Citigroup Global Markets Inc., a brokerage firm headquartered in New York, New York, has been censured and fined $5,500,000.00 by consenting to findings that the firm, inter alia, inaccurately exhibited ratings of equities that the firm offered to customers. Letter of Acceptance, Waiver and Consent, No. 2016048931101 (Dec. 21, 2017).
According to the AWC, between February of 2011 and December of 2015, the firm had displayed one-thousand eight-hundred wrong equity securities ratings to supervisors, customers and brokers. Apparently, those securities represented thirty-eight percent of the equities that the firm covered.
Evidently, customers and brokers received analysis from the firm, which included a perspective on the total return expected for an equity over a twelve-month period. The AWC stated that equity research ratings were also provided, representing another opinion of the firm as to how a security will fare in the future, as based upon research reports. Those opinions, according to FINRA, could have considerably affected market prices as well as the decisions customers made to invest.
Apparently, the firm rated a security a “buy” when the expected return was fifteen percent or more, or exceeding twenty five percent for highly risky securities. It rated the security “neutral” for positive returns under fifteen percent or less than twenty-five percent for highly risky securities. Securities were rated “sell” when a positive total return was not expected.
Apparently, the wrong data was provided by Citigroup to its clearing firm, causing Citigroup to indicate an incorrect classification of buy, sell or neutral for the ratings. In other situations, the firm displayed a rating during the time that the firm’s research division failed to cover the security, or failed to display ratings when the firm’s research division covered the security.
The AWC stated that thousands of transactions pertaining to the wrong rating had been solicited by the firm’s stockbrokers as a result of inaccurately posting ratings. In addition, stockbrokers reportedly committed violations of firm managed portfolio guidelines. Particularly, some of the portfolios disallowed securities with a sell rating to be held. Also, customers’ investment portfolios inappropriately contained securities with a sell rating as a result of the stockbrokers’ reliance on the wrong ratings.
Consequently, thousands of ratings were not consistent with the actual research. More than nineteen thousand ratings had been represented on the customer’s account statements. The ratings mishap also affected customers who specifically subscribed to the firm to obtain alerts on three hundred fifty-three securities. The AWC revealed that the firm distributed information about ratings to customers within their email alerts and account statements, and exhibited the wrong ratings when customers used their online portals to check ratings.
The AWC revealed that the firm was cited for failing to create and implement adequate supervision systems and procedures for purposes of making sure that the firm transmitted complete and accurate ratings to brokers, supervisors and customers. Systems were reportedly deficient concerning ratings information used in supervisory tools, accounts statements, customer e-mail alerts, web portals and internal communications to brokers soliciting customers’ account transactions.
FINRA concluded that the firm also failed to take immediate action on the incorrect information even though there were many signs of the wrong information for securities made known to the firm’s staff. For example, the firm’s brokers notified the firm about inaccuracies, but the firm failed to act accordingly to reasonably fix the problem. Then, the firm’s management did not reasonably address the problem after it was escalated, failing to identify the entire scope of the ratings inaccuracies until December of 2015. Consequently, FINRA found that the firm’s conduct was violative of NASD Rules 2210(d)(1), 3010(a) and 3010(b), and FINRA Rules 2010, 2210(d)(1) and 3110(a) and 3110(b).
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