By Jonathan Stempel
NEW YORK, April 6 (Reuters) - Citigroup Inc has been fined $650,000 by an independent U.S. brokerage regulator for disclosure and supervisory failures relating to a 'stock borrow' program intended to help clients sell shares short.
In its first such enforcement action, the Financial Industry Regulatory Authority said on Tuesday the bank's Citigroup Global Markets Inc unit failed to properly disclose risks to retail and other customers in its direct borrow program, which extended more than 4,000 loans averaging $301 million a year.
FINRA said that from Jan. 1, 2005 to Nov. 30, 2008, more than 2,300 customers lent the program more than 770 securities that were hard to borrow, mainly because a large number of short-sellers had already borrowed them to use as collateral.
Citigroup's brokers did not make clear to customers that most of the loaned securities were used in short-selling, which can cause them to lose value, and that customers could sell them at any time even while they were on loan, FINRA said.
'The program created an artificial impediment to liquidity,' FINRA enforcement chief James Shorris said in an interview. 'Disclosures related to short-selling are material to customers insofar as they have a potential impact on the price of securities they are holding. Customers may not realize they can reduce the potential loss by selling the securities.'
Widespread short-selling by hedge funds and other investors was one cause of the global plunge in stocks following the bankruptcy of Lehman Brothers Holdings Inc on Sept. 15, 2008.
FINRA said Citigroup also failed to properly tell customers they could face higher taxes by lending, that the bank could lower interest rates on the loans, and that brokers won commissions on outstanding loans. Brokers earned more than $4.3 million of commissions for soliciting the loans, it said.
The New York-based bank also consented to a censure in agreeing to settle, but it did not admit wrongdoing. Citigroup in a statement said it 'takes matters of investor protection very seriously,' and cooperated fully with the investigation.
FINRA said Citigroup suspended the program on Nov. 30, 2008, and has returned all shares to customers who lent them.
Shorris said other FINRA investigations into similar lending programs are ongoing. 'Our principal concern is that when customers engage in these kinds of transactions, they need to have full disclosure about the consequences,' he said.
FINRA said it oversees more than 4,700 brokerages.
(Reporting by Jonathan Stempel; Editing by Leslie Gevirtz and Steve Orlofsky) Keywords: CITIGROUP/FINRA FINE (jon.stempel@thomsonreuters.com +1 646 223 6317; Reuters Messaging: jon.stempel.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, April 6 (Reuters) - Citigroup Inc has been fined $650,000 by an independent U.S. brokerage regulator for disclosure and supervisory failures relating to a 'stock borrow' program intended to help clients sell shares short.
In its first such enforcement action, the Financial Industry Regulatory Authority said on Tuesday the bank's Citigroup Global Markets Inc unit failed to properly disclose risks to retail and other customers in its direct borrow program, which extended more than 4,000 loans averaging $301 million a year.
FINRA said that from Jan. 1, 2005 to Nov. 30, 2008, more than 2,300 customers lent the program more than 770 securities that were hard to borrow, mainly because a large number of short-sellers had already borrowed them to use as collateral.
Citigroup's brokers did not make clear to customers that most of the loaned securities were used in short-selling, which can cause them to lose value, and that customers could sell them at any time even while they were on loan, FINRA said.
'The program created an artificial impediment to liquidity,' FINRA enforcement chief James Shorris said in an interview. 'Disclosures related to short-selling are material to customers insofar as they have a potential impact on the price of securities they are holding. Customers may not realize they can reduce the potential loss by selling the securities.'
Widespread short-selling by hedge funds and other investors was one cause of the global plunge in stocks following the bankruptcy of Lehman Brothers Holdings Inc on Sept. 15, 2008.
FINRA said Citigroup also failed to properly tell customers they could face higher taxes by lending, that the bank could lower interest rates on the loans, and that brokers won commissions on outstanding loans. Brokers earned more than $4.3 million of commissions for soliciting the loans, it said.
The New York-based bank also consented to a censure in agreeing to settle, but it did not admit wrongdoing. Citigroup in a statement said it 'takes matters of investor protection very seriously,' and cooperated fully with the investigation.
FINRA said Citigroup suspended the program on Nov. 30, 2008, and has returned all shares to customers who lent them.
Shorris said other FINRA investigations into similar lending programs are ongoing. 'Our principal concern is that when customers engage in these kinds of transactions, they need to have full disclosure about the consequences,' he said.
FINRA said it oversees more than 4,700 brokerages.
(Reporting by Jonathan Stempel; Editing by Leslie Gevirtz and Steve Orlofsky) Keywords: CITIGROUP/FINRA FINE (jon.stempel@thomsonreuters.com +1 646 223 6317; Reuters Messaging: jon.stempel.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.