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April 8, 2010
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Citigroup Inc.’s (C) brokerage and securities arm, Citigroup Global Markets Inc., has been fined $$650,000 by the Financial Industry Regulatory Authority (FINRA). The fine is due to disclosure and supervisory violations associated with the operation of its Direct Borrow Program (DBP). It was the first such enforcement action by FINRA involving a stock borrowing program.
According to the investigations of FINRA, it was found that from Jan. 1, 2005 to Nov. 30, 2008, Citigroup's DBP borrowed fully paid “hard-to-borrow" securities owned by the firm's customers. The borrowed securities were put in a pool of securities which helped in the execution of Citigroup’s clients’ short-selling strategies.
The program arranged for over 4,000 loans relating to more than 770 different securities borrowed from more than 2,300 customers. The average annual value of outstanding loans from customers was $301 million.
FINRA said that proper disclosures were not made by Citigroup to its customers who participated in this program. Citigroup did not reveal to the customers that the securities were hard-to-borrow, that interest rates could be lowered by the company and that the brokers earned commission on the loans outstanding. Neither did the customers know that the dividend could be subject to higher tax rates.
FINRA also said that the program operated in the absence of any procedures for supervising the DBP staff and its brokers. Additionally, there was no system to effectively monitor the account of those customers who participated in this program.
On Nov 30, 2008, Citigroup, however, suspended all new borrowing through this program and has returned all shares to the customers who had lent them. Citigroup has neither admitted nor denied the allegations by FINRA.
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