SEC Fines Citigroup $18 Million For Overbilling Clients

On Thursday, the SEC fined Citigroup Global Markets $18.3
million for overbilling investment advisory clients and losing
client contracts.  This case may be interesting to a potential
SEC whistleblower or
SEC whistleblower lawyer
not only because of the hefty fine, but also because of the
type of case and how the SEC characterized it.

As might be expected, the SEC referred to it in part as an
“overbilling” case.  But it did not call the remainder an
“accounting” or “internal controls” case.  Instead, in the
SEC’s
press release, it labeled it a “books and records” case.  While for many
purposes “accounting,” “internal controls,” and “books and
records” may seem relatively synonymous, and oftentimes they
overlap, there are actually distinctions between these
different types of cases.

In addition, it is a common misconception among non-lawyers
and non-investment professionals that the SEC only handles
frauds committed in the literal purchase or sale of stocks. 
This case demonstrates that there is a much wider range of
attendant conduct that falls within the SEC’s purview.

Citigroup’s overcharges

According to the SEC’s
Order, Citigroup failed to confirm the accuracy of billing rates
that it entered into its computer systems and charged its
investment advisory clients.  The SEC’s press release adds
that Citigroup did not confirm those rates by comparing them
to the clients’ contracts and other account documents.

Additionally, for some clients who had temporarily suspended
their accounts, Citigroup continued to charge them fees or did
not give them pro-rated rebates on their pre-paid advisory
fees.  For others who terminated their accounts, Citigroup did
not provide them with pro-rated rebates on their pre-paid
advisory fees.

Over a 15-year period, from 2000 – 2015, Citigroup overcharged
at least 60,000 investment advisory clients.

The Order states that the affected clients have been
reimbursed with interest.

These overcharges could have been classified as accounting
failures or internal control violations.  Instead, the SEC
chose to describe them as “fee-billing” violations in its
press release.

83,000 lost contracts

Citigroup was also unable to locate approximately 83,000
advisory account contracts.  This prevented Citigroup from
confirming that the rates that it was charging those clients
were consistent with the rates those clients contracted for
and agreed to.

In-and-of-itself, not having copies of documents that are
required to be maintained might not be an accounting
violation.  It could have been an internal controls or
compliance violation.  The Order even says that Citigroup did
not have adequate internal controls or compliance policies. 
But the SEC chose not to call it either of those in its press
release about the case.

The SEC determined that Citigroup’s lost documents were books
and records violations.  Because the lost documents prevented
the confirmation of the billing rates, those documents were
tied in with the “fee billing” or overcharge violations.

The SEC’s press release refers to the case as involving
“fee-billing and books-and-records practices.”

Why this might matter to a potential SEC whistleblower or SEC
whistleblower lawyer

The facts of the Citigroup case, and the nuances about what
and why the SEC chose to categorize this case the way it did,
are more than an academic curiosity.  They may have practical
relevance for a potential SEC whistleblower or
SEC whistleblower attorney.

First, in
simplified terms, the Citigroup case is about (1) contracts,
and (2) not being able to find copies of those contracts.  The
SEC did not allege that there were any fraudulent stock trades
in any of Citigroup’s clients’ accounts.

For non-lawyers and non-banking professionals, the case
illustrates that the SEC does more than just monitor
individual stock trades and public filings, and supervise
securities exchanges.  The SEC regulates just about everything
related to securities and the financial markets, as well as
the participants in the securities markets and many aspects of
how they conduct their business.

Second, an SEC
whistleblower or their SEC whistleblower lawyer has to file
their whistleblower tip using the SEC’s Form TCR.  One of the
questions on the Form TCR asks what type of case the
whistleblower is filing.  On the SEC’s on-line TCR portal, the
question has a drop-down list of pre-set options to choose
from, or the filer can select “other” and type in their own
description.

If the filer selects a type of case that is different than
what the SEC itself would have selected, that is unlikely to
cause the tip to be rejected instead of forwarded to the SEC
Staff for investigation.  But it might cause some early
hiccups.

For example, if the SEC Staff expects to see facts and
information supporting the type of case selected, but then
sees something else, it could delay things while the SEC
decides whether and how to reclassify the whistleblower’s tip.

Furthermore, the SEC sometimes assigns cases to Staff lawyers
who have expertise in a particular area or experience handling
similar types of cases to the one selected by the
whistleblower.  If the SEC whistleblower or SEC whistleblower
lawyer mischaracterized the tip, that might contribute to a
delay while the SEC determines whether the assigned Staff
lawyer can handle the case or if it should be reassigned to
another Staff lawyer.

Would any of this doom an SEC whistleblower tip?  Unlikely.

But a potential source of stress for many SEC whistleblowers
is waiting to hear back from the SEC about their tip.  There
is no guarantee that the SEC will ever contact the
whistleblower or their attorney after the whistleblower’s tip
is filed, even if the tip causes the SEC to open an
investigation.  The electronic filing confirmation received
from the TCR portal states this.  However, sometimes the SEC
Staff does reach out to the whistleblower or their lawyer with
questions or seeking clarification.

For an SEC whistleblower, a delay could increase their
stress.  For an SEC whistleblower lawyer, a delay could
increase their client’s stress.

On the chance that the SEC might wish to reach out, it would
make sense at the outset for an SEC whistleblower or SEC
whistleblower attorney to try to select as accurate a category
as possible, to remove one possible source of delay.  In this
regard, the Citigroup case might help in trying to decide
whether to identify a whistleblower tip as an accounting case,
an internal controls case, or a books and records case.

* * *

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