finra

FINRA

 

For Release:
Contacts:
Wednesday, June 6, 2007
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464

 


 

Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading Documents and Inadequate Disclosure in Retirement Seminars, Meetings for BellSouth Employees

Washington, D.C. — NASD announced today that it has fined Citigroup Global Markets, Inc., $3 million to settle charges relating to the use of misleading materials in retirement seminars and meetings for BellSouth employees in North Carolina and South Carolina. NASD also ordered Citigroup to pay approximately $12.2 million in restitution to more than 200 former BellSouth employees.

Specifically, NASD found that Citigroup failed to adequately supervise a team of brokers based in Charlotte, NC, who used misleading sales materials during dozens of seminars and meetings for hundreds of employees of BellSouth Corporation. As a result of these presentations, more than 400 BellSouth employees opened over 1,100 accounts with the Citigroup brokers. Most of these employees were unsophisticated investors with minimal experience in the financial markets who retired in their mid-50s, well before the BellSouth retirement age of 62. They generally were of modest means, with retirement savings of less than $350,000. These employees typically cashed out their pensions and 401(k) accounts, and invested these proceeds and other retirement assets with the Citigroup brokers.

"NASD remains strongly committed to protecting investors as they make critical decisions about how to provide for their retirement years," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "The improperly supervised brokers in this case used misleading documents that made exaggerated and unwarranted projections of future earnings without fully explaining the risks involved. Many BellSouth employees gave up secure pensions, believing they could afford to retire early, but ended up losing substantial amounts from their retirement nest eggs. We are pleased that this settlement helps ensure that the injured investors will receive the restitution to which they are entitled."

NASD also disciplined three brokers and two managers at the Charlotte branch office. Those sanctions include:

  • A $125,000 fine and an 18-month suspension for Jeffrey Sweitzer, the broker who developed the sales campaign, led over 40 seminars, directed the activities of the other brokers and drafted or directed the drafting of the misleading sales materials.

  • A $50,000 fine and a 9-month suspension for broker Matthew Muller, for his role at 25 seminars and numerous face-to-face meetings.

  • A $30,000 fine and a 30-day suspension for Joseph Zentner, a junior broker who helped Sweitzer prepare some of the misleading sales materials.

    In addition, Sweitzer, Muller and Zentner must each complete 40 hours of continuing education relating to compliance with NASD rules and federal securities laws, including courses that cover communications with the public and the use of sales materials.

  • A $60,000 fine and a 90-day suspension from acting in a supervisory capacity for the brokers' branch office manger, Randall Matz.

  • A $30,000 fine and a 45-day suspension from acting in a supervisory capacity for branch operations manager Elizabeth Harris.

    In addition, before Matz and Harris can return to work at a broker-dealer in a supervisory or principal capacity, they must each pass the appropriate NASD Qualification Examination.

NASD found that from 1994 to 2002 Sweitzer conducted more than 40 seminars, alone or with Muller, without obtaining firm approval for the seminars or seminar sales materials. Following the seminars, Sweitzer and Muller, alone or together, met with BellSouth employees. Using charts, graphs, handouts and other documents at the seminars and meetings, the brokers' sales presentations led the employees to expect that for 30 years they could earn approximately 12 percent annually on their investments and withdraw approximately 9 percent annually.

One document projected the amount a generic 53-year-old BellSouth employee would earn from an initial investment of $300,000. The projection sheet suggested that this typical employee would earn more than $1.8 million, could withdraw from $27,000 to $69,000 annually, and still have more than $770,000 in principal remaining 30 years later, at age 83. During their face-to-face meetings, many employees received a customized version of this document, which projected the amount of money the employee could expect to have after 30 years, based upon the employee's current age, assets and monthly expenses. Sweitzer told one couple: "I'm going to tell you by way of expectations that you should be able to expect 12%. That is not guaranteed, but I feel like good times, bad times, ugly times, beautiful times, we should be able to average 12 . . . We expect to earn 12%. We pay out 9%. … [b]asically, 10 years down the road you are looking at doubling your money. … We may do 15, may do 18 or 20. But good times, bad times, I think that we would do 12%."

NASD found that the brokers' sales materials and presentation failed to adequately disclose that the recommended investments exposed the BellSouth employees to greater market risk than the employees would have faced had they opted to retain their fixed annuity pension payments from BellSouth. The brokers' materials also failed to adequately disclose that the customers would pay fees of two to three percent, requiring them to earn 14 to15 percent annually to achieve the expected 12 percent return. It was not adequately explained that the expected 12 percent annual net returns exceeded the historical average return of the Standard & Poor's 500 index over 70 years, and that for many periods during that time the S&P 500 returned far less than 12 percent. The brokers also did not adequately disclose that the recommended investments could decline in value so much as to reduce the customers' principal. In addition, various pieces of the sales materials overstated the brokers' credentials and experience and omitted necessary disclaimers.

NASD found that as a result of Sweitzer's and Muller's sales presentations many of the BellSouth employees came to believe that they could afford to retire early by relying upon monthly withdrawals from their retirement savings pursuant to the provisions of Internal Revenue Code Section 72(t). Under Section 72(t), a person under the age of 59 ½ can withdraw a fixed stream of regular and equal payments from their retirement accounts without having to pay the usual 10 percent tax penalty for early withdrawals. Relying on this IRS provision, many of Sweitzer's and Muller's customers cashed out their nearly risk-free BellSouth pensions, their 401(k) accounts and other retirement assets and invested the proceeds with the brokers. Fees and commissions from those BellSouth employee accounts comprised a majority of the compensation earned by Sweitzer and Muller.

Over 200 BellSouth employees saw the principal in their accounts decline by a total of approximately $12.2 million. NASD found that when the customer accounts began losing value, Sweitzer and Muller held a series of telephone conference calls to retain their clients' accounts. In a December 2000 call, Sweitzer told his clients that he believed that the Dow Jones Industrial Average (DJIA) could rise above 11,000 and that it might get "closer to 12,000" by the end of 2001. He also told clients that he believed the DJIA would double in six years, rising to 20,000 or 21,000 by 2006. Sweitzer had no reasonable basis for making these statements (in fact, the DJIA ended 2001 at 10,021).

Citigroup failed to follow up on various red flags arising from the brokers' conduct. During most of the relevant years, Sweitzer indicated to Citigroup in branch audit questionnaires that he was holding seminars, but the auditors did not require him to produce samples of the materials he was using at his seminars or to confirm that the seminars and related documents had been approved by a principal, as required by Citigroup's procedures. Furthermore, Citigroup's compliance officials had an opportunity to review one of the team's seminar handouts in 2001, but failed to detect, correct and follow up on some of the misstatements and omissions contained in the documents, after having sent the documents back to the branch for revision and resubmission Matz and Harris failed to supervise the activities of the brokers even though they should have known the brokers were holding seminars and using misleading, unapproved sales materials.

NASD ordered Citigroup to pay $12.2 million in restitution to former BellSouth employees through the recently approved settlement of a North Carolina state court class action brought on behalf of the BellSouth customers of Citigroup, entitled Victoria T. McPhatter, et. al. v. Citigroup Global Markets, Inc., et al. The state court judge has certified the class and approved the settlement of the class action, Citigroup has deposited the money into an escrow account, and an administrator will process compensation claims from the brokers' customers subject to court approval.

Citigroup, Sweitzer, Muller, Zentner, Matz, and Harris settled the action announced today without admitting or denying the charges, but consented to the entry of NASD's findings.

For a detailed look at the potential benefits and risks of early retirement investment plans, see the NASD Investor Alert Look Before You Leave; Don't Be Misled By Early Retirement Pitches That Promise Too Much.

Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasd.com/brokercheck. Investors can also access this service by calling (800) 289-9999.

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.