Investor Alert - Citigroup’s Inaccurate Research Ratings Result in FINRA Sanctions of Over $11M
On December 21, 2017, CitiGroup Global Markets Inc. (“Citigroup”) agreed to pay over $11 million for displaying inaccurate research ratings, consisting of $5.5 million in fines and $6 million in compensation to retail investors.
Citigroup submitted a Letter of Acceptance Waiver and Consent (“AWC") regarding the issuance of inaccurate research ratings to its brokers, managers, and retail investors from February 2011 through December 2015. By signing the AWC, Citigroup agreed not to contest any of the findings made by FINRA.
The AWC describes Citigroup’s violations of FINRA Rule 2010 (Just and Equitable Principles of Trade), FINRA Rule 2210(d)(1) and NASD Rule 2210(d)(1) (Communications with the Public), and FINRA Rules 3110(a) and (b) and NASD Rules 3010(a) and (b) (Supervision).
Citigroup consented to FINRA’s findings that it issued inaccurate research ratings via an inaccurate electronic feed through its clearing firm to customers, brokers and supervisors. The AWC states that Citigroup would provide an incorrect rating (for instance, listing a security as having a “buy” rating, when the actual rating was “neutral” or “sell”), produce ratings for securities which Citigroup’s Research Department did not cover or fail to supply ratings for securities the Research Department did, in fact, cover.
These inaccurate research ratings were communicated to customers through monthly account statements, online portals and email alerts. The firm’s brokers saw the inaccurate ratings on an internal online platform.
Citigroup’s actual research reports, which were available to brokers, and the ratings appearing in those reports were not affected by these “errors”.
Issuing these inaccurate ratings to their own brokers and managers resulted in brokers unknowingly soliciting thousands of securities’ transactions inconsistent with the firm’s actual ratings. Citigroup-managed portfolios were also affected in that brokers entered transactions based on the inaccurate ratings that were in violation of portfolio guidelines established by Citigroup (for example, prohibiting the purchase of a “sell” rated security in a managed account).
Due to the inaccurate ratings data, certain exception reports used by Citigroup supervisors were also inaccurate, resulting in supervisors being unable to properly supervise their brokers.
Over the five-year span, Citigroup displayed over 1,800 inaccurate security ratings, which represented 38% of all equity securities covered by the firm.
According to the New York Times, while Citigroup’s individual investors were severely affected by these ratings, their institutional clients, who also use Citigroup’s ratings in investment decisions, were not. Individuals use brokerage firms, and pay commissions to brokers, in order to obtain the knowledge and expertise of industry experts. However, in Citigroup’s case, it seems these individuals were not only provided with inaccurate research ratings, but were also put at a disadvantage when compared to other retail clients.
The experienced securities arbitration and regulatory attorneys at Lubiner, Schmidt & Palumbo would be interested in speaking with Citigroup investors who had an account relationship between February 2011 and December 2015. Please contact us for a consultation.