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Citi Execs to Fight $100M TA Payoff Charge: Former CEO, CFO Hit With SEC Kickback Suit

Two former executives within the asset management unit of Citigroup will fight Securities and Exchange Commission charges that they siphoned nearly $100 million from mutual fund investors through a finely executed, behind-the-scenes scheme involving a questionable transfer agent setup.

Last week, the SEC filed a long-anticipated enforcement action against former Citigroup Asset Management Chief Executive Officer Thomas W. Jones and the unit's former Senior Vice President, Chief Financial Officer and Fund Treasurer Lewis E. Daidone. The executives, nonetheless, claim that they acted in good faith and are characterizing the regulator's fraud charges as "unfounded and overreaching."

"Mr. Jones did not aid and abet any fraudulent activity during his watch," said Jones' attorneys G. Irvin Terrell, who represented President Bush in the 2000 election debacle, and James Doty, in a joint statement from the law firm Baker Botts in Houston.

"Mr. Jones oversaw a rigorous management process in the Citigroup Transfer Agency matter, supported by both experienced internal staff and external consulting experts," the statement indicated. "The record will demonstrate that [he] achieved substantial benefit for mutual fund shareholders and that he made every effort to fulfill his fiduciary duty to them. Mr. Jones is a victim of this situation, not a perpetrator of wrongdoing."

Daidone's attorney, Richard Morvillo of the Washington law firm Mayer Brown Rowe & Maw, did not return calls seeking comment. Morvillo, however, told the financial press when the news first broke last week that Daidone also "acted in good faith and with the advice of counsel."

Citigroup settled SEC fraud charges against its Citigroup Global Markets and Smith Barney Fund Management units over the alleged transfer agent windfall three months ago by distributing $208 million to investors (see MME 06/06/05). It neither admitted nor denied any wrongdoing. The company's only comment last week regarding Jones and Daidone was that its issues with the SEC "were settled in May of this year."

Other Run-Ins

This isn't Citigroup's only run-in with regulators, nor is it the only occasion where its powerful executives may have gone astray. Last fall, the NASD stuck Citigroup with a $250,000 penalty for distributing misleading information about its hedge funds (see MME 11/01/04), and in those same weeks, former Vice Chairman Deryck Maughan and private banking chief Peter Scaturro left amid a scandal at the firm's Japanese unit, where clients were allegedly misled in some private bond sales. That incident reportedly led to the ouster of Jones from Citibank. He now runs his own private equity fund.

The latest allegations of wrongdoing at Citigroup, however, point to an executive culture where company profit was placed ahead of shareholder interest, SEC officials said.

"We're looking to hold those individuals responsible for this conduct accountable," said James M. McGovern, senior trial counsel for the SEC Northeast Regional Office.

In short, Jones and Daidone led a successful initiative to create an affiliated transfer agent to serve the firm's Smith Barney family of mutual funds at steeply discounted rates. But, the SEC claims, "rather than passing the substantial fee discount on to the mutual funds, Citigroup took most of the benefit of the discount itself, reaping tens of millions of dollars in profit at the expense of mutual fund shareholders."

The SEC's case against Jones, 56, of New Canaan, Conn., and Daidone, 48, of Holmdel, N.J., seems to rest on two points. First, the executives knowingly disregarded advice from an outside consulting firm questioning the legality of their transfer agent idea, and, secondly, they crafted a presentation to the Smith Barney fund boards that disguised the windfall Citigroup would enjoy.

During the 1990s, SEC documents reveal, the Smith Barney funds used a division of Denver-based First Data as its full-service transfer agent. That contract was to expire in June 1999. First Data had been booking big profit margins on a "highly automated" business function, and the executives wanted Citigroup to reap those easy profits. So, in the spring of 1997, Jones ordered Daidone to begin negotiations on a deal that would make that scenario happen, the SEC says.

First, Deloitte & Touche Consulting was retained to comprehensively review the TA function. A Deloitte team worked on location at Citigroup Asset Management, using a conference room on the same floor as Daidone's office, the SEC documents indicate. Jones, meanwhile, received regular briefings on the project. As early as November of that year, Deloitte confirmed that, "First Data earns high margins" and there exists "a unique opportunity for Smith Barney to divert those profits to the firm."