In a fine that is on one hand bizarre, and on the other vindication for all those who claim that nearly two decades after the Henry Blodget fiasco banks still tell their customers to do one thing (i.e. "buy") while meaning the opposite, Citigroup was ordered to pay at least $11.5 million in fines and restitution to settle charges it displayed the wrong research ratings on more than 1,800 stocks, "causing many customers to own shares they never would have bought" a market regulator ordered on Thursday.
FINRA fined Citigroup $5.5 million and ordered it to pay at least $6 million to retail customers over errors that occurred between February 2011 and December 2015, and involved more than 38% of the equity securities that the New York-based bank covered. From the filing:
FINRA found that from February 2011 through December 2015, Citigroup Global Markets Inc displayed to its brokers, retail customers and supervisors inaccurate research ratings for more than 1,800 equity securities —more than 38 percent of those covered by the firm. Because of errors in the electronic feed of ratings data that the firm provided to its clearing firm, the firm either displayed the wrong rating for some covered securities (e.g., “buy” instead of “sell”), displayed ratings for other securities that CGMI did not cover or failed to display ratings for securities that CGMI, in fact, rated. The firm’s actual research reports, which were available to brokers, and the research ratings appearing in those reports, were not affected by these errors.
Specifically, Reuters notes that FINRA accused Citi of sometimes displaying to customers, brokers and supervisors the wrong ratings, such as "buy" instead of "sell" while in other cases it would display ratings for companies it did not cover, or no ratings at all. It was unclear if Citi was punished for ever told clients to "sell" any security.
Why: to create churn and collect commissions on trades that made zero sense. As Reuters explains, as a result of the flawed "ratings" brokers solicited thousands of transactions and negligently made inaccurate statements premised on wrong ratings, and many customers ended up owning stocks with “sell” ratings despite a prohibition on such ownership, FINRA said.
The inaccuracies in the research ratings feed had widespread, adverse consequences. As a result of the errors, CGMI brokers solicited thousands of transactions inconsistent with the firm’s actual ratings and negligently made inaccurate statements to customers about those ratings. They also solicited transactions that violated certain firm-managed portfolio guidelines, which were premised on CGMI research ratings. For example, the portfolios were prohibited from containing equity securities the firm had rated “sell.” Because CGMI brokers relied on inaccurately displayed ratings, many customers’ portfolios improperly included “sell”-rated securities. CGMI supervisors, relying on those same inaccurate ratings, failed to detect and prevent a substantial number of transactions that were actually inconsistent with CGMI research or portfolio guidelines. The firm also made materially inaccurate statements and omissions regarding more than 19,000 research ratings on customer account statements, sent more than 1,000 customer email alerts with inaccurate ratings, and displayed inaccurate ratings on online portals available to customers.
As usual, somehow humans avoided blame and FINRA said the errors stemmed from problems with an electronic data feed, and Citigroup failed to timely fix the wrongly displayed ratings despite “numerous” red flags. The bank’s actual research reports and ratings were not affected.
"The display and use of incomplete and inaccurate research ratings can have widespread, adverse consequences to customers,” FINRA enforcement chief Susan Schroeder said in a statement. “Firms should react quickly to address those errors."
Citigroup did not admit or deny wrongdoing, but the sanctions reflected its cooperation, including its decisions to report the rating issues and compensate customers, FINRA said. Citigroup spokeswoman Danielle Romero-Apsilos said the bank was pleased to resolve the matter.