Massachusetts' top securities regulator has fined Citigroup $2 million, charging that one of the bank's analysts leaked confidential information about Facebook's initial public offering (IPO).
Secretary of the Commonwealth William Galvin announced the charges on Friday, Oct. 26. Citigroup agreed to the settlement, but did not admit to any wrongdoing.
Citigroup was part of the team of banks that helped underwrite the deal that made Facebook a public company back in May. To help underwrite such a deal, a bank has information about a company that the broader investing public does not have. Needless to mention, the bankers who underwrite a deal are not supposed to act on the information they have or share it with favored clients, because that would give them an unfair advantage over the public.
A court from Massachusetts has now ruled that Citigroup should pay a fine for improperly revealing Facebook's financials before the company went public. The ruling marks the first formal charge against the bank for allowing its underwriter to disclose financial information prior to the Facebook IPO.
It all started when a subordinate of Mark Mahaney, a well-respected Citigroup tech analyst, sent out some emails to TechCrunch. The tech blog in turn revealed some of the information, said the Massachusetts court.
The act stands in violation of the state of Massachusetts securities laws, which prohibit analysts of underwriting firms from revealing "written research or other written content" until 40 days after a company's IPO.
Galvin would not say whether other firms will be charged as well, or if there is other evidence. According to him, it was easier for his office to prosecute Citi because the e-mails in question directly showed how the analyst broke the law.
The regulator further indicated that his office is still trying to investigate whether underwriters Goldman Sachs, JP Morgan Chase, and Morgan Stanley had also broken the rules.
Citigroup said that both Mahaney and his junior analyst were fired. Silicon Valley analysts, however, believe that firing Mahaney was not reasonable. He was implicated because he failed to supervise his subordinate.
Galvin has indicated that his office is still trying to to probe whether underwriters Goldman Sachs, JP Morgan Chase, and Morgan Stanley had also violated the rules. In addition to agreeing to the $2 million fine, Citigroup also pledged to review its policies for overseeing analysts' communication, and to bolster compliance training for its analysts.
