Citi Probe Focuses on Ex-First Data Unit Payment

An investigation by federal prosecutors into the back-office operation of Citigroup's(C Quote - Cramer on C - Stock Picks) asset-management division focuses on a 6-year-old deal between the bank and a former subsidiary of First Data(FDC Quote - Cramer on FDC - Stock Picks) that is now part of PNC Bank(PNC Quote - Cramer on PNC - Stock Picks).

At issue are the events leading up to a $16 million payment from First Data Investors Services Group to Citigroup Asset Management back in 1997, when Citigroup decided to provide transfer agent services for its mutual fund business, said people familiar with the investigation.

A transfer agent is a Wall Street functionary that keeps records about shareholders in order to process the sale of shares to another party.

Prior to 1997, First Data had been the transfer agent for Citigroup's in-house family of mutual funds. But when the bank decided to provide its own in-house operation it entered into an agreement with First Data to continue providing much of those same services, only this time as a subcontractor.

Citigroup Asset Management disclosed the investigation by James Comey, U.S. Attorney for the Southern District of New York, late Tuesday. But the nation's biggest bank provided few details. The bank didn't identity the name of the subcontractor, nor did it mention the prior relationship with First Data.

The activities under scrutiny appear to be unrelated to the fast-growing allegations of improper trading in the mutual fund industry. But the press release implied that some executives of the asset-management unit had overstepped their bounds when they hired the subcontractor to outsource the transfer agent business. The bank said its asset-management division did not notify the directors that oversee its family of mutual funds about the deal with the First Data subsidiary.

The deal initially had the subcontractor guaranteeing a minimum revenue payment to Citigroup. But the deal was amended to having the subcontractor make a one-time, $16 million payment.

A person familiar with the investigation said the issue is whether the directors would have approved the deal if they had known about the $16 million payment. That's because it appears the First Data subsidiary was willing to do the job for $16 million less than the total price.

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