Banking & Capital Markets

Time Expires, Two Citi Execs Walk

Statute of limitations precludes an SEC lawsuit; the bank had garnered ''tens of millions of dollars in profit at the expense of mutual fund shareh...
Stephen Taub and Dave CookFebruary 27, 2007

A federal judge has ruled that the Securities and Exchange Commission waited too long to sue two former Citigroup executives in connection with alleged fraud at its mutual-fund businesses, according to published accounts.

In a Manhattan courtroom, U.S. District Judge Richard Casey dismissed the SEC suit against Thomas W. Jones, the former chief executive officer of Citigroup’s asset management division, and Lewis Daidone, treasurer and chief financial officer of the Smith Barney mutual funds at the center of the controversy.

The wrongdoing alleged by the SEC took place in 1999, Judge Casey reportedly stated, but the commission did not file its lawsuit until August 2005, after the expiration of the five-year statute of limitations. The judge also determined that the SEC failed to make an adequate case for disgorgement of any ill-gotten gains.

Several months earlier, in May 2005, Citigroup agreed to pay $208 million to settle SEC fraud charges against the Smith Barney division and against Citigroup Global Markets. The bank neither admitted nor denied the charges.

The SEC had charged Jones and Daidone with fraud stemming from Citigroup’s creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates. “Rather than passing the substantial fee discount on to the mutual funds,” alleged the commission, “Citigroup took most of the benefit of the discount for itself, reaping tens of millions of dollars in profit at the expense of mutual fund shareholders.”

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.”

Regarding the judges ruling, SEC spokesman John Heine told the Associated Press, “We are disappointed with the decision, and are reviewing our options.”