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Citigroup (C) to Pay $7.3M Penalty for Substandard IPO Work

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Citigroup Inc. (C - Free Report) has recently been fined $7.3 million by Hong Kong’s securities regulator. The Securities and Futures Commission said that the bank failed to discharge its duties of conducting proper due diligence as a sponsor for China-based Real Gold Mining Ltd.’s initial public offering (IPO) in 2009.

The mining company was banned from trading since 2011 after irregularities were found in its accounting system.

Yesterday, the SFC said that the bank “failed to conduct adequate and reasonable due diligence on Real Gold’s customers and properly supervise its staff when carrying out the sponsor work on Real Gold’s listing application”.

While conducting interviews with the customers of the mining company, Citigroup -- without verifying their identities -- discussed the numbers that were given by the company.

Notably, in case any untrue or misleading statements are found in the offer documents during an IPO, the sponsor is held accountable.

Being concerned about poor and insufficient advisory work and the lack of proper due diligence, the SFC conducted investigations on almost 15 firms that acted as sponsors for IPOs in Hong Kong.

The SFC stated that Real Gold’s IPO was the only listing application that Citigroup sponsored in Hong Kong. It also noted that the breaches made by the bank were not deliberate.

James Griffith, a Hong Kong-based spokesman for Citigroup said, “The resolution announced by the SFC does not involve any license suspension and does not place any constraints on Citi’s business activities or on any individual in Hong Kong or elsewhere.”

Notably, in March, UBS Group AG (UBS - Free Report) was banned from sponsoring IPOs in Hong Kong for almost 1.5 years for a sponsor work that it conducted on an IPO in 2009.

Citigroup continues to encounter many investigations and lawsuits from investors and regulators. Though the company resolved certain litigations related to the sale of risky mortgage-backed securities and other issues, many of the cases are yet to be resolved.

While a diversified business model, focus on core operations, streamlining of international businesses and strategic investments are expected to continue supporting Citigroup’s growth, such legal issues might lead to increased expenses, thereby hurting bottom-line growth.

Shares of the company have gained 17.1% in the past year, underperforming 20.4% growth of the industry.



Currently, Citigroup carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks from the same space are Comerica Incorporated (CMA - Free Report) and State Street Corporation (STT - Free Report) . Both stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comerica’s Zacks Consensus Estimate for the current-year earnings moved 5.2% upward over the past 60 days. The company’s shares have surged 45.4% over the past 12 months.

State Street’s current-year earnings estimates have been revised 1.3% upward over the past 60 days. Its shares have gained 25.3% in the past year.

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