U.S. securities regulators Tuesday fined a trio of global investment banks over alleged outsourcing supervisory failures.

The Financial Industry Regulatory Authority announced that it has fined Citigroup Global Markets, UBS Securities and Deutsche Bank Securities a total of US$425,000 — and ordered the firms to make payments to customers that could total US$420,000 — in connection with the firms’ failure to adequately supervise communications with their customers in the initial public offering of Vonage, LLC in May 2006.

FINRA found that each of the firms “failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of securities in the Vonage IPO”.

The firms were the lead underwriters for the IPO, which included a directed share program under which the firms sold approximately 4.2 million shares to Vonage customers. To deal with that aspect of the deal, the firms hired an outside company to design and administer a Web site for DSP participants. However, FINRA found that because of the firms’ supervisory failures, when a problem occurred at the outside company that caused numerous customers to receive incorrect communications, the firms were unable to respond satisfactorily.

“Communicating with customers about the sale of shares in a public offering is an important brokerage firm activity and must be supervised effectively by firms,” said Susan Merrill, executive vice president and chief of enforcement. “Supervisory obligations apply not only to brokerage activities undertaken directly by firms, but also to those activities when they are outsourced to other parties. In this case, each of the firms failed to take effective action to ensure that important communications with customers about the sale of IPO shares were properly supervised, and they failed to take sufficient action to determine the cause and extent of the problem once they learned of it.”

Citigroup was fined US$175,000 and ordered to pay a maximum of US$250,000 to 284 potentially eligible customers; UBS was fined US$150,000 and ordered to pay a maximum of US$118,000 to 126 potentially eligible customers; and, Deutsche Bank was fined US$100,000 and ordered to pay a maximum of US$52,000 to 59 potentially eligible customers. In settling the case, none of the firms admitted nor denied the charges, but consented to the entry of FINRA’s findings.

IE