SEC Suit Against Former Citigroup Execs Time-Barred

March 2, 2007 ( - The U.S. District Court for the Southern District of New York threw out Securities and Exchange Commission (SEC) charges that two former Citigroup executives helped their company cheat mutual fund investors out of $100 million over five years, because the charges were filed too late.

The move brought Citigroup nearly $100 million in profit over five years, cheating shareholders, the SEC contended.

U.S. District Judge Richard Conway Casey said that the charges against Thomas Jones, chief executive of Citigroup Assets Management (CAM) and Lewis Daidone, treasurer and chief financial officer of the Smith Barney mutual funds in question, were filed too late (See Former Citigroup Execs Charged With Fraud ).

The case stems from CAM’s decision in 1999 to employ processing provider First Data as an in-house transferring agent and hand over control of customer service functions and overall responsibility of the process to Citigroup Trust Bank (CTB). First Data’s contract with Citigroup was up for renewal at the time and the processing company warned of the threat that Citigroup would go with another vendor by sweetening its offer with fee discounts.

According to the opinion, the arrangement required minimal investment by CTB – roughly $1 million to staff a customer service call center and $2.5 million in other expenses – but was expected to bring in revenues for the asset management division of about $258 million over five years, minus the sub-contracting fees that had to be paid to First Data. First Data also offered a revenue guarantee for certain existing and unrelated business relationships between it and Citigroup.

However, instead of passing the large fee discount to the funds, the SEC said that Citigroup’s divisions, through the transfer agent, took most of the benefit of the discount for themselves.The SEC charged that neither Jones nor Daidone properly relayed to the board how much Citigroup stood to gain from the deal. The board ultimately approved the transfer agent proposal, which was implemented in 1999.

However, in August 2003, Irving David, a former Citigroup employee, told the SEC that the agreement between Citigroup and First Data was “probably not in the best interest of the shareholders of the funds because there were profits that were being taken that should have been passed on as savings to the shareholders of the funds as opposed to profits to the corporation.”

The SEC then ordered, among other things, disgorgement of more than $109 million plus prejudgment interest and a civil penalty of $80 million. The regulator also charged Jones and Daidone of “aiding and abetting” the scheme, alleging that their actions violated §206 of the Investment Advisers Act.

In his opinion, Casey held that the civil monetary damages and permanent injunction requests were subject to the five-year statute of limitations and that the agency filed the lawsuit six years after the alleged wrongdoing.

The judge also wrote that while Jones and Daidone’s allegedly fraudulent acts of misrepresentation may not have been affirmatively disclosed to the SEC, “the record does not support a finding that they were incapable of being known.” The judge also rebuffed the SEC’s argument that Jones and Daidone engaged in a pattern of securities law violations” and would therefore be a threat to the public in the future.

The full opinion is  here .