Massachusetts Secretary of State William F. Galvin today fined Citigroup Global Markets Inc. $2 million for failing to supervise research analysts who disclosed confidential information about last spring's Facebook initial public offering on which the company was a member of the underwriting syndicate.
The order issued by the Securities Division censures CGMI, which admitted to the division's statement of facts and agreed to permanently cease and desist from violating the state securities law.
CGMI was known as Salomon Smith Barney when it signed a consent order in 2003 as part of a global settlement of charges of publishing fraudulent research reports, permitting inappropriate influence by investment bankers over research analysts and failing to adequately supervise employees who engaged in those practices.
"It is essential in these times of rapid and diffuse means of communications that financial institutions be vigilant to ensure that the rules on IPOs are observed by all their personnel so that the integrity of the process is maintained," Galvin said. "This penalty should serve as a warning to the industry as a whole."
CGMI could not immediately be reached for comment.
Facebook chose CGMI to be part of the syndicate that underwote the social network's May 18 IPO.
"At all relevant times, the applicable securities laws and related rules required members of the Facebook IPO underwriting syndicate to refrain from disseminating written research or other written content about Facebook until 40 days after the IPO," the order said.
Facebook also required CGMI's senior analyst to sign a non-disclosure agreement.
The senior analyst, a managing director of Citigroup Investment Research based in San Francisco, led the company's research on Facebook and is considered the top Internet analyst, according to Institutional Investor Magazine.
On April 17, he assigned a junior analyst to work on research projects in connection with the Facebook IPO. On May 2, that junior analyst emailed two employees at TechCrunch.com, seeking feedback on a Facebook document that contained confidential CGMI information, including the senior analyst's view of investment risks and positives and his revenue estimates for Facebook after the IPO.
In September, TechCrunch hosted the first post-IPO interview by Facebook founder Mark Zuckerberg.
The email exchanges were produced by CGMI on Sept. 14 in response to a subpoena. The junior analyst was terminated by CGMI on Sept. 27.
In addition to the Facebook matter, the division's investigation also uncovered emails showing that the senior analyst covering technology had given his unpublished information about YouTube revenue estimates to a reporter for a French business magazine on April 30.
In an email to a Citi employee who questioned him on the communication, he responded, "This could get me in trouble. Shoot." This communication occurred days after the senior analyst had received a "letter of education" for a failure to obtain pre-approval on a public appearance.
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