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Citi Faces 3 FINRA Fines: Enforcement

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Citigroup recently faced three disparate disciplinary actions from the Financial Industry Regulatory Authority, according to its February report of disciplinary actions.

Citigroup Global Markets Inc. submitted a letter of acceptance, waiver and consent to FINRA in which the firm was censured and fined $850,000.

According to FINRA, Citigroup failed to implement a reasonable supervisory system or procedure to ensure that its methodology for verifying trader prices on securities was applied consistently throughout the firm.

The findings stated that the firm’s product control group verified the accuracy of prices used by its traders when a security did not have an easily identifiable market price. In doing so, the firm’s product control group compared the trader’s marks to prices derived from market data through a variety of sources, including its market making desks, vendor prices, exchange prices and other internal pricing data.

Consequently, different departments within the firm separately priced the same securities using the same market data, but applied the data in different ways, resulting in the same hard-to-value securities being priced differently for different purposes.

Separately, FINRA also found that the firm’s Financial and Operational Combined Uniform Single Report (FOCUS) Haircut System, used to automatically apply haircuts to its mortgage-backed securities (MBS) positions in order to calculate its net capital, at times applied incorrect haircuts to those positions.

In one instance, this caused the firm to overstate its net capital by approximately $26 million. Similarly, on other occasions, the firm overstated its net capital by up to $14.8 million because it applied incorrect haircuts to certain MBS positions.

Citigroup submitted another letter of acceptance, waiver and consent in which the firm was censured, fined $250,000, and required to revise its written supervisory procedures.

According to FINRA, Citigroup failed to submit interest rate reset information for 251,507 weekly-reset variable rate demand obligation (VRDO) securities to the Municipal Securities Rulemaking Board’s (MSRB) Short-Term Obligation Rate Transparency (SHORT) System within the prescribed time requirements.

The findings stated that the firm also failed to submit accurate rate reset dates and times to the MSRB’s SHORT System for these VRDO securities. Specifically, the determination dates the firm submitted to SHORT were actually the effective dates for the rates.

In another disciplinary action, Citi International Financial Services – which is a part of Citigroup that provides clients with access to financial products and services with an international perspective and global reach – submitted a letter of acceptance, waiver, and consent in which the firm was censured, fined $5.75 million. Citi International Financial Services also agreed to submit to FINRA, within 180 days of issuance of the AWC, a written certification that the firm has developed and implemented written policies, procedures and internal controls reasonably designed to address its shortcomings.

According to FINRA, the Puerto Rico-based firm’s anti-money laundering program was not reasonably designed to achieve and monitor compliance with the requirements of the Bank Secrecy Act.

The findings stated that among other things, despite having conducted substantially all of its business in a geographic region generally considered to present elevated AML risk, and despite having handled a number of customer securities transactions of a kind often associated with elevated AML risk, the firm relied primarily on manual supervisory review of securities transactions that was not sufficiently focused on AML risks and was otherwise insufficient to satisfy the firm’s AML compliance obligations.

Given the volume and nature of transactions the firm processed, as well as the particular risks associated with its business model, the firm lacked an adequate system to monitor transactions for purposes of detecting potentially suspicious activity and evaluating whether transactions should be elevated for closer AML scrutiny and potential reporting.

Purported Real Estate Investment Manager Settles Fraud Charges

The Securities and Exchange Commission announced that a “purported real estate investment manager” agreed to pay more than a half-million dollars to settle charges that he pocketed investor money in an investment scheme.

The SEC alleges that James P. Toner Jr. of Scottsdale, Arizona, siphoned $51,000 from investors who were falsely told that he would personally manage some of the real estate projects in which they were purchasing interests. The stated purpose of each investor offering was to purchase a residential property in the Phoenix area, renovate that property and then sell it for a profit. 

According to the SEC’s complaint, Toner took $31,000 in undisclosed management fees even though he did not manage any of the offerings, and stole $20,000 directly from an investor. Without conducting any due diligence, Toner allegedly entrusted the management of the investments to a real estate broker who subsequently squandered investor funds. According to the SEC’s complaint, the real estate broker was later imprisoned for other crimes.

Without admitting or denying the allegations, Toner consented to the entry of a court order requiring him to pay disgorgement of $51,358 plus interest of $4,893.98 and a penalty of $450,000. The settlement is subject to court approval.

SEC Charges Fuel Cell Company and Officers With Defrauding Investors

The SEC charged a California-based penny stock company and four corporate officers with misleading investors about the research, development and profitability of their purported business to manufacture power generation products such as fuel cells.

The SEC alleges that while raising approximately $7.9 million from investors in Terminus Energy Inc., the company and its officers claimed to have a viable prototype capable of being sold and earning revenue. 

According to the SEC’s complaint, Terminus did not have the fuel cell technology or the funding to match their claims, and the officers were instead converting substantial amounts of investor funds to their own use.

The SEC says the company failed to disclose to investors that Terminus’ operations manager George Doumanis is a convicted felon who went to prison for securities fraud and was secretly acting as an officer of the company despite being barred from participating in penny stock offerings. Emanuel Pantelakis served on the Terminus board of directors despite having been permanently barred by the Financial Industry Regulatory Authority. Also charged in the SEC’s complaint are Terminus’ CEO Danny B. Pratte and its former president, director and legal counsel Joseph L. Pittera. 

Terminus also allegedly used unregistered brokers to sell its securities and paid them more than twice as much in commissions than was disclosed to investors in offering documents. Joseph Alborano is charged in the SEC’s complaint with soliciting and selling investments for which he received more than $1 million in commissions.

The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties as well as officer-and-director bars and penny stock bars. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today filed criminal charges against Pratte, Doumanis and Pantelakis. 

SEC Announces Cases Related to Disclosures During Battles for Corporate Control

The SEC announced two enforcement actions involving disclosure violations that deprived investors of material information during battles for corporate control of publicly traded companies.

In one case, the SEC’s order finds that Texas-based oil refinery company CVR Energy made inadequate disclosures in SEC filings about “success fee” arrangements with two investment banks retained by the company to fend off a hostile takeover bid. Shareholders were consequently unaware of potential conflicts of interest that stemmed from the fee arrangements, namely that the banks could still earn success fees even if the hostile bidder secured control of the company. CVR agreed to settle the case without admitting or denying the findings in the SEC’s order, which notes that the company will not pay a penalty due to its remedial acts and extensive cooperation with the investigation.

In the other case, the SEC’s order finds that groups of investors failed to properly disclose ownership information during a series of five campaigns to influence or exert control over microcap companies. Jeffrey E. Eberwein and Charles M. Gillman collaborated with mutual fund adviser Heartland Advisors in some of these campaigns, and other campaigns involved a hedge fund advisor headed by Eberwein called Lone Star Value Management and a private fund advised by Gillman called Boston Avenue Capital. In each of these campaigns, the groups collectively owned more than 5% and sometimes even more than 10% of the companies’ outstanding common stock, yet the required ownership filings to disclose that information to the investing public were either incomplete, untimely or absent. 

Without admitting or denying the findings, they consented to the SEC’s order and agreed to penalties of $90,000 for Eberwein, $30,000 for Gillman, $120,000 for Lone Star Value Management and $180,000 for Heartland Advisors.

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