The National Association of Securities Dealers today announced that it has fined Citigroup Global Markets, Inc., US$3 million to settle charges relating to the use of misleading materials in retirement seminars and meetings for BellSouth employees in North Carolina and South Carolina. NASD also ordered Citigroup to pay approximately US$12.2 million in restitution to more than 200 former employees.

Specifically, the NASD found that Citigroup failed to adequately supervise a team of brokers based in Charlotte, NC, who used misleading sales materials during dozens of seminars and meetings for hundreds of employees of BellSouth. As a result of these presentations, more than 400 BellSouth employees opened over 1,100 accounts with the Citigroup brokers. Most of these employees were unsophisticated investors with minimal experience in the financial markets who retired in their mid-50s, well before the BellSouth retirement age of 62. They generally were of modest means, with retirement savings of less than US$350,000. These employees typically cashed out their pensions and 401(k) accounts, and invested these proceeds and other retirement assets with the Citigroup brokers.

The NASD also disciplined three brokers and two managers at the Charlotte branch office. Those sanctions include: a US$125,000 fine and an 18-month suspension for Jeffrey Sweitzer, the broker who developed the sales campaign, led over 40 seminars, directed the activities of the other brokers and drafted or directed the drafting of the misleading sales materials; a US$50,000 fine and a 9-month suspension for broker Matthew Muller, for his role at 25 seminars and numerous face-to-face meetings;a US$30,000 fine and a 30-day suspension for Joseph Zentner, a junior broker who helped Sweitzer prepare some of the misleading sales materials. In addition, they must each complete 40 hours of continuing education relating to compliance with NASD rules and federal securities laws, including courses that cover communications with the public and the use of sales materials.

It also ordered: a US$60,000 fine and a 90-day suspension from acting in a supervisory capacity for the brokers’ branch office manger, Randall Matz; and, a US$30,000 fine and a 45-day suspension from acting in a supervisory capacity for branch operations manager Elizabeth Harris. In addition, before Matz and Harris can return to work at a broker-dealer in a supervisory or principal capacity, they must each pass the appropriate NASD Qualification Examination.

The NASD found that from 1994 to 2002 Sweitzer conducted more than 40 seminars, alone or with Muller, without obtaining firm approval for the seminars or seminar sales materials. Following the seminars, Sweitzer and Muller, alone or together, met with BellSouth employees. 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.

The regulator found that the brokers’ sales materials and presentation failed to adequately disclose that the recommended investments exposed the BellSouth employees to greater market risk than the employees would have faced had they opted to retain their fixed annuity pension payments from BellSouth. The brokers’ materials also failed to adequately disclose that the customers would pay fees of two to three percent, requiring them to earn 14% to15% annually to achieve the expected 12% return. It was not adequately explained that the expected 12% annual net returns exceeded the historical average return of the Standard & Poor’s 500 index over 70 years, and that for many periods during that time the S&P 500 returned far less than 12%. The brokers also did not adequately disclose that the recommended investments could decline in value so much as to reduce the customers’ principal. In addition, various pieces of the sales materials overstated the brokers’ credentials and experience and omitted necessary disclaimers.

Over 200 BellSouth employees saw the principal in their accounts decline by a total of approximately US$12.2 million. The NASD ordered Citigroup to pay US$12.2 million in restitution to former BellSouth employees through the recently approved settlement of a North Carolina state court class action brought on behalf of the BellSouth customers of Citigroup. The state court judge has certified the class and approved the settlement of the class action, Citigroup has deposited the money into an escrow account, and an administrator will process compensation claims from the brokers’ customers subject to court approval.

@page_break@Citigroup, Sweitzer, Muller, Zentner, Matz, and Harris settled the action announced today without admitting or denying the charges, but consented to the entry of NASD’s findings.

“NASD remains strongly committed to protecting investors as they make critical decisions about how to provide for their retirement years,” said James Shorris, NASD executive vice president and head of enforcement, in a news release. “The improperly supervised brokers in this case used misleading documents that made exaggerated and unwarranted projections of future earnings without fully explaining the risks involved. Many BellSouth employees gave up secure pensions, believing they could afford to retire early, but ended up losing substantial amounts from their retirement nest eggs. We are pleased that this settlement helps ensure that the injured investors will receive the restitution to which they are entitled.”