Citigroup Inc. (C) has hit the headlines again and this time for a wrong reason. According to a report in the Wall Street Journal, its unit – Citigroup Global Markets has been ordered to pay $2.43 million to a group of investors who had suffered losses on investing in the company’s MAT Five, one among a series municipal arbitrage fund. This fines refers to a ruling of the Financial Industry Regulatory Authority panel (FINRA).
The investors who are five in number and based in Memphis, Tennessee, have accused Citigroup Global Markets for misrepresentation the fund’s risk and for violation of its fiduciary duty. The claim was filed in 2009 asking for damages related to the fund which lost substantially between 2007 and 2008.
The funds were purchased by the investors in February 2007 through Smith Barney, Citi’s retail brokerage unit at that time. Later in 2009, the brokerage operations of Smith Barney were merged with Morgan Stanley (MS).
While FINRA did not provide the details of the case, Citi’s spokesperson termed the claims as “meritless,” as per the report. The fined amount is said to fully compensate for the out-of-pocket losses of the investors and the interest to be earned if the amount had been invested in a municipal-bond portfolio, according to the lawyers involved in the case.
Post the financial crisis the authorities went in for rigorous investigations on all fraudulent practices of the Wall Street companies. Besides Citi, Goldman Sachs Group Inc. (GS) have also faced harsh rulings from the authorities. We believe that such rulings somewhat creates a dent in the company’s reputation and puts its financials at stake as well.
Citi, which posted a third quarter earnings of 8 cents per share (3 cents ahead of the Zacks Consensus Estimate, on improvement in credit quality and lower loan loss provisions), is facing pressure on its revenues. The overall industry is facing stricter regulatory requirements these days, which are aimed at reducing any fraudulent activities and paper work flaws in the system and protect consumers.
The CARD Act, Basel III requirements, the Dodd-Frank Act, and other legal/regulatory matters are expected to suppress returns and earnings growth of Citi. Nevertheless, Citi’s core business, Citicorp, remains attractive. Its global footprint would help its earnings and make up for the losses in other areas.
Citi currently has a Zacks #3 Rank, which translates to a short-term Hold rating and indicates no clear directional pressure on the shares over the near-term. Considering its fundamentals, we also have a Neutral recommendation on the stock.
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