The Securities and Futures Commission (SFC) has also suspended Lisa Chan Sin Man’s right to act as Citi Asia’s responsible officer and suspended her licence for eight months from 3 October 2011 to 2 June 2012.
In addition, Citi Asia has agreed to pay compensation to the customers affected by the fraudulent scheme.
The City watchdog’s actions follows an investigation into the suspected misconduct of a former licensed representative of Citi Asia named only by the SFC as Mr X.
The SFC said Mr X was responsible for 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 Treasures and other products”.
In fact, the SFC found that, while Mr X promised his clients that their principal was protected and returns were guaranteed, returns were actually funded wholly or partly from other affected clients.
The SFC said that 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”.
The scheme is believed to have operated from 2004 until February 2009 when Citi Asia suspended Mr X while investigating the suspected misconduct. Shortly thereafter Mr X was dismissed by the company.
However, the SFC said Citi Asia failed to report Mr X’s activities in a timely manner, as required by the SFC’s Code of Conduct.
In addition, the SFC said, after initially reporting 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”.
Because of this failing, Mr X was able to leave Hong Kong and has not returned since. The SFC said that, while this was not Citi Asia’s intention, the consequence of the delay in reporting details of the fraudulent scheme to the SFC meant the neither the SFC not any other law enforcement agency had an opportunity to interview Mr X.
The SFC also said that Mr X was “insufficiently supervised” by the company, with the result that, despite a number of “red flags”, his fraudulent scheme was able to go undetected. Furthermore, the SFC said responsible officer Chan, who has now been suspended, did not act sufficiently on a number of “red flags” which would have detected Mr X’s misconduct much earlier.
Citi Asia has agreed that to pay for an external auditor, which will be appointed by the SFC, to audit the accounts of affected customers and assess the amount of compensation required to make them whole.
Citi Asia has also agreed to 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 has been told it must 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 the SFC within two years of today’s date.
“Citi Asia not only failed to detect a Ponzi scheme operating under its nose, despite having the opportunity to do so, but then failed to report the scheme to the SFC in a timely way, thus making the investigation of this case more difficult given Mr X’s decision to leave Hong Kong after he had been dismissed by Citi Asia,” said the SFC’s executive director of enforcement Mark Steward said.
“Intermediaries know they have a duty to report misconduct to the SFC immediately upon discovery, not when they have plumbed the bottom of it. Delay in reporting simply helps the wrongdoer. This public reprimand should make it clear that the SFC condemns such delay in the strongest terms.”
