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Tue, Jun 28, 2005 - Page 12 News List

Citigroup braces for record fine by London watchdog

THE OBSERVER , LONDON

Citigroup, the US banking and financial services giant, is braced for a record multimillion-pound fine from the chief City of London watchdog, the Financial Services Authority (FSA).

The penalty, which could be announced this week, follows a controversial bond trade that rocked continental markets and angered European governments.

In August of last year, Citigroup traders suddenly sold ?7 billion (US$12.7 billion) of government bonds, but within minutes repurchased nearly ?3 billion at lower prices -- overwhelming electronic trading systems but yielding the bank a tidy profit of ?10 million.

The trades, which led to the suspension of several dealers, were undertaken after it emerged that Citigroup had published a memorandum that gave details of an aggressive plan designed to undermine the German government-bond market and thereby eliminate weaker competitors. Citigroup officials later described the exercise as "juvenile" and suspended a number of traders.

But its rivals were furious and government officials from Germany and Portugal complained that Citigroup had destabilized the market for the trading of European government debt.

This week, according to City -- the financial district of London -- sources, the FSA will impose a record fine for offences involving trading in the capital markets: the amount is expected to be between ?15 million and ?25 million. The figure could exceed the ?17 million fine that the FSA slapped on Shell last year for exaggerating its oil and gas reserves.

But Citigroup has apologized for the incident -- which the bank's boss, Chuck Prince, described as "knuckleheaded" -- and is understood to have been cleared of market manipulation, a charge that could have led to criminal prosecutions. The FSA is expected to limit its criticism to the absence of proper internal controls.

Citigroup declined to comment, but a spokeswoman referred to earlier statements that said it regretted the trades, "but did not believe that it had violated any market rules or regulations."

A City source said: "You can bet Citigroup will never try something like that again."

Last year there was evidence that Citigroup had lost some government business in the wake of the bond affair.

Citigroup is no stranger to controversy. A fortnight ago, it agreed to to pay about ?1 billion to settle a class-action lawsuit filed by Enron investors who sued the bank for its alleged role in fraudulent deals at the collapsed energy group.

And last year, Citigroup paid US$2.6 billion to settle a lawsuit brought by investors in WorldCom, which crashed after the dotcom bubble burst.

In both cases, Citigroup denied breaking any laws.

Despite the setbacks, Citigroup's financial fortunes are reviving strongly. It recently disclosed record first-quarter earnings and a US$15 billion share buyback.

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