The NASD ordered Citigroup Inc to pay $1.12 million over a scheme by more than 100 brokers to obtain mutual fund sales charge waivers by falsely claiming their customers, including hedge funds, were disabled.
Citigroup Global Markets Inc will pay a $400,000 fine for supervisory and record-keeping violations and reimburse $715,000 to mutual fund companies, the NASD said on August 10.
The NASD has taken disciplinary action against five Citigroup brokers, including one it barred from the securities industry, and said it is investigating several others.
It found more than 2,400 improper waivers in transactions by hundreds of customers with over two dozen fund companies.
"Citigroup missed the red flags," said James Shorris, the NASD's head of enforcement, in an interview.
"We were deeply disappointed because it was aware of similar problems based upon a 1997 disciplinary action and didn't take effective steps to prevent a recurrence," he added. "One of the particularly stunning facts is it submitted (waivers) for hedge funds, which was inexplicable."
Citigroup, the largest US bank by assets, denied wrongdoing but consented to the NASD's findings.
"This behaviour was inappropriate, and disciplinary measures were taken," Citigroup spokesman Alex Samuelson said. He declined to describe those measures, but said Citigroup improved its internal controls nearly four years ago.
According to the NASD, between June 2001 and June 2002, the Citigroup brokers obtained improper disability waivers for 2,415 mutual fund transactions totalling $26 million.
Under the settlement, Citigroup will let fund firms seek restitution for improper waivers prior to June 2001. It will also improve supervision and training. The sanctions are at least the third in 17 months for Citigroup involving mutual funds.
In March 2005, Citigroup agreed to pay a $20 million fine to resolve US Securities and Exchange Commission charges that it failed to disclose payments to promote some funds. At the same time, the NASD fined Citigroup $6.25 million for steering investors into costlier funds. The NASD is the securities industry's self-regulatory arm.