Citigroup to Pay $30 Million Fine for Disclosure of Unpublished Research

Citigroup will pay a $30 million fine to Massachusetts to settle charges that one of its analysts offered unpublished research related to orders for Apple smartphones to hedge funds and other select clients, including SAC Capital Advisors.

The analyst, Kevin Chang, provided three hedge funds â€" SAC Capital, Citadel and GLG Partners â€" and T. Rowe Price with confidential information about Hon Hai, a Taiwanese supplier to Apple smartphones, according to an order filed by William Francis Galvin, the Massachusetts secretary of the Commonwealth who oversees securities laws.

Citigroup has also been censured and will have to undertake a three-year review of its policies and procedures. The fine comes nearly a year after Citigroup paid $2 million to Massachusetts to settle charges that two other analysts broke federal and state securities laws by sharing nonpublic information about Facebook. Mr. Galvin’s office said the latest charges violated the terms of last year’s agreement.

“It seems that the concept that investors are to be presented with a level playing field when it comes to the product of research analysts is a lesson that must be learned over and over again,” Mr. Galvin said. “But it’s important that it should be taught as often as necessary.”

Citigroup said on Thursday that it was “pleased to have this matter resolved,” adding, “We take our regulatory compliance requirements very seriously and train all of our employees about these obligations. ”

The order, which includes references to e-mails from fund managers to Mr. Chang, demonstrates the lengths that a handful of SAC Capital employees were willing to go to get information on a stock they had large positions in.

The allegations date back to Nov. 13, 2012, when Mr. Chang, a research analyst who worked for a Taiwanese partner of Citigroup, published a report with a “buy” rating on Hon Hai’s stock. In the report, the analyst estimated that Apple iPhone shipments would increase from the third quarter to the fourth quarter of the year. These estimates were in line with other analyst estimates at the time.

But when Macquarie, a competing investment bank, issued a report on Dec.13 highlighting “structural risks” to demand for Apple iPhones and downgraded its rating on Hon Hai’s stock, a flurry of internal e-mails began to fly within Citigroup, questioning Mr. Chang on the new numbers.

At the same time, he was also bombarded with e-mails from Citigroup’s hedge fund and institutional clients, seeking more information. Over the span of one morning alone, multiple managers from SAC Capital e-mailed Mr. Chang, according to the order.

Under pressure from the hedge funds and institutional clients, Mr. Chang sent them “previews” of a new research report that same day, a day before publishing this same information to all of Citigroup’s clients. The new report included Mr. Chang’s estimates of cuts in Apple iPhone production numbers.

After this research note, the Citigroup downgraded its recommendation on the Apple stock from “buy” to “neutral.”