10/26/2012 02:08 pm ET

Citigroup Fined $2 Million After Analysts Blab To Press About Facebook, Google

The Facebook IPO debacle continues to cost money and scalps. And, once again, as with every Wall Street scandal, dumb emails are involved. Thank you, Wall Street, for never learning your lesson on that one.

The other, more serious lesson from this particular episode is that the way Wall Street communicates with investors and the public is still a giant mess, nearly a decade after regulatory reforms meant to clean that mess up.

Citigroup on Friday agreed to pay $2 million to settle charges by the Massachusetts Secretary of the Commonwealth William F. Galvin that it had failed to properly supervise its analysts, one of whom allegedly disclosed confidential information about Facebook ahead of its disastrous May IPO.

Citi has also fired Mark Mahaney, a senior analyst covering Internet companies including Facebook and Google, the Wall Street Journal reported. Mahaney was not cited by name in Galvin's complaint, but a "senior analyst" matching Mahaney's description was discussed early and often -- including several dumb emails.

Last month, Citi also fired an unnamed junior analyst who, according to Galvin's complaint, disclosed confidential information about Facebook to a couple of TechCrunch bloggers before the IPO. And, you guessed it, that junior analyst sent some dumb emails! (AOL is the parent company of both TechCrunch and The Huffington Post.)

Specifically, on May 2, a couple of weeks before Facebook's IPO, Unnamed Junior Analyst ("UJA" hereafter, but probably someone named Eric Jacobs, according to Business Insider) emailed TechCrunch bloggers a one-page summary of Citigroup's thesis about Facebook. He said he wanted to get their opinion about whether they had the risks and rewards of Facebook right.

"I am ramping up coverage on FB and thought you guys might like to see how the street is thinking about it (and our estimates)," UJA wrote. "Any feedback on the investment positives and risks would be super helpful. I want to make sure I'm thinking about this the right way. This, of course is confidential."

I just want to stop right here and allow you to consider that this is a person paid, probably extremely well, by Citigroup to analyze companies, and he is asking a couple of bloggers -- very, very smart bloggers! -- for their help.

Anyway, based on the description of the bloggers in Galvin's complaint, one of those TechCrunch bloggers would appear to be Josh Constine, a Stanford graduate like UJA, and a former writer for Inside Facebook. Constine did not immediately respond to a request for comment.

According to the complaint, that TechCrunch blogger asked to publish Citi's thesis, sourcing it anonymously.

"My boss would eat me alive," UJA wrote.

The TechCrunch blogger asked UJA, just for clarity, if this was really Citi's thesis on Facebook, and UJA responded that it was an outline that "will eventually become our initiation report at 30-40 pages."

Ultimately, Mahaney's first report on Facebook, released on June 27, gave the stock a "neutral" rating, calling the company's challenges "significant" and saying the stock was only worth $35, or $3 less than its IPO price.

Citigroup handed all of these emails to Galvin in response to a subpoena looking for information about the Facebook IPO, which is the subject of several regulatory probes and lawsuits. Facebook's stock suffered through volatile trading on its first day and then lost 53 percent of its value in the next three months. Facebook, its underwriters and Nasdaq-OMX face dozens of lawsuits over the IPO. Meanwhile, regulators are investigating whether the banks leading the IPO warned a select group of investors about Facebook's risks, while pumping the stock to the general public, creating a media frenzy.

Ironically, Citi got fined $2 million for its analysts possibly tipping the public off to those risks, via TechCrunch. TechCrunch did not ultimately reveal Citi's cautious take on the stock, but imagine if it had -- maybe some of the air would have come out of the Facebook bubble before its IPO.

Of course, Citi and its analysts were under a perfectly reasonable non-disclosure agreement ahead of the IPO, along with rules meant to keep these analysts from leaking private information to select investors. Some of those rules arise out of the global research settlement that Citi and other firms signed in 2003. That settlement was meant to curb some of the analyst abuses of the dot-com boom, when analysts pumped up some tech stocks while simultaneously trashing them in, you guessed it, emails. In the case of Citi's analysts, the system appeared to work. Mistakes were made, and heads rolled.

But there are still apparently giant holes that allow some pertinent information to get to select investors, while the unaware public is still at risk of getting caught up in an IPO frenzy.

Ultimately, Unnamed Junior Analyst got fired, as did his boss, Unnamed Senior Analyst. According to the complaint, he had some compliance issues of his own. In one instance, according to the complaint, he appeared to mislead a Citi public-relations employee about whether he had already responded to some questions from a French reporter about YouTube, a unit of Google. According to the complaint, he also tried unsuccessfully to get that PR employee to pretend he hadn't yet responded to the questions, emailing: "Shoot. This could get me into trouble. Shoot."

That, and the Facebook IPO, did apparently get him into some trouble.



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