Oct. 26, 2012 at 4:44 PM ET
BOSTON — Citigroup fired top Internet analyst Mark Mahaney and paid a $2 million fine to a Massachusetts regulator to settle charges that the bank improperly disclosed research on Facebook's IPO and information on other tech companies.
William Galvin, Massachusetts's top securities regulator, is also probing other Wall Street banks involved in FaceBook Inc's initial public offering, including lead underwriter Morgan Stanley, Goldman Sachs and JPMorgan Chase.
The ouster of Mahaney, a blow to Citi's technology business, came after Galvin's office charged Citigroup Global Markets Inc with breaking state securities laws governing disclosure of broker research. The bank said it also dismissed a junior analyst Mahaney had supervised.
The complaint contends the unidentified junior analyst sent some of Citi's confidential views on investment risks and revenue estimates for Facebook to two employees at TechCrunch.com, a technology-focused media company, three weeks before Facebook went public on May 18.
Mahaney failed to supervise this junior analyst, according to the Massachusetts complaint. It said Mahaney also had improperly passed on his views about Google Inc to a reporter at Capital Magazine, a French publication.
Citi said it was pleased that the matter with Massachusetts has been resolved. The bank added, it takes its "internal policies and procedures very seriously and have taken the appropriate action."
Citi was one of the underwriters for the $16 billion Facebook IPO, the biggest ever for a U.S. technology company.
Morgan Stanley's role in the IPO long has been controversial because of how poorly the stock has performed and for the firm's own handling of non-public information prior to the listing.
In the complaint, Galvin said Citi's analysts broke securities laws prohibiting them from sending "written research or other written content" until 40 days after Facebook's IPO.
But it was not the first time Mahaney, one of the most respected internet analysts on Wall Street, got into trouble with his bosses for sharing information with journalists, the Massachusetts complaint shows.
On April 11, the bank's Director of Research, Americas sent Mahaney a "letter of education" noting that he broke the bank's rules about speaking with journalists and sticking to published research.
The letter said Mahaney had violated the bank's Public Appearance Policy when he spoke with Bloomberg and the New York Times. To Bloomberg, he "offered comments on a company that he does not cover and which he did not receive legal approval to discuss" in February, the complaint says. And in March he failed to get permission to speak with the Times, the complaint added.
Only weeks after receiving that letter, the civil complaint said Mahaney again broke the bank's rules when he gave the Capital journalist information about Google's YouTube revenue estimates and profitability that had not been reported.
After Facebook's debut, word started dripping out in the market that big investors may have been given a heads up about problems with the social media company's revenue lines.
Smaller investors were outraged to learn that Morgan Stanley had arranged conference calls for large investors prior to the IPO to tell them the underwriters were scaling back their revenue forecasts for Facebook.
So far, there has been no regulatory action against Morgan Stanely or any of its analysts.
"This is about not having two sets of rules one for preferred clients and one for everyone else," Galvin said, noting the Citi case was completed first because his office was able to obtain emails showing how the analysts broke the rules.
What may distinguish the situation with Citi from that of Morgan Stanley is that Mahaney's alleged communications with the media violated the firm's own internal procedures.
James Fanto, a professor at Brooklyn Law School in New York and an authority on broker-dealer regulation, said analysts with underwriting firms are "not supposed to give out research and views." He said the Citi case may have been easier to prove given the trail of emails. Galvin "had a roadmap," Fanto said.
Meanwhile, Facebook's shares this week had their best trading day ever after strong quarterly results. Mahaney had recently upgraded the stock to buy from neutral.
Mahaney has consistently received high marks in surveys of institutional investors. He came to Citi in 2005 from Galleon Group, the hedge fund led by Raj Rajaratnam, who was arrested in 2009 and later convicted in one of the biggest insider trading crack-downs in U.S. history.
With various regulators looking at the Facebook listing, Galvin is the first to come out with a fine, albeit a small one.
He has long had a reputation of being an aggressive regulator who has filed suit against Wall Street's top banks for securities law violations. But some have criticized him from often settling high-profile cases for small sums.
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