Ctitigroup faces record UK fine

Citigroup faces the largest-ever fine imposed by UK regulators for a bond market deal following transactions that shook eurozone government debt trading last August, people close to the investigation said yesterday.

It comes as Citigroup agreed to pay $206m to settle allegations by US regulators that it made profits at the expense of its mutual funds.

People close to the investigation by the UK Financial Services Authority said regulators were expected to fine Citigroup for a lack of internal controls rather than market manipulation – a preferred outcome for the bank.

However, it is thought a fine could amount to millions of pounds, possibly exceeding the Euro 17,5m ($22m) profit the bank made on the transactions.

Neither the FSA nor Citigroup would comment yesterday, although the bank has apologised for the trades, which caused liquidity of the EuroMTS electronic trading platform to dry up, angering eurozone governments. On August 2 last year, Citigroup stunned the eurozone government bond market by selling Euro 12.4 bn of the paper within seconds, only to buy back Euro 4bn at lower prices slightly later.

Meanwhile, the Securities and Exchange Commission alleged that Smith Barney Funds Management, a Citigroup subsidiary and the investment adviser to its mutual funds, “placed its interest in making a profit ahead of the interests of the mutual funds it had a duty to serve”.

US regulators said Smith Barney Fund Management recommended to the Smith Barney family of mutual funds that they hire an affiliate as transfer agent, which involves keeping records about shareholdings.

Smith Barney Fund Management failed to disclose that most of the work would be subcontracted to the funds’ existing transfer agent at discounted rates, alleged the SEC.

This enabled Citigroup Global Markets, another Citigroup subsidiary, and Smith Barney Fund Management to reap almost $100m in profit at the funds’ expense over a five-year period, said the SEC.

Without admitting or denying the SEC allegations, which included civil fraud charges, Citigroup will pay $128 m in disgorgerment of profits and interest, and $80m in penalties.

Mark Schonfeld, director of the SEC north east regional office, said the sanctions imposed on Citigroup were severe and sent a strong message that “this type of conduct will not be tolerated”.

Citigroup said it was pleased to resolve the matter.