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From Securities Regulation Daily, October 3, 2013

Citigroup fined $30 million for leaking research to hedge funds

By Matthew Garza, J.D.

The Massachusetts Securities Division has entered a consent order fining Citigroup Global Markets, Inc. (CGMI) $30 million for leaking a research report on Taiwan-based Hon Hai Precision Industry Co., Ltd., a major supplier to Apple. CGMI’s research analyst, Kevin Chang, who was employed by the Taiwanese affiliate, leaked the information early to Steven Cohen’s hedge fund SAC Capital, as well as Citadel, LLC, GLG Partners, and T. Rowe Price, after receiving pressure to respond to a competitor’s conflicting report. The Massachusetts securities regulator said that Chang forwarded previews of his unpublished reports on Hon Hai on December 13, 2012, one day before it was published.

Contrasting forecasts. As of May 2012, Hon Hai was the largest supplier of Apple iPhones and iPads. Chang had issued a buy rating for Hon Hai in November after he forecasted that the total shipment of iPhones to Apple would go up in the third and fourth quarters of 2012 and the supplier would continue to meet heavy demand from Apple in the first quarter of 2013. After a competitor issued an analyst report indicating that Hon Hai would supply 35 to 40 percent fewer iPhones to Apple in the first quarter of 2013, CGMI began to get inquiries from clients about its rosy predictions. CGMI’s clients all executed sales of Apple stock on December 13 and 14, and the price of the stock dropped from $531.15 to $503.50.

Communication with clients. A SAC Capital employee allegedly emailed Chang on December 13, asking, “Hey Kevin, are you picking up any order cuts to iPhone?” He received three more inquiries from SAC Capital that day, and also was contacted by Citadel and T. Rowe Price. In response to the inquiries, Chang forwarded previews of his unpublished research views, which indicated that he was predicting a 26.7 percent cut in the number of iPhones supplied by Hon Hai. The hedge funds immediately took a dimmer view of Hon Hai. On December 14, after being told by another Citigroup employee, prior to the release of the report, that “they are already going out with that the cuts are likely true,” Chang responded, “We apparently can’t talk about the new numbers yet,” despite the fact that he had already disclosed them to four clients.

Settlement. The consent order concluded that the conduct violated CGMI’s own policies and procedures, federal and state securities laws, FINRA and NASD rules, and a 2012 consent order with the division. In that matter, CGMI was fined $2 million for a failure to prevent or detect the written disclosure of material, nonpublic information prior to an IPO. At the time, CGMI agreed to review its policies and procedures related to its electronic surveillance program for communications between its analysts and external parties. In addition to the $30 million penalty, CGMI agreed to a cease and desist order and a censure, and also agreed to conduct an internal review, revise its policies and procedures, and conduct internal education. The Massachusetts Securities Division said that its investigation is ongoing.

Attorneys: Brian J. Lantagne, Esq. of Massachusetts Securities Division.

Companies: Citigroup Global Markets, Inc.; Apple, Inc.

MainStory: TopStory FraudManipulation MassachusettsNews

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