III and depressed the bank's stock price.
In recent months, regulators closed Citigroup's Japanese private bank, and British authorities investigated a big bond trade in London in which the company was fined for lack of proper controls. Last year, Citigroup agreed to pay $2.6 billion to settle a class-action suit filed by WorldCom Inc. investors.
In the settlement announced Tuesday, the SEC alleged that two Citigroup subsidiaries, Citigroup Global Markets Inc. and Smith Barney Fund Management, shortchanged investors in Citigroup mutual funds when they recommended to the funds' directors that they use a new transfer agent without disclosing that the transfer agent was a Citigroup subsidiary. (Transfer agents keep records for mutual funds on account balances, stock purchases, sales and other items.)
The SEC alleged that the Citigroup subsidiaries arranged for the third-party firm that previously acted as the transfer agent to continue to do much of the work at a deep discount. The SED said that instead of passing savings from the discount on to the mutual fund investors, the Citigroup subsidiaries, through their affiliated transfer agent, pocketed the money, about $100 million over a five-year period.
"Basically, the essence of the wrongdoing here is that [Citigroup] put its interest in making a profit ahead of its duty to act in the best interests of its mutual fund investors," Mark K. Schonfeld, director of the SEC's Northeastern regional office, said in an interview.
Citigroup did not admit or deny wrongdoing as part of the settlement. In a prepared statement, the firm's president and chief operating officer, Robert B. Willumstad, said: "We recognize that aspects of the transfer agency arrangements entered into six years ago did not reflect the way we think business should be done, and that is unacceptable. We are pleased to resolve this matter."
As part of the settlement, Citigroup agreed to repay $128 million, including interest, and $80 million in penalties. The firm will design a distribution plan, subject to SEC approval, that would send the settlement money back to its mutual fund investors. Citigroup also agreed that in the future it will seek competitive outside bids if one of its affiliates seeks to serve as a transfer agent for the firm's mutual funds.
Richard X. Bove, a banking industry analyst at Punk, Ziegel & Co., said that while the size of the settlement is insignificant for a firm as big as Citigroup, it nonetheless contributes to the perception that the bank is too big to manage. Bove said all the negative regulatory headlines keep Citigroup's stock trading at about 11 or 12 times earnings, a low multiple given Citigroup's consistently dazzling earnings performance.
"The multiple on the stock is impacted by the fact that these things just seem to keep happening," Bove said. Citigroup shares closed at $47.11 on Tuesday, down 17 cents, or 0.4 percent. Citigroup disclosed the transfer agent probe in 2003. The firm has also disclosed that Thomas Jones, former head of Citigroup's investment management unit and two others who were not identified could face civil actions in the probe. The SEC said its investigation into individuals was continuing.