This page examines the allegations made about Citigroup's behaviour and the scandals after the merger to form Ciitigroup in 1998.
The massive analyst, share spinning, employee, Enron and WorldCom scandals exposed betweem 2000 and 2003 dwarfed the ongoing scandals involving both Citicorp companies and Salomon Smith Barney (now renamed Citigroup Global Markets). Those major scandals are examined on other pages.
This page examines the other scandals which were happening at the same time or occurred subsequently.
Poaching each others successful money making staff and the customers who they work with is part of this marketplace.
In the instance below Merrill Lynch objeced to Smith Barney's theft of their staff and clients. At around the same time Smith Barney was the victim. By 1999 their Benjamin Lorello and his team had attracted over US $8 billion in business from HealthSouth. USB Warburg made Lorello's team an offer they could not refuse. Lorello took his clients with him. Lorello and his team are currently meeting with a senate committee in regard to their possible involvement in aiding and abetting the US $2.7 billion HealthSouth fraud.
This is the way in which financially successful but socially untenable practices spread. In the late 1980s Tenet Healthcare (then called NME) developed a strategy of needlessly admitting teenagers and young children to psychiatric hospitals for long periods of time in order to maximise useless therapies. It was a gold mine and very rapidly these managers were poached. The practice of needlessly admitting children became industry wide.
Merrill Lynch & Company, the largest United States securities firm, has sued two brokers who quit its office in Dunwoody, Ga., this month to join Salomon Smith Barney Inc., contending the former employees stole more than 400 accounts.
Merrill Lynch, in the suit, contends that Mr. Daner and Mr. Bennett received more than $250,000 in up-front cash bonuses from Salomon Smith Barney, a Citigroup unit, in exchange for bringing the clients with them. Salomon Smith Barney declined to comment. Merrill Sues Over Loss of Accounts The New York Times July 15, 1999
Several groups including Nikko Salomon Smith Barney have all been penalised or are being investigated for illegally covering up client losses in Japan. Faced with an investigation of all banks Citigroup quickly "fessed up". Once again it was structured finance (see under Enron) used to hide losses which was an issue.
Japan's Financial Services Agency, the country's top financial regulator, has started a routine investigation of Nikko Salomon Smith Barney FSA investigates NSSB in Japan Financial Times (London,England) January 19, 2001
The Japanese branch of Citibank, a part of Citigroup, the world's largest financial services company, has been punished by Japan's financial services agency, the country's chief financial regulator, for illegally helping clients to conceal losses.
The bank has been ordered to close its alternative investment strategies division, a nine-person division with 14 mainly institutional customers that looked after hedge-fund, structured credit and other related investments, between August 10 and August 16.
The FSA - - - - - and has meted out a range of punishments in recent years to Goldman Sachs, Deutsche Bank, Lehman Brothers, Credit Suisse First Boston, Paribas, Societe Generale and West LB. Some local groups have also been penalised. Japanese regulator punishes Citibank Financial Times (London,England) August 10, 2001
Associates First Capital, a Citigroup company paid US $215 million for preying on customers seeking mortgages.
Mr. Prince, 52, appears to be acting as a sort of fireman in the boardroom for Mr. Weill. He played a leading role in Citigroup's negotiations with the Federal Trade Commission after it sued the company's Associates First Capital unit for abusive and predatory lending practices. Citigroup was close to settling that suit last week for a sum reported to be about $200 million. Salmon Smith Barney Chief Ousted in Citigroup Shuffle The New York Times September 9, 2002
Citigroup has had a difficult year on the regulatory front. It recently agreed to pay $215 million to settle charges that Associates First Capital manipulated customers into buying overpriced mortgages and credit insurance. Salomon Talks To the S.E.C. About Settling Conflict Cases The New York Times September 28, 2002
Creditors of bankrupt Adelphia Communications sued Citigroup and other banks in Manhattan accusing them of aiding and abetting the Rigas family who had been indicted because of the $3 billion fraud and faced many civil suits. The allegations suggest that Citigroup may have played a complicit role similar to that it played in the Enron scandal for which it was heavily fined. This seems to be another example of structured finance - financial deals to keep shareholders in the dark.
The case against the banks accuses them of conspiring with the family to help perpetrate a fraud. The banks "knew that the Rigas family used the proceeds of the co-borrowing facilities and other loans made available to them to enrich themselves at the debtors' expense and to maintain voting control of Adelphia," the suit said.
(Creditor's lawyer) "It's just astonishing that banks would make undisclosed personal loans to the Rigas family and seek repayment from Adelphia. The more we looked at this the more we asked ourselves 'What were some of these banks thinking?' " Adelphia Creditors Sue Banks Over Loans to Rigas Family The New York Times July 7, 2003
Citibank denied it had been infiltrated by criminals, nor it claimed had it suffered any significant losses as a result. In fact a crime ring was able to infiltrate Citigroup four years before and pull off a dramatic Dollars 37m heist.
Bank security falls victim to moles FRAUD INVESTIGATIONS MULTI MILLION DOLLAR STINGS: Financial Times (London,England) March 11, 2003
Two of Citibank's staff helped another fraudster by doing trades for him. They were fired.
AIB is suing Citibank and Bank of America for at least Dollars 500m (Pounds 310.5m) in damages for allegedly helping John Rusnak, the Irish bank's former foreign exchange trader, hide Dollars 691m in losses.
The claim, filed in the US district court in New York, accuses the two US banks of helping to undermine controls at Allfirst, AIB's Maryland-based subsidiary where Mr Rusnak was head foreign exchange trader.
AIB alleges that Citibank and Bank of America joined Mr Rusnak's scheme by becoming prime brokers for Allfirst. AIB to sue Citibank and Bank of Americ Financial Times (London,England) May 27, 2003
Just as the flack from the analyst, share spinning and Enron scandals was fading another major scandal in which shareholders were systematically pillaged was being exposed - once again by Mr Spitzer with a reluctant SEC in pursuit.
Mutual fund managers had boasted that they were above the fraud scandals that had engulfed Wall Street.
The mutual fund industry has done itself no favors in recent years by sashaying around and claiming to be squeaky clean. Typical of the industry's arrogance was a statement last March by Paul G. Haaga Jr., chairman of the Investment Company Institute, in a press briefing on funds: "Under the S.E.C.'s watchful eye, mutual funds have remained free of major scandal for more than 60 years." Will Investors Stampede Out of Mutual Funds? The New York Times November 9, 2003
Donald Christensen, a veteran of Wall Street had written a book in 1994 predicting fraud in this area by 2000 so was not surprised. He drew attention to the previous frauds in this area.
Rather than being surprised by the way the scandal was unfolding, Mr. Christensen said it was mirroring what had happened during previous periods of fund abuses, in both the 1920's and the late 1960's.
"In the 1970's, the peak of the withdrawals was not during the scandals, but in the aftermath of the scandals," he said. Back then, fund managers got into trouble by buying illiquid or highly risky securities. Redemptions hit and investors suffered huge losses. Will Investors Stampede Out of Mutual Funds? The New York Times November 9, 2003
The investigation came into the open in July 2003. Morgan Stanley was the first to be targeted but information was soon sought from others. The fund managers including Citigroup immediately started firing many of their brokers because of their dealings in mutual funds. Loyalty to those who do your dirty work has never been a corporate consideration.
This hurried attempt at corporate self-regulation confirms that the practices were widespread and that the companies ignored them until faced by retribution from regulators. A corporate culture which connived in the exploitation of customers and twisted the system forl profit had not been dented by the recent scandals. The extracts tell the story. Once again the issue is not the legality of the practices but their immorality.
At a news conference in Boston, officials from New York and Massachusetts said that Morgan Stanley had created improper financial incentives for its brokers to sell mutual funds that may not be in their clients' best interests.
Regulators disclosed that a senior Morgan Stanley official admitted to them that such an incentive structure exists, despite having made regulatory filings to the contrary.
Earlier this year, federal regulators began an inquiry into how big firms compensate their brokers when they sell mutual funds to clients. After discovering that in many cases registered representatives were not fully disclosing to clients the different types of discounts available to them, the S.E.C. broadened its inquiry. States, Intent on Regulating, Look at Morgan The New York Times July 15, 2003
Through his widening investigation of the fund management industry, Mr Spitzer has said he intends to put an end to illegal trading schemes that cost investors billions of dollars a year.
In addition to late trading, Mr Spitzer's office is also investigating market timing, a scheme that usually involves arbitraging mutual fund shares across international time zones.
Mr Spitzer opened his investigation on September 3, when he announced a Dollars 40m settlement with Canary Capital Partners, - - - ..
Citigroup's Smith Barney unit, which is reviewing its mutual fund sales practices, fired a New Jersey broker for improperly canceling mutual fund orders after the market closed, according to a memo dated October 2 - - - - . Prudential Securities fired 12 brokers, including the chief of its Boston head office, as a result of the probe.
The dismissals followed the suspension on Tuesday of two employees of Alliance Capital, a fund management company owned by Axa, the French insurance group, over the same matter. Guilty plea in late trading case Financial Times (London,England) October 3, 2003
Smith Barney, the brokerage arm of Citigroup Corp., fired four more brokers Thursday for improper trading of mutual funds, the firm's second such move in less than a month amid an expanding probe of the fund industry.
Market-timing, which involves short-term, in-and-out trading of mutual fund shares, is not illegal, but most funds prohibit the practice because it tends to reduce value for long-term shareholders. The practice could constitute fraud if investors were not advised that market-timing was permitted or being coordinated by a fund.
Since Spitzer's probe was made public, Merrill Lynch & Co., Alliance Capital Management Holding LP, and Prudential Securities have suspended or fired nearly two dozen employees believed to have engaged in market timing or illegal late trading.
Spitzer's investigation has also targeted individuals.
Last week, James P. Connelly Jr., a former vice chairman and chief mutual fund officer at Fred Alger & Co. pleaded guilty to a felony for trying to cover up improper trading of mutual funds. He also agreed to pay a $400,000 civil penalty to settle an SEC complaint.
Two traders at other companies have been charged. Smith Barney Fires Brokers for Trades Associated Press 23 Oct 2003
A senior regulator yesterday deepened the crisis in the US mutual fund industry, claiming that executives had been making personal trades for their own benefit using controversial techniques denied to many ordinary investors.
Stephen Cutler, head of enforcement at the US Securities and Exchange Commission, said the personal profits had been uncovered by the SEC's investigation into "market timing" - trades that take advantage of the fact that mutual fund prices are set once a day.
A number of mutual funds are under investigation for allowing privileged clients to trade for quick profits after certain prices have been fixed.
The trades are against publicly stated industry practice and are illegal in certain circumstances. Funds probe takes new twist Financial Times (London,England) October 24, 2003
Investors have lived through a steady stream of financial mischief in recent years. But the mutual fund scandal is worse because fund managers have a fiduciary duty to put their investors' interests first. Will Investors Stampede Out of Mutual Funds? The New York Times November 9, 2003
In December 2003 the Italian global giant collapsed with revelations of a massive fraud. In January 2004 the Australian press reported that US authorities were investigating the involvment of US banks, in particular the Bank of America in this. Citigroup and Deutsche bank were both interviewed by Italian authorities in regard to the fraud. Citigroup has been accused in Italy of using structured fraud techniques to assist in trhe fraud and is under investigation. In the USA two civil suits have been commenced by investors. Both Citigroup and the authors are included in these. This has all the hallmarks of another structured finance scandal like Enron. It seems likely that the marketing of structured finance packages, like the other fraudulent practices has been globalised and Australia is likely to have been a target.
U.S. banks were very active in placing Parmalat's debt. Banks outside Italy placed 80% of the EUR7.8 billion worth of bonds issued by Parmalat since 1997, the Financial Times reported Saturday. JP Morgan Chase & Co. (JPM), Merrill Lynch & Co. (MER) and Morgan Stanley (MWD) accounted for about 40% of the total.
U.S. banks also were active in inventing special financing vehicles for Parmalat. For example, Citigroup engineered a device that allowed it to lend money to Parmalat through a vehicle called buconero, Italian for "black hole." Parmalat To Decide On Bank Negotiator Next Week -Source Dow Jones International News January 3, 2004
Prosecutors (in Italy) piled the pressure on Parmalat's former finance chief on Tuesday to reveal how billions of euros vanished from the food group as U.S. banking giant Citigroup (C.N) and Parmalat's accounting firms faced legal action in the widening scandal.
A U.S. class action law firm on Monday named investment bank Citigroup Inc and auditing firms Deloitte & Touche Tohmatsu and Grant Thornton among defendants in a lawsuit brought against the food group, filed on behalf of a U.S. pension fund.
The U.S. Securities and Exchange Commission is looking to see whether banks had been "negligent or reckless" by selling $1.5 billion of Parmalat bonds to U.S. investors, a senior SEC official was quoted as saying on Saturday. Prosecutors turn up Parmalat heat, Citigroup sued. Reuters News January 6, 2004
It (one of two US lawsuits) accuses Parmalat executives of having "concocted a massive scheme whereby they overstated Parmalat's reported profits and assets for more than a decade" through "the creation of bogus bank accounts, the use of forged financial records (. . .) and sham transactions". It claims Parmalat falsified documents overstating its assets by more than $8 billion and playing down its debts by at least $3.6billion. Citigroup, which created a financial vehicle called Buconero - "black hole" - for Parmalat in 1999, is named in the lawsuit, - - - - . Parmalat ensnares Citigroup Deloitte and Grant Thornton The Daily Telegraph (London) January 7, 2004
Eight people, including former and current Parmalat executives and two outside auditors, have been arrested and accused by prosecutors of fraud in the multi-billion-euro case.
On Tuesday former Parmalat Chief Financial Officer Fausto Tonna told prosecutors in the northern city of Parma about the crippled food firm's relations with banks, which lent money to the group, sold its bonds and in some cases advised Parmalat on offshore units.
Citigroup has been named in at least two class action suits brought by Parmalat investors in the United States, which have mentioned special purpose vehicle "Buconero" - Italian for "black hole" - created by Citigroup and used for loans among units in the Parmalat group. Citigroup lawyer meets prosecutor probing Parmalat Reuters News January 7, 2004
Italian police on Wednesday seized documents from a company controlled by U.S. financial services group Citigroup (C.N) as part of an investigation into Parmalat's accounting scandal, a judicial source said.
Investigators on Wednesday were trying to establish if someone from Citigroup had helped companies linked to the food group raise debt backed by inflated invoices, another judicial source said earlier on Wednesday. Italy police seize papers from Citigroup unit. Reuters January 14, 2004
Citigroup's web site contains an impressive page marketing its friendliness and its investments in in good causes.
Citigroup's and the Citigroup Foundation's giving in 2002 totaled $77.7 million to organizations in 83 countries and territories. Over the last three years, the FoundationÄôs international grantmaking increased steadily, from $8.09 million in 2000 to $14.3 million in 2002.
Working with a global network of colleagues and partners, the Foundation gives grants focused in three main areas:
Educating the Next Generation
Building Communities and Entrepreneurs
In 2002, the Citigroup Foundation gave more than $8.9 million to organizations that promote and enhance Financial Education.
In 2002, the Citigroup Foundation gave more than $19.8 million to organizations engaged in Educating the Next Generation.
In 2002, the Citigroup Foundation gave more than $27.8 million to organizations engaged in Building Communities and Entrepreneurs.Citigroup Foundation website <http://www.citigroup.com/citigroup/corporate/foundation/> Accessed December 2003
In contrast CorpWatch the group which monitors and exposes corporate misdemeanours publicised an award from groups of environmentalists. This honoured Citigroup as the world's most destructive bank and for the massive political contributions which helped it in this.
Outside of the local headquarters (in Philadelphia) of Citigroups subsidiary Salomon Smith Barney, the country's largest bank was honored with the award for the World's Most Destructive Bank, earning this distinction for its role in the buy-out of the country's elected political leaders and its unsurpassed contribution to the financing of socially and environmentally destructive projects.
Citigroup has rightfully earned a triple A credit rating - -, Citigroup comes out Number One in a highly competitive private finance industry. Citigroup Awarded ''Honor'' as World's Most Destructive Bank CorpWatch <http://www.corpwatch.org/> August 2, 2000
Corpwatch monitors and researches the conduct of large corporations and publishes this information. Every year it selects the 10 worst corporations. Citigroup made the list in 2002, with its environmental vandalism contributing.
- - - - - as well as the company's funding of environmentally destructive projects around the world.
Citigroup, both for its deep involvement in the Enron and other financial scandals and its predatory lending practices through its recently acquired subsidiary The Associates. Citigroup paid $215 million to resolve Federal Trade Commission (FTC) charges that The Associates engaged in systematic and widespread deceptive and abusive lending practices. The Ten Worst Corporations of 2002 Multinational Monitor <http://www.corpwatch.org/> January 3, 2003
A high level of fraud by staff, particular senior staff and people in positions of trust is a reflection of the culture in an organisation. In a "whatever it takes" culture employees willing to bend the rules for the company are likely to be successful and will be promoted. They will also bend the rules for themselves, particularly when they see their seniors doing so.
Going back into the 1990s there are a number of often senior staff who were charged with fraud in which Citigroup or its predecessors were the victims. I have not included this material.