Of the $50 million total, $40 million will go to investors who were harmed by the activity.
“Member firms that inadequately supervise their businesses run the risk of disgorging profits and paying additional penalties,” said Susan L. Merrill, chief of enforcement at NYSE Regulation. “The issuance of internal policies and memoranda is not enough: They must be effectively enforced. Actions must follow words.”
The regulators said 250,000 market-timing trades took place in approximately 60 Smith Barney branch offices between January 2000 and September 2003, where more than 150 financial consultants took efforts to conceal their, and their clients’, identities. The exchange calculated that the trades generated $32.5 million in gross revenues.
The exchange said that deceptive practices employed by Smith Barney financial consultants included using: multiple branch code prefixes, multiple registered representative identification numbers, multiple customer accounts, multiple limited liability companies, multiple tax ID numbers for accounts, structured trades in amounts below certain thresholds, accounts opened under the auspices of other financial institutions, and market timing through mutual fund sub-accounts of variable annuities.
In exchange for being allowed to market time funds, some of the 1,100 clients that were employing the abusive trading practice committed “sticky assets” to other funds or agreed to pay the financial consultants additional monthly or quarterly fees.
Although mutual fund and insurance companies sent hundreds of complaints to Smith Barney about the practice, the company stopped market timing in its proprietary funds by early 2002, but allowed it to continue in non-proprietary funds.
NYSE Regulation said that it was even possible that late trading occurred, but that because Smith Barney failed to maintain proper books and records as to when trades were submitted, it was impossible to detect whether that occurred.
Smith Barney, which neither admitted to nor denied the charges, issued a statement saying it “cooperated fully” with the regulators and was “very please to resolve these matters, all of which happened prior to September 2003. Since that time, we’ve completed the implementation of business practices [to address these issues to] meet or exceed industry standards.”
The settlement comes a week after another case, levied by New Jersey, in which two Smith Barney was accused of properly supervising two consultants in Short Hills, costing investors more than $3 million, the regulator said. In this case, Smith Barney agreed to pay $978,000 last week; earlier it committed to $1.6 million in restitution to investors.
