In an Order dated January 26, 2017, the Securities and Exchange Commission (SEC) demanded payment of $18.3 million from Citigroup Global Markets, Inc. (“Citigroup”) stemming from allegations that the advisory firm had charged its clients millions of dollars in unauthorized fees from 2000 through 2015. The $18.3 million payment demand includes $3.2 million in disgorgement of illegally-charged advisory fees, $800,000 in interest and a $14,300,000 penalty, all to be paid to the United States Treasury.
Illegal Fees Charged in Connection with TRAK Fund Solution Program
According to the Order, Citigroup charged the unauthorized fees to approximately 60,000 clients participating in its TRAK Fund Solution Program (“TRAK”). The SEC’s Order describes TRAK as:
“[A] wrap fee investment advisory program designed to recommend an appropriate mix of investment types based on the client’s financial goals and risk tolerances . . . [by] provid[ing] specific advice about implementing investment decisions through a series of mutual fund investment portfolios that covered a spectrum of investments.”
The 60,000 clients who were illegally charged represent approximately 15 percent of all investors to whom Citigroup and its affiliates sold TRAK investments between 1991 and 2011.
The Order states that the majority of the illegal fees – approximately $13.5 million – were in the form of overcharges that exceeded the rates Citigroup had negotiated with its clients. Citigroup collected another $8.7 million by charging investors higher advisory fees than those which had been disclosed. This was the case even though, [i]ndividual advisory clients often negotiated an advisory fee lower than the traditional . . . advisory fee rate . . . [and] the negotiated advisory fee was typically documented in a client contract.” According to the Order, many clients were overcharged as a result of a flaw in Citigroup’s contract management system.
Other unlawful advisory fees involved in the case include:
- $3.8 million in overcharges resulting from a “system feature” that caused clients’ negotiated rates to default to the higher standard rates when they switched Citigroup branches.
- $3.5 million charged to clients on suspended (or “frozen”) non-TRAK accounts.
- $1 million in non-reimbursed pre-paid advisory fees owed to clients who terminated their TRAK accounts.
- $10,000 in advisory fees overcharged on clients’ retirement accounts as a result of Citigroup failing to consistently apply fee reductions on a quarterly basis.
As reflected in the SEC’s Order, individual clients’ overcharges ranged from as little as a few dollars to, “tens of thousands of dollars.”
While Citigroup has reimbursed many of the clients who paid illegally-charged fees, the Order notes that Citigroup has been able to identify all affected clients due, in part, to its inability to locate their contracts.
Are You Paying Unauthorized or Illegal Investment Advisory Fees?
If you invested in Citigroup’s TRAK Fund Solution Program or have investments with any other brokerage firm and have questions about your advisory fees, contact the stock fraud law firm of Zamansky LLC. To speak with an experienced lawyer in confidence, call (212) 742-1414 or inquire online today.