Citi Fined $30M After Analysts Leaked Info on Apple's iPhone Supply Chain
Citi has signed a consent order with the Massachusetts Secretary of State agreeing to pay $30 million after its analysts leaked information on Apple’s iPhone supply chain to a number of big clients including SAC Capital Advisors. Late last year, Citi’s method of covering Apple revolved around a “unique team approach,” with semiconductor analyst Glen Yeung, software analyst Walter Pritchard and hardware analyst Jim Suva sharing the duties. The team initially upgraded AAPL to a buy recommendation in late November but by December 17 the firm had cut its rating to neutral.
Citi explained the rating and target price cuts as stemming from “near-term supply chain orders” that cast doubt on iPhone 5 demand. Much like what most analyst firms do, Citi was estimating iPhone shipments based on production reports from suppliers, more specifically Hon Hai in this case.
A consent order released recently by Massachusetts Secretary of State William Galvin recently revealed that Yeung had received word on those production quotes nearly a week earlier and that another Taiwan-based Citi analyst had been slipping that information to select funds ahead of Citi’s reports. Among the clients who had been receiving advanced knowledge was SAC Capital, the hedge fund run by billionaire Steve Cohen. Both Cohen and SAC are now under investigation over insider trading allegations and Citi revelation stemmed from that process. SAC joined T. Rowe Price in selling off Apple stock ahead of the release of Citi’s actual report, according to Reuters
The consent order quotes a number of emails between Citi analyst Kevin Chang and several personnel from SAC. Secretary Galvin said those emails “reveal this cozy culture which illustrates again that there are two types of customers; big ones and retail customers who often don’t receive this information.”
Galvin levied a $30 million fine on Citi, one of the biggest state securities regulators have ever handed down. The size of the fine stemmed in part from Citi’s embarrassing role in the difficulties surrounding Facebook’s initial public offering last year. Citi’s supervisory culture, Galvin mentioned hasn’t learned its lesson from the event.
The $30 million fine is the result of a settlement and there haven’t been any charges filed in the case. Apple Chief Tim Cook had previously warned investors about the perils of relying on supply chain to divine the company’s quarterly fortunes, noting that the supply chain is very complex and we obviously have multiple sources for things.”
Current speculation points toward Apple diversifying its supply chain even further in 2014, moving from a partnership model, the type it currently has with Hon Hai, to a transaction model for some devices. The company continues to work towards said model.