Two former executives at Citigroup Inc., the world's biggest financial company, were accused by the U.S. Securities and Exchange Commission of diverting to the bank tens of millions of dollars that should have gone to reduce costs for mutual fund investors.
Thomas W. Jones, 56, former chief executive of Citigroup Asset Management, and Lewis E. Daidone, 48, a former senior vice president of Smith Barney Management LLC, were named in a complaint filed today by the SEC in U.S. District Court in Manhattan. Both defendants said they would fight the claims.
Jones and Daidone re-negotiated a more favorable contract with First Data Investment Services Group and then kept the savings for Citigroup's asset management arm instead of passing the discount along to the mutual funds, the SEC said. The bank made $100 million in profit at the expense of its mutual funds' shareholders during a five-year period, the SEC said.
``This was a particularly egregious situation in which the adviser took a large chunk of the profit for the transfer agent business without doing significant work,'' said Mark Schonfeld, regional director for the SEC's New York office.
Citigroup agreed in May to pay $208 million to settle regulators' claims it pocketed fees that should have been passed on to mutual funds. The company didn't admit or deny wrongdoing.
Jones's seven-year career at New York-based Citigroup ended in October when Chief Executive Officer Charles Prince forced him to resign after a scandal at the Japanese private bank Jones oversaw cost the company $244 million. Six months later, the firm gave him $50 million to start his buyout fund TWJ Capital Opportunity Fund I LP, according to a June filing with the SEC.
``It's a mess,'' said Marshal Front, who manages $1.2 billion at Chicago-based Front Barnett & Associates, which owns 774,000 Citigroup shares. ``It seems counterintuitive if Chuck Prince's principal goal is to make this company squeaky clean to continue to have a relationship with Jones in the private equity fund.''
Jones and Daidone were accused of misrepresenting and omitting facts when recommending to the mutual funds' boards that they change to a transfer agent that was a Citigroup affiliate, the SEC said. Mutual funds pay transfer agents to perform administrative services. The fund advisers recommend to directors which transfer agents to hire and how much to pay them.
``At no point in the process did the defendants alert the funds that such a discount was available,'' the SEC's complaint said. ``Instead, they co-opted all of this benefit for CAM.''
James R. Doty and G. Irvin Terrell, attorneys for Jones, said in a statement their client will contest the SEC's claims. Jones lives in New Canaan, Connecticut.
``Mr. Jones did not aid and abet any fraudulent activity during his watch at Citigroup Asset Management,'' Jones's attorneys said. ``The record will demonstrate Mr. Jones achieved substantial benefit for mutual fund shareholders and that he made every effort to fulfill his fiduciary duty to them. Mr. Jones is a victim of this situation, not a perpetrator of wrongdoing.''
Daidone, of Holmdel, New Jersey, said in a statement issued by his attorney Richard J. Morvillo, a partner at Mayer Brown Rowe & Maw LLP in Washington, that he would fight the SEC claims.
``The SEC's charges that Mr. Daidone aided and abetted wrongdoing are irreconcilable with the evidence that shows he acted in good faith and with the advice of counsel,'' the statement said. ``We are confident that the evidence will show not only that Citicorp did nothing wrong but that Mr. Daidone fully and appropriately discharged any and all duties he may have owed to the Funds.''
``The SEC issues with respect to the company were settled in May of this year,'' said Citigroup spokeswoman Shannon Bell. She declined to comment further.
Citigroup shares fell 33 cents to $43.30 in composite trading on the New York Stock Exchange. Its shares have fallen 10 percent this year compared with a 1 percent gain in the Standard & Poor's 500 Index.