Citi’s Bond Probe

Discussion in 'Wall St. News' started by chartie, Jun 28, 2005.

  1. chartie


    Citigroup Pays $25 Million to Settle U.K. Bond Probe

    June 28 (Bloomberg) -- Citigroup Inc., the world's biggest bank, will pay 14 million pounds ($25 million) to settle an investigation by the U.K. securities regulator into a series of European government bond trades that roiled markets last year.

    The bank must forfeit the 9.96 million pounds in profit made from the Aug. 2 bond trades and pay a 4 million-pound penalty, the Financial Services Authority said in an e-mailed statement today. Citigroup still faces probes in Italy, Belgium and Portugal.

    Chief Executive Officer Charles Prince is trying to repair Citigroup's reputation after the New York-based bank spent more than $5 billion in two years to resolve regulatory probes around the world. Citigroup's share of government bond underwriting in Europe has tumbled since the Aug. 2 trades, as countries such as France punished the company by withholding business.

    ``Citi will want to move on now,'' said Angela Knight, head of the Association of Private Client Investment Managers and Stockbrokers, a trade group for stockbrokers in London. ``They will want to repair the damage and make sure their practices are sound and the people who trade with them trust them.''

    Citigroup has apologized for the August trades, when it bought European government bond futures on the Eurex AG derivatives exchange before flooding the MTS SpA electronic-trading platform and other cash markets with 12.9 billion euros ($15.6 billion) of bonds within seconds. The bank then bought some back for a profit.

    `Dr. Evil'

    Citigroup ``planned, authorized and executed a trading strategy without having due regard to the risks and likely consequences of its action for the efficient and orderly operation of the MTS platform,'' Hector Sants, the FSA's managing director for wholesale business, said in the statement.

    The sale of the bonds on the electronic network of Rome-based MTS was equal to the average daily volume during the month. The traders involved in the transaction dubbed the strategy of benefiting from discrepancies in prices on the bond market and Eurex ``Dr. Evil,'' the U.K. regulator said.

    The FSA determined Citigroup ``did not deliberately set out to disrupt the orderly and efficient operation of the MTS platform,'' and said the strategy didn't depend on ``distortive behavior.''

    Citigroup's European government bond desk had been encouraged to boost profits through increased proprietary trading and the development of new trading strategies in July 2004, a month before the trades, the FSA said in the statement.

    Traders Reinstated

    ``The lack of adequate systems and controls meant that the strategy was never fully considered, as would be expected, at an appropriate senior level within'' Citigroup, Sants said.

    Citigroup in February said the six traders who were involved were placed on leave until the investigations were concluded. The FSA said it recognizes that Citigroup has taken ``significant remedial work'' in the areas ``where controls were lacking.''

    The bank in February started holding ethics classes for its employees to restore accountability and prevent past mistakes.

    The traders ``will be reinstated and back in their jobs in another week or two,'' William Mills, chairman and chief executive officer of Citigroup's European corporate and investment bank, said in an interview. The bank hasn't fired anyone over the trades.

    ``We are pleased to conclude this matter with the FSA,'' Prince said in an e-mailed statement from Citigroup today. ``Citigroup and its employees have made a number of changes in how we do things as a result of this case.''

    Eurex, BaFin

    Investigations into Citigroup's bond trades in Europe came on top of a series of run-ins with regulators around the world. Citigroup was forced to close its private bank in Japan in October after it failed to make proper checks against money laundering.

    In the U.S., Citigroup paid $2.7 billion to settle a class- action suit that accused it of playing a role in WorldCom Inc.'s fraud. The bank said June 10 it would pay $2 billion to settle a lawsuit with Enron Corp. shareholders it helped the company hide debt in off-the-books partnerships.

    The FSA penalty is smaller than the 17 million-pound fine imposed last July on Royal Dutch/Shell Group, the third-largest publicly traded oil producer, for overstating oil reserves.

    Germany's financial-services regulator, BaFin, also examined Citigroup's purchase of bond futures on Eurex before the sale and said it found evidence of market manipulation. BaFin passed the case to the Frankfurt prosecutor, which closed the probe on March 21 because the trade didn't violate laws in place at the time.

    Citigroup was cleared by the Eurex sanctions committee of breaching ``general principles'' on June 17 and fined 5,000 euros for failing to register one of its traders on a timely basis. Eurex had the power to impose a fine of as much as 250,000 euros and suspend trading for 30 days.

    Underwriting Slide

    Citigroup's first-quarter revenue from fixed-income sales and trading globally was $2.92 billion, up 16 percent from a year ago, according to the company's Web site. Net income from Citigroup's corporate and investment bank in Europe for the quarter totalled $188 million, down 29 percent from a year earlier. The company doesn't break out fixed-income revenue or earnings by region.

    ``Clearly this has affected our primary government bond position,'' said Citigroup's Mills. ``In terms of our conversations with treasuries and other clients in Europe, I think it's appropriate to say they're glad we have reached this settlement and they want us to turn the page and move forward.''

    The bank has slid to 26th this year in managing debt sales for the 12 countries using the euro, down from sixth in the same period last year, according to data compiled by Bloomberg.

    Citigroup has managed one government bond sale for a euro- region country this year, a 5 billion-euro 32-year bond sale for Greece, the data show. It was one of five managers on the sale.

    Shares of Citigroup, whose 2.9 percent decline this year compares with a 1.8 percent drop in the 82-member S&P 500 Financials Index, fell 18 cents to $46.77 yesterday in composite trading on the New York Stock Exchange.

    Bloomberg LP, the owner of Bloomberg News, competes with MTS in electronic bond-trading.