It can be awkward to sell potential clients on a new back-office accounting and financial record-keeping service when the enterprise is under investigation for not meeting standards in its own financial reporting, recordkeeping, and internal controls.
Citigroup faced that problem in its desire to acquire the Bisys Group.

Citi agreed to buy Bisys earlier this month for $1.45 billion to help it compete with J.P. Morgan Chase and Goldman Sachs as a "prime broker" for hedge funds. Those funds, which account for a significant slice of all securities trades, are a lucrative source of fees.

Bisys, based in Roseland, New Jersey, handles the back-office accounting and financial record-keeping for more than 1,200 hedge funds, 400 private equity funds and 80 mutual funds. Buying it makes Citi instantly more competitive in the prime brokerage game.

Only problem was a federal investigation of the way Bisys kept its own books for a wholesale insurance subsidiary.

The Securities and Exchange Commission announced today that Bisys has agreed to settle the case, without admitting or denying the allegations. As part of the settlement, it agreed to pay about $25 million in disgorgement and interest.

The settlement was filed along with the S.E.C.'s complaint in federal court in Manhattan. In the complaint, the S.E.C. alleged that former Bisys executives and employees engaged in a variety of improper accounting practices that resulted in an overstatement of the company's financial results by roughly $180 million over three years--sometimes accounting for about 30 percent of all revenue.

The improper accounting practices were primarily based in the company's insurance services division, the complaint said, but also occurred in other divisions of the company.

The complaint also said that the improper accounting was the result of pressure to meet "aggressive, short-term earnings targets" and of a "lax internal control environment."

The New York Times reported earlier this month (subscription required) that Citi's acquisiton of Bisys is expected to close in the second half of this year.

Citi then plans to sell Bisys' retirement and insurance services divisions to J.C. Flowers & Company, the private equity firm that recently helped engineer the $25 billion buyout of the student loan giant Sallie Mae.

by Mark Stein