Finra goes after trading tax dodges

After fining Citi $600K, regulator to clamp down on lax supervision

Oct 18, 2009 @ 12:01 am

By Sara Hansard

Finra's $600,000 fine against Citigroup Inc. last week is the latest salvo in the war against trading strategies used as tax shelters, and the regulator expects to press the attack.

The Financial Industry Regulatory Authority Inc. is likely to bring more cases based on financial services company trading connected with illegal tax strategies, said its spokesman, Brendan Intindola. “There are more investigations under way,” he said.

He would not say how many cases have been opened.

While Finra is not the agency charged with enforcing tax law, it took action in the Citigroup case based on lax supervision of trades, he said.

Finra fined Citigroup $600,000 for allowing some of its international clients to avoid paying taxes on dividends connected with derivatives transactions.

Citigroup failed to supervise, control and prevent improper internal trades, as well as some with the bank's trading partners, Finra said.

The bank settled with Finra without admitting or denying the charges. “We're pleased to have the matter resolved,” said Citi spokesman Jon Diat.

Financial institutions for several years have been in the sights of the Internal Revenue Service and the Department of Justice in connection with tax shelter investigations, noted Scott Michel, a partner with tax and litigation law firm Caplin & Drysdale Chartered. “This appears to be a new front in the long-standing battle by the government against these large, mass-marketed tax shelter deals,” he said.

The transactions in question occurred between 2000 and 2005. One of the strategies involved a Citigroup unit that bought stock from foreign brokerage customers. After the taxable dividends on the stock were paid out, the stock was sold back to the customers, Finra said.

When dividends on U.S. company shares are paid to foreign investors, they may be subject to U.S. withholding taxes. Under the Citigroup arrangement, certain foreign customers were deemed to receive a “dividend equivalent” in a swap, not considered to be subject to withholding taxes.

Finra said that in determining the amount of the fine, it took into account the fact that Citigroup discovered the alleged violations and reported them to the regulators, and that the bank and a law firm it hired to make a review aided Finra in its investigation.


“Increasingly complex trading strategies must be governed by supervision that is equally sophisticated and detailed,” Susan Merrill, Finra's executive vice president and chief of enforcement, said in a statement confirming the reports.

“In this case, Citigroup's inadequate supervision resulted in improper trading related to the execution of strategies involving transactions with a principal purpose of limiting tax liability.”

While the case primarily involves a tax case, Finra brought its action based on rules requiring companies to supervise the activities of their brokers, Mr. Intindola said.

“Our piece of it is just the trading, [and] the lack of supervision over the trading in execution of these particular strategies that gave rise to these tax issues,” he said. “These were strategies that broadly were designed to create certain tax advantages for the firm and their clients,” he said.

The Citigroup case is the second case brought by Finra for trading strategies that allowed clients to avoid taxes. Last October, NYSE Regulation, an arm of Finra, brought a similar case against The Goldman Sachs Group Inc. for allegedly not supervising trades that allowed clients to avoid paying dividend taxes. Like Citigroup, Goldman Sachs was fined $600,000 without admitting or denying guilt.

E-mail Sara Hansard at


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