The Securities Lawyer Blog has posted previously on the problems brokers and dealers face when supervisory failures arise. The Financial Industry Regulatory Authority (FINRA) recently closed a matter involving alleged supervisory failures by Citigroup Global Markets Inc.
This matter has many twists and turns and would be best presented by a visual roadmap of alleged fraud and misappropriation. But, simply stated, it boils down to supervisory violations in the handling of cemetery trust funds in Michigan and Tennessee.
Specifically, the $1.5 million sanction imposed was half for fines and half for disgorgement of commissions. The cemetery trusts will receive partial restitution from the sanction.
The Big Scheme
The problems for Citigroup are alleged to have taken place over a two-year period and involved a broker and two customers. They are alleged to have created and executed a scheme that involved more than $60 million in cemetery trust funds and included the use of trust funds to purchase cemeteries and funeral homes.
The Citigroup broker involved helped his clients open improper personal accounts. He also helped the transfer of monies from these accounts to third party accounts that were used to hide the misappropriation of funds and fake investments.
Red Flags Ignored
FINRA found that Citigroup failed to appropriately supervise these accounts and also failed to respond to red flags that could have stopped these activities. The prior employer of the broker involved in this scheme warned Citigroup of the irregularities in trust fund movement.
But Citigroup did not adequately investigate the warning. Even after a series of unusual transfers and opening of accounts in third party names, Citigroup allegedly did not pursue the matter adequately.
Whistleblower Letter
Citigroup even received a whistleblower letter that apparently was quite credible from a party whose company was involved as a trustee for the cemeteries. The letter exposed some of the broker's unusual activities, including the use of a personal email address to avoid Citigroup's monitoring systems. FINRA said that even after this, Citigroup did not respond adequately to stop the allegedly improper activity.
Related Web Resources
For more information on broker-dealer status, visit FINRA's service, BrokerCheck®.
New York City's Gusrae, Kaplan, Bruno & Nusbaum, PLLC, represents broker-dealers in all aspects of compliance and enforcement. Contact us for FINRA representation and other regulatory matters.
