Smith Barney Fined $50M for Market-Timing Violations

According to an announcement, CGMI has been fined $50 million, of which $35 million in disgorgement and one-half of the $10 million penalty to be paid to NYSE Regulation will be placed in a distribution fund to compensate injured customers of the firm who invested in the affected mutual funds. The company will pay $5 million to the State of New Jersey for a separate regulatory matter arising out of the same conduct, the announcement said.

NYSE Regulation claims that between January 2000 and September 2003, over 150 financial consultants using over 200 financial consultant numbers in 60 branches engaged in approximately 250,000 market-timing exchanges in over 1,500 accounts on behalf of more than 1,100 customers. According to calculations by NYSE Regulation, this activity generated approximately $32.5 million in gross revenues.

While the firm had compliance policies in place, the enforcement of its policies and procedures was ineffective, the announcement said. Deceptive practices employed by financial consultants included the improper use of multiple branch code prefixes, multiple registered representative identification numbers, multiple customer accounts, multiple limited liability companies, multiple tax ID numbers for accounts; structured trades in amounts below certain thresholds; accounts opened under the auspices of other financial institutions; and market-timing through mutual fund sub-accounts of variable annuities.

In non-proprietary mutual funds, certain financial consultants entered into “Sticky Asset Agreements” that allowed select timing customers exchange privileges that were not offered to other shareholders, NYSE Regulation found. Certain financial consultants also entered into explicit market-timing “Administrative Fee Arrangements” with known market-timing customers that provided for a monthly or quarterly fee based upon assets under management.

The announcement said that though the firm’s policies gradually evolved during this period, they were inadequate and were inadequately enforced. In addition, NYSE said the firm failed to adequately supervise trading in mutual fund sub-accounts of variable annuities and to maintain the required books and records which hindered both the firm’s ability to supervise that activity and the subsequent regulatory investigation of market timing in those products.

There was no finding of late trading, but the firm also failed to maintain books and records of mutual fund trade cancellations and rejections related to market timing and the times when mutual fund trades were communicated to the firm (as opposed to executed), which prevented NYSE Regulation from determining whether “late trading’ occurred or orders were administratively entered after 4:00 p.m.

Citigroup Global Markets Inc. neither admitted nor denied guilt in the settlement of the charges against it. Investigations of individuals are continuing, NYSE Regulation said.