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HK regulator fines Citi $770,000 for employees' Ponzi scheme

Oct 3, 2011, 3:48 a.m.
A Citibank sign on a bank branch in midtown Manhattan, New York, November 17, 2010. REUTERS/Mike Segar

HONG KONG (Reuters) - Hong Kong's securities regulator has fined Citigroup HK$6 million ($770,000) for failing to report a Ponzi scheme involving one of its former employees.

Citigroup will also compensate customers affected by the fraud and hire an external expert to review some of its operational practices and policies, the Securities and Futures Commission (SFC) said in a statement on Monday.

"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," the SFC's Executive Director of Enforcement Mark Steward said.

The SFC said a Citi employee ran a fraudulent scheme between 2004 and 2009 involving 13 Citi Asia clients, who had invested through the employee on the basis that their money would be used to purchase U.S. Treasuries and other products.

The employee was later dismissed for gross misconduct, but the SFC said Citi failed to report the activities in a timely manner and did not forward a preliminary report it prepared until after an external investigation was completed.

A Ponzi scheme is usually one in which early investors are paid with the money of new clients and it collapses when funds run out.

Citi said in a statement it accepted the decision and actions of the SFC, and had already taken steps to further strengthen its prevention, supervisory and detection processes.

"Citi has cooperated fully with the SFC investigation and we have also agreed to compensate the affected investors for their principal loss which can be independently substantiated."

Citigroup is being investigated by Japanese regulators for possible infractions relating to its marketing of financial products and could face its third major punishment in Japan in seven years, a person with knowledge of the matter said on Sunday.

(Reporting by Kelvin Soh; Editing by Vinu Pilakkott)

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