On October 2, 2013, the Securities Division of the Massachusetts Secretary of State (“Securities Division”) entered into a consent order with Citigroup in which Citigroup admitted to the facts alleged in the Order, but neither admitted nor denied it violated any laws.[1] Specifically, the Order states that Citigroup, through its former employee Kevin Chang, violated securities laws by passing unpublished analyst research about Apple to a handful of clients, including indicted hedge fund SAC Capital, giving those select clients the opportunity to trade in Apple stock before the information was widely disseminated. Under the Order, Citigroup agreed to pay a $30 million fine and to implement a raft of internal review, training, reporting and other programs. The money is to come out of Citigroup’s treasury without the possibility of insurance reimbursement.
Mr. Chang, a Taipei-based former Citigroup analyst, was responsible for coverage of technology companies and suppliers, including Hon Hai Precision Industry, a supplier to Apple. The Order states that the day before Citigroup publicly released Mr. Chang’s research on iPhone orders, which forecasted a drastic reduction of orders, Mr. Chang provided certain select Citigroup customers with the unpublished research, permitting them to trade ahead of the public. The next day, after the research was publicly disseminated, Apple’s share price fell 5.2%.
There are a few notable aspects to this matter that jump out. First, this is the second time the Securities Division reprimanded Citigroup for selective disclosure of company research. Last year, the Division fined Citigroup $2 million for the selective dissemination of an analyst’s research note on the Facebook IPO.[2]
Second, because Citigroup already had one strike against it, the Division was probably more emboldened to seek big concessions. Apart from the $30 million fine, which cannot be paid using insurance, Citigroup agreed to certify annually for a three-year period that it has implemented a wide array of new training and internal review programs under the Order. This includes reviewing and improving internal e-mail surveillance policies to make sure they are up to snuff and instituting new training programs for all publishing equity analysts.
Finally, even though the Order is heavily weighted in favor of the Division’s wish list, Citigroup was able to work in a couple of things to its own benefit. As noted above, Citigroup neither admitted nor denied the conclusions of law. Relatedly, the Division agreed that nothing in the Order is intended to disqualify Citigroup from relying on any state or federal exemptions, such as registration exemptions or safe harbor provisions.
Such concessions, however, may not be available to Citigroup should it have a “third strike” at the plate in Massachusetts in the future.
The Securities Litigator 