In Focus

June 26, 2007

and 9%. Those projections — of annual investment returns and allowable annual withdrawal rates, respectively — caused securities regulators to whack Citigroup Global Markets with a $15.2 million charge, over $12 million of which to pay its retiree customers restitution.

Citigroup's problems stem from the activities of brokers and managers in its Charlotte branch office in encouraging more than 400 BellSouth employees to retire early and to cash out their secure pensions and 401(k) accounts to reinvest in the stock market. The brokers were "improperly supervised" and "made exaggerated and unwarranted projections of future earnings without fully explaining the risks involved."

The "M.O" of the Citigroup team was to host seminars (unapproved) and use charts, graphs and handouts (unapproved) that omitted critical information, such as: 1) the lofty 2% to 3% annual fees; and 2) the fact that the stock market historically did not return 12% annually and often returned far less or even declined. Worse, when the retirees' accounts started to decline in 2000, a series of conference calls unrealistically predicting high stock market returns were held in order to convince retirees not to cash out.

Unfortunately, this problem is not limited to Charlotte, or to Citigroup / Smith Barney. Retirees must be on guard for projections of both investment return and allowable withdrawal rates that are too optimistic. In an Investor Alert entitled, ""Look Before You Leave: Don't Be Misled By Early Retirement Investment Pitches That Promise Too Much", the NASD warns employees to be "especially skeptical" of 12% expected returns and 9% withdrawal rates, given the true history and volatility of the stock market. That's good advice!

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.