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Citigroup to pay state $30m over analyst leak

Citigroup will settle charges a company analyst improperly shared research with large investors in advance.

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Citigroup will settle charges a company analyst improperly shared research with large investors in advance.

Citigroup Global Markets Inc. will pay $30 million to Massachusetts to settle charges a company analyst improperly shared research with large investors in advance, giving them the chance to profit from weaker sales of iPhones. The information was not shared with other investors until a day later.

The settlement is one of the largest by Secretary of State William F. Galvin’s securities division and the second case in two years involving New York-based Citigroup. It’s the latest example of Galvin’s aggressive policing of the investment industry.

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“Just a year ago, with Facebook, we fined them $2 million, when they were playing the same game,’’ Galvin said in an interview. When elite clients get an unfair edge, he said, it’s like average investors “going to the supermarket and having a weighted scale.’’

Galvin had the authority to pursue Citigroup because the company is registered to conduct brokerage business in Massachusetts.

The settlement filed late Wednesday centered on a research office halfway around the world sharing coveted tips on anticipated sales by giant Apple Inc. with a handful of sophisticated money managers.

According to the settlement, a copy of which was obtained by the Globe, a Citigroup analyst offered portions of his research on a company that made iPhones for Apple to four large clients, including SAC Capital Advisors and the mutual fund firm T.Rowe Price, ahead of individual investors.

The settlement said the Citigroup analyst, Kevin Chang in Taipei, provided an unpublished report to the four clients on Dec. 13, 2012, predicting lower sales of the iPhone. The information wasn’t released to the broader market until three days later.

By then, Apple shares had already fallen 5.2 percent, and only the large investors had the opportunity to sell shares or bet they would fall in that time. Three of the big investors traded Apple shares at the time, Galvin alleged, but it was unclear if they profited from the transactions.

Citigroup spokeswoman Sophia Stewart said in a statement: “We are pleased to have this matter resolved. We take our regulatory compliance requirements very seriously and train all of our employees about these obligations.’’

She also said the company is “constantly working to improve, manage and monitor the compliance and controls process.”

The settlement document portrays an analyst who allegedly came under heavy pressure from inside and outside the company to say what he knew about the size of anticipated shipments by Hon Hai Precision Industry Co. Ltd. of Taiwan, the supplier of iPhones.

Chang received a flood of urgent e-mails on Dec. 13. Executives from the four client companies wanted to know if he agreed with a competitor’s report, predicting much lower shipments of the iPhone 5 than Wall Street had been expecting.

Chang’s insights into Hon Hai’s expected iPhone business were in high demand, as Apple was a major stock holding for many hedge funds and mutual funds around the globe.

“Hey Kevin, Are you picking up any order cuts to iPhone?’’ asked one employee of SAC Capital Advisors of Stamford, Conn., a Citigroup client that owned Apple stock, according to the settlement, citing one of many e-mails.

After a barrage of similar requests, Chang sent out a new, as yet unpublished report, predicting a sharply lower number of iPhone sales. The report allegedly went to SAC, as well as to Baltimore-based T.Rowe Price and the investment firms Citadel in Chicago and GLG Partners of New York.

By the next day, on the 14th, Apple shares had lost 5.2 percent of their value. But it wasn’t until that day that the rest of Citigroup’s clients received Chang’s report. And it was two days later that Citigroup’s Apple analyst lowered his rating on the company, releasing the information to the broader audience of Apple investors, according to the Massachusetts settlement.

Representatives for the four companies declined to comment. While the firms were not named as parties in the complaint, Galvin did not rule out pursuing legal claims against them for allegedly seeking and accepting the tips from the analyst.

“We haven’t got there yet,’’ Galvin said.

Chang was fired by Citi Taiwan last month. He could not be reached for comment.

According to the settlement, another Citigroup analyst responsible for covering Apple had wanted to coordinate the release of separate reports on Hon Hai and Apple. But an e-mail from Chang on Dec. 14 said, “I have an issue that forces me to publish my HH note on Apple order cut note right away. It’s totally out of my control.’’

Hedge funds have often been at the center of a six-year federal crackdown on insider trading on Wall Street and beyond. SAC Capital Advisors was indicted three months ago by a federal grand jury in New York on charges related to what prosecutors called an unprecedented insider trading ring. Those charges were unconnected to the new Massachusetts case.

Beth Healy can be reached at Beth.Healy@globe.com.

Correction: An earlier version of this story said the report came three days later; it was one day later, but days until ordinary investors could react.

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