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SEC: Traders for Citigroup Global Markets Hid Losses by Overvaluing Securities

A junior trader discovered misconduct when preparing to cover a colleague’s trading book during a vacation, the regulator said.

  • By Leanna Orr

Citigroup and a broker-dealer subsidiary have settled with the Securities and Exchange Commission over charges relating to alleged “widespread unauthorized trading” and inflating the value of positions, the regulator announced Thursday. 

Citigroup and Citigroup Global Markets Inc. (CGMI) agreed to pay $5.75 million in penalties, as well as cease and desist from future violations, to settle the charges. The bank and its broker-dealer did not have to admit guilt or deny the findings. 

Between 2013 and 2016, three former traders for CMGI, a New York-based Citigroup subsidiary, mismarked illiquid positions that they managed to inflate valuations, the SEC said in its press release. 

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Two of the traders were trying to cover up losses from unauthorized and speculative trading, according to the regulator’s order

The third trader made markets for inflation derivatives and allegedly manipulated a key input for valuing his book of zero-coupon inflation options. He got away with it for about six months because of a spreadsheet error by Citi’s Valuation Control and Analytics group, according to the order. 

The manipulation came to light when the trader went on vacation in early 2015. By then, the options were overvalued by almost $40 million, the SEC said, which was reflected in Citi’s income statements for three quarters. 

A vacation likewise led to CGMI’s discovery that a residential mortgage-backed securities trader had lost millions over several years of unauthorized trading in hedging products, the SEC’s order claimed. To offset the daily losses, he allegedly mismarked the RMBS portfolio. 

CGMI fired all three traders following investigations and withheld their last annual bonuses. 

Citigroup also agreed to pay a $4.75 million penalty to settle a separate charge that it failed to implement and maintain adequate internal accounting controls pertaining to a loan made by a subsidiary in Mexico, according to the press release.

“We are pleased to have these matters resolved,” a spokesperson for Citi said in an email to Institutional Investor.

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