Massachusetts fined Citigroup Global Markets Inc. $2 million for violating state securities law when it released confidential information about Facebook Inc. during the social media company’s troubled initial public offering earlier this year.
While the case relates to action that occurred in Citigroup’s San Francisco office, Massachusetts has jurisdiction due to a 2003 consent order that the firm, then known as Salomon Smith Barney, signed with the state to settle charges of securities fraud. Citigroup, which is based in New York, is also registered to do business in Massachusetts.
Citigroup has agreed to pay the fine — the first such penalty related to the Facebook IPO — and is not disputing the charges.
“We are pleased to have this matter resolved. We take our internal policies and procedures very seriously and have taken the appropriate actions,” said Sophia Stewart, a Citigroup spokeswoman, in an e-mail.
The social networking giant’s IPO was the third-largest ever in the stock market, with Facebook shares debuting at $38 and the company raising $16 billion. But the much-heralded launch hit immediate problems, including an unexpected delay in trading that first day.
Moreover, Facebook and its investment banks have since been accused of not sufficiently warning investors of potential business risks, including its strategy of dealing with the shift to mobile computing.
Massachusetts Secretary of State William Galvin was among the first regulators to look into allegations of impropriety. In addition to Citigroup, the state is looking at the activities of Morgan Stanley, J.P. Morgan, and Goldman Sachs leading up to the IPO.
Galvin said many investors in Massachusetts deserved to know more information about the company before they bought its stock.
“It is essential in these times of rapid and diffuse means of communications that financial institutions be vigilant to ensure that the rules on IPOs are observed by all their personnel so that the integrity of the process is maintained,” he said. “This penalty should serve as a warning to the industry as a whole.”
A decade ago, Salomon Smith Barney and other big investment firms were at the center of a legal fight over tainted analyst research. The outfits agreed to a $1.4 billion settlement that also led to greater oversight of their research practices.
In this case, Massachusetts said that a junior analyst at Citigroup, which was an underwriter for Facebook in the IPO, improperly sent confidential information about the company to two reporters at the technology news site TechCrunch.com several weeks before the scheduled stock sale. The e-mail contained the firm’s opinion about investment risk into Facebook and estimated revenues for the social media site. The analyst who sent the e-mails was fired in September.
The information from the junior analyst does not appear to have resulted in an article on TechCrunch. According to the complaint, when the TechCruch reporter asked the Citigroup analyst if the site could publish its document, the analyst responded, “My boss would eat me alive.”
The state’s investigation also revealed that a senior analyst, Mark Mahaney, separately released confidential information to a French journalist about YouTube, the video-sharing site owned by Google Inc. Mahaney, a longtime and well-regarded technology analyst, was also terminated.
The action from Massachusetts’ top securities watchdog could be the first of many related to Facebook’s offering. The company and its investment banks are facing dozens of shareholder lawsuits over the IPO.
“The far larger issue is to what extent Facebook as an entity was forthcoming and made full and adequate disclosure about what its numbers were.” said Anthony Michael Sabino, a securities law expert at St. John’s University’s business school.
Facebook’s stock closed Friday at $21.94, down 2.7 percent, but its share price jumped earlier this week after it released better-than-expected earnings.Michael B. Farrell can be reached at firstname.lastname@example.org.