FINRA Fines Citi, Morgan, UBS and Wells $9.1 Million for ETFs

FINRA announced that it has fined Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

We have represented investors who lost significant sums of money in leveraged ETFs, which are securities which seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms' registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

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Citigroup Ordered to Pay $500,000 in Age Bias Case

Citigroup Global Markets has been ordered to pay $500,000 to a former branch manager who alleged the company fired him because of his age. The arbitration award against the firm found that the firm violated Florida's civil rights statute in 2008 when it terminated the branch manager.

Age discrimination cases are extremely difficult to prove in FINRA arbitrations, given the limited amount of discovery, and the reluctance of arbitration panels to order discovery regarding terminations and human resources issues. I was therefore eager to learn what it was that caused this particular panel to award a half a million dollars in damages.

The FINRA panel did not explain its reasons for the decision, but according to an article in Reuters, the branch office manager began to hear from other branch managers who told him they were being "forced" back into broker positions and replaced with younger employees. His manager made frequent remarks about age. For example, he said that the manager was "getting kind of long in the tooth" for the job, and "When you reach your age, you should think of retirement and not working," according to the Reuter's article. The article also claims that the manager then engaged in a series of actions against branch manager, including giving him a "final warning" for alleged employee complaints and reducing his bonus by 3 percent as a penalty for an alleged customer complaint, according to the document. The branch manager was eventually "offered" a position as a broker while on family leave after his sister died. Citigroup replaced him with a 42-year-old manager, according to the article.


Citigroup unit to pay $500,000 in age bias case - Yahoo! News

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

FINRA has fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports (published from January 2007 through March 2010) and research analysts' public appearances. Due to technical deficiencies, the database Citigroup used to identify and create disclosures was inaccurate or incomplete. In concluding this settlement, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

FINRA Fines Citigroup Global Markets $725,000 for Failure to Disclose Conflicts of Interest in Research Reports

Citigroup to pay $285 Million for Misleading Investors

The SEC has charged Citigroup Global Markets Inc. with misleading investors about a $1 billion CDO called Class V Funding III. When the U.S. housing market was showing signs of distress, Citigroup structured and marketed Class V III and exercised significant influence over the selection of $500 million of the assets included in the CDO. Citigroup then took a proprietary short position with respect to those $500 million of assets. That short position allowed Citigroup to profit in the event of a downturn in the housing market and gave Citigroup economic interests in the Class V III transaction that were adverse to the interests of investors. Without admitting or denying the SEC’s allegations, Citigroup has consented to settle.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these CDO investors,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Investors were not informed that Citgroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

The SEC has also instituted settled administrative proceedings against Credit Suisse Asset Alternative Capital, LLC (CSAC), Credit Suisse Asset Management, LLC , and the Credit Suisse protfolio manager responsible for the transaction, based on their conduct in the Class V III transaction. The SEC has also brought a litigated civil action against a former Citigroup employee.

Citigroup To Pay $285 Million to Settle SEC Charges For Misleading Investors About CDO Company Profited From Proprietary Short Position Former Citigroup Employee Sued For His Role In Transaction

Compensation Cuts Leads to Broker Transitions

In my practice I have seen a huge increase in the number of wirehouse brokers who are changing firms, as those firms consolidate and attempt to increase their profits.

Unfortunately for some, the wirehouses are ramping up profits at the expense of their brokers, and ultimately, their customers. In all of the years that I have been representing wirehouse brokers, I have never seen such a large number of brokers who are being terminated on the basis of trumped up charges. I certainly understand the need and desire to run a compliant firm, and to weed out brokers who have difficulty following the rules. And I am aware that brokers, like everyone else, tend to downplay their own culpability in such matters. But really, some of these terminations are simply beyond the pale, and nothing more than an asset grab.

I have been saying for almost a decade that the wirehouses want to get rid of brokers and move their business model to salaried employees. See my column from the January 1998 issue of Research Magazine - Death of a Salesman. But now there is a new attack - lower payouts.

It started with the small producers - who can forget Bank of America's decision to cut payouts for brokers on the banking side by 50%, causing a exodus of brokers from the firm, and a mess of promissory note arbitrations.

Citigroup, never the friend to its brokers, apparently has plans to force its brokers into a fee based model, regardless of what the customers want, or need. In an article titled "FAs Disgruntled over New Comp Plan at Citi Personal Wealth Management", David Geracioti, the editor-in-chief of Registered Rep magazine, details the information he has received regarding this forced transition from broker to investment adviser.

As Mr. Gercioti points out, brokers are upset; and leaving. Just take a look at the discussion at the Advisor Forum at Registered Rep titled "Citi PWM Exodus" for a peek at what some brokers are facing, and thinking.

Certainly, in many instances, the fee based model works for customers, and brokers. In many cases, it aligns the interests of the broker with the interests of the customer, and both do well if the assets increase in value, without any selling pressure on the broker or the customer.

But it doesn't work well for everyone. Customers with fixed income accounts, customers who adjust their portfolios once a year, and a host of others, will pay lower fees with a commission based account. Unless of course you lower the management fee to less than a percent.

Citigroup would obviously love to get rid of brokers, and the payouts, and it just may get its wish. Brokers are leaving. If a broker wants to be an RIA, he certainly can do so without the heavy hand of a wirehouse.

Setting up an investment advisory firm, using the platform of a major broker-dealer like Fidelity, is not expensive, nor is it difficult. For the enterprising professional, it is an excellent business model. For an overview of what is involved, take a look at my article, Registration and Regulation of Investment Advisers at SECLaw.com and our update of the SEC publication, Guide to Broker-Dealer Registration.

Or, becoming an independent, and associating with an independent broker-dealer. Doing so lets brokers do exactly what they and their customers need - the flexibility to use a commission based model when appropriate, or a fee based model for those customers who need that model.

Some brokers are reluctant to go into business on their own, and certainly some customers will be reluctant to leave a "big" name like Citigroup. Brokers who stay may find their compensation continually reduced, being forced into teams, and their smaller accounts sent to a call center. Ultimately, the firms will keep the assets, and continue to have less overhead, and more profit, all to the detriment of the financial professionals who cultivated those relationships and serviced those clients.

Does the big name make a difference? I am sure it does. But given the recent financial crisis, are customers still impressed with those "big" name wirehouses? Do customers really believe that those firm offer better advice than an independent? Are they in better financial shape than their competitors? Aren't customers really relying on the relationship with their financial adviser?

Time will tell, but like the brokers in the Registered Rep forums and those who are calling my office, the outlook is not good.

Naturally, any move needs the assistance of professionals, including an experienced securities attorney. Creating an investment advisory firm is not difficult, but requires guidance through the regulatory maze. But all of that can be achieved with effort, and the cost is going to be less than the loss that you will incur over the course of a single month.

My firm offers free consultations to financial professionals who are seeking to change firms, join independents or to start their own RIAs or broker-dealers. Feel free to email me at astarita@beamlaw.com, or to call 212-509-6544 to discuss the possibilities.

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Citi's Krawcheck to Head BofA's Wealth Management Group.

Former top Citigroup executive Sallie Krawcheck is joining Bank of America Corp. as head of its global wealth and investment management group, according to a statement from the Charlotte, N.C.-based company. She replaces Brian Moynihan, who was named to a new position as the head of consumer banking.

Ms. Krawcheck — who was reportedly being considered to take over the top spot at UBS AG's U.S.-based wealth management business — was most recently in charge of the wealth management business at Citigroup Inc. of New York.

Morgan Stanley Smith Barney

The joint venture between Morgan Stanley and Smith Barney closed today, creating a massive brokerage firm with over 18,000 financial advisors and 1,000 branch offices.

According to press reports, the joint venture will handle each firm's retail operations, which each firm's institutional business will remain separate, although institutional will execute is orders through the joint venture.

What remains to be seen is the effect of the joint venture, if any, on existing relationships between brokers and their respective firms.

Smith Barney Loses 2,500 Reps; Recruits Heavily

While losing over $40 billion in client assets and over 2,500 advisors, Smith Barney continues to heavily recruit new advisors. Smith Barney is offering 240% of trailing 12 in order to attract those new advisors.

Naturally, those advisors need to carefully review and negotiate those employment agreements and promissory notes. Smith Barney is not just giving away that 240%.

Smith Barney Losing Advisors, Client Assets.

Congressional Pandering and the 100% Income Tax on Compensation

Congress does a number of things very well. Pandering to the populace is one of them, and nothing demonstrates this as well as the House's attempt to punish AIG. The other thing they do well is pass a bill that has popular appeal, and then hope that someone else stops them, or there is a presidential veto, or the courts strike it down. Then they get to say "we tried to fix it but the [opposing party][the President][the Courts] wouldn't let us!"

We all know that Congress screwed up on the AIG bonuses. They prevented the use of bailout funds for bonuses, but exempted any bonus payable pursuant to a contract that existed prior to February 2009. That might not have been a screwup, on some levels, it makes sense. However, as we all know, there was a huge backlash from the public, since the bailout money was going to pay "executive bonuses." Congress, in its usual pandering, fueled that fire. Ignoring the fact that they expressly permitted those bonuse payments, they began railing against "bonuses" to "executives" at AIG too.

Mixing terminology is another thing Congress does well, since those "bonuses" are not really "bonuses" and the majority of people getting those bonuses are not "executives" but rather technical staff, analysts, assistants, in-house counsel, etc.

Then the House passed legislation on Thursday to impose a 90% surtax on bonuses granted to employees with household income of more than $250,000 at companies that received at least $5 billion from the government's financial rescue program.The Senate is considering a similar plan that could be up for a vote as soon as next week.

Let's follow the bouncing ball. First, the tax is on HOUSEHOLD incomes over $250,000. That covers a whole host of families. Two professionals, a nurse and a lawyer; a stock broker and a teacher.

Second, almost everyone on Wall Street has a compensation package that is salary plus "bonus." Wall Street structures its compensation packages this way intentionally. You see, they don't pay the "bonus" until March of the following year. Not only do they keep the float on the employee's money for the extra months, if you are not at the firm when the "bonus" is paid, you don't get it. So, folks stay until bonuses are paid in March. By then, the employee has worked three months, receiving a vastly reduced "salary" and is 1/4 of the way towards earning next year's bonus. Makes it hard to quit, since you will lose 1/4 of your compensation if you do. And round and round it goes.

Back to the tax. The tax applies to any bonus paid to any employee of any company who received more than $5 billion from the TARP funds, which includes Citi, JPMorgan, BofA, Goldman Sachs Group Inc., Morgan Stanley, PNC Financial Services Group Inc. and U.S. Bancorp.

Morgan Stanley staff gets paid salary plus bonus. Secretaries, IT folks, internal accountants, attorneys, all get bonuses as part of their overall compensation. It is almost guaranteed that most of those folks who are married with a working spouse make over $250,000 a year, combined. It's relatively easy, given the cost of living in a major city these days. An in-house attorney makes something on the order of $200,000. Her husband probably makes over $100,000 and BAM, they get hit with a 90% tax on her bonus, and she has absolutely nothing to do with the bank's current problems. Some of the IT professionals make over $200,000. Same situation. There are assistants who make significant amounts of money working at these firms, who get paid with a bonus, and the government is going to tax them too at 90%.

Congress cannot possibly justify this. They have created this mess and they are now pandering to the public. AND, they are too lazy to write a bill that actually addresses what they are trying to address. While I wouldn't agree with it, if you want to get the bonuses that were paid to executives, use the power of additional TARP funds to do it, not the tax code.

If you want to use the tax code, then apply the tax to bonuses over one million dollars. I would still have a huge problem with that, but you would not be taking money from the innocent secretary, bookkeeper and IT guy.

Don't believe it? Read it yourself, it's only one page long - The House Bonus Bill