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Citigroup, MorganChase, Putnam Pay Fines for Misconduct
By Marcy Gordon
Associated Press
Wednesday, March 23, 2005
http://biz.yahoo.com/ap/050323/mutual_funds_firms_fined_10.html
WASHINGTON -- In three unrelated cases, federal regulators fined
Citigroup Inc. and Putnam Investments $20 million and $40 million
respectively and a smaller brokerage firm $100,000 to resolve
allegations that they concealed from customers the fact that brokers
were paid to recommend certain mutual funds, creating a conflict of
interest.
The Securities and Exchange Commission announced the separate
settlements Wednesday with Citigroup, the biggest U.S. financial
institution; Putnam, the seventh-largest mutual fund company; and
brokerage Capital Analysts Inc.
Citigroup, Capital Analysts, and Putnam, a unit of Marsh & McLennan
Cos., neither admitted nor denied wrongdoing as part of the
agreements.
The SEC also alleged that Citigroup sold a type of mutual fund
shares known as Class B shares to certain large-scale customers who
could have earned a higher return from another type of shares.
Capital Analysts, a brokerage firm based in Radnor, Pa., agreed to
pay a civil fine of $100,000 and $350,000 in restitution plus
interest.
In a related move, the National Association of Securities Dealers
disclosed that Citigroup, American Express Financial Advisors Inc.,
and JPMorgan Chase & Co. had agreed to pay a total $21.25 million
for alleged violations in sales of mutual funds.
The NASD, which is the brokerage industry's self-policing
organization, fined Citigroup $6.25 million, American Express
Financial Advisors $13 million and JPMorgan Chase $2 million. The
investment firms, which also were censured by the organization,
neither admitted nor denied wrongdoing. They did agree to establish
a plan to correct deficiencies for some 50,000 households that
invested in the fund shares.
The regulators' moves were the latest enforcement actions over
alleged abuses in the trading and marketing of mutual funds, in an
industry-wide crackdown that began in September 2003.
"We hope securities-industry professionals have by now received the
message that they must fully inform their customers of the nature
and extent of any conflicts of interest that may affect their
recommendations," SEC Enforcement Director Stephen Cutler said in a
statement.
Citigroup shares rose a penny to close at $44.45 in Wednesday
trading on the New York Stock Exchange, while Marsh & McLennan
shares rose 43 cents to close at $30.23. Shares of American Express
Co., which has announced plans to spin off the American Express
Financial Advisors brokerage, lost 76 cents to close at $50.42 on
the NYSE, and JPMorgan Chase shares fell 13 cents to close at $34.93.
The $40 million that Boston-based Putnam is paying will go into the
affected mutual funds, the SEC said. For Citigroup, Putnam, and
Capital Analysts, what is at issue are so-called "shelf space"
arrangements between fund companies and brokerage firms, under which
the funds pay brokers for slots on lists of recommended buys for
customers. The practice appears widespread in the securities
industry, regulators have said.
Citigroup failed to fully disclose to its Smith Barney retail
customers that 75 fund complexes made payments for "shelf space,"
the SEC alleged. In fact, it said, the company offered for sale only
the funds of the complexes that made the incentive payments.
Similarly, Putnam had such arrangements with more than 80 brokerage
firms from 2000 through 2003 but did not adequately disclose the
potential conflict of interest to Putnam's board or shareholders,
the SEC said.
Putnam was the first investment firm formally accused of abuses in
the fund industry scandal. It agreed in April 2004 to pay $110
million to settle allegations by federal and Massachusetts
regulators of allowing improper market timing -- rapid in-and-out
trades -- by favored clients to the detriment of long-term
shareholders. Earlier this month Putnam agreed to pay an additional
$83.5 million to current and former fund shareholders to resolve the
allegations, the result of new calculations by a Harvard business
professor hired to tally investor losses from trading abuses.
The SEC alleged that Citigroup also recommended and sold, through
Smith Barney, so-called Class B mutual fund shares to certain large-
scale customers who generally would have gotten a higher rate of
return had they bought Class A shares -- allowing them discounts on
sales charges for investments of $50,000 or more.
That was not properly disclosed to customers, and Citigroup reaped
heftier commissions from sales of the Class B shares than it would
have earned from selling Class A shares of the same funds, the SEC
said.
Typically, investors in Class B fund shares don't pay an upfront
sales commission when they make a purchase but often pay higher fees
and a commission when they sell the shares. Class B shares have been
criticized because some investors purchase them on the incorrect
belief that they are commission-free.
The NASD's cases against Citigroup, American Express Financial
Advisors, and JPMorgan Chase involved similar allegations related to
sales of different classes of fund shares. NASD said the three
companies "did not consistently consider that large investments in
Class A shares of mutual funds entitle customers to ... discounts on
sales charges, generally beginning at the $50,000 investment level,
which are not available for investments in other share classes."
David Kanihan, a spokesman for American Express Financial Advisors,
said the company was pleased to resolve the matter and that "we are
confident that our policies governing the sale of Class B shares
will serve our clients well."
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