Dr Evil debacle still haunts Citigroup

NEW YORK - Almost two years after Citigroup riled the dozen countries in Europe's Government bond market with secret trades code-named Dr Evil, the debacle is hurting shareholders of the world's largest financial institution.

Citigroup arranged just 2.3 per cent of the €155 billion ($315 billion) in debt sold by the Governments since it unleashed Dr Evil on August 2, 2004.

That's little more than a fifth of its market-leading 10.1 per cent share in 2003, data compiled by Bloomberg shows.

And although the US$26 million ($41 million) fine Citigroup paid was the equivalent of a rounding error on annual earnings, the New York-based bank has lost the chance to win lucrative fees for handling sales of state assets, such as France's US$7 billion stake in Groupe Caisse d'Epargne.

Citigroup is now 14th among advisers on European privatisations, down from third.

"This should serve as a lesson to others that it isn't just regulators, but other players in the market that they have to worry about when making decisions of this kind," said Michael Levi, a specialist in economic crime at Cardiff University.

"In this case, it's the damage to reputation more than the fine."

Britain's Financial Services Authority ruled in June last year that Citigroup failed to consider risks or consequences when it authorised six traders in London to unload €12.8 billion of securities in 18 seconds and then profit by buying some back seven minutes later at lower prices.

None of the traders was penalised, and four left Citigroup to take jobs at other firms.

Since the Dr Evil transaction, Italy and Austria, formerly two of Citigroup's best customers among European Governments, have shunned the bank.

Deutsche Bank, Europe's biggest securities firm, and Goldman Sachs, Wall Street's most profitable firm, displaced Citigroup, earning the cachet that comes with being the top arranger of sovereign bond deals for the countries that make up the world's second-largest economy.

Deutsche Bank, based in Frankfurt, collected about US$29 million of fees for underwriting the bonds, roughly triple what Citigroup got.

The firms also gain revenue from trading the bonds.

New York-based Goldman made US$83 million managing five of Europe's 10 biggest share sales by state-owned companies, again more than triple Citigroup's take.

"We regret the trade of August 2004," said Philip Brown, 45, who runs Citigroup's team in London that manages sovereign debt sales.

"It clearly had an adverse impact on our business in the months afterwards but as nearly two years have now passed, I don't believe it's a factor in our relationship with any issuer today.

"We have ambitions to get back to the position we had in sovereign syndications in 2004."

The lasting fallout from Dr Evil, initiated 10 months after Charles Prince, 56, succeeded Sanford Weill as Citigroup's chief executive officer in October 2003, shows how difficult it is to rehabilitate the bank's reputation after legal and regulatory violations that tarred it around the world.

Regulators shut Citigroup's private bank in Japan in September 2004 for failing to police money laundering.

In the US, Prince spent US$4.6 billion to settle lawsuits alleging the company helped to defraud investors of Enron and WorldCom.

The FSA's US$26 million fine was so small for a company of Citigroup's size it barely exceeded the US$23 million the bank paid Prince last year.

Although Citigroup remains the world's most profitable bank, it is in danger of losing its title as the biggest by market value, a distinction held since Weill, now 73, merged Citicorp and Travelers to create the company in 1998.

- BLOOMBERG