On January 18, 2012, the Financial Industry Regulatory Authority — the entity which handles securities arbitration on behalf of investors who have been the victims of stock broker fraud — announced its decision to fine Citigroup Global Markets Inc. for failure to disclose conflicts of interest. The conflicts of interest occurred in research reports and research analysts’ public appearances. From January 2007 through March 2010, Citigroup, in some research reports, failed to disclose certain conflicts of interest related to its business relationships. In addition to the failure to make required disclosures in research reports, Citigroup research analysts did not disclose the same potential conflicts in relevant public appearances that mentioned the covered companies.
“Citigroup failed to make required conflict of interest disclosures which prevented investors from being aware of potential biases in its research recommendations,” says FINRA Executive Vice President and Chief of Enforcement Brad Bennett. “Firms need to provide investors with full and accurate information so they will be able to take it into consideration before making an investment decision.”
Conflicts of interest not included in research reports and analysts’ public appearances included the fact that Citigroup and/or Citigroup affiliates co-managed or managed public securities offerings, would make a market in the related securities, received revenue and/or investment banking from the related securities and/or had ownership in covered companies that amounted to 1 percent or more.
The cause of the failure, according to FINRA’s findings, was “because the database it used to identify and create the disclosures was inaccurate and/or incomplete due primarily to technical deficiencies.” In addition to the insufficient database, adequate supervisory procedures for monitoring the research reports were not in place. Adequate supervisory procedures would have ensured that the required disclosures were provided in research reports.
While Citigroup did not confirm or deny the charges, the firm has consented to FINRA’s findings. The firm will have to pay a fine of $725,000 for the misconduct. Investment attorneys continue to watch FINRA arbitration for incidents that could lead to potential investor claims.