SEC Charges Against Two Former Citigroup Officials For Fraudulent Fund Dealings Are Dismissed

Charges by the Securities and Exchange Commission have been dropped against Lewis Daidone and Thomas Jones, two former Ex-Citigroup Officials. The SEC had charged the two men with alleged involvement in a fraud scheme that let Citigroup gain millions of dollars in profits, which should have gone to specific mutual funds.

According to Judge Richard Conway Casey of The U.S. District Court for the Southern District of New York, the SEC’s push for injunctive relief and civil penalties is time-barred. He also said that there is no factual support for the Commission’s disgorgement claim.

The court said that the SEC sought three forms of relief-permanent injunctions, civil penalties, and disgorgement-for one cause of action-aiding and abetting 1940 Investment Advisers Act Section 206 violations. The remedies, according to the judge, are not available. The civil penalties and injunction relief is time-barred (the charges did not meet the 5-year statute of limitations) and the disgorgement request was not supported by enough facts. The SEC filed its suit in 2006, six years after the alleged wrongdoing that took place in 1999.

The SEC says that it is disappointed with the decision. The commission had charged the former Citigroup officials with being principally responsible for the creation of an affiliated transfer agent intended to serve Smith Barney mutual funds at a reduced rate. Instead of handing off the “substantial fee discount” to the mutual funds, however, Citigroup took most of the discounts for itself and garnered tens of millions of dollars in profit at fund shareholders’ expense.

In order to maintain its suit, SEC would have to demonstrate that it is entitled to tolling the limitations period. The SEC says that it is, under the fraudulent concealment doctrine, but the court disagrees, saying that the SEC did not meet the burden of proving that the defendants’ alleged deception was “was unknowable and hence self-concealing. … To the contrary, evidence in the record suggests that the alleged misrepresentations and omissions at issue were discoverable. …”
The bid for injunctive relief was said to be untimely for similar reasons. The Court said disgorgement by the two men was also not proven by the Commission and needed to be dismissed.

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