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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.

SEC Release Citigroup

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.

SEC Order Citigroup

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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