Citigroup, UBS and Deutsche Bank fined over outsourcing failure

23 September 2009

Citigroup Global Markets, UBS Securities and Deutsche Bank Securities have been hit with fines by the Financial Industry Regulatory Authority (Finra) after failures regarding communicating with customers over the sale of securities in the initial public offering (IPO) of VoIP provider Vonage.

Financial penalties totaling $425,000 have been levied against the three firms, with Citigroup fined $175,000, UBS ordered to pay $150,000 and Deutsche Bank given a $100,000 punishment.

Furthermore, the three companies will have to make payments to customers that could reach $420,000 after Finra concluded that they "failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of securities in the Vonage IPO".

Each of the firms was a lead underwriter in the deal, part of which involved Vonage selling around 4.2 million shares to customers who had opened accounts through Citigroup, UBS and Deutsche Bank.

The scale of the deal meant that an outside company was brought in to handle communications with the customers taking part in the directed share program and a website was set up to give clients information relating to the IPO.

However, "supervisory failures" by the financial services companies meant that they were unable to respond in the necessary manner when a problem occurred at the outsourcing business handling the communication, Finra found.

An error by an employee at the outside organization meant some customers were told they had not been given allocations on the IPO when the opposite was the case, with many of these unaware that they had in fact received shares until many days after the deal had taken place.

By this time, shares in Vonage had fallen to below the initial IPO price, but customers were required to pay the higher value and therefore made losses when they sold the shares on at a later date.

Executive vice president and chief of enforcement at Finra Susan Merrill stated that customer communication is an "important brokerage firm activity", warning that financial organisations must supervise these "effectively".

Finra was established in 2007 and is the largest independent regulator for securities companies operating in the US.

Written by Asim Shah

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