Morgan Stanley and Citigroup have finalized an agreement to pay U.S. authorities $5.9 million combined to settle claims that they misled investors with the trading conditions on the FX platform of the brokerage firm Smith Barney, which they jointly own.
The firms agreed to pay the fine without admitting or denying violations, according to the notice. The breakdown statement includes each company paying $624,458 disgorgement of ill-gotten gains, in addition to interest of $89,277 and a $2.25 million penalty.
Morgan Stanley and Citi Smith Barney teamed up in 2009 to create Morgan Stanley Smith Barney LLC as a joint venture with 1.3 million advisory accounts.
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Over a one year period starting in August 2010, Smith Barney failed to disclose on its FX trading platform, known as ‘CitiFX Alpha’, that there was significantly greater potential for investors to be placed into the program using substantially more leverage than advertised. Additionally, the platform didn’t disclose that greater markups could be charged on each trade, the SEC said in the news release.
The SEC’s investigation also finds that the brokerage negligently misstated or omitted to state the true financial risk associated with investing in the firm’s offering. “The undisclosed leverage and markups caused investors to suffer significant losses,” the SEC wrote in its order against the company.
Citigroup and Morgan Stanley are also alleged by the SEC to have made misleading presentations which were based on the program’s past performance and risk metrics. The company should have instituted and enforced written policies to avoid the above violations, the SEC said.
Eric I. Bustillo, Director of the SEC’s Miami Regional Office, commented: “Citigroup and Morgan Stanley sold securities in a complex trading program without giving certain investors important information about the risks and costs of the program. Investors simply cannot be sold investments based on disclosures that are inaccurate or incomplete.”