Citigroup arm caught up in scandal

CITIGROUP, the world's largest financial services company, has become the latest investment firm caught in a widening probe of mutual fund abuses.

The group said the US Attorney was investigating its mutual fund unit Citigroup Asset Management over its relationship with a 'transfer agent services provider' - a third party company providing outsourced services.

Citigroup expressed 'regret' over 'errors' in the relationship. The $495m (£292m) unit is co-operating with the Securities and Exchange Commission, New York attorney general Eliot Spitzer, and other regulators.

CAM chief executive Thomas Jones said the bank was reimbursing $16m to the unit. Citigroup said it had received the funds under a 'revenue transfer agreement' with the third-party provider, which it did not name.

Jones said Citigroup, in the course of reviewing documents requested by the SEC, focused on its entry into the transfer agent business from 1997 to 1999.

He said Citigroup initially agreed with the subcontractor that it would 'guarantee certain benefits to CAM or its affiliates'. Later Citigroup agreed to eliminate the benefits in exchange for a one-time payment and other arrangements.

'Neither the agreement nor the amendment was disclosed to the boards of CAM's proprietary funds at the time the boards were considering whether to approve the transfer agent arrangements or subsequently,' he said. 'These errors never should have occurred and we deeply regret that they did.'

Mutual fund companies fear the stakes in the scandal are rising rapidly. They were shocked when regulators summarily closed down Security Trust, a company that provides back-office services to investment firms.

It is the most radical action that regulators have taken against the industry since they began investigating abuses in September. It is also the first time they have targeted an outsourcing company that processes trades for investment funds, rather than the funds themselves.

They accused Security Trust of helping hedge funds make illegal trades in mutual funds with the cooperation of its top management.

Spitzer said: 'This is one of those cases where the criminal conduct emanated from the top.'

His office has charged Security Trust chief Grant Seeger, former president William Kenyon, and former senior vice president Nicole McDermott with grand larceny, falsifying business records, and securities fraud. The SEC has also filed charges against the company and three executives.