April 25, 2012 / 7:18 PM / 5 years ago

Exclusive: Citi can promote executive tied to Grubman scandal

A Citibank sign on a bank branch in midtown Manhattan, New York, November 17, 2010. REUTERS/Mike Segar

(Reuters) - Citigroup Inc (C.N) can appoint as chief of equity sales an executive disciplined by regulators for failure to properly oversee Jack Grubman, a research analyst who wrote fraudulent reports on companies to boost their stocks.

The U.S. Securities and Exchange Commission approved a request by Citigroup and the Financial Industry Regulatory Authority to allow the executive, Kevin McCaffrey, to work as chief of equity sales in the Americas for Citigroup, the nation’s third-largest bank. In return, Citi agreed to strictly monitor McCaffrey’s behavior.

In 2005, McCaffrey, was fined $120,000 and prohibited from working as a securities industry supervisor for 15 months.

He was penalized for failing in 2000 and 2001 to properly supervise Grubman, who regulators said issued “fraudulent and misleading” research reports to help Citi win investment banking business. Grubman in 2003 paid civil penalties totaling $15 million and was barred from working in the securities industry for life.

The discovery of Grubman’s actions at Citigroup and similar ones at other brokerages led to a separation of research and investment banking functions at major Wall Street companies. More than a dozen companies participated in the settlement with regulators, which wound down in 2009.

McCaffrey, then head of North American equity research at Salomon Smith Barney Inc, was one of two supervisors who did not adequately respond to red flags that Grubman had “unrealistically bullish ratings” on companies he covered, according to a 2005 SEC document.

The suspension of McCaffrey from a supervisory role was part of a settlement between McCaffrey and FINRA, Wall Street’s self-funded regulator. The agreement also allowed McCaffrey to reapply for a supervisory license.

Citi’s application for a new supervisory license on McCaffrey’s behalf is unusual because of the burdensome procedures the company would have to follow to receive approval from regulators, said Thomas Lewis, a lawyer for Stark & Stark in Lawrenceville, New Jersey who represents brokers.

The conditions agreed to by Citigroup include weekly management meetings between McCaffrey and two high-level supervisors. McCaffrey will be assigned a dedicated senior compliance officer who will provide and document quarterly training, and Citigroup’s compliance department must conduct weekly reviews of all of McCaffrey’s electronic communications, including email and instant messages.

Citigroup spokesman Scott Helfman confirmed that McCaffrey will head the equities sales unit. “Kevin has satisfied all the regulatory requirements for reinstatement. We have complete confidence and trust in his abilities and believe he is the right person for the job,” he said.

McCaffrey remained a licensed broker during the time he was unable to supervise employees. He has worked at Citigroup since in various roles since the 2005 decision, including as a managing director focused on business development in Asia and an investment adviser to a fund, according to the SEC order, published Monday.

Most recently, McCaffrey has been in a non-supervisory role related to the head of equity sales unit that he will head.

A message left for McCaffrey was not immediately returned.

Additional reporting by Jed Horowitz; Editing by Jennifer Merritt and Steve Orlofsky

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