Supervision failures cost three Citibank affiliates $4.5 million

The Commodity Futures Trading Commission (CFTC) has issued an order filing and simultaneously settling charges against three Citibank affiliates, two provisionally registered swap dealers – Citibank N.A. and Citigroup Energy Inc., and Citigroup Global Markets, Inc., a provisionally registered swap dealer, and a registered futures commission merchant. At issue is that all three Citi entities failed to supervise their audio preservation system diligently.

Are you archiving your audio recordings?

You better, because this is a cautionary tale of what happens when regulator-requested files and recordings are deleted – accidentally or otherwise.

Here’s what happened:

In 2017, the CFTC launched an investigation of specific Citi trades, issuing a subpoena at the end of December requesting Citi produce communications relating to certain trades on a particular date by specific, named Citi custodians. Approximately six weeks later, on February 9, 2018, Citi responded, saying that it had sent a notice to staff to retain the recordings and that they were preserved. Sounds great until the opposite happened.

The CFTC says that Citi failed to take adequate steps. It did not segregate the recordings or duplicate them as a preservation method. Instead, more than eight months later, Citi’s Audio Preservation System began deleting audio files. Starting on October 12, 2018, and each day following, the System deleted audio recordings created exactly two years before (e.g., on October 13, 2018, the System deleted audio recordings created on October 13, 2016; on October 14, 2018, the System deleted audio recordings created on October 14, 2016, etc.).

Eleven days after the Audio Preservation System began automatically deleting audio files, the CFTC issued a second subpoena to Citi, which included requests for audio from May 2016. However, Citi still did not take steps to ensure its Audio Preservation System was actually preserving audio. In fact, it was systematically deleting files.

More than 2.77 million recordings were deleted

On October 30, 2018—after having deferred production of audio recordings requested in the December 2017 subpoena, at Citi’s request, the CFTC again asked for specific audio recordings which still existed at the time. The CFTC asked again one month later – the same day Citi’s Audio Preservation System automatically deleted the requested audio recordings of North American users’ telephone calls recording from October 13 – November 17, 2016. All told, Citi’s audio preservation system deleted more than 2.77 million recordings. These 2.77 million recordings comprised 683,296 calls for 982 individual users—including the four custodians whose audio recordings were subpoenaed in December 2017—and 2,087,789 recordings from speakerbox or “Hoot n’ Holler” lines.  

A system failure cost the Citi entities $4.5 million

No recordings were recoverable. At issue was a known design flaw in the system preserving audio recordings. The CFTC was not amused.

Citi notified the CFTC on December 3, 2018 that the recordings had been deleted roughly three weeks earlier. The team blamed a design flaw in its audio preservation system, previously flagged by a Citibank employee in 2014. Per the employee, if the system was not configured correctly, there was a “ticking time bomb effect” that could—and here did—lead to the automatic deletion of audio recordings. Despite being on notice of the problem as of 2014, Citibank did not mitigate the risk. Nor did it maintain adequate internal controls.

One failure with systemwide repercussions

According to the order, because all of the Citi entities relied on Citibank to operate and maintain the audio preservation system to record and preserve not only Citibank’s own audio but also the audio of its affiliated North American swap dealers, all of the Citi entities violated CFTC Regulation 166.3 by failing to diligently supervise the operation of the audio preservation system.

Where was compliance?

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