Finance leader to settle fund flap

ASSOCIATED PRESS

Financial-services giant Citigroup Inc. will pay $250,000 to settle accusations that it used misleading sales material on hedge funds, the National Association of Securities Dealers announced yesterday.

The NASD’s announcement of a censure and fine against Citigroup, the nation’s largest financial institution, came a day before the Securities and Exchange Commission is expected to mandate new oversight for hedge funds — largely unregulated investment pools traditionally for the wealthy that have become more popular with small investors.

The high-risk, potentially high-return funds have an estimated $750 billion to $1 trillion in assets and are growing, and oversight is needed to head off any blowups that could hurt ordinary investors, SEC officials say.

The amount of the fine against Citigroup Global Markets Inc., a division of Citigroup, is small, but the NASD, which is the brokerage industry’s self-policing organization, said this was its largest enforcement action involving sales of hedge funds by a brokerage firm. More than 100 pieces of sales literature distributed by Citigroup from July 1, 2002, to June 30, 2003, touted rates of return of 12 percent to 15 percent a year “without providing a sound basis for evaluating the target” and failed to adequately disclose the potential risks of the investments, the NASD said.

“As hedge funds and ’funds of hedge funds’ are marketed more and more aggressively to individual investors, ensuring that those investors receive full and accurate information is critical,” said NASD Vice Chairman Mary L. Schapiro. “This enforcement action underscores our commitment to making certain that firms provide the investing public with a sound basis for evaluating hedge fund investments, and adequately disclose all of the risks.”

Citigroup neither admitted to nor denied the accusations in its settlement with the NASD. Its brokerage subsidiary, Smith Barney, said the company “took immediate action and cooperated fully with the NASD to ensure all materials comply with current NASD guidance.”

News of the NASD’s action followed a difficult week for Citigroup. In two cases, Citigroup removed three senior New York-based executives in the wake of a banking scandal in Japan, and it disclosed that the SEC’s staff was considering recommending civil charges against two former employees and a current employee. The potential SEC charges involve the creation and operation of an internal transfer agent unit mainly to serve the Smith Barney family of funds.

The SEC has taken a series of enforcement actions against hedge funds.