FINRA said today that it sanctioned Citigroup Global Markets, Inc. (NYSE: C) in the amount of $1.5 million as a result of supervisory violations relating to the handling of trust funds which belonged to Michigan and Tennessee based cemeteries. The sanction represents a $750,000 fine and disgorgement of $750,000 in commissions. The commissions will be reimbursed to the cemetery trusts.
“Firms have a duty to protect customer funds by taking prompt and meaningful action when they encounter indications of possible fraud or misappropriation,” said James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement. “That duty is particularly critical when firms handle trust funds where the beneficiaries may be unsophisticated investors who are unaware of how the funds are being handled.”
According to FINRA, from September 2004 through October 2006, Citigroup broker Mark Singer and two of his customers engaged in a scheme to misappropriate about $60 million from cemetery trust funds. One of Singer’s customers, Clayton Smart, is currently facing criminal charges relating to the scheme in Michigan and Tennessee. Singer’s criminal trial in Tennessee recently ended in a mistrial. Criminal charges remain pending against Singer in Indiana. Smart and a second client of Singer, Craig Bush, have been named as defendants in litigation relating to the scheme.
FINRA added that Singer’s two customers, Smart and Bush, were successive owners of a group of Michigan cemeteries from which funds were believed to be stolen. In August 2004, Smart purchased the cemeteries from Bush using trust funds that had been improperly transferred from the Michigan cemeteries themselves to a company that Smart owned. Soon thereafter, Smart used additional trust funds to buy cemeteries and funeral homes in Tennessee.
FINRA found that a Citigroup branch manager had recruited Singer from another brokerage firm where the scheme was hatched. When Singer joined Citigroup in September of 2004, nearly all of his customer accounts came with him, including the cemetery trust accounts and other accounts belonging to Bush. Singer assisted Bush and Smart in opening numerous Citigroup accounts in their own names, as well as in the names of corporate entities they owned or controlled. Singer helped Bush and Smart deposit cemetery trust funds into some of these accounts and then effectuated improper transfers to third parties. On some occasions, conduit accounts were utilized to mask the transactions. Some of the fund transfers were disguised as fictitious investments made on behalf of the cemeteries.
FINRA’s investigation showed that over a period of more than two years, Citigroup failed to reasonably supervise the handling of these accounts by inadequately responding to a succession of “red flags” – failures that permitted the scheme to continue undetected until October 2006.
The red flag events began in September 2004, FINRA said, shortly after Singer began working at Citigroup. Singer’s former employer warned Citigroup about irregular movement of funds involving accounts connected to the Michigan cemetery trusts – activity that occurred before Bush moved his accounts to Citigroup and while Bush was still owner of the Michigan cemeteries. After receiving this information, however, FINRA found that Citigroup’s follow-up of the activity in Bush’s accounts was superficial and incomplete.
By November 2004, Citigroup’s management became aware of rapid movement of funds involving Citigroup accounts associated with Bush and Smart – including unusual transfers of cemetery trust funds to accounts opened in the names of third parties – but failed to conduct an adequate inquiry into the matter. In February 2005, Citigroup received information indicating possible misrepresentations by Smart regarding his acquisition of hedge fund investments belonging to the Michigan cemetery trusts, which Smart used as collateral for a personal $24 million line of credit from Citigroup Private Bank. Nevertheless, Citigroup failed to adequately review the matter.
Finally, in May 2006, Citigroup received a whistleblower letter from the principal of a company acting as a third-party trustee for the cemeteries which alleged misconduct by Singer in connection with the handling of the cemetery trusts. Among other things, this letter alleged that Singer was involvement in making unauthorized transfers of cemetery trust funds, as well as Singer’s use of his personal email address to conduct business with the whistleblower, in an apparent attempt to bypass Citigroup’s email monitoring system. Despite the seriousness of these allegations, Citigroup failed to place Singer under special supervision or place restrictions on his activities.