The Securities and Futures Commission is investigating a former Citigroup adviser who has fled Hong Kong for India after allegedly misleading investors into buying investments guaranteeing an annual return of up to 18 per cent.
Citigroup's internal control system is also being scrutinised by the SFC as part of an investigation of why it failed to detect the misconduct of Ramesh Sadhwani, who was a senior vice-president with Citi Private Bank.
Sadhwani reportedly sold investors a product he said guaranteed a return of between 7 per cent and 18 per cent between 2004 and 2008. Investors said they didn't have any knowledge of how it worked.
In January 2009, Sadhwani, who had been with Citi for more than 10 years, reassured one of his clients in a letter that his investments, which had both long and short positions on stocks using options, was risk-free and 100 per cent covered.
'This [option trading] strategy was commonly used by conservative investors, specially [sic] older clients in their retirement plan accounts as it has zero risk,' the letter said.
Investors demanded their guaranteed returns in the wake of the global financial crisis and complained to Citi, which terminated Sadhwani's employment in early 2009.
It then hired consulting firm PricewaterhouseCoopers to conduct an internal investigation to examine all of Sadhwani's client accounts, which held US$30 million.
The PwC investigation found that a possible fraud had occurred affecting seven investors with an estimated loss of US$1.7 million, according to sources. Sadhwani is reported to have fled Hong Kong shortly after he was fired, with investors complaining to the Hong Kong Monetary Authority and the SFC after finding this out.
Sources say it took the SFC a while to contact regulators in India in order to get hold of Sadhwani for questioning. The outcome of any investigation by Indian regulators is not known.
Sadhwani had a network of clients, mostly among the Indian community in Hong Kong, with whom he had social ties. Deepak Sureka, a 75-year-old Hong Kong resident, believes he has lost US$700,000 after investing with Sadhwani, about whom he complained to Citi in 2009 after becoming suspicious of him.
Sureka said Citi had offered him partial compensation last year but he rejected the offer.
'I didn't accept [the offer],' said Sureka. 'I think Citi has not been professional about it. I think some of the securities [my account invests in] have moved up. There's been no progress made since [to recover losses].'
Sureka said he had contemplated launching a lawsuit against Citi after the bank told him it was not responsible for the case but he thought it would be too costly.
According to sources familiar with the situation, Citi settled with a number of investors on the condition that they signed an agreement to never disclose details of the case.
Sadhwani was fired by Citi Private Bank in February 2009 for gross misconduct, said a spokesman for Citigroup yesterday, declining to comment on the investigation.
While it may not be possible to have Sadhwani detained in Hong Kong for questioning, the SFC can prevent anyone who has violated securities law from working in Hong Kong again. The investigation is on-going.