Failure of Research Supervision

Citigroup Global Markets Inc. ("CGMI") was sanctioned by the Massachusetts State Securities Division ("MSD") on the basis, according to the disciplinary action, of its failure to supervise two research analysts, described in the disciplinary action as the Senior Analyst and the Junior Analyst. The reasons for the disciplinary actions against each were unrelated, as described below.

In the case of the Senior Analyst, he responded improperly to a question asked by a reporter without seeking prior approval from the firm's Compliance Department. When his improper response was uncovered by a compliance person within the firm, he sought (unsuccessfully) to hide his act. In spite of this conduct, the firm give him a good score on his compliance review.

In the case of the Junior Analyst, he improperly sent a draft research report concerning Facebook which may have contained material nonpublic information to a reporter at a technology publication. The Junior Analyst and the reporter had attended college together and were friends. According to the disciplinary action, it appears that the Junior Analyst wanted feedback on the draft research report from his friend who was knowledgeable in the area; the action does not assert that any use was made of the information in the report beyond the reporter giving the Junior Analyst feedback.

The disciplinary action reports that MSD is conducting a study into the Facebook IPO. In response to inquiries from MSD, CGMI, at first, failed to find the communications sent by the Junior Analyst, but CGMI located the communications in response to a second subpoena.

Notably, the disciplinary action does not suggest that there was any mercenary or ulterior motive in the compliance violations of either the Senior Analyst or the Junior Analyst, nor does the disciplinary action suggest that the information provided by the analysts was ultimately used for any improper purpose.

The disciplinary action against CGMI was a "failure to supervise" charge. As part of the settlement, CGMI was required to review its program for surveilling electronic communications involving analysts and to provide supplementary training to the analysts.