Some corporate bond certificates that should have been destroyed years ago came back to haunt Citibank to the tune of $750,000 yesterday.
Without admitting or denying wrongdoing, Citibank settled the $750,000 civil suit and an accompanying administrative cease-and-desist proceeding brought yesterday by the Securities and Exchange Commission, sources on both sides said.
The suit and proceeding involve canceled corporate bond certificates that Citibank handled as transfer agent and that should have been destroyed. The certificates have since popped up in U.S. and foreign markets, according to Lani Lee, branch chief at the SEC's Division of Enforcement. The suit was filed yesterday in U.S. District Court for the District of Columbia.
According to the SEC, Citibank hired a now-defunct paper recycling firm called MSM Corp. between 1984 and 1987 to destroy the corporate certificates, which had a total face value of over $111 billion. But an undetermined number of those certificates escaped destruction. Lee said they have since been offered and sold or pledged as collateral on loans.
Since 1987, Citibank has known that canceled securities with a face value of "at least several hundred million dollars" have surfaced here and abroad, an SEC release says. The potential losses to brokerage firms and banks that have honored the bogus paper exceed several million dollars, according to the release.
Some of the certificates that were never destroyed have lacked any stamp or mark indicating cancellation. The rest have been perforated with the banks' initials and date, the release says, but those perforations sometimes went undetected or were misread as official notarization.
Certificates that MSM should have destroyed began surfacing in Europe in March 1987, increasing in incidence in 1990 and 1991, the SEC's complaint says. Citibank, however, failed to filed a Securities Report regarding the certificates until Oct. 28, 1991, the SEC said.
The SEC sought the $750,000 civil penalty based on Citibank's failure to file timely Securities Reports for the issues that surfaced from Oct. 15, 1990, to Oct. 28, 1991, when Citibank filed its report. On Oct. 15, 1990, the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 took effect. The act allows the SEC to seek a money penalty in civil actions.
In settling the administrative proceeding, Citibank agreed to the SEC's order that it "permanently cease and desist" from committing or causing any future violations.
The SEC found that when Citibank gave the certificates to MSM, the bank's "practices, policies, and procedures with regard to the cancellation and destruction of [the] certificates were inadequate." The administrative action also faulted Citibank for failing to file the timely Securities Reports.
In response to the SEC's complaint, Citibank yesterday issued a statement.
"Citibank used a vendor to dispose of an unusually large volume of canceled certificates that had been in storage, and received affidavits from the firm attesting to their destruction," the statement says. "Citibank's procedures and controls for canceling and destroying certificates are sound, in compliance with [the Office of the Comptroller of the Currency] and SEC requirements, and, in many cases, exceed industry practice."
In other news yesterday, Securities Data Co. said it had acquired some of IDD Enterprises L.P.'s data base and publishing assets for an undisclosed amount.
Under the agreement, Securities Data will acquire IDD's mergers and acquisitions, corporate financing, municipal new issues, banking data base assets, and customer lists, according to a Securities Data release.
The New Jersey-based financial information publisher will also acquire certain IDD publishing assets, including Financial Services Week, Securities Traders Monthly, Bank Insurance Marketing, Bank Securities Journal, Insurance Product News, and Securities Product News. The acquisition also includes IDD's interest in a financial planning industry exhibition and conference called Financial Services Expo, the release says.
"[Securities Data], based on its leadership position and financial strength, was a logical choice to provide a smooth transition for those IDD customers affected by the sale," Michael Danziger, Securities Data's president, said in the release.
In secondary trading yesterday, high-grade bonds moved in line with Treasuries, which added 1/8 point in the long end. High-yield bonds ended unchanged.
"The calendar seems to be over with for the year, and now investors are looking to the secondary market for value," one high-yield trader said.