Today SFC announced in a press release that it has reprimanded Citigroup Global Markets Asia Limited, fined it $6 million, and suspended the approval granted to Ms Lisa Chan Sin Man, to act as a responsible officer. Her licence has also been suspended for 8 months.
Citi Asia has also agreed to offer to pay compensation to customers affected by a fraudulent scheme operated by a former licensed representative in the amount of any principal lost by such customers.
The disciplinary action follows an investigation into suspected misconduct of a former licensed representative of Citi Asia, Mr X, who was responsible for operating what appears to have been a fraudulent scheme involving 13 Citi Asia wealth management clients who invested through Mr X on the basis their money would be pooled and used to purchase US Treasuries and other products.
It appears Mr X promised the affected customers that their principal was protected and returns were guaranteed. Instead, returns were funded wholly or partly from other affected clients induced by Mr X's representations. In effect, Mr X appears to have been operating a Ponzi or Madoff-style scheme in which high returns are paid to investors out of the contribution by new investors. Ponzi Scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.
Mr X's scheme operated from 2004 until February 2009 when Citi Asia suspended Mr X while investigating the suspected misconduct. Shortly thereafter, Citi Asia dismissed Mr X for gross misconduct. However, Citi Asia failed to report Mr X's activities to SFC in a timely manner as required by the Code of Conduct.
After initially reporting to the SFC that Mr X had been dismissed for gross misconduct, Citi informed the SFC that an internal investigation was in progress, when in fact a preliminary report was already available which revealed important information in relation to Mr X's apparent fraudulent scheme. Citi Asia did not provide the report to SFC until after a follow-up investigation by Citi Asia's external auditor was completed.
By the time these reports were provided to the SFC, Mr X had left Hong Kong. He has not returned since then. While this was not Citi Asia's intention, the consequence of the delay in reporting details of the fraudulent scheme to SFC meant SFC and other law enforcement agencies had no opportunity to interview Mr X or to secure his whereabouts pending the completion of the investigation.
SFC also found that Mr X was insufficiently supervised by Citi Asia and Chan (as Mr X's supervisor) with the result that his fraudulent scheme was undetected despite a number of "red flags" which should have caused those supervising Mr X to instigate inquiries. For example, Mr X issued correspondence under Citi Asia's name referring to guaranteed returns contrary to Citi Asia's internal guidelines. Some of this correspondence was brought to Chan's attention but Chan accepted Mr X’s explanations and did not conduct any probative inquiry into the true nature of Mr X's dealings on behalf of Citi Asia’s clients. The reference to guaranteed returns in Mr X's correspondence was a very clear red flag. A quick check to verify the existence of the US Treasuries and other products supporting Citi Asia's clients' investments should have been conducted.
Citi Asia has agreed that it will pay for an external auditor, to be appointed by SFC, to audit the accounts of affected customers and assess the amount of compensation required to make them whole. Citi Asia will also pay for an external expert to conduct a review of the internal and external detection, escalation and notification practices and policies in Citi Asia's private banking division in relation to compliance with all applicable regulatory and legal requirements in its securities business, including:
- the identification and handling of red flags by all staff involved in regulated activities; and
- performance management of all staff engaged in supervision of staff conducting regulated activities, including calculation of compensation in respect to supervisory functions.
Citi Asia will implement all recommendations by the external expert and submit to a surprise audit of all detection, escalation, notification, red flag practices and policies at a time to be selected by SFC within two years of today’s date.
My questions:
- Why can't the identity of Mr X be disclosed?
- Did the compliance head of Citi Asia survive from this case?
