(Updates with corporate banking head and leader of the unit in the fifth paragraph, analyst’s comment in the last.)
May 15 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Michael Corbat spent almost three months talking about his intent to change the bank’s culture after fraud and a regulatory review exposed weak controls. Yesterday he took action.
Citigroup fired 11 people, including four managing directors, for failing to prevent or discover a $400 million loan fraud at its Mexico unit, according to an employee memo yesterday signed by Corbat. The bank’s investigation continues and more people will probably be punished, he said.
“He’s clearly sending a message,” said Charles Peabody, a Portales Partners LLC analyst who assigns the equivalent of a sell rating to the shares. “This is the first sign I have seen where he is holding senior managers accountable. That has been lacking in that culture.”
Corbat, 54, has been criticized by analysts and investors for sparing senior managers from punishment after recent setbacks. While he repeatedly vowed to discipline people tied to the Banamex fraud, only a junior employee had been fired so far. After the Federal Reserve rejected Citigroup’s capital plan in March for the second time in three years, Corbat shifted roles of some managers, rebuffing calls from CLSA Ltd.’s Mike Mayo for more stringent penalties.
The dismissals included two business heads, according to the memo. Among those fired were the chief of risk for the institutional clients group in Mexico, and the head of treasury and trade services and head of corporate banking in the nation, a person briefed on the matter said yesterday, asking to remain anonymous because the information isn’t public. Javier Arrigunaga runs the Mexico unit, known as Banamex, and sits on Citigroup’s operating committee.
Citigroup said in February that invoices backing loans to Oceanografia SA, an oil-services firm based in Ciudad del Carmen, were found to be fraudulent. That forced the New York- based bank to reduce previously reported earnings for 2013 by $235 million.
The memo to the bank’s almost 250,000 employees builds on the comments Corbat made in February, when he called the crime “despicable” and said the punishment would send “a crystal- clear message about the consequences.”
“Investors will like to see people being held accountable for this,” Jeff Harte, an analyst at Sandler O’Neill & Partners LP, said in a phone interview. “It sends a pretty clear message to your employees, and to investors and counterparties as well, that this kind of stuff will not be tolerated at Citigroup.”
The stock fell 25 cents to $46.87 at 9:44 a.m. in New York trading, after falling 0.6 percent yesterday as the broader KBW Bank Index of 24 companies dropped 1.6 percent. The firm has slid 9.6 percent this year through yesterday, compared with the index’s 2.3 percent decline.
“We continue to believe this was an isolated incident,” Corbat wrote in his memo. “We are reviewing our controls and processes in Mexico and are strengthening any area we think falls short of our global standards and best practices.”
Citigroup’s internal investigation has found Banamex altered how it dealt with Oceanografia in 2010, according to a person with knowledge of the matter. Rather than demanding invoices, Banamex accepted work orders and didn’t corroborate them, the person said. An employee involved in the change left in 2012 and later worked as a consultant to Oceanografia, the person said.
The ultimate fallout from the incident in Mexico will depend on the extent to which controls broke down, according to Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
“The first thing you do is separate individuals involved and secondly, you attempt to determine how it can be avoided in the future,” Elson said. “Does that mean a change in policy, a change in personnel, a change in procedure?”
So far the bank hasn’t detailed how the fraud occurred or the culpability of employees. The firm shared information with law enforcement and regulatory agencies and left it up to them to determine criminal liability, Corbat wrote. The U.S. Securities and Exchange Commission and the Department of Justice are investigating.
Corbat will spend time this week in Mexico, where he plans to show support and provide encouragement to employees, according to the memo.
“It does show a significant effort from Corbat to try to clean this up,” Peabody said. Even so, it may not be enough for regulators who could seek to extract significant fines or guilty pleas from the bank, he said.
--With assistance from Elizabeth Dexheimer in New York and Ben Bain in Mexico City.