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Fresh Penalty Imposed on Citigroup

C CME

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Citigroup Inc. (C - Analyst Report) has hit the headlines for all the wrong reasons. In order to settle charges for breaching position limits on wheat futures trading, Citigroup will pay $525,000, according to media sources.

The allegations are associated with the long positions held by Citigroup in 2009, which surpassed the caps imposed on such trades. These trades took place on the Chicago Board of Trade, a unit of CME Group Inc. (CME - Analyst Report).

This penalty, imposed by The Commodity Futures Trading Commission (CFTC), comes just a couple of weeks before the implementation of the new limits on the trading of natural gas, wheat and certain other items under the Dodd-Frank Act.

The measures are aimed at reducing excessive speculation. Such speculative moves are said to be responsible for amplifying the volatility in the price and increasing the price of that commodity.

Of late, Citigroup has been making news for a number of litigation settlements. In an effort to reach a settlement with investors who bought its shares between February 2007 and April 2008, last month Citigroup agreed to shell out $590 million. The settlement, one of the largest of its kind, has accused Citigroup of misleading its investors by withholding information regarding its toxic asset transactions during that period.

We believe that with the resolving of the suit, the company stands to lose its hard earned money which could have been otherwise used for growth purposes. Though the company has adequate reserves to meet this settlement amount, we believe that it could have been steered towards the company’s growth initiatives, had it not been subject to such litigations.

Citigroup, otherwise, boasts of an impressive global footprint and attractive core business. The company has restructured its business and overhauled its risk management. It is reducing its risky exposures by trimming the problem assets, which in turn frees up capital to be invested in its core business. Yet, a low interest rate environment, regulatory headwinds and litigation risks remain our concerns.

Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock.

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