More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Citigroup Global Markets Inc. will pay $1.5 million for supervisory violations relating to its handling of trust funds belonging to cemeteries in Michigan and Tennessee, according to a May 27 announcement by the Financial Industry Regulatory Authority (FINRA). The regulator imposed a $750,000 fine on the firm and demanded disgorgement of another $750,000 in commissions, which will be returned to the cemetery trusts as partial restitution.
In settling these matters, Citigroup neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
The securities regulator found that, from September 2004 through October 2006, Citigroup broker Mark Singer and two of his customers schemed to misappropriate more than $60 million in cemetery trust funds. One of the customers, Clayton Smart, is currently under criminal indictment arising from the scheme in Tennessee and in Michigan. His recent criminal trial in Tennessee ended in a mistrial, but he still faces criminal charges in Indiana. Smart and the second customer, Craig Bush, have been named in civil litigation arising from the scheme.
FINRA's statement said that Smart and Bush were successive owners of a group of Michigan cemeteries from which funds were believed to have been stolen. In August 2004, Smart bought the cemeteries from Bush, using trust funds that had been improperly transferred from the Michigan cemeteries themselves to a company Smart owned. Soon afterward, Smart used additional trust funds to buy cemeteries and funeral homes in Tennessee.
FINRA found that a Citigroup branch manager had recruited Singer from another broker/dealer, where the scheme originated. When Singer began working for Citigroup in September 2004, he brought nearly all of his customer accounts with him, including the cemetery trust accounts and other accounts belonging to Bush. Singer helped Bush and Smart open numerous Citigroup accounts in their own names, as well as in the names of corporate entities they owned or controlled. Singer also helped the two men deposit cemetery trust funds into some of these accounts and then make improper transfers to third parties, sometimes using conduit accounts to mask the transactions. Some of the fund transfers were disguised as fictitious investments made on behalf of the cemeteries.
The regulator said its investigation showed that for more than two years, Citigroup failed to reasonably supervise the handling of these accounts by inadequately responding to a succession of "red flag" events. These began in September 2004, shortly after Singer joined Citigroup. His previous employing broker-dealer warned Citigroup about irregular movement of funds involving accounts connected to the Michigan cemetery trusts-activity that occurred before Bush moved his accounts to Citigroup and while he still owned the Michigan cemeteries. After receipt of this information, Citigroup's follow-up of the activity in Bush's accounts was superficial and incomplete, FINRA found.
By November 2004, Citigroup's management became aware of rapid movement of funds involving Citigroup accounts associated with Bush and Smart-including unusual transfers of cemetery trust funds to accounts opened in the names of third parties-but failed to conduct an adequate inquiry into the matter, FINRA said. In February 2005, the firm received information indicating possible misrepresentations by Smart regarding his acquisition of hedge fund investments belonging to the Michigan cemetery trusts, which Smart used as collateral for a personal $24 million line of credit from Citigroup Private Bank. Again, Citigroup failed to conduct an adequate inquiry.
Finally, in May 2006, Citigroup received a whistleblower letter-from the principal of a company acting as a third-party trustee for the cemeteries-alleging misconduct by Singer in connection with the handling of the cemetery trusts. Among other things, the letter alleged Singer's involvement with unauthorized transfers of cemetery trust funds, as well as use of his personal email address to conduct business with the whistleblower, in an apparent attempt to bypass the firm's e-mail monitoring system. Despite the seriousness of these allegations, Citigroup failed to enhance supervision of Singer or restrict his activities, FINRA found.
Michael S. Fischer (firstname.lastname@example.org) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.