The Securities and Exchange Commission has ordered broker-dealer Citigroup Global Markets Inc. (CGMI) for willful breach of recordkeeping requirements relating to expenses incurred in connection with its underwriting business.
The recordkeeping requirements of the federal securities laws require broker-dealers to maintain and keep certain books and records current, including ledgers or other records showing all assets and liabilities.
The SEC order found that, from at least 2009 through May 2019, CGMI used an unproven and unverified methodology to calculate and record indirect expenses associated with its work as an underwriter.
Pursuant to the SEC order, CGMI calculated an indirect expense amount based on a fixed percentage of the underwriting fee for each deal where it was appointed as lead underwriter and, again, using a fixed “allocation grid”. By doing this, that amount was divided into specific categories of expenses. ,
The order observed that, on computing these indirect expenses through this unproven method, CGMI booked the amount in its general ledger. According to the order, for at least a decade, CGMI did not know the basis of this indirect expense calculation method and did not conduct any review or similar process to verify that the method was appropriate.
“Underwriters play an important role as gatekeepers in the offering of securities. They perform essential functions, including protecting investors and helping companies access capital to grow and innovate, said Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement.
“Such recordkeeping failures, which have been ongoing for at least more than a decade, may undermine the viability of those operations. The SEC will continue to vigorously enforce the bookkeeping and records provisions of the federal securities laws, which are critical to well-functioning markets.
The SEC order alleges CGMI is in violation of Section 17(a) of the Exchange Act and Rule 17A-3 thereunder. Without accepting or rejecting the SEC’s findings, CGMI agreed to a cease-and-desist order, indictment and a $2.9 million civil penalty.
The SEC investigation was conducted by Shevonne Walker, Mala Bartucci and Lindsay Moilainen of the New York Regional Office and the Market Abuse Unit of the SEC Enforcement Division with assistance from the New York Regional Office Broker-Dealer and Exchange Examination Program. It was supervised by Joseph Sansone.