NEWARK, N.J. – Citigroup Global Markets agreed to pay nearly $1 million to settle state allegations that a failure to supervise two of its Smith Barney agents and maintain accurate records cost investors more than $3 million, state authorities announced Monday.
Citigroup will pay $478,000 in restitution and $500,000 in penalties.
The nearly $1 million figure is in addition to $1.6 million already paid by Smith Barney in restitution.
"The penalty and additional restitution ordered in this case is a clear demonstration that the state intends to hold broker-dealers responsible for monitoring their agents' activities, especially where the investing public is at risk," Attorney General Anne Milgram said.
Citigroup Global Markets Inc., part of New York-based Citigroup Inc., neither admitted nor denied any wrongdoing.
The company cooperated with the state Bureau of Securities investigation and made changes to increase oversight of its agents, authorities said.
Smith Barney spokesman Alexander Samuelson said the two financial advisers are no longer with the company. "We have since made changes to supervisory procedures and made voluntary and directed remunerations to impacted clients," he said.
The case stems from May 2003, when the Smith Barney agents recommended speculative short-sale trading for shares of Trinity Industries Inc. to clients, authorities said.
Short-selling is a bet that stocks or markets will fall to make a profit from downturns. Here, it involved shares that an investor borrowed, but did not own. If the price rises, the investor faces a big risk of loss.
By July 2003, the two agents had shorted approximately 263,000 Trinity shares for 42 clients, many deemed unsuitable for short-selling investment strategies because of their age, investment objectives and financial profiles, the state said.
When Trinity shares rose, investors lost millions, including a 67-year-old woman with an annual income of $37,500 who lost approximately $52,500, the state said.
At the time, Smith Barney did not require agents to file a plan of solicitation, enabling the two agents to implement the strategy without oversight, the state said.
"Client account profiles were altered, without detection by the firm, to include inaccurate information and conform to the speculative nature of this unsuitable trading activity," said Franklin L. Widmann, chief of the Bureau of Securities.