Washington, DC, August 8, 2005. LAWFUEL – The Law News Network – The Securities and Exchange Commission today filed an enforcement action in the United States District Court for the Southern District of New York charging former Citigroup executives Thomas W. Jones and Lewis Daidone with fraud relating to Citigroup’s
creation of an affiliated transfer agent to serve its Smith Barney family of
mutual funds at steeply discounted rates. Rather than passing the
substantial fee discount on to the mutual funds, Citigroup took most of the
benefit of the discount for itself, reaping tens of millions of dollars in
profit at the expense of mutual fund shareholders.
The actions against the individuals follows the Commission’s settlement with
the company in May in which Citigroup agreed to pay $208 million that will
distributed to victims of the fraud.
In its complaint filed today, the Commission alleges that Jones and Daidone
were two of the officers principally responsible for the fraud. The
complaint alleges that Jones, the former chief executive officer of the
asset management division, directed an effort to negotiate a deal that would
permit Citigroup to reap much of the profit that the funds’ third party
transfer agent had been making. Jones approved the final structure of the
deal fully aware that the affiliated transfer agent was projected to make
tens of millions of dollars in profit each year for doing minimal work. The
complaint further alleges that Jones intentionally or recklessly acted in
disregard of his fiduciary duty by failing to take steps to ensure the
funds’ independent directors were fully informed of the details of the
proposal and that Jones approved the presentation delivered to the funds’
boards seeking approval of the self-dealing transaction knowing or
recklessly disregarding that the presentation was materially misleading.
The complaint alleges that Daidone, a senior vice president of the Adviser
and the funds’ treasurer and chief financial officer, participated in the
negotiations with the existing third party transfer agent and was the person
responsible for making the presentation to the funds’ boards in a way that
led the boards to believe the affiliated transfer agent proposal was in the
funds’ best interests, which was not true.
The complaint charges Jones and Daidone with aiding and abetting the Adviser
and Global Markets’ violations of Sections 206(1) and 206(2) of the
Investment Advisers Act of 1940, which prohibit registered investment
advisers from employing devices, schemes or artifices to defraud clients or
prospective clients and from engaging in transactions, practices, or courses
of business that operated or would operate as a fraud or deceit upon clients
or prospective clients. The complaint seeks permanent injunctions against
future violations of those provisions, disgorgement of any ill-gotten gains
and civil penalties.