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Citigroup Fund Unit Faces Inquiries

The firm says it failed to pass on $16 million to its mutual funds. Federal and state prosecutors are investigating.

November 26, 2003|From Bloomberg News

Citigroup Inc. said Tuesday that state and federal prosecutors were investigating an undisclosed arrangement between its mutual fund unit and a vendor that provided transfer-agent services.

Citigroup Asset Management Chairman and Chief Executive Thomas Jones said in a memo to senior managers that an internal investigation showed the unit had failed to pass on to its mutual funds a $16-million payment received from an unnamed agent. The funds' directors weren't told about the payment.

New York-based Citigroup, which manages $495 billion of assets, has agreed to channel the $16 million it received from the outside agent to its mutual fund group, plus interest. It's also making unspecified personnel changes and cooperating with federal and state regulators, said the memo, which Citigroup made public.

Citigroup's disclosure comes amid a widening probe of wrongdoing in the $7-trillion mutual fund industry.

"The incentives that business line managers have to grow their businesses cause some of them to be very aggressive and in a small number of cases cross the line between honesty and dishonesty," said Marshall Front, who helps manage $1.5 billion at Front Barnett.

Citigroup said it was being investigated by the federal prosecutor in Manhattan, James Comey; the Securities and Exchange Commission; New York Atty. Gen. Eliot Spitzer; and "other regulators."

Michael Kulstad, a spokesman for Comey, declined to comment, as did SEC spokesman John Nester and Citigroup spokesman Edward Giltenan.

Citigroup's Smith Barney unit last month fired four brokers for inappropriate behavior related to market timing in the trading of mutual fund shares.

Jones said the misconduct stemmed from the bank's entry into the transfer-agent business in 1997.

"Regrettably, we can now see that it was not done the way it should have been," Jones said in the memo.

A transfer agent is a processor that records the transfer of a security's ownership and is responsible for recording the names of stockholders, share purchases and proxy votes.

Citigroup is still in the fund transfer business, and recently expanded the unit with an acquisition. The company bought Forum Financial Group, a provider of fund-administration services, on Nov. 3 for an undisclosed amount.

Citigroup Asset Management has about 2,600 employees in more than 20 countries and $495.4 billion under management as of Sept. 30.

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