Banking & Capital Markets

Fund-Fraud Charges for Former Citi Execs

The SEC maintains that Citigroup took most of the benefit of a discount for itself rather than passing it on to mutual-fund shareholders.
Stephen TaubAugust 9, 2005

The Securities and Exchange Commission has charged two former executives of Citigroup Inc. with fraud for their roles in a scheme that enabled the banking giant to reap tens of millions of dollars in profits at the expense of mutual fund shareholders.

According to the regulator, the fraud relates to Citigroup’s creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates. The SEC maintains that the bank took most of the benefit of the discount for itself rather than passing it on to the mutual funds.

In May, noted the Associated Press, Citigroup agreed to pay $208 million to settle SEC fraud charges against its division Smith Barney Fund Management LLC, the investment adviser to the mutual funds, and against Citigroup Global Markets Inc. The bank neither admitted nor denied wrongdoing. In June, reported The New York Times, Citigroup exchanged its asset management division for Legg Mason’s broker-dealer business in a $3.7 billion asset-swap deal.

The individuals charged by the SEC are Thomas W. Jones, the former chief executive officer of Citigroup’s asset management division, and Lewis Daidone, treasurer and chief financial officer of the funds.

The SEC alleged that Jones “approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work” and that Daidone “was the person responsible for making the presentation to the funds’ boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds’ best interests, which was not true.”

The SEC seeks permanent injunctions against future violations, disgorgement of any ill-gotten gains, and civil penalties. Attorneys for Jones and Daidone have reportedly said they will contest the charges.