According to FINRA, Citigroup Global Markets Inc. was fined $2.5 million and ordered to pay disgorgement of $5.7 million for over-tendering shares in partial tender offers and failing to maintain adequate supervisory systems to comply with the Short Tender Rule.

The firm over-tendered shares in 13 partial tender offers (PTOs) and received ill-gotten gains of approximately $5.7 million. The firm tendered approximately 11.1 million more shares than it was entitled to tender in the offers because it calculated the number of shares available for tender on an account-by-account basis instead of a firm-wide basis. In addition, in two PTOs, the firm over-tendered shares because it did not account for relevant short call positions.

The Short Tender Rule (Securities Exchange Act Rule 14e-4) is designed to prevent market participants from tendering more shares in a tender offer than they actually own on a net long basis. This rule protects the integrity of tender offers and ensures that participants cannot manipulate the proration process to gain an unfair advantage.

FINRA found that the firm did not have a supervisory system reasonably designed to achieve compliance with the Short Tender Rule. The firm had only operational procedures that instructed Asset Services to check individual accounts to make sure shares were held in the account. If the tendering account was long the shares, it was permitted to tender the shares. However, the procedures did not require the firm to determine whether it held any short positions in the security in other accounts.

This case demonstrates how seemingly technical compliance failures can result in a firm gaining millions of dollars in ill-gotten gains at the expense of other market participants. The disgorgement requirement ensures the firm does not profit from its violation. Investors participating in tender offers should understand that these regulatory protections help ensure a level playing field.