Earlier this week, Citigroup Global Markets, Inc, agreed to settle a matter involving alleged supervisory failures with The Financial Industry Regulatory Authority (FINRA). The firm will pay a penalty of $500,000 for its alleged failure to identify the activities of one of its registered sales assistants who is no longer with the firm. The situation is alleged to have taken place over an 8-year period of time and occurred in one of the firm's branch offices, specifically in Palo Alto, California.
FINRA claimed that the employee was involved in misappropriation of 22 customer accounts which amounted to $749,978 in customer funds over this period of time. The activities included falsification of account records and unauthorized customer account trades.
As regulatory and enforcement securities lawyers, we suggest that the facts surrounding this situation are instructive to all firms and broker-dealers to ensure that supervisory lapses do not occur. In this case, the employee is alleged to have taken advantage of "Citigroup's supervisory lapses" at the Palo Alto branch in which elderly and ill customers were targeted. The sales assistant apparently targeted those customers whom she knew would be less likely to read their account statements.
Two years ago, FINRA took action to bar the sales associate from further activities. According to the agency, it is still in the process of investigating others involved in supervising her. Citigroup has paid restitution to the customers involved in these incidents.
In this matter, Citigroup is alleged to have "failed to detect or investigate a series of 'red flags' that upon further inquiry should have alerted the firm to [the assistant's] improper use of customer funds." We have previously posted on the impact of similar failures when firms ignore red flags.
Here, FINRA said these red flags included "exception reports highlighting conflicting information in new account applications and customer account records reflecting suspicious transfers of funds between unrelated accounts." It is also alleged that the firm's systems and controls in supervision and review made it possible for the sales assistant to falsify various records.
Specific instances involved suspicious discrepancies with customer addresses and phone numbers, which the sales assistant tried to explain away to her supervisors. FINRA says the explanation was not reasonable and the firm should have looked further.
FINRA also claims that the firm ignored suspicious activity involving transfers and disbursements in various accounts that the sales assistant was able to access, enabling her to use the funds for her own purposes. She was even able to open an account in her father's name to further her activities with no repercussions from the firm. Her activities also included accounts of deceased customers and others that went undetected by Citigroup, even when red flags were present.
Ensuring proper supervision and compliant systems enables firms to avoid regulatory action. Please contact the experienced securities lawyers at New York's Gusrae Kaplan Nusbaum PLLC, PLLC, for more information about our law practice and how we can support your firm's compliance and provide legal counsel in regulatory and enforcement proceedings.
