Citigroup Unit Fined $1 Million by NYSE

Citigroup Inc.’s Smith Barney unit was fined $1 million by the New York Stock Exchange for failing to supervise brokers who encouraged WorldCom Inc. employees to borrow money to buy stock in the now-bankrupt telecom firm when it was flying high.

NYSE spokesman Richard Adamonis confirmed the penalty, which was disclosed in a regulatory filing for Michael Grace, a former Smith Barney branch manager in Atlanta. Grace, who was censured by the NYSE and relieved by Citigroup of his branch manager duties on Dec. 31, 2001, now is a Smith Barney broker in Atlanta. He did not return calls for comment.

The fine is another black eye for Citigroup, which was among 10 brokerages that paid a total of $1.4 billion this year to settle regulators’ charges of tainted research and analyst conflicts of interest.

Grace’s case centers on stock option programs that brokerages administer for corporate customers. When employees exercise options from their companies to buy stock at a fixed price, they owe taxes on the difference between their cost and the current market price.

Some Smith Barney brokers advised customers to hold the stock and borrow money to pay for the share purchase and taxes.

Grace allegedly failed to ensure that brokers he managed advised WorldCom employees they could lose money if the stock fell. Shares of WorldCom, which is changing its name to MCI, were as high as $58 in 1999 before collapsing in 2000 and 2001.

Citigroup’s former telecom analyst, Jack Grubman, rated WorldCom shares a “buy” at least since Oct. 28, 1999. He also advised WorldCom’s former chief executive, Bernard J. Ebbers, on strategy.

“We are pleased to have the matter resolved,” said Mary Ellen Hillery, a Smith Barney spokeswoman.

The penalty was first reported in the Wall Street Journal on Friday.