Violations Centered on Outsourcing of Communications with Customers; Customer Restitution Payments Could Reach $420,000
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Citigroup Global Markets, UBS Securities and Deutsche Bank Securities a total of $425,000 — and ordered the firms to make payments to customers that could total $420,000 — in connection with the firms' failure to adequately supervise communications with their customers in the initial public offering (IPO) of Vonage, LLC in May 2006.
Citigroup was fined $175,000 and ordered to pay a maximum of $250,000 to 284 potentially eligible customers; UBS was fined $150,000 and ordered to pay a maximum of $118,000 to 126 potentially eligible customers; and, Deutsche Bank was fined $100,000 and ordered to pay a maximum of $52,000 to 59 potentially eligible customers.
FINRA found that each of the firms failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of securities in the Vonage IPO. Each of the firms was a lead underwriter for the Vonage IPO, which included a directed share program (DSP) under which the firms sold approximately 4.2 million shares to Vonage customers through accounts the customers had opened at the firms.
Because of the large number of expected DSP participants, Vonage and the three underwriting firms agreed that an outside company would design and administer a Web site for DSP participants. Communications with customers of the firms about the sale of Vonage IPO securities were to occur through that Web site. These communications included acceptance of offers to purchase the IPO shares, information about share allocations and communications about money the customers owed to the firms for the allocated shares. FINRA found that because of the firms' supervisory failures, when a problem occurred at the outside company that caused numerous customers to receive incorrect communications, the firms were unable to respond satisfactorily.
"Communicating with customers about the sale of shares in a public offering is an important brokerage firm activity and must be supervised effectively by firms," said Susan L. Merrill, Executive Vice President and Chief of Enforcement. "Supervisory obligations apply not only to brokerage activities undertaken directly by firms, but also to those activities when they are outsourced to other parties. In this case, each of the firms failed to take effective action to ensure that important communications with customers about the sale of IPO shares were properly supervised, and they failed to take sufficient action to determine the cause and extent of the problem once they learned of it."
FINRA also found that, even though each of the firms had written procedures for both directed share programs and for outsourcing, the firms did not follow those procedures.
As a consequence of the firms' failures, when an error by an employee of the outside company — who disabled a server when the allocation program was run — resulted in certain customers receiving communications stating that they had not received IPO allocations when in fact they had, the firms were unable to take prompt and effective action to respond to the problem. By the time some customers learned several days later that they had been allocated shares, the price of Vonage stock had declined significantly from the initial IPO price. Nevertheless, those customers were required to pay the higher IPO price for their shares and incurred losses when they later sold those shares.
The restitution payments that FINRA ordered will compensate the customers for the difference between the $17 per share IPO price they paid and the lower price of Vonage stock at the time they learned that they had been allocated shares. Pursuant to the terms of the settlement, the firms will notify eligible customers.
FINRA found that when the incorrect communications went out, none of the firms knew what information had been communicated to their customers about IPO allocations and were unable to determine how many customers had received incorrect communications. In fact, a number of months had passed before the firms were able to learn the cause of the problem, and then only when the outside company reported the results of its investigation. Responding to the problem promptly was important because customers were unaware of their IPO allocations at a time when the price of Vonage stock was declining significantly. The firms also failed to ensure that FINRA had the same access to the work of the outside company that FINRA would have had if the firms had performed the work themselves. In addition, the firms were unable to provide FINRA with certain information, hampering FINRA's ability to investigate the matter.
More than 7,000 accounts were opened at Citigroup by Vonage customers to participate in the DSP, approximately 3,000 accounts were opened at UBS, and approximately 1,370 accounts were opened at Deutsche Bank. Citigroup sold approximately 2.5 million shares in the program, UBS sold approximately 1.2 million shares and Deutsche Bank sold approximately 500,000 shares.
In settling each of these matters, none of the firms admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business - from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and firms.
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