NYSE Regulation, Inc. today announced it has censured and fined the Smith Barney Division of Citigroup Global Markets Inc. for failing to supervise trading of mutual fund shares and variable annuity mutual fund sub-accounts, failing to prevent market timing by its brokers, and failing to maintain adequate books and records.

Of the US$50 million total payment, US$40 million (US$35 million in disgorgement and one-half of the US$10 million penalty to be paid to NYSE Regulation) will be placed in a distribution fund to compensate injured customers of the firm who invested in the affected mutual funds. Also, US$5 million will be paid to the State of New Jersey regarding a separate regulatory matter arising out of the same conduct.

The NYSE said that between January 2000 and September 2003, CGMI failed to adequately supervise its branch offices and certain financial consultants, who engaged in market timing, including the use of deceptive trading practices to conceal their own identities or the identities of their timing customers, as well as their excessive trading. During the period, over 150 FCs using over 200 FC numbers in 60 branches engaged in approximately 250,000 market timing exchanges in over 1,500 accounts on behalf of more than 1,100 customers. According to calculations by NYSE Regulation, this activity generated approximately US$32.5 million in gross revenues.

Deceptive practices included the improper use of: multiple branch code prefixes, multiple registered representative identification numbers, multiple customer accounts, multiple limited liability companies, multiple tax ID numbers for accounts, structured trades in amounts below certain thresholds; accounts opened under the auspices of other financial institutions; and market timing through mutual fund sub-accounts of variable annuities.

In settling these charges brought by NYSE Regulation, CGMI neither admitted nor denied guilt. Investigations of individuals are continuing.

CGMI was on notice that its FCs were engaged in market timing activity that was potentially harmful to the mutual funds and the long-term shareholders, many of whom were also non-timing customers of the firm, the NYSE noted. While the firm had compliance policies in place, the enforcement of its policies and procedures was ineffective. CGMI undertook efforts to stop market timing and had largely ended timing in its proprietary funds as well as in its own fee based mutual fund trading programs by the end of 2001–early 2002, although market timing continued in non-proprietary funds.

The NYSE hearing officer noted the firm’s cooperation in this investigation — a factor considered in determining an appropriate sanction — including periodic briefings about the firm’s internal investigation with the Division of Enforcement of NYSE Regulation.

Along with the financial payments, CGMI will also retain an independent distribution consultant to plan and administer the distribution of the US$40 million in disgorgement and penalty to the firm’s customers who invested long-term in the same mutual funds that were the subject of market timing.

“Member firms that inadequately supervise their businesses run the risk of disgorging profits and paying additional penalties,” said Susan Merrill, chief of enforcement, NYSE Regulation. “The issuance of internal policies and memoranda is not enough: they must be effectively enforced. Actions must follow words.”

http://www.nyse.com/press/1185186378721.html