SEC raps Citi for inadequate books and records as traders tried to hide losses

Source: Securities and Exchange Commission

The Securities and Exchange Commission today announced that Citigroup has agreed to pay $10.5 million in penalties to settle two enforcement actions involving its books and records, internal accounting controls, and trader supervision.

The charges stem from $81 million of losses due to trader mismarking and unauthorized proprietary trading and $475 million of losses due to fraudulently-induced loans made by a Mexican subsidiary.

In the first action, Citigroup Inc. and its U.S. broker-dealer subsidiary Citigroup Global Markets Inc. (CGMI) agreed to pay a $5.75 million penalty to settle charges of inaccurate books and records and CGMI’s failure reasonably to supervise traders. Citigroup and CGMI settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations.

The SEC found that from 2013 to 2016, three CGMI traders mismarked illiquid positions in certain proprietary accounts they managed, in two cases covering losses from widespread unauthorized trading. The discovery of the mismarking led to the termination of the traders and the recognition of $81 million in losses not previously reflected in CGMI’s or Citigroup’s books and records. The SEC’s order finds that CGMI failed to detect the traders’ misconduct earlier because it had inadequate supervisory procedures and systems and did not independently verify the valuations of the mismarked positions.

In the second action, Citigroup agreed to pay a $4.75 million penalty to settle charges that it failed to devise and maintain adequate internal accounting controls. Citigroup settled without admitting or denying the SEC’s findings and agreed to cease and desist from future violations. The SEC’s order finds that Citigroup subsidiary Grupo Financiero Banamex S.A. de C.V. loaned approximately $3.3 billion to Oceanografia, S.A. (OSA) between 2008 and 2014 based on invoices and work estimates for services that OSA provided to Petroleos Mexicanos (Pemex), the Mexican state-owned oil company. According to the order, many of the OSA work estimates were fraudulent and did not reflect amounts Pemex actually owed to OSA. Citigroup ultimately lost approximately $475 million as a result of OSA’s fraud. The SEC’s order finds that Banamex and Citigroup lacked the controls necessary to verify the invoices before making loans to OSA and ignored numerous red flags that should have led to discovery of the fraud.

“Today’s charges reflect the Commission’s view that Citigroup fell short of its obligations to supervise its traders and maintain appropriate controls to guard against fraud,” said Marc P. Berger, Director of the SEC’s New York Regional Office. “Citigroup’s lax supervision and weak internal accounting controls allowed a handful of rogue traders to mismark positions over several years and, separately, resulted in the unnecessary loss of hundreds of millions of dollars of its shareholders’ assets to fraud.”

The mismarking and unauthorized trading investigation was conducted by Derek Schoenmann, Janna Berke and Celeste Chase. The Banamex investigation was conducted by Olivia Zach, Jorge Tenreiro, James Addison and Ms. Chase. Both investigations were conducted out of the SEC’s New York office and supervised by Sanjay Wadhwa.
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