Financial Industry Regulatory Authority (FINRA) has imposed a monetary sanction of $1.5m against Citigroup Global Markets for supervisory violations relating to its handling of trust funds belonging to cemeteries in Michigan and Tennessee.
The sanction represents a $750,000 fine and disgorgement of $750,000 in commissions, which is being returned to the cemetery trusts as partial restitution.
According to FINRA, Citigroup consented to findings that, from September 2004 through October 2006, Citigroup broker Mark Singer and two of his customers were involved in a scheme to misappropriate an amount alleged in various legal actions to be over $60m in cemetery trust funds.
Mr Singer’s two customers, Smart and Bush, were successive owners of a group of Michigan cemeteries from which funds were believed to be stolen. In August 2004, Mr Smart purchased the cemeteries from Mr Bush using trust funds that had been improperly transferred from the Michigan cemeteries themselves to a company that Mr Smart owned. Soon afterwards, Mr Smart used additional trust funds to buy cemeteries and funeral homes in Tennessee.
FINRA found that a Citigroup branch manager had recruited Mr Singer from another broker-dealer, where the scheme originated. When he began working for Citigroup in September 2004, he brought nearly all of his customer accounts with him, including the cemetery trust accounts and other accounts belonging to Mr Bush.
Mr Singer assisted Mr Bush and Mr Smart in opening numerous Citigroup accounts in their own names, as well as in the names of corporate entities they owned or controlled. Mr Singer helped Mr Bush and Mr Smart deposit cemetery trust funds into some of these accounts and then effect improper transfers to third parties, sometimes using conduit accounts to mask the transactions. Some of the fund transfers were disguised as fictitious investments made on behalf of the cemeteries.
FINRA has said that its investigation showed that over a period of more than two years, Citigroup failed to reasonably supervise the handling of these accounts by inadequately responding to a succession of ‘red flags’, failures that permitted the scheme to continue undetected until October 2006.
James Shorris, executive vice president and executive director of enforcement at FINRA, said: “Firms have a duty to protect customer funds by taking prompt and meaningful action when they encounter indications of possible fraud or misappropriation. 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.”