Forbes

Did Citi Dupe Its Own Employees About Risky Investments?

Advisor Network 12/12/2011 @ 5:09PM

It’s tough to forget the all the pains brought on by 2008 financial crisis when e-mails like the ones from Citigroup make their way public.

Apparently Vikram Pandit’s employees felt duped about the safety and soundness of products they were being told to sell clients before the financial crisis took hold. Fox Business revealed today internal communications from Citi’s rank and file employees, including financial advisors, to the bank executives over their concerns.

“The issue is that clients got duped, and we as FAs [financial advisors] got duped on what we were getting,” said Jennifer Krause, a financial advisor at Citi’s Smith Barney unit, on an internal bank conference call in April 2008 after the funds failed, according to an internal bank transcript in court documents that FOX Business has obtained.

Smith Barney managing director Mark Curtis — who Barron’s would rank as Wall Street’s No. 1 financial advisor in 2008 — on April 11, 2008, emailed Sallie Krawcheck, who ran Citi’s global wealth management business: “We will not be defensible in arbitration… It is what was told to us (FAs) and in some cases directly to the clients by the Falcon/MAT portfolio manager that will be indefensible.”

And Smith Barney financial advisor Andrew Basch had already emailed Krawcheck on March 14, 2008: “Sadly for our firm this is a gigantic disaster because of lack of proper disclosure.”

Citi employees  repeatedly told Citi’s top executives, including new chief executive Vikram Panditand Krawcheck, about problems even while the funds were melting down, the documents show. Krawcheck could not be reached for comment.

Krawcheck fought to refund the bank’s lucrative investors who were largely wiped out, the cream of the bank’s clientele at its Smith Barney unit, the crown jewel at Citi. But Pandit and his top executives opposed her moves, the documents show and sources close to the matter say.

The failure of these funds were partly the reason why Krawcheck, one of Wall Street’s most powerful women, was shown the door by Pandit, people close to the matter say.

At the time of the e-mails Citi owned Smith Barney, the retail wealth management arm of the bank made up of thousands of financial advisors and led by Sallie Krawcheck. Krawcheck later moved on to Bank of America where she was in charge of that bank’s retail advisory business, Merrill Lynch. She was fired earlier this year amid CEO Brian Moynihan’s management re-0rganization.

At issue appears to be investments dubbed Falcon and ASTA/MAT. The bank’s financial advisors who were apparently told the investments were stable then turned around and sold them to retail investors. Fox reports that those investments “became nearly worthless, dropping a breathtaking 80% to 97% from 2007 to March 2008. More than 2,000 of the bank’s wealthiest clients lost the majority of their initial investment, court documents show.”

Citi tells Fox in a statement that it “acted appropriately at all times in connection with these investments” adding“our disclosures were accurate and complete and the investors who purchased these investments were highly sophisticated and knew of the risks involved.”

It’s interesting that the folks making noise about the safety of investments sold to clients were stockbrokers who likely made commission off the investments. Unlike investment advisors, brokers are held to a suitability standard when selling investments to clients–meaning the products sold to their clients need only be suitable not and necessarily the best product for the client. SEC-registered investment advisors are meanwhile held to a fiduciary standard in which the client’s interests are put first.

Under Dodd-Frank reform there has been plenty of debate about whether all financial advisors including ones working at big wirehouse firms like Merrill Lynch, Morgan Stanley, Wells Fargo and UBS should operate under the fiduciary standard.

Last week Citi said it would take nearly a half-billion dollar fourth-quarter charge related to severance and other costs associated with 4,500 layoffs.