Compliance July 24, 2007

Hartford Settles with Three States on Market Timing, Bid Rigging

The Hartford Financial Services Group has agreed to pay $115 million to settle allegations by the states of Connecticut, Illinois and New York that it faked bids and allowed mutual fund market timing.

Reported by

Fred Schneyer

Connecticut Attorney General Richard Blumenthal said in a Monday news release that The Hartford agreed to establish a $5 million fund for policyholders harmed by improper insurance practices and pay a $26 million penalty to the three settling states – $3 million each going to Connecticut and Illinois, and $20 million to New York.

It will also establish an $84 million fund to compensate market timing investor victims, according to Blumenthal.

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“The Hartford failed to act swiftly and strongly to stop and disclose market timing – despite its duty to do so,” Blumenthal said, in his press release. “It failed to do enough soon enough to prevent this pernicious practice. The Hartford never encouraged or invited these illegal practices. It knew the harm and was lax and late in halting it. The inadequate response was primarily a corporate failing, not an individual responsibility, reflected in this action to hold the corporation accountable.”

As part of the agreement, The Hartford acknowledged that brokers and agents must disclose their financial motivation to customers before 25 or more policies are moved to The Hartford at one time, and The Hartford service center employees must clearly identify themselves as soon as a consumer calls.

The insurer also gave broker Marsh & McLennan inflated bids that enabled Marsh to charge higher insurance prices to thousands of consumers, the attorney general said. Marsh already paid $850 million in fines and restitution in 2005.

The Hartford revealed in a statement that – in light of the settlement – U.S. Securities and Exchange Commission staff had told Hartford that it would not recommend any enforcement action against the company.

“We are pleased to have these matters behind us,” The Hartford’s Chairman and CEO, Ramani Ayer said in the news release. “Since these investigations began more than three years ago, we have cooperated fully with the attorneys general and other regulators. We have worked assiduously to strengthen and improve our business practices and will continue to do so. We emerge from this period with an unwavering resolve to uphold our longstanding commitment to providing our customers with outstanding products and exemplary service.”

Compliance July 24, 2007

Smith Barney Fined $50M for Market-Timing Violations

NYSE Regulation, Inc. has censured and fined the Smith Barney Division of Citigroup Global Markets Inc. (“CGMI″) for failing to supervise trading of mutual fund shares and variable annuity mutual fund sub-accounts, failing to prevent market-timing violations by its brokers, and failing to maintain adequate books and records.

Reported by

Rebecca Moore

According to an announcement, CGMI has been fined $50 million, of which $35 million in disgorgement and one-half of the $10 million penalty to be paid to NYSE Regulation will be placed in a distribution fund to compensate injured customers of the firm who invested in the affected mutual funds. The company will pay $5 million to the State of New Jersey for a separate regulatory matter arising out of the same conduct, the announcement said.

NYSE Regulation claims that between January 2000 and September 2003, over 150 financial consultants using over 200 financial consultant numbers in 60 branches engaged in approximately 250,000 market-timing exchanges in over 1,500 accounts on behalf of more than 1,100 customers. According to calculations by NYSE Regulation, this activity generated approximately $32.5 million in gross revenues.

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While the firm had compliance policies in place, the enforcement of its policies and procedures was ineffective, the announcement said. Deceptive practices employed by financial consultants included the improper use of multiple branch code prefixes, multiple registered representative identification numbers, multiple customer accounts, multiple limited liability companies, multiple tax ID numbers for accounts; structured trades in amounts below certain thresholds; accounts opened under the auspices of other financial institutions; and market-timing through mutual fund sub-accounts of variable annuities.

In non-proprietary mutual funds, certain financial consultants entered into “Sticky Asset Agreements” that allowed select timing customers exchange privileges that were not offered to other shareholders, NYSE Regulation found. Certain financial consultants also entered into explicit market-timing “Administrative Fee Arrangements” with known market-timing customers that provided for a monthly or quarterly fee based upon assets under management.

The announcement said that though the firm’s policies gradually evolved during this period, they were inadequate and were inadequately enforced. In addition, NYSE said the firm failed to adequately supervise trading in mutual fund sub-accounts of variable annuities and to maintain the required books and records which hindered both the firm’s ability to supervise that activity and the subsequent regulatory investigation of market timing in those products.

There was no finding of late trading, but the firm also failed to maintain books and records of mutual fund trade cancellations and rejections related to market timing and the times when mutual fund trades were communicated to the firm (as opposed to executed), which prevented NYSE Regulation from determining whether “late trading’ occurred or orders were administratively entered after 4:00 p.m.

Citigroup Global Markets Inc. neither admitted nor denied guilt in the settlement of the charges against it. Investigations of individuals are continuing, NYSE Regulation said.

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