Citigroup fined in Britain over bond sales

$25 million is assessed for flooding the market

June 29, 2005|By NEW YORK TIMES NEWS SERVICE

LONDON - A British regulator fined Citigroup more than $25 million yesterday for its rapid trades of billions of dollars of Eurobonds last summer, which caused prices to plummet and stirred the anger of other trading houses.

The regulator, the Financial Services Authority, ordered Citigroup to pay a 4 million pound ($7.3 million) penalty and to return the 9.96 million pounds ($18.1 million) in profit it made on a trading strategy that became known in the bank as "Dr. Evil."

On Aug. 2, Citigroup sold 11.3 billion euros (currently $13.63 billion) in bonds, the equivalent of an average day's trading volume on the MTS electronic trading platform, in 18 seconds - swamping the market and causing prices to buckle. It also sold 1.5 billion euros on domestic cash markets. Less than an hour later, it bought back 3.8 billion euros ($4.6 billion) in bonds at a far cheaper price, gaining a swift profit.

Earlier in the day, Citigroup had bought Eurobond futures contracts, but it was unclear how large those purchases were.

Though the trades were not illegal, they angered the other bond houses, which said the bank violated an unspoken agreement not to flood the market to drive down prices.

Thomas G. Maheras, Citigroup's chief executive for global capital markets, acknowledged in a memo to employees six weeks later that the bank "failed to fully consider its impact on our clients, other market participants and our regulators."

Yesterday, the Financial Services Authority cited Citigroup for breaches of principles that require a company to "conduct its business with skill, care and diligence" and to "take reasonable care to organize and control its affairs responsibly and effectively."

It stopped short of charging Citigroup with market manipulation. The six traders who executed the deals were not individually fined and will be reinstated in their jobs. No one has been fired over the trades.

Executives from the bank said they were pleased with the result.

Charles O. Prince, the chief executive, said in a statement, "Citigroup and its employees have made a number of changes in how we do things as a result of this case, and we continue to focus on our shared responsibilities to our clients, to each other and to the Citigroup franchise."

The bank has increased its controls and employee training, and strengthened the compliance staff on its trading floor.

European governments, whose bond prices fell sharply, have since been withholding business from Citigroup. The bank now ranks No. 26 in managing debt for European governments, down from 12th last year, according to Bloomberg data.

The Citigroup fine was the second-largest the Financial Services Authority has levied, after the 17 million pounds (now $30.9 million) it ordered the Royal Dutch/Shell Group to pay for overstating its oil and gas reserves.

Citigroup still faces inquiries in Italy, Belgium and Portugal, but has been cleared in Germany. Spanish regulators halted their investigation.

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