Asian Citigroup unit fined US$45 million by Hong Kong's SFC for misleading clients over 11-year period

Hong Kong’s securities watchdog has fined a unit of the American banking giant Citigroup HK$348.25 million (US$45 million) for “pervasive dishonest behaviour” across its various trading desks over an 11 year-period.

The Securities and Futures Commission reprimanded and imposed the fine on Citigroup Global Markets Asia (CGMAL) for making misrepresentations to institutional clients between 2008 and 2018.

“The SFC considers that such pervasive dishonest behaviour would not have continued but for serious lapses and deficiencies in [the bank’s] internal controls, compliance function and management oversight,” it said.

The heavy fine is intended to send “a strong message to the industry to deter other market participants from permitting similar failures to occur.”

The watchdog will also commence disciplinary proceedings against several senior executives. It did not name them.

“The severity of CGMAL’s failures exposed a culture that encouraged chasing revenue at the expense of basic standards of honesty,” said Ashley Alder, chief executive of the SFC.

“The sanction against CGMAL is warranted because it fell far short of the standards expected of licensed intermediaries. It also underscores the SFC’s zero-tolerance attitude in its determination to root out misconduct by licensed intermediaries.”

From 2008 until November 2018, the company had mislabelled the trading potential of selected blue chip stocks to provoke clients into trading them, the regulator said.

The SFC described such behaviour to be “inconsistent with the fundamental principles of being honest with clients and treating them fairly.”

The commission also found 127 out of 174 sample trades executed by the company between 2014 and 2018 had misled clients. While the company had told the clients the transactions involved other market participants, they were in fact trading with Citi’s own desk.

The aim of the false information was to prevent losing trade to competitors, as institutional clients prefer to trade in the market, the SFC said.

The misconduct lasted for over 10 years and only came to light as a result of an inspection by the SFC in 2018.

The prevalence of the misconduct for over 10 years reflected a failure on internal control and senior management’s supervisory responsibilities, said Thomas Atkinson, executive director of enforcement for the regulator.

A Citi spokeswoman said the bank had fully cooperated with the SFC’s investigation and had implemented significant remedial measures to strengthen its compliance and internal controls.

“The former senior management members of Citigroup Global Markets Asia are no longer employed by Citi,” she said. “These are legacy issues and Citi has moved forward and implemented a series of initiatives focused on culture and ethics. Fostering a culture of ethical behaviour has also been and continues to be a top priority for Citi.”

It is not the first time Citigroup Global Markets Asia has fallen foul of the market regulator.

In July 2018, the SFC reprimanded and fined the unit HK$4 million for misconduct within its dark pool operation – an electronic trading platform that allows institutional investors to trade without exposing their identities.

Two months before that, it fined the Citi unit HK$57 million for failing in its duty as a sponsor for the initial public offering of Real Gold Mining.