Citigroup's Smith Barney fined $50 million in 'market timing' trades

Citigroup's Smith Barney fined $50 million in 'market timing' trades
WASHINGTON: Smith Barney, the brokerage unit of Citigroup Inc, is paying $50 million as fine for its failure to enforce its supervisory functions as its employees made nearly 250,000 short-term trades in mutual funds and variable annuity mutual fund sub-accounts at the expense of its shareholders.

The regulatory arm of the New York Stock Exchange, NYSE Regulation Inc., levied the fine on the unit charging that it failed to prevent violation of market timing by its brokers and that it did not maintain adequate records. The regulator said Tuesday $40 million of the penalty will be converted into a distribution fund and paid to the brokerage's customers, who had invested in the mutual funds, as compensation. An amount of $5 million will be paid to the state of New Jersey in another regulatory matter arising out of the same conduct and $5 million will go to NYSE Regulation.

The regulator charged that the brokerage created $32.5 million in revenue during 2000-2003 through "market-timing trades" for select customers. The brokerage's consultants did not reveal the trades thereby preventing the mutual funds from identifying and blocking these trades. Some 150 consultants of the firm were involved in the trades.

Susan Merrill, the regulator's enforcement officer, said, "Firms that inadequately supervise their businesses run the risk of disgorging profits and paying additional penalties." The firm, in spite of its parent having rules that banned its consultants from conducting themselves in such a manner, failed to enforce them, said the regulator.

"Market timing trades" involve buying shares of a fund, then selling them immediately to make profits out of the differences in the fund's share price and the value of its underlying holdings. While it is not illegal, funds usually discourage such trades as they add to the transaction costs and cut down profits for long-term holders.

Earlier in 2004, Bank of America Corp. had agreed to pay a fine of $675 million to settle a similar charge. Prudential Financial Inc. too had an agreement and paid $600 million in August, 2006.

A spokesperson for Citigroup said Smith Barney has already implemented several corrective measures to meet the best industry practices.