FINRA Fines Citigroup, UBS and Deutsche Bank $425,000

The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Citigroup Global Markets, UBS Securities and Deutsche Bank Securities a total of $425,000 — and ordered the firms to make payments to customers that could total $420,000 — in connection with the firms’ failure to adequately supervise communications with their customers in the initial public offering (IPO) of Vonage, LLC in May 2006.

Citigroup Global Markets was fined $175,000 and ordered to pay a maximum of $250,000 to 284 potentially eligible customers; UBS Securities was fined $150,000 and ordered to pay a maximum of $118,000 to 126 potentially eligible customers; and, Deutsche Bank Securities was fined $100,000 and ordered to pay a maximum of $52,000 to 59 potentially eligible customers.

FINRA found that each of the firms failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of securities in the Vonage IPO.

Each of the firms was a lead underwriter for the Vonage IPO, which included a directed share program (DSP) under which the firms sold approximately 4.2 million shares to Vonage customers through accounts the customers had opened at the firms.

Because of the large number of expected directed share program participants, Vonage and the three underwriting firms agreed that an outside company would design and administer a Web site for directed share program participants. Communications with customers of the firms about the sale of Vonage IPO securities were to occur through that Web site. These communications included acceptance of offers to purchase the IPO shares, information about share allocations and communications about money the customers owed to the firms for the allocated shares. FINRA found that because of the firms’ supervisory failures, when a problem occurred at the outside company that caused numerous customers to receive incorrect communications, the firms were unable to respond satisfactorily.

FINRA also found that, even though each of the firms had written procedures for both directed share programs and for outsourcing, the firms did not follow those procedures.

As a consequence of the firms’ failures, when an error by an employee of the outside company — who disabled a server when the allocation program was run — resulted in certain customers receiving communications stating that they had not received IPO allocations when in fact they had, the firms were unable to take prompt and effective action to respond to the problem. By the time some customers learned several days later that they had been allocated shares, the price of Vonage stock had declined significantly from the initial IPO price. Nevertheless, those customers were required to pay the higher IPO price for their shares and incurred losses when they later sold those shares.

The restitution payments that FINRA ordered will compensate the customers for the difference between the $17 per share IPO price they paid and the lower price of Vonage stock at the time they learned that they had been allocated shares. Pursuant to the terms of the settlement, the firms will notify eligible customers.

More than 7,000 accounts were opened at Citigroup by Vonage customers to participate in the directed share program, approximately 3,000 accounts were opened at UBS, and approximately 1,370 accounts were opened at Deutsche Bank. Citigroup sold approximately 2.5 million shares in the program, UBS sold approximately 1.2 million shares and Deutsche Bank sold approximately 500,000 shares.

In settling each of these matters, none of the firms admitted nor denied the charges, but consented to the entry of FINRA’s findings.

If you have questions about the Vonage IPO, or if you believe that you have been the victim of a securities fraud, The White Law Group may be able to help. To speak to a securities attorney, please call our Chicago office at 312-238-9650 for a free consultation.

The White Law Group is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

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