Citigroup Settles Inadequate Supervision Charges with NASD

For failing to properly supervise brokers delivering misleading information to plan participants during retirement seminars, Citigroup Global Markets, Inc. will settle with the NASD for more than $15 million and brokers involved will pay between $30,000 and $125,000.
According to a press release from the private-sector regulator, NASD alleged that the bank failed to supervise a team of Citigroup brokers who, through misleading presentations, led more than 400 BellSouth employees in North Carolina and South Carolina to open more than 1,100 accounts with the Citigroup brokers and made “exaggerated and unwarranted projections of future earnings without fully explaining the risks involved” in withdrawing money from their retirement accounts early and rolling it over into brokerage accounts.
The employees were unsophisticated investors with little experience in the financial markets, who retired in their mid-50s. These employees, mostly with retirement savings of less than $350,000, typically cashed out their pensions and 401(k) accounts, and invested these proceeds and other retirement assets with the Citigroup brokers.
The Settlement
Citigroup will pay $3 million to settle the charges with NASD and pay $12.2 million in restitution to more than 200 former BellSouth employees, who saw the principal of their retirement savings drop by that amount as a result of basing their decisions off the brokers’ materials.
The greatest disciplinary fine by NASD against an individual broker went to the reported mastermind behind the sales campaign, Jeffrey Sweitzer, who was slapped with a $125,000 fine and an 18-month suspension. Matthew Muller was given a $50,000 fine and a nine-month suspension. Other brokers involved in the scheme received less than $60,000 fines.
Using charts, graphs, handouts and other documents at the seminars and meetings, the brokers’ sales presentations led the employees to expect that for 30 years they could earn approximately 12% annually on their investments and withdraw approximately 9% annually, according to NASD.
For instance, one document projected the amount a generic 53-year-old BellSouth employee would earn from an initial investment of $300,000. The projection sheet suggested that this typical employee would earn more than $1.8 million, could withdraw from $27,000 to $69,000 annually, and still have more than $770,000 in principal remaining 30 years later, at age 83.
NASD also found that as a result of Sweitzer’s and Muller’s sales presentations many of the BellSouth employees came to believe that they could afford to retire early by relying upon monthly withdrawals from their retirement savings, hinging their decision on the Internal Revenue Service rule that says a person under the age of 59 세 can withdraw a fixed stream of regular and equal payments from their retirement accounts without having to pay the usual 10% tax penalty for early withdrawals.
Many of these customers cashed out their nearly risk-free BellSouth pensions, their 401(k) accounts and other retirement assets and invested the proceeds with the brokers. Fees and commissions from those BellSouth employee accounts comprised a majority of the compensation earned by Sweitzer and Muller.