Citigroup's Smith Barney division has agreed to pay $50 million to settle market-timing charges by the New York Stock Exchange and New Jersey regulators. 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."
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.
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.
When 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.
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