DISCLOSURE
Citigroup
Events disclosed in connection with Rule 506(e)
1. Regulatory action initiated by Commodity Futures Trading Commission against Citigroup, Inc. (“Citigroup”) and Citigroup Global Markets Ltd. (“CGML”) for violation of Section 4a(b)(2) of the Commodity Exchange Act and Commission regulation 150.2 in that Citigroup, via its wholly owned subsidiaries, held aggregated net long positions in wheat contracts that exceeded the all months speculative position limits established by the commission as a result of trading on the Chicago Board of Trade (“CBOT”). In addition, CGML individually held net long positions in wheat contracts that exceeded the all months speculative position limits established by the commission as a result of trading on the CBOT. Action resulted in the issuance of consent order to cease and desist and civil monetary penalty in the amount of $525,000. Without admitting or denying the findings, respondents consented to cease and desist and a civil monetary penalty in the amount of $525,000. (Resolution Date: 09/21/2012).
2. Regulatory action initiated by Board of Governors of the Federal Reserve System (the “Federal Reserve”) against Citigroup and CitiFinancial Credit Company (“Citifinancial” and together with Citigroup, “Citi”) resulting in issuance of a consent order to cease and desist (the “Consent Order”). The Consent Order made no finding on any issues of fact or law nor any explicit allegation concerning Citi. The Consent Order described a consent order that the Office of the Comptroller of the Currency (the “OCC”) and Citibank, N.A. (the “Bank”), which is owned and controlled by Citigroup, entered into addressing areas of weakness identified by the OCC in residential mortgage loan servicing, loss mitigation, foreclosure activities, and related functions. The Consent Order also stated that the OCC’s findings, which the Bank neither admitted nor denied, raised concerns that Citi did not adequately assess the potential risks associated with such activities of the Bank. The Consent Order stated it is the common goal of the parties to maintain effective corporate governance and oversight over the consolidated organization relating to the weaknesses identified by the OCC consent order. In addition, the Consent Order stated that it is the further goal of the parties to effectively manage their legal, reputational, and compliance risks. The Consent Order required Citi and their institution-affiliated parties to cease and desist and take specified affirmative action, including that Citi or Citigroup’s board: (i) take steps to ensure the bank complies with the OCC consent order; (ii) submit written plans to strengthen risk management, internal audit, and compliance programs concerning certain mortgage loan servicing, loss mitigation, and foreclosure activities conducted through CitiMortgage, Inc. or Citifinancial; and (iii) periodically submit written progress reports detailing the form and manner of all actions taken to secure compliance with the OCC consent order. Citi agreed to consent to a settlement with the Federal Reserve. In the settlement, Citi agreed to consent to the entry of the Consent Order, without the Consent Order constituting an admission by Citi or any of theirs subsidiaries of any allegation made or implied by the Federal Reserve in connection with the matter (Resolution Date: 04/13/2011).
3. Civil judicial action initiated by the Securities and Exchange Commission (the “SEC”) against Citigroup for violations of Section 17(a)(2) of the U.S. Securities Act of 1933 (the “Securities Act”), Section 13(a) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), and Exchange Act rules 12b-20 and 13a-11 in connection with disclosures made between July 2007 and October 2007 about the subprime exposure in Citibank’s investment banking unit. As alleged in the complaint, a violation of Section 17(a)(2) of the Securities Act may be established by a showing of negligence. The specific allegations are that Citigroup misled investors when it stated that it had reduced the investment bank’s subprime exposure from $24 billion at the end of 2006 to $13 billion or slightly less than that amount, while, in fact, the investment bank’s subprime exposure also included approximately $43 billion of “super senior” tranches of subprime collateralized debt obligations and related instruments called “liquidity puts.” On July 19, 2010, Citigroup submitted a consent to judgment which was presented by the SEC in the United States District Court for the District of Columbia (the “Court”) on July 29, 2010. In the consent, Citigroup consented to the entry of final judgment as to defendant Citigroup without admitting or denying the matters set forth therein (other than those relating to the jurisdiction of the court and the subject matter of the action). The final judgment resolved the allegations set forth in a complaint filed by the SEC, described above. The Court entered the final judgment where Citigroup was permanently enjoined from violating Section 17(a)(2) of the Securities Act, Section 13(a) of the Exchange Act, and Exchange Act rules 12b-20 and 13a-11. Citigroup agreed to pay disgorgement in the amount of $1 and a civil monetary penalty of $75 million. Citigroup paid the disgorgement and civil penalty on October 22, 2010. In a related matter, the SEC settled an administrative cease-and-desist proceeding relating to Exchange Act Section 13(a) and Exchange Act Rules 12b-20 and 13a-11 with a current employee of Citigroup and a former employee of Citigroup (Resolution Date: 10/19/2010).
4. Regulatory action initiated by the Federal Reserve against Citifinancial for failure to comply with SEC. 202.7(d)(1) of Federal Reserve Board Regulation B (“Regulation B”) and 15 U.S.C. 1691 et seq., which prohibit a creditor from requiring the signature of a co-applicant if the applicant qualifies based on his or her creditworthiness, engaging in unsafe and unsound practices under 12 U.S.C. 1818(i)(2)(b) in connection with its underwriting and lending practices with respect to certain loans subject to 15 U.S.C. 1639 and Federal Reserve Board Regulation Z (“Regulation Z”), and engaging in unsafe and unsound practices under 12 U.S.C. 1818(i)(2)(b) relating to its actions to allegedly mislead examiners in connection with examiner interviews of Citifinancial employees. Citigroup and Citifinancial consented to the imposition of an order to cease and desist and order of assessment of a civil money penalty. The order required Citifinancial and its institution-affiliated parties to cease and desist from practices and policies that violate SEC. 202.7(d)(1) of Regulation B and from unsafe and unsound practices in connection with Citifinancial’s underwriting and lending activities, SEC. 202.7(d)(1) of Regulation B, and comply with all applicable consumer protection laws, rules and regulations. Citifinancial was required to submit a restitution plan to the Federal Reserve concerning the alleged Regulation B and Regulation Z violations and pay a civil monetary penalty of $70 million subject to a partial credit of up to $20 million to the extent that restitution payments were made. The total funds available for restitution were expected to exceed $50 million. Finally, the order imposed certain remedial measures in the areas of compliance, audit, training, internal controls and interactions with regulatory authorities (Resolution Date: 5/27/2004).
5. Case No. SEU-2006-002. The State of Hawaii’s Commissioner of Securities, Department of Commerce and Consumer Affairs conducted an investigation to determine whether Citigroup Global Markets Inc. (“CGMI”) engaged in any violation of the Hawaii Uniform Securities Act, Hawaii Revised Statutes and other applicable authority with respect to a Hawaii investor’s claim that his telephone order to purchase penny stock was misplaced by a CGMI securities salesperson, which allegedly resulted in a settlement balance that was larger than the investor expected. In April 2013, without admitting or denying the allegations, CGMI entered into a consent agreement with the Hawaii Commissioner of Securities, in which CGMI agreed to make a restitution payment to the investor in the amount of $33,240 and $9,000 to the state for the cost of the investigation.
6. Matter No. 2012-0090 (Oct. 26, 2012). The Massachusetts Securities Division alleged that CGMI violated Mass. Gen. Laws Ch. 110, Section 204(a)(2)(f), 204(a)(2)(g), 204(a)(2)(j), and 950 CMR Section 12.204(1)(a) for allegedly failing to supervise certain research analysts, during the period between December 1, 2011 and May 2, 2012. Without admitting or denying the allegations, CGMI consented to a cease and desist order, censure, civil penalty in the amount of $2,000,000, and an undertaking to review written supervisory policies and procedures related to Citigroup Investment Research (“CIR”) electronic surveillance program and training provided to CIR equity research analysts, CIR supervisors, and CIR compliance personnel.
7. I08-345 (Mar. 31, 2011). The State of Nevada alleged that CGMI failed to ensure compliance with its supervisory requirements when one of its sales representatives improperly set up brokerage accounts for a customer between 1995 and 2008. Without admitting or denying the allegations, CGMI consented to an order to cease from future violations, and to pay both costs of investigation in the amount of $25,000 and a fee for inspection of records in the amount of $1,000.
8. 2010-0329-S (December 15, 2010). The State of New York Insurance Department (2010-0329-S) alleged that Citicorp Insurance Agency, Inc. (“CIAI”) and Citicorp Investment Services (“CIS”), both of which merged into CGMI, and SBHU Life Agency, Inc. (“SBHU”) violated Section 51.5(c) of the New York Regulation 60 by failing to present complete, accurate and/or timely disclosure statements to applicants in replacement transactions (from January 1, 2003 through December 31, 2007). CIAI, CIS and SBHU did not adequately process and resolve certain client complaints pertaining to the sale of life insurance policies or annuity contracts. Certain sales of life insurance policies or annuity contracts were inconsistent with CIAI, CIS and SBHU’s internal suitability standards. Action resulted in a stipulation agreement among the parties. CIAI, CIS and SBHU consented to the imposition of a civil penalty of $2 million and to take certain remedial actions described by the stipulation agreement.
9. 10-0477 CA (Oct. 26, 2010). The Indiana Securities Division alleged that CGMI violated Indiana Code Section 23-2-11 and 710 Ind. Admin. Code 1-17 by failing to adequately supervise a registered representative. It was alleged that the representative, for a period from September 2004 to May 2005, engaged in a scheme, along with a CGMI customer, to misappropriate funds from cemeteries in Indiana over which the customer had acquired control. While denying liability and without the entry of any findings of fact or conclusions of law, CGMI consented to an order of a fine in the amount of $400,000, restitution in the amount of $142,000, and costs of investigation in the amount of $175,000.
10. I07-044-JN (Oct. 22, 2010). The State of Nevada alleged a violation of NRS 205.960(1)(a) by CGMI. CGMI allegedly failed to properly supervise certain accounts handled by its representatives between 1999 and 2004 with respect to a brokerage account, which should have been opened as qualified escrow accounts or qualified trusts, and as such, failed to follow its policies and procedures with respect to the supervision and approval of such accounts. Without admitting or denying the findings, CGMI consented to an order to cease future violations and to pay $125,000 for costs of investigation.
11. AP-10-22 (Oct. 20, 2010). The Missouri Securities Division alleged that CGMI violated Missouri law (Section 409.4-412, (d)(9), RSMO. (Cum. Supp. 2009)) by failing to reasonably supervise a registered representative. The representative was alleged to have made improper recommendations, over a period of time from 2000 to 2007, relating to the retirement accounts and investments of a customer. Without admitting or denying the allegations, CGMI consented to an order of censure, restitution in the amount of $195,000, a fine in the amount of $75,000, and costs of investigation in the amount of $3,750.
12. IC10-CAF-12 (May 3, 2010). The State of Texas alleged that CGMI failed to deliver to the Director of the Inspections & Compliance Division of the Texas State Securities Board, notice of five client arbitrations/complaints as required per an undertaking with the Securities Commissioner and failed to enforce written policies and procedures designed to achieve compliance with the Texas Securities Act. In so doing, CGMI allegedly failed to enforce written procedures designed to achieve compliance with the Texas Securities Act. Without admitting or denying the findings, CGMI consented to an order of reprimand, and an administrative fine in the amount of $130,000.
13. Complaint – 08 CIV 10753 (RMB) (S.D.N.Y. Dec. 11, 2008); Sec Lit Rel. No. 20824. The SEC finalized a settlement with CGMI that provided nearly $7 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February of 2008. The settlement resolved the SEC’s charges that CGMI allegedly misled investors regarding the liquidity risks associated with Auction Rate Securities (“ARS”) that it underwrote, marketed and sold. Previously, on August 7 and 8, 2008, the SEC’s Division of Enforcement announced a preliminary settlement with CGMI. According to the SEC’s complaint, filed in federal court in New York City, CGMI misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaint, in late 2007 and early 2008, CGMI knew that the ARS market was deteriorating, causing CGMI to have to purchase additional inventory to prevent failed auctions. At the same time, however, CGMI was alleged to have known that its ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed CGMI’s balance sheet. The complaint alleged that CGMI failed to make its customers aware of these risks. In mid-February 2008, according to the complaint, CGMI decided to stop supporting the ARS market, leaving tens of thousands of CGMI customers holding tens of billions of dollars in illiquid ARS. The settlement, which was subject to court approval, restored approximately $7 billion in liquidity to CGMI customers who invested in ARS.
Sec Lit Rel. No. 21585 (June 30, 2010). The SEC announced that CGMI satisfied its obligations under the settlement (discussed above). CGMI was required to offer to purchase ARS at par value from individual, charitable, and small business customers. Nearly 100% of these customers accepted the offer. CGMI purchased ARS from its eligible customers in the amount of $6.38 billion. The settlement also required CGMI to use “best efforts” to provide opportunities for liquidity to institutional customers. To assist in its analysis of whether CGMI had in fact used “best efforts,” the SEC retained an outside expert with extensive knowledge of the ARS market. From the time of the ARS market failure in February 2008 through May 31, 2010, Citigroup institutional customer holdings were reduced by $8.46 billion or 46% (from $18.55 billion to $10.09 billion). In compliance with its obligations, Citigroup implemented broad-based liquidity measures for its institutional investors. Citigroup also met its other settlement obligations, including compensating investors who sold ARS below par value, reimbursing investors for excess interest costs associated with loans taken out due to ARS illiquidity, and participating in special arbitration proceedings before the Financial Industry Regulatory Authority. CGMI also submitted periodic reports to, and met quarterly with, the SEC staff regarding its progress on meeting the settlement obligations. To ensure compliance with the terms, the settlement provided for a potential deferred penalty if CGMI did not meet its settlement obligations. The SEC determined that based on CGMI’s compliance with the settlement, as well as other factors, no penalties would be pursued.
August 7, 2008. In a related matter, CGMI reached agreements with state regulatory authorities from the 50 states and with the North American Securities Administrators Association in relation to allegations that Citigroup mislead clients by falsely assuring that ARS securities were safe and liquid. As part of the settlement, CGMI agreed to reimburse investors who sold auction rate securities at a discount, consent to a special public arbitration procedure to resolve claims of consequential damages, undertake to expeditiously provide liquidity solutions to all other institutional investors, and to reimburse refinancing fees to state municipal issuers who issued auction rate securities through CGMI between August 2007 and February 2008. In addition, CGMI agreed to pay a $50 million penalty to the states and an additional $50 million penalty to the State of New York.
14. SEC-2007-00047 (Nov. 7, 2008). The Virginia Division of Securities & Retail Franchising alleged that CGMI violated (i) Securities Rule 21 VAC 5-20-260 D (2) by failing to perform frequent examinations of all customer accounts to detect and prevent irregularities or abuses and (ii) Rule 21 VAC 5-20-260 D (4) by failing to review and receive written approval by the designated supervisor of the delegation by any customer of discretionary authority with respect to the customer’s account to the broker-dealer or to a stated agent or agents of the broker-dealer and the prompt written approval of each discretionary order entered on behalf of that account. The investigative matter involved CGMI and one associated agent of CGMI. CGMI neither admitted nor denied the violations. A collaborative settlement was entered where CGMI paid penalties in the amount of $10,000 and investigative costs in the amount of $12,000.
15. In July 2007, the State of New Jersey Bureau of Securities (the “N.J. Bureau”) alleged that CGMI violated N.J.S.A. 49:3-58(a)(2)(xi) due to its failure, during the time period March 2003 through January 2004, to reasonably supervise and establish and enforce procedures necessary to detect and prevent unsuitable trading and the alteration of customer profiles by certain employees at the branch office in Short Hills, New Jersey. Further, the N.J. Bureau alleged that CGMI violated N.J.S.A. 49:3-59 and N.J.A.C. 13:47a-1.10 due to its failure during the time period specified above to maintain books and records which accurately reflected the account profiles of certain of its clients. Without admitting or denying the allegations and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of the N.J. Bureau, or to which the N.J. Bureau is a party, prior to hearing and without an adjudication of any issue of law or fact CGMI consented to restitution in the amount of $478,000 and a civil monetary penalty of $500,000.
16. In July 2007, the N.J. Bureau alleged that, from January 2000 through September 2003, CGMI failed: (i) to reasonably supervise certain persons associated with CGMI in violation of N.J.S.A. 49:3-58(a)(2)(xi) and (ii) to establish and/or enforce reasonable supervisory procedures for detecting and preventing deceptive market timing practices. Further, CGMI allegedly violated N.J.A.C. 13:47a-1.10 by failing to make and/or preserve accurate books and records relating to: (i) order communications and entry time for mutual fund trades, (ii) rejection and/or cancellation of mutual fund and variable annuity sub-account trades related to market timing, and (iii) shares orders and/or confirmations for transactions executed by certain persons associated with CGMI in variable annuity accounts and other insurance sub-accounts away from CGMI. CGMI consented to the entry of the order without admitting or denying the N.J. Bureau’s findings of fact or conclusions and solely for the purpose of resolving the matter without the expense and delay that formal administrative proceedings would involve. The civil monetary penalty of $5 million was paid in June 2007.
17. Case No. SEC-2005-41 (Mar. 7, 2006). Montana State Auditor and Commissioner of Securities alleged that CGMI submitted an application for registration on behalf of a registered financial consultant without ensuring the accuracy of the information contained therein. Without admitting or denying the findings of fact and conclusions of law, CGMI agreed to pay an administrative fine of $4,000, and consented to an order to provide proper supervision to ensure the accuracy of the registration application of an individual financial consultant registered in the State of Montana.
18. Order No. 05-394 (Dec. 20, 2005). State of Rhode Island alleged that CGMI violated R.I. Gen. Laws Sec. 7-11-212(b)(8), due to its failure to reasonably supervise the sales representatives and activities at its Rhode Island branch offices. Allegedly, in the absence of proper supervision, certain CGMI sales representatives were involved in several unethical and dishonest practices that violated Rhode Island law. Without admitting or denying any findings or violations, CGMI entered into a consent order in which it agreed to cease and desist from any further violations of the Rhode Island Uniform Securities Act, and agreed to pay a civil penalty of $700,000.00 and investigation costs of $300,000.00. CGMI also agreed to retain an independent consultant to review current internal supervisory and compliance procedures of its Rhode Island offices and the current business practices of CGMI’s registered representatives in the Rhode Island offices.
19. SEC-2003-00038 (June 25, 2004). The Virginia State Corporation Commission, Division of Securities and Retail Franchising, alleged that CGMI violated commission Rule 21 VAC 5-20-260 B, due to its failure to exercise diligent supervision over the actions of two of its registered representatives. Without admitting or denying the allegations, CGMI consented to a penalty in the amount of fifty thousand dollars ($50,000.00) and agreed to pay the sum of twenty-two thousand four hundred eighty-six dollars ($22,486.00) to defray the costs of the investigation. The fines were paid on June 24, 2004.
20. CAF030018 (NASD Apr. 28, 2003). The SEC, the National Association of Securities Dealers (“NASD”), the New York Stock Exchange (“NYSE”) and other regulators alleged violations of Exchange Act Section 15(c), Rule 15c1-2 thereunder, Section 15(c)(1) of the Exchange Act, Rule 15c-1 thereunder, Section 15(c)(2) of the Exchange Act, Section 15(f) of the Exchange Act and Exchange Act 17(a)(1) and Rule 17a-3 thereunder, NASD Conduct Rules 2110, 2210(d)(1), 2210(d)(2), 3010, and 3110 by predecessor firm Salomon Smith Barney Inc. (“SSB”), now known as CGMI, arising out of certain of its business practices concerning (i) research during the period 1999 through 2001 and (ii) initial public offerings (“IPOs”) during the period 1996 through 2000. The NASD alleged that SSB engaged in certain business practices that created inappropriate influence by investment bankers over research analysts, thereby imposing conflicts of interest on them. It was further alleged that SSB published certain fraudulent research reports and other research reports that violated applicable legal or regulatory requirements for communications with the public. It was also alleged that SSB failed to maintain policies and procedures reasonably designed to prevent potential misuse of material, non-public information in certain circumstances. Regarding SSB’s handling of IPOs, it was alleged that SSB engaged in improper “spinning” and failed to maintain adequate books and records. Finally, it was alleged that SSB failed to supervise certain aspects of its research and IPO allocation activities.
21. On April 28, 2003, the SEC, the NASD, NYSE, the Attorney General of the State of New York, and several state securities regulators announced their acceptance of a global settlement with 10 firms, including SSB, completely and finally resolving the respective regulators’ investigation of the firms stemming from alleged conflicts of interest resulting from interactions between the firms’ research and investment banking departments. In connection with the April 28, 2003 announcement, SSB executed the following documents: a letter of acceptance, waiver, and consent with the NASD; a stipulation and consent with the NYSE; an assurance of discontinuance with the Attorney General of the State of New York; and a consent in connection with a complaint filed by the SEC in the United States District Court for the Southern District of New York on April 28, 2003 and a final judgment to be entered by the court. Solely for the purpose of settling each proceeding, prior to hearing, without adjudication of any issues of law or fact, and without admitting or denying the facts or conclusions alleged in the respective regulators’ documents, SSB consented to findings that SSB violated certain federal securities laws and regulations and NASD rules set forth above. Further, SSB agreed to implementation of certain structural reforms relating to the operation of the research and investment banking departments; appointment of an independent monitor to review compliance with such reforms; and monetary payments for procurement of “independent research” ($75 million) and for investor education ($25 million). In addition, SSB consented to the imposition of NASD censure and a total payment of $400 million, as specified in the final judgment to which SSB consented to be entered in a related action filed by the SEC, which includes $150 million as disgorgement that will be placed in a distribution fund and distributed to investors, $75 million for the procurement of independent research that SSB will make available to investors, and $25 million for investor education. Each settling state will receive a payment equal to $150 million multiplied by the percentage of the U.S. population resident in that state. SSB also consented to undertakings to implement certain structural reforms relating to the operation of its research and investment banking departments. Finally, SSB also agreed to participate in a voluntary initiative pursuant to which it will no longer make allocations of “hot” IPOs to corporate insiders
Events disclosed pursuant to SEC order
1. Case No. 11-CV-7387, Securities and Exchange Commission v. Citigroup Global Markets Inc. (S.D.N.Y. Aug. 5, 2014): On October 19, 2011, the SEC filed a complaint in the United States District Court for the Southern District of New York regarding Citigroup’s structuring and sale of the Class V Funding III CDO (Class V) (“CDO”). The complaint alleged that the marketing materials for the CDO were materially misleading because they suggested that Citigroup was acting in the traditional role of an arranging bank, when in fact Citigroup had allegedly exercised influence over the selection of the assets and had retained a proprietary short position of the assets it had helped select, which gave Citigroup allegedly undisclosed economic interests adverse to those of the investors in the CDO. On the same day the complaint was filed, the SEC and Citigroup announced a settlement of the SEC’s claims, subject to judicial approval, and the SEC filed a proposed final judgment pursuant to which Citigroup’s U.S. broker-dealer CGMI, without admitting or denying the allegations, agreed to disgorge $160 million and to pay $30 million in prejudgment interest and a $95 million penalty; the consent agreement required the issuance of an injunction against CGMI from violating Sections 17(a)(2) and (3) of the Securities Act. After a lengthy series of court proceedings, the court approved the settlement on August 5, 2014. CGMI received a waiver from the SEC of any disqualification under Rule 506 of Regulation D arising from the settlement. A more detailed description of CGMI’s settlement with the SEC and the relief granted is available at http://www.sec.gov/rules/other/2014/33-9657.pdf. The SEC’s complaint can be found at http://www.sec.gov/litigation/complaints/2011/comp-pr2011-214.pdf
2. On August 19, 2015, CGMI entered into a settlement agreement with the SEC in connection with two enforcement actions concerning CGMI’s surveillance of trading against certain restricted trading lists and principal trading by Automated Trading Desk Financial Services LLC in managed accounts. Without admitting or denying the SEC’s allegations that CGMI violated Section 15(g) of the Exchange Act and Section 206(4) of the U.S. Investment Advisers Act of 1940 (the “Advisers Act”) and Rule 206(4)-7 thereunder, CGMI has agreed to pay a $15 million civil penalty and comply with an undertaking to continue to retain a consultant to conduct a comprehensive assessment of CGMI’s trade surveillance program and order handling in relation to transactions for which CGMI acts as an investment adviser.
3. On January 26, 2017, CGMI entered into a settlement agreement with the SEC in connection with overcharges in certain advisory client accounts (the “Order”). The overcharges related primarily to the TRAK Fund Solution program, which was a wrap fee investment advisory program offered and sold to advisory clients from 1991 through 2011 by CGMI and its predecessor, Salomon Smith Barney. A much smaller number of advisory fee overcharges occurred in frozen advisory accounts and certain advisory accounts that were not migrated to the Morgan Stanley Smith Barney joint venture.
4. The SEC found that CGMI violated various provisions of the Advisers Act by overcharging or causing to be overcharged approximately 60,000 advisory client accounts an estimated amount of $18 million and by failing to keep proper books and records with respect to maintenance of client contracts. Those overcharges have, at the time of the Order, been reimbursed with interest, to the extent they have been identified. Pursuant to the Order, CGMI agreed to a censure, a cease and desist order, payment of disgorgement and pre-judgment interest in the amount of $4,000,000, payment of a civil money penalty in the amount of $14,300,000 and comply with certain undertakings related to fee billing, books and records and notice to advisory clients. CGMI received a waiver from the Division of Corporation Finance, acting for the SEC pursuant to delegated authority, of any disqualification under Rule 506 of Regulation D arising from the entry of the Order. The Order can be obtained at https://www.sec.gov/litigation/admin/2017/34-79882.pdf.
Other events
On August 17, 2015, pursuant to an administrative cease-and-desist order from the SEC, Citi Alternative Investments LLC (“CAI”) and CGMI entered into a settlement agreement with the SEC in connection with enforcement actions concerning material misstatements and omissions by CAI and CGMI between 2002 and 2007 in the offer and sale of securities in the ASTA and MAT funds and the Falcon Strategies funds. Without admitting or denying the SEC’s findings that CAI and CGMI willfully violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, CGMI willfully violated Section 206(2) of the Advisers Act and CAI willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 and 206(4)-8 promulgated thereunder, CGMI and CAI have agreed to pay an approximate $140 million disgorgement penalty plus interest and cease and desist from committing any of the aforementioned violations.
Deutsche Bank Securities Inc.
On August 26, 2004, in connection with the 2002 industry-wide governmental and regulatory investigations into research and analysts practices, Deutsche Bank Securities Inc. (“DBSI”) reached a settlement agreement with the Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange and the New York Attorney General, and with other state regulators arising from an investigation of research analyst independence. Under the terms of the settlement, DBSI agreed to pay $87.5 million.
On June 3, 2009, DBSI settled proceedings with the U.S. Securities and Exchange Commission, the New Jersey Department of Securities and the New York Attorney General in connection with various claims under the federal securities laws and state common law arising out of the sale of auction rate preferred securities and auction rate securities (together, “ARS”). Under the terms of the settlements, DBSI was required to, among other things, offer to buy back ARS purchased by certain customers from DBSI, reimburse certain customers who took out loans secured by ARS and compensate eligible customers who sold their ARS below par value. In connection with the settlements, a number of state securities commissions issued final orders against DBSI.
Stifel, Nicolaus & Company Inc
On December 6, 2016, a final judgment (“Judgment”) was entered against Stifel, Nicolaus & Company, Inc. (“Stifel Nicolaus”) by the United States District Court for the Eastern District of Wisconsin (Civil Action No. 2:11-cv-00755) resolving a civil lawsuit filed by the U.S. Securities & Exchange Commission (the “SEC”) in 2011 involving violations of several antifraud provisions of the federal securities laws in connection with the sale of synthetic collateralized debt obligations (“CDOs”) to five Wisconsin school districts in 2006.
As a result of the Order:
– Stifel is required to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act; and
– Stifel and David Noack, a former employee, are jointly liable to pay disgorgement and prejudgment interest of $2.44 million. Stifel was also required to pay a civil penalty of $22.5 million. The Judgment also required Stifel to distribute $12.5 million of the ordered disgorgement and civil penalty to the school districts involved in this matter.
Simultaneously with the entry of the Judgment, the SEC issued an order granting Stifel waivers from the application of the disqualification provisions of Rule 506(d)(1)(iv) of Regulation D and Rule 262(b)(2) of Regulation A under the Securities Act (the “Securities Act Waivers”) and a no-action letter granting relief from the disqualification provisions of Rule 206(4)-3 under the Advisers Act (the “Advisers Act Waiver”). The SEC also exempted Choice Financial Partners, Inc., 1919 Investment Counsel, LLC and Ziegler Capital Management, LLC (“Stifel Affiliates”) from section 9(a) of the Investment Company Act of 1940 (the “Investment Company Act Exemption”) through the issuance of a temporary order. Unless the SEC orders a hearing, a permanent order will be issued in 2017 and will be posted to the SEC’s EDGAR database.
Copies of the Judgment, Securities Act Waiver, Advisers Act Waiver and ’40 Act Exemption are available on the SEC’s website:
– Judgment: https://www.sec.gov/litigation/litreleases/2016/lr23700-final-judgment.pdf
– Advisers Act Waiver: https://www.sec.gov/divisions/investment/noaction/2016/stifelnicolaus-120616-206(4).htm
– Securities Act Waivers: https://www.sec.gov/rules/other/2016/33-10263.pdf
– Investment Company Act Exemption: https://www.sec.gov/Archives/edgar/data/948905/999999999716027528/filename1.pdf
UBS Financial Services Inc.
(Acting as Solicitor/Distributor to a Third Party Private Investment Fund)
Disclosure Statement under Rule 506(d)
1. Date of Action: August 22, 2011
Entity: UBS Financial Services, Inc.
Brought By: New Hampshire Bureau of Securities Regulation
Allegations: UBS sold Lehman Structured Products to clients (specifically referencing three particular investors), who were not
made aware of the risks of these products and failed to inform clients of Lehman’s financial condition prior to Lehman’s
bankruptcy. It was also alleged that the firm’s recommendations to a small number of New Hampshire residents to purchase
Lehman Structured Products were unsuitable.
Disposition: Consent Order
Administrative fine of $100,000; Investigation costs of $200,000; Administrative payment of $700,000
2. Date of Action: May 4, 2011
Brought By: SEC, Internal Revenue Service (IRS), Dept. of Justice (DOJ), State Attorney General of 24 States
UBS AG and UBS Financial Services Inc. reached settlements with the SEC, the IRS, the DOJ and a group of State Attorneys
General regarding investigations into the conduct of certain former employees in UBS Financial Services’ former municipal
reinvestment and derivatives group from 2001 to 2006. Allegations included violations of: Section 15(c)(1)(A) of the Securities
Exchange Act of 1934, Section 1 of the Sherman Act, and IRS regulations in bidding practices and representations made
involving the investment of proceeds of municipal securities transactions.
Disposition: SEC: Waiver and Consent to Final Judgment enjoining UBS from violating Section 15(c) of the Act, disgorgement
of profits, interest and civil penalty; IRS: Closing Agreement; DOJ: Non- prosecution Agreement
SEC: Disgorgement of $9,606,543 plus interest of $5,100,637 and civil penalty of $32,500,000; IRS: penalty of $18 million
and restitution of 4.3 million; States: $70.8 million plus $20 million credited from the SEC settlement
3. Date of Action: Dec. 22, 2008
Brought By: Securities and Exchange Commission (SEC), Massachusetts Securities Division, New York State Attorney General
(NYAG) and other members of the North American Securities Administrators Association.
Auction Rate Securities (ARS): UBS is permanently enjoined from violations of the broker/dealer anti-fraud provisions.
Allegations: Violations of 34 Act Section 15(c) regarding the marketing and sale of Auction Rate Securities.
Disposition: Cease & Desist Injunction; Civil Penalty; Consent Judgment
Cease & Desist, and Fines in varying amounts currently being paid to all 50 states. UBS Financial Services Inc. (together with
UBS Securities LLC) agreed to pay a fine of $150 million ($75 million to the NYAG and $75 million allocated to the remaining
states).
4. Date of Action: July 16, 2007
Entity: UBS Financial Services
Brought By: Attorney General State of NY
Allegations: Non-discretionary fee-based brokerage accounts offered by UBS were unsuitable for certain clients and
fees/commissions were higher than non- fee based accounts
Disposition: Remediation to Customers & Penalty to State of NY
Remediation: $21,300,000; Penalty: $2,000,000
5. Date of Action: March 7, 2005
Entity: UBS Financial Services
Brought By: State of Illinois
Allegations: Failure to provide investors with accurate account statements re: callable CD’s and failure to supervise.
Disposition: Fine
Fine: $95,000
6. Date of Action: April 28, 2003 – March 19, 2004
Entity: UBS Financial Services and affiliates
Brought By: Secretary of State of 47 States and Washington D.C.
Allegations: Violation of Securities Act regulations regarding research practices and conflicts of interest
arising from those practices. Violations of Section 17(b) of the Securities Act of 1933, NYSE Rules 476(a)(6), 401, 472,
476(A)(6) and 342, NASD Rules 2210 and 2110 and state securities laws
Disposition: Cease & Desist, Fine, Penalty, Disgorgement, Investor Education.
Details: UBS Financial Services Inc. (together with UBS Securities LLC) paid a total of $80M (allocated among the states),
which includes $25M penalty, $25M as disgorgement, $25M to be used for procurement of independent research and $5M
for investor education. Fines varied by State.
7. Date of Action: March 2007
Entity: Individual Financial Advisor
Brought By: State of New York Department of Insurance
Disposition: Final Order in connection with violations of sections 2123 of the NY Insurance Law and Department Regulation
60 (11 NYCRR 51.5).
8. Date of Action: June 9, 2008
Entity: Individual Financial Advisor
Brought By: State of New York Department of Insurance
Disposition: Final Order issued in connection with violations of sections 2123 of the NY Insurance Law and Department
Regulation 60 (11 NYCRR 51.5).
9. Date of Action: May 12, 2000
Entity: Individual Financial Advisor
Brought By: Ohio Division of Securities
Details: The Ohio Division of Securities issued a final order to deny the Financial Advisor’s application for a securities sales
person license.
10. Date of Action: February 2, 2010
Entity: Individual Financial Advisor
Brought By: State of Nevada
Details: State of Nevada issued Final Order revoking the Financial Advisor’s license to act as a sales representative on Feb. 2,
2010.
SBAI
No responsibility, duty of care or liability whatsoever (whether in contract or tort or otherwise including, but not limited to, negligence) is or will be accepted by the Standards Board for Alternative Investments Limited (“SBAI”), the Board of Trustees of the SBAI, any member of the SBAI’s Investor Chapter (each an “Investor Chapter Member”) or a Core Supporter of the SBAI to Signatories, investors or any other person in connection with the Standards or any Conformity Statement or Disclosure Statement made by any Signatory. A Core Supporter can be a Signatory to the Standards, a member of the SBAI’s Investor Chapter or an investment consultant.
Neither the SBAI nor its Board of Trustees is a regulator of the alternative investment industry and their role does not extend beyond being a custodian of the Standards. None of the SBAI, its Board of Trustees, the Investor Chapter Members and the Core Supporters will seek to enforce compliance with the Standards by Signatories. The fact that a manager is a Signatory to the Standards is not and should not be taken as an endorsement of such manager by the SBAI, the Board of Trustees, any Investor Chapter Member or any Core Supporter or as a representation by the SBAI, the Board of Trustees, any Investor Chapter Member or any other Core Supporter that such Signatory operates in conformity with the Standards. In determining whether to accept a manager’s application to become a Signatory (or whether to revoke a manager’s status as a signatory), the Board of Trustees is entitled to rely on the information provided to it by such manager without further investigation or verification. Further, subject to any duties a Trustee may have under applicable law, it is not envisaged, or expected, that a Trustee will when participating in any such decision of the Board of Trustees take into consideration information which it may possess otherwise than in its capacity as a Trustee. For the avoidance of doubt, Trustees act as individuals.
None of the SBAI, the Board of Trustees of the SBAI, the Investor Chapter Members and the other Core Supporters accept any responsibility or liability for any loss or damage caused to any person who acts or refrains from acting as a result of anything contained in or omitted from the Standards or any Conformity Statement or Disclosure Statement made by any Signatory or in reliance on the provisions of or material in the Standards or any Conformity Statement or Disclosure Statement made by any Signatory, whether such loss or damage is caused by negligence or otherwise.
