Stock ratings are offered by many investment banking groups as a simple way for investors to judge the value of a stock or security. In addition to rating a value of a security, stock ratings typically provide an answer to the question all investors ask: Is it time to buy or sell?
In the case of the recent Citigroup fiasco, investors got mixed messages from the investment bank.
The Financial Industry Regulatory Authority (FINRA) recently slapped Citigroup with $11.5 million in fines for providing investors with erroneous stock ratings. FINRA’s sanctions find that the investment bank’s faulty stock ratings go back four years. In addition to $5.5 million in fines, Citigroup must also pay out at least $6 million to investors as compensation for investment losses.
Of the 1,800 securities affected, nearly all were attached to individual retail investor accounts. According to reports, 38 percent of the faulty stock ratings were actually covered by Citigroup. In these cases, the errors provided incorrect stock ratings to investors (advising to buy rather than sell). Other errors included ratings for securities that weren’t even covered by the firm.
Lost in Translation
The error, it seems, occurred in the electronic feed sent out to retail customers which was inconsistent with the firm’s actual reports. According to the FINRA statement, “[Citigroup]…failed to timely correct the inaccurately displayed ratings, despite numerous red flags alerting the firm to ratings inaccuracies for several securities”.
Citigroup’s stock ratings snafu doesn’t appear to be the result of willful misdirection, but the firm’s slow response and passive consent to FINRA’s findings show how large-scale investment banks don’t often have the best interests of their clients and consumers at heart.