The Financial Industry Regulatory Authority (FINRA) has cracked
down on Citigroup Global Market, a unit of
) and imposed a fine of $3.5 million for allegedly offering
inaccurate information related to subprime residential
mortgage-backed securitizations (RMBS). The company was also
accused of lacking supervisory procedures as well as violating
other norms related to RMBS.
FINRA has accused Citi of providing inaccurate performance data
related to three RMBS from January 2006 to October 2007 on its
website. In spite of being informed that such information were
inaccurate, Citi continued to retain them until early May 2012.
Notably, RMBS issuers need to provide historical performance
data for prior securitizations which include mortgage loans that
are similar to those in the RMBS they are offering to investors.
However, the disclosure of faulty data by Citi likely impacted
investors' assessment as they used such inaccurate data to gauge
the value of RMBS.
Moreover, Citi has also been alleged of lacking a proper
supervisory procedure for verifying the pricing of these RMBS and
failing to document steps for assessing whether trader's prices
were reasonable or not. Citi, also, did not supposedly maintain the
required books and records when re-pricing of mortgage backed
securities were made following margin calls.
Post financial crisis, regulators have intensified their
scrutiny in the mortgage market and have come up with charges
against the big shots for their fraudulent practices. In fact,
besides Citi, other majors who could not escape FINRA's wrath and
were imposed penalties related to similar issues include
) as well as
Deutsche Bank AG
). They have been accused of misinterpreting delinquency data
related to RMBS.
Notably, Citi has hit headlines in the past couple of years for
issues related to its faulty procedures associated with the
mortgage business. The company was subject to a penalty of $75
million in 2010 by the Securities and Exchange Commission for
misleading its investors about its exposure to subprime
mortgage-related assets. We believe such penalties not only dent
the company's financial but also blemish its reputation.
Citi currently retains its Zacks #3 Rank, which translates to a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term Neutral recommendation on the stock.
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