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SEC, Citigroup Units Settle Over TA Fraud Charges For a Total of $208 Million


The Securities and Exchange Commission has settled fraud charges against two Citigroup subsidiaries, related to the use of an affiliated transfer agent that had been serving the Smith Barney mutual funds.

The company has consented to the order without admitting to or denying the charges, and is set to pay $128 million in disgorgement and interest and $80 million in penalties.

"Fund advisors owe a duty of undivided loyalty to the funds they serve," said Linda Chatman Thomsen, director of the SEC's division of enforcement.

Citigroup's mutual fund subsidiary switched from a third-party transfer agent to a subsidiary transfer agent, reaping $100 million in profits in the process, and without adequately disclosing to the mutual fund board the nature of the relationship, the SEC charged.

Furthermore, under the new arrangement, the third-party transfer agent continued to provide much of the same services as a subcontractor, but now at a "steeply discounted rate."

Not only did the fund advisor fail to disclose to the board these facts about the new arrangement, but the transfer agent also failed to pass on any of its cost savings to the mutual funds, instead keeping the profits.

In addition to the monetary fees and fines, in future dealings with transfer agent subsidiaries, New York-based Citigroup will also have to seek competitive bids with unaffiliated transfer agents. In addition, an independent monitor that is accountable only to the mutual funds' boards must oversee the process.

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