Citi, UBS and Deutsche Bank have been fined a total of $425,000 by US regulators and ordered to pay customers up to $420,000 for failing to supervise communications related to the 2006 initial public offering of Vonage Holdings.
The three were all lead underwriters for the Vonage IPO, which included a directed share programme (DSP) under which they sold approximately 4.2 million shares to Vonage customers through accounts opened at the firms.
The Financial Industry Regulatory Authority (Finra) found that they all failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of the securities.
Expecting heavy demand, the three underwriters and Vonage agreed to appoint an outside company to design and administer a Web site for DSP participants, through which communications with customers about the IPO would go through.
But an employee at the outside firm mistakenly disabled a server when the allocation programme was run, meaning some customers were informed they had not received IPO allocations when in fact they had.
By the time these customers learned several days later that they had been allocated shares, the price of Vonage stock had fallen sharply from the initial IPO amount. Nevertheless, those customers were required to pay the higher price and made losses when they later sold the shares.
Finra says that when the incorrect communications went out, none of the firms knew what information had been given to their customers and were unable to determine how many had been affected.
It took several months for them to find out what had gone wrong, and that was only when the outside company reported the results of its investigation.
Finra has ordered restitution payments that will compensate the customers for the difference between the $17 IPO price they paid and the lower price of Vonage stock at the time they learned that they had been allocated shares.
Susan Merrill, chief of enforcement, Finra, says: "Supervisory obligations apply not only to brokerage activities undertaken directly by firms, but also to those activities when they are outsourced to other parties. In this case, each of the firms failed to take effective action to ensure that important communications with customers about the sale of IPO shares were properly supervised, and they failed to take sufficient action to determine the cause and extent of the problem once they learned of it."
Citigroup was fined $175,000 and ordered to pay a maximum of $250,000 to 284 potentially eligible customers; UBS was fined $150,000 and ordered to pay a maximum of $118,000 to 126 potentially eligible customers; Deutsche Bank was fined $100,000 and ordered to pay a maximum of $52,000 to 59 potentially eligible customers.
In settling, none of the firms admitted nor denied the charges, but consented to the entry of Finra's findings.