Citi faulted for poor oversight

PUBLISHED : Tuesday, 04 October, 2011, 12:00am
UPDATED : Tuesday, 04 October, 2011, 12:00am


Citigroup has been reprimanded by Hong Kong's securities regulator for failing to notice that one of its former private bankers operated a Ponzi scheme for five years.

The Securities and Futures Commission (SFC) has fined the bank's regional branch, Citi Asia, HK$6 million and suspended the license of managing director Lisa Chan Sin-man, who directly supervised alleged Ponzi banker Ramesh Sadhwani.

The SFC announced yesterday that the scheme was operational between 2004-2009. Sadhwani, who fled Hong Kong over two years ago, often targeted Indian investors based in Hong Kong, including pensioners, according to three former clients.

'Citi 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,' said Mark Steward, the regulator's director of enforcement.

The SFC statement referred to the Ponzi scheme operator only as 'Mr X', though it did name Lisa Chan.

Two independent sources confirmed the announcement concerned Sadhwani. Documents seen by the South China Morning Post also confirm Sadhwani was directly supervised by Chan.

'I am happy some justice has been done,' said Deepak Sureka, a 75-year-old Hong Kong resident who believes he lost US$700,000 after investing with Sadhwani. 'Citi deserved the reprimand.'

The bank said yesterday it would repay the principal amounts of funds investors placed with its former adviser, though it did not offer compensation for money they may have lost by not putting their cash into real investments.

'We accept the decision and actions of the SFC and have already taken steps to further strengthen our prevention, supervisory and detection processes,' Citi said, adding that it 'co-operated fully' with the SFC.

In correspondence he sent to one elderly client, which was reviewed by the Post, Sadhwani claimed he had a special options trading strategy that carried 'zero risk' and could net investors annual returns of up to 18 per cent. Sadhwani said the strategy was 'commonly used by conservative investors, specially [sic] older clients in their retirement plan accounts'.

Ponzi operators pay profits to their earlier investors out of contributions made by people lured into their schemes later on.

Some of Sadhwani's customers discovered the scheme in early 2009, when the global financial crisis hit and they stopped getting payments. They have been battling the bank for compensation since.

The SFC said Chan did not take action when she was shown correspondence between 'Mr X' and his clients that promised guaranteed returns in a manner that breached the banks' internal guidelines.

Meanwhile, Citi's failure to report its former adviser on time meant the regulator and other law enforcement authorities 'had no opportunity to interview Mr X or to secure his whereabouts,' the SFC said.