NOTE: On February 26, 2007, the United States District Court for the Southern District of New York granted motions for summary judgment filed by defendants Jones and Daidone, dismissing the case with prejudice.
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19330 / August 8, 2005
Securities and Exchange Commission v. Thomas W. Jones and Lewis E. Daidone, 05 Civ. 7044.
SEC CHARGES THOMAS W. JONES AND LEWIS E. DAIDONE WITH FRAUD RELATING TO CREATION OF AFFILIATED TRANSFER AGENT TO SERVE CITIGROUP MUTUAL FUNDS
The Securities and Exchange Commission today filed an enforcement action in the United States District Court for the Southern District of New York charging former Citigroup executives Thomas W. Jones and Lewis Daidone with fraud relating to Citigroup's creation of an affiliated transfer agent to serve its Smith Barney family of mutual funds at steeply discounted rates. Rather than passing the substantial fee discount on to the mutual funds, Citigroup took most of the benefit of the discount for itself, reaping tens of millions of dollars in profit at the expense of mutual fund shareholders.
The actions against the individuals follows the Commission's settlement with the company in May in which Citigroup agreed to pay $208 million that will distributed to victims of the fraud.
In its complaint filed today, the Commission alleges that Jones and Daidone were two of the officers principally responsible for the fraud. The complaint alleges that Jones, the former chairman and chief executive officer of the asset management division, directed an effort to negotiate a deal that would permit Citigroup to reap much of the profit that the funds' third party transfer agent had been making. Jones approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work. The complaint further alleges that Jones intentionally or recklessly acted in disregard of his fiduciary duty by failing to take steps to ensure the funds' independent directors were fully informed of the details of the proposal and that Jones approved the presentation delivered to the funds' boards seeking approval of the self-dealing transaction knowing or recklessly disregarding that the presentation was materially misleading.
The complaint alleges that Daidone, a senior vice president of the Adviser and the funds' treasurer and chief financial officer, participated in the negotiations with the existing third party transfer agent and was the person responsible for making the presentation to the funds' boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds' best interests, which was not true.
The complaint charges Jones and Daidone with aiding and abetting the Adviser and Global Markets' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, which prohibit registered investment advisers from employing devices, schemes or artifices to defraud clients or prospective clients and from engaging in transactions, practices, or courses of business that operated or would operate as a fraud or deceit upon clients or prospective clients. The complaint seeks permanent injunctions against future violations of those provisions, disgorgement of any ill-gotten gains and civil penalties.