[ by Howard Haykin ]

William Galvin, Secretary of the Commonwealth of Massachusetts, faults a "senior" analyst and a "junior" analyst.

On Friday, it was disclosed that Citigroup, Inc., had settled charges filed by the Commonwealth of Massachusetts relating to regulatory matters involving the bank's equity research department.  The bank agreed to pay a $2 million fine to the commonwealth, and fired 2 employees including a star technology analyst.

Massachusetts authorities accused the bank of improperly disclosing confidential information to media outlets about YouTube's earnings and Facebook's initial public offering.  William Galvin, the Secretary of the Commonwealth of Massachusetts, specifically accused a junior analyst of leaking nonpublic information about Facebook to TechCrunch, a blog focused on the technology world.  The information included Citigroup's unpublished revenue estimates for Facebook, as well as "Investment Risks" and "Investment Positives."

Citigroup fired the junior analyst in September, according to Mr. Galvin's order. The bank also terminated the analyst's boss, according to a person briefed on the matter.  It turns out that the boss is Mark Mahaney, a star technology analyst and a crucial member of the bank's San Francisco-based technology research team.  It was acknowledged that Mr. Mahaney had no involvement with leaking the information, but he was blamed for not preventing the illegal activity.  It was further noted that the leaked information came from Mr. Mahaney's research files.

At the time Massachusetts filed the complaint against Citigroup, Mr. Galvin did not disclose the name of either analysts, and instead identified the two analysts as "senior" and "junior."  He did disclose certain revealing details in court filings that enabled one to identify the senior analyst as being Mark Mahaney. 

Mr. Galvin's order took aim separately at Mr. Mahaney ... for discussing YouTube's earnings with a reporter from a French magazine, Capital, without permission from Citigroup.  The discussion with the magazine did not appear to violate any securities rules, but conflicted with Citigroup's policy that research analysts receive internal approval before talking to reporters.

Mr. Galvin also cited past problems in which Citigroup rebuked Mr. Mahaney for conducting an interview with Bloomberg on a company he did not cover.  On another occasion this year, Mr. Galvin said, Citigroup cited Mr. Mahaney for not receiving approval before an interview.

Yet, the main legal violations in Galvin's order clearly stemmed from the disclosure of Facebook information.  Under securities rules and a nondisclosure agreement with Facebook, Citigroup analysts were banned from "disseminating written research" about the social networking giant until 40 days after the IPO.  The restriction, which applied to all banks that helped take Facebook public in May, was created to prevent research analysts from improperly promoting companies in a bid to drum up business for bankers.

Those rules were reinforced in a landmark 2003 settlement with several banks, including Citigroup.  The case, led by a former New York attorney general, Eliot Spitzer, built a Chinese wall between Wall Street research analysts and investment bankers.

For further details, go to:   [ Dealbook, 10/26/12 ].