Citigroup Global Markets to pay $2.5M fine for Short Tender Rule violations
Citigroup Global Markets Inc (CGMI) has agreed to pay a fine of $2.5 million as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
Between November 2017 and August 2022, CGMI violated Securities Exchange Act of 1934 Rule 14e-4, commonly referred to as the “Short Tender Rule,” and FINRA Rule 2010, by over-tendering shares in 13 partial tender offers (PTOs), and received ill-gotten gains of approximately $5.7 million.
Between November 2017 and August 2022, CGMI tendered approximately 11.1 million more shares than it was entitled to tender (i.e., over-tendered) in 13 PTOs, ranging from 5,798 shares to 4.4 million shares per offering. CGMI over-tendered the shares because it calculated the number of shares available for tender on an account-by-account basis instead of on a firm-wide basis, as Exchange Act Rule l4e-4 requires.
In addition, in two PTOs, CGMI over-tendered shares because it did not account for relevant short call positions, as required under Exchange Act Rule 14e-4.
In nine of the thirteen PTOs, the proration factors ranged from approximately 4.7% to 96.2%. Four of the PTOs were not prorated.
By tendering more shares than it was entitled to tender in the 13 PTOs discussed above, CGMI violated Exchange Act Rule 14e-4 and FINRA Rule 2010.
From November 2017 through December 2020, CGMI did not have a supervisory system or WSPs reasonably designed to achieve compliance with Exchange Act Rule 14e-4. Instead, CGMI had only operational procedures that instructed Asset Services to check the individual accounts from which the shares were tendered to make sure that the shares were held in the account. If the tendering account was long the shares, it was permitted to tender the shares.
The procedures did not require the firm to determine whether it held any short positions in the security in other accounts, nor did they provide any other means to ensure that the firm would not tender more securities than it was net long.
Therefore, CGMI violated FINRA Rules 31 10(a) and (b) and 2010.
The firm has agreed to:
- a censure;
- a $2.5 million fine, of which $833,334 is payable to FfNRA; and
- disgorgement of $5,771,489, of which $1,923,829 is payable to FlNRA.