Citigroup

(C) - Get Report

agreed to pay $208 million Tuesday to settle allegations that it cheated shareholders of its own mutual funds out of a handsome discount it received from the funds' transfer agent in the late-1990s.

The

SEC

settlement is a stiff one, covering misrepresentations and omissions that prosecutors believe cost shareholders of various Smith Barney funds about $100 million over five years. Citigroup agreed to put the funds' future transfer agent services out for competitive bidding as part of the pact.

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

According to the SEC, Citigroup Global Markets rung up unethical profits by failing to tell directors of the Smith Barney funds about

a big discount it was receiving from the contractor doing its transfer agent work. The contractor was previously identified by

TheStreet.com

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as

First Data

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. The First Data unit that handled the contract is now owned by

PNC

(PNC) - Get Report

.

The misdeeds began in 1997 when Citi decided to bring Smith Barney's transfer agent services in house but failed to disclose to fund investors that it was receiving a big discount from the contractor who actually handled the work.

Citigroup, without admitting guilt, agreed to pay $128 million in disgorgement and interest, $80 million in penalties and to comply with remedial measures.

"Rather than passing the substantial fee discount on to the mutual funds, the respondents, through the affiliated transfer agent, took most of the benefit of the discount for themselves, reaping nearly $100 million in profit at the funds' expense over a five year period," the SEC said.

Citigroup, in a statement, said the value of the settlement had been set aside in a previously established legal reserve. The settlement then will have no impact on earnings.