The U.S. Securities and Exchange Commission has brought an enforcement action against former Citigroup executives over their creation of an in-house transfer agent to service its mutual funds that saw the company skim off the savings rather than passing it along to investors.

In its complaint, the SEC alleges that Thomas Jones, the former chief executive officer of the asset management division, and Lewis Daidone, a senior vice president of the adviser and the funds’ treasurer and chief financial officer, were two of the officers principally responsible for the fraud. None of its allegations have been proven.

The SEC’s action against the executives for fraud, filed in the US District Court for the Southern District of New York, follows the commission’s settlement with the company in May in which Citigroup agreed to pay US$208 million that will distributed to victims of the fraud.

The complaint alleges that Jones directed an effort to negotiate a deal that would permit Citigroup to reap much of the profit that the funds’ third party transfer agent had been making. It claims that he approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work. The complaint further alleges that Jones intentionally or recklessly acted in disregard of his fiduciary duty by failing to take steps to ensure the funds’ independent directors were fully informed of the details of the proposal and that he approved the presentation delivered to the funds’ boards seeking approval of the self-dealing transaction knowing or recklessly disregarding that the presentation was materially misleading.

The complaint alleges that Daidone participated in the negotiations with the existing third party transfer agent and was the person responsible for making the presentation to the funds’ boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds’ best interests, which was not true.

The SEC seeks permanent injunctions against future violations of those provisions, disgorgement of any ill-gotten gains and civil penalties.