Citigroup is in trouble for activities performed by some of its analysts. FINRA is leveraging its largest fine in a decade, but it’s hard to see how much it is actually going to hurt the bank.
Dakin Campbell had this story for Bloomberg:
At a July 2011 dinner for Citigroup Inc. (C) clients, a research analyst identified a stock to bet against. In his last research notes before that gathering, he upgraded the shares, advising investors to stick with them.
The analyst was among several cited today in an action by the Financial Industry Regulatory Authority, which fined Citigroup $15 million. The employee offered similar tips at six subsequent “idea dinners” on stocks that he had rated as hold or neutral, Finra said. While the regulator didn’t name the analyst, a person familiar with the matter said he’s Deane Dray, who now covers industrial firms for RBC Capital Markets.
The incident is among several examples Finra cited, alleging Citigroup failed to supervise research analysts and prevent them from sharing material, non-public information. It’s reminiscent of industry-leading fines the bank paid in 2003 to settle claims analysts published misleading stock research to win investment-banking business. The firm has paid at least $33 million over relevant violations since, Finra said.
“The egregious conflicts of interest that went on during the Internet-bubble period are much less common today, but some of the underlying economic incentives haven’t changed,” Jay Ritter, a finance professor at the University of Florida in Gainesville, said in a phone interview. “When sell-side analysts at say, Citigroup, push it too far, there have to be penalties. Otherwise, the envelope will continue to be pushed.”
USA Today’s Kevin McCoy pointed out some of the other problems at Citigroup:
Additionally, an equity research analyst working for a Citigroup affiliate in Taiwan gave information about Apple iPhone order cuts to approximately 40 bank clients on Dec. 13, 2012, before including that information in his published research, FINRA said.
That same day, a sales employee of the bank’s Taiwan affiliate discussed the order cuts with external clients, as well as bank traders, FINRA said.
Separately, a Citigroup research analyst in mid-2011 assisted two companies in the preparation of material to be presented to potential investors during so-called road shows before the firms’ initial public stock offerings. The bank was the lead underwriter on the IPOs.
The analyst sent representatives of one of the companies an email in which he advised the firm to “amp up” discussions of certain topics, FINRA said.
The Wall Street Journal story by Christina Rexrode and Alexandra Scaggs said that the fine was the largest by FINRA in more than a decade:
The penalty—the largest from industry-funded Finra since the early 2000s—touched on some of the same allegations against the bank highlighted by Massachusetts regulators in 2012 and 2013. It was Citigroup’s fourth settlement involving alleged research violations since the start of 2012.
Monday’s case went further, detailing allegations that Citigroup analysts were encouraged to host dinners in which they and clients would identify their favorite and least favorite stocks. It is common for analysts to host clients. But the stock-picking contests aren’t generally disclosed to the public, and analysts’ views of some companies didn’t always match up with their more widely distributed reports, Finra said.
More than a decade ago, 10 investment banks including Citigroup agreed to pay a combined $1.4 billion and overhaul research practices after regulators, led by New York’s then Attorney General Eliot Spitzer , found that banks’ research opinions were biased in favor of their investment-banking clients. Citigroup alone had to pay $400 million, more than any other bank. Citigroup at the time neither admitted nor denied the allegations.
Michael Corkery wrote for The New York Times that Citigroup hadn’t made the rules clear for analysts:
Finra said that Citigroup had not provided adequate guidance for its analysts on what constituted “permissible communications” with bank clients.
In 2011, for example, a Citigroup senior equity research analyst helped two companies prepare presentations for their road shows, in which a business is promoted to potential investors in the initial public offering, Finra said.
One of the companies sent the Citigroup analyst a draft of its slide presentation. The analyst suggested that the company “amp up” some of its material, Finra said. Although those activities violated Finra rules, Citigroup at the time did not expressly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials.
At Citigroup’s “idea dinners,” attended by its clients and traders, research analysts would often offer their “long” stock pick, a stock they believed would perform well, and a “short” pick, a stock they expected to fall in value.
It’s hard to see how $15 million is actually going to hurt a bank as large as Citigroup. The reputational damage also isn’t too much given that the violations all seem to be in the vein of helping privileged clients. It’s definitely not fair for some to get different information than others, but this fine doesn’t seem too onerous, which can’t be good for FINRA.
