Institutional Investment Securities Round-Up: Citigroup Agrees to $3.5M FINRA FIne Related to Subprime RMBS, Ex-Broker Consents to $600K CFTC Fine Over Alleged Options Trading Scam, and Senate Ag Chair Presses Regulators To Fully Implement Dodd-Frank

Citigroup Global Markets Inc. (CLQ) has consented to pay the Financial Industry Regulatory Authority a $3.5M fine to settle allegations that he gave out inaccurate information about subprime residential mortgage-backed securities. The SRO is also accusing the financial firm of supervisory failures and inadequate maintenance of records and books.

Per FINRA, beginning January 2006 through October 2007, Citigroup published mortgage performance information that was inaccurate on its Web site, including inaccurate information about three subprime and Alt-A securitizations that may have impacted investors’ assessment of subsequent RMB. Citigroup also allegedly failed to supervise the pricing of MBS because of a lack of procedures to verify pricing and did not properly document the steps that were executed to evaluate the reasonableness of the prices provided by traders. The financial firm is also accused of not maintaining the needed books and records, including original margin call records. By settling, Citigroup is not denying or admitting to the FINRA securities charges.

In other institutional investment securities news, in U.S. District Court for the Southern District of New York, Kent Whitney an ex-registered floor broker at the Chicago Mercantile Exchange, agreed to pay $600K to settle allegations by the Commodity Futures Trading Commission that he made statements that were “false and misleading” to the exchange and others about a scam to trade options without posting margin. The CFTC contends that between May 2008 and April 2010, Whitney engaged in the scam on eight occasions, purposely giving out clearing firms that had invalid account numbers in connection with trades made on the New York Mercantile Exchange CME trading floors. He is said to have gotten out of posting over $96 million in margin.

The CFTC says that before an option was about to expire, Whitney would make orders to sell front-month out-of-the-money options. By doing this, he was “implicitly” representing that the accounts were open and had enough margin to cover trades (In truth, the accounts had no margin and were closed). When the clearing firms would turn the trades down because the accounts were closed, they would give back the trades to the executing floor brokers’ clearing firms. The following day, Whitney would give account numbers that were valid to clear the trades. The CFTC says that this process allowed him to avoid the margin posting. Also, when Whitney traded, he would allegedly collect the options premium. By settling, he is not denying or admitting to the CFTC allegations.

Meantime, Senate Agriculture Committee Chairman Debbie Stabenow (D-Mich.) has written a letter to the heads of the Securities and Exchange Commission, the CFTC, the US Treasury Department, the Federal Reserve Board, the Comptroller of the Currency, and Federal Deposit Insurance Corporation urging them to go ahead and complete its implementation of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Right now, regulators are a year behind on the deadline for most of the law’s rules.

Stabenow cited JPMorgan Chase’s (JPM) recent over $2 billion trading loss and MF Global Inc.’s (MFGLQ) bankruptcy last fall as clear examples of the need to pass Dodd-Frank. She worried that there hasn’t been sufficient rulemaking to enforce the act’s new derivatives laws. She said that now is the time to finish writing the rules and “fully” implementing the law.

Our institutional investment lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represents investors throughout the US. We also have clients that are located abroad.

FINRA fines Citigroup Global Markets $3.5 million, Reuters, May 22, 2012

Federal Court in New York Orders Chicago Resident and Former Floor Broker, Kent R.E. Whitney, to Pay $600,000 for Margin Call Avoidance Scheme, CFTC, May 23, 2012

Chairwoman Stabenow: It Is Time To Fully Implement Wall Street Reform, AG.Senate.gov, May 18, 2012


More Blog Posts:

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats, Institutional Investor Securities Blog, May 26, 2012

Alleged Ponzi-Like Real Estate Investment Scam that Defrauded Victims of $9M Leads to SEC Charges Against New Jersey Man, Institutional Investor Securities Blog, May 24, 2012

SEC Charges New York-Based Fund Manager and His Two Financial Firms Over Alleged $11M Ponzi Scheme, Stockbroker Fraud Blog, May 28, 2012