NEW YORK (Reuters) - Citigroup Inc agreed to pay $1.5 million to settle civil regulatory charges over its handling of trust funds belonging to Michigan and Tennessee cemeteries, in a matter that has led to criminal prosecutions.
The Financial Industry Regulatory Authority, a brokerage regulator, said Citigroup agreed to pay a $750,000 fine and surrender $750,000 of commissions. It said the commissions will be returned to cemetery trusts as partial restitution.
According to FINRA, former Smith Barney broker Mark Singer and two customers, Oklahoma oil and gas speculator Clayton Smart and Michigan lawyer Craig Bush, schemed from September 2004 to October 2006 to misappropriate funds estimated to total more than $60 million.
Citigroup put its Smith Barney unit into a joint venture controlled by Morgan Stanley one year ago.
FINRA said Smart bought 28 Michigan cemeteries from Bush using trust funds improperly transferred from the cemeteries to a company that Smart owned. Smart then used other trust funds to buy cemeteries and funeral homes in Tennessee, FINRA said.
The regulator said Citigroup missed several “red flags,” including irregular funds transfers and a May 15, 2006 “whistle-blower” letter from a cemetery trustee warning of “serious concerns” about Singer’s handling of trust funds. He worked in a Newtown, Pennsylvania, office for Citigroup.
Brokerages must take “prompt and meaningful action when they encounter indications of possible fraud or misappropriation,” FINRA enforcement chief James Shorris said. “That duty is particularly critical when firms handle trust funds where the beneficiaries may be unsophisticated investors who are unaware of how the funds are being handled.”
Citigroup spokesman Alex Samuelson said the bank cooperated with authorities, and the FINRA penalty related to a single Smith Barney broker. The New York-based bank did not admit wrongdoing in agreeing to settle.
An embezzlement case against Singer ended Monday in a mistrial after a Tennessee state jury failed to reach a verdict in nine days of deliberations. A spokeswoman for the Shelby County District Attorney’s office said the prosecution will request a new trial date at a June 30 hearing.
FINRA said Singer still faces criminal charges in Indiana, Smart faces criminal charges in Michigan and Tennessee, and Bush has been named in civil litigation.
Singer’s lawyer Robert Katzberg, Smart’s lawyer Michael Scholl and Bush did not immediately return calls or e-mails seeking comment.
Reporting by Jonathan Stempel, editing by Leslie Gevirtz and Gerald E. McCormick