The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) announced today that an agreement has been reached with Citibank (Hong Kong) Limited (Citibank HK) in relation to its distribution of market-linked notes (MLNs) and equity-linked notes (ELNs) issued by Lehman Brothers (collectively referred to as "LB Notes") between March 2007 and June 2008 (Notes 1, 2 & 3).
Without admitting any liability, Citibank HK has agreed to make a repurchase offer to eligible customers holding outstanding LB Notes distributed by Citibank HK at a price equal to 80% of the total value of each eligible customer's investment in the Notes (Note 4).
The total value of Citibank HK's repurchase offer is estimated to be about HK$1.06 billion, covering about 92% of Citibank HK customers holding outstanding LB Notes (Note 5).
The offer price will exclude the amount of coupon already paid to eligible customers but include an additional amount representing the interest that would have been earned if the amount invested in LB Notes had been invested with Citibank HK on a fixed term deposit (Note 6).
Although Citibank HK's written guidelines to staff in relation to the sale of securities were comparatively sound and provided a foundation for compliance with key regulatory requirements, the SFC had a number of concerns regarding the bank's implementation and supervision of those guidelines and associated procedures and controls which posed risks that regulatory requirements would not be met.
Specifically, the SFC had concerns in the following areas:
Under the repurchase scheme, Citibank HK will also pay top-up payments to those customers of outstanding LB Notes with whom Citibank HK has already entered into settlement agreements but would otherwise have been eligible to receive a repurchase offer to the extent that such payments are needed to ensure those customers are treated in the same way as other customers participating in the repurchase scheme.
In entering into this agreement under section 201 of the Securities and Futures Ordinance, the SFC has taken into account:
"While sound internal guidelines dealing with what is required and expected in the sale of investment products is an essential compliance tool for intermediaries, adequate guidelines alone are not sufficient. Good controls and supervision together with sound experience and judgement are needed to ensure recommended investment products are suitable for customers," the SFC's Acting Chief Executive Officer, Mrs Alexa Lam said.
"This outcome is a demonstrably good one for affected customers and brings the matter to an appropriate conclusion," she added.
Mr Arthur Yuen, Deputy Chief Executive of the HKMA, said, "The HKMA welcomes the resolution. The HKMA believes that this resolution is a reasonable and practical one and is in the interests of investors and in the public interest. Eligible customers are encouraged to consider the offers positively."
In view of the repurchase scheme, the SFC will not impose disciplinary sanctions against Citibank HK and its current or former officers or employees in relation to the distribution of LB Notes, save for any acts of dishonesty, fraud, deception or conduct that is criminal in nature.
The HKMA has also informed Citibank HK that it does not intend to take any enforcement action against their executive officers and relevant individuals in connection with the sale of LB Notes to customers who have accepted the repurchase offers or the top-up payments under the repurchase scheme, except for any acts of dishonesty, fraud, deception or conduct that is criminal in nature.
End
Notes:
In respect of ELNs, they were structured notes offered in USD/HKD/GBP with a tenor from eight months to one year. The potential return of ELNs was linked to the performance of a basket of stocks traded in Hong Kong. They were not principal protected and at maturity, they might be redeemed by the physical delivery of the worst performing stock at the strike price upon certain triggering events.
Both ELNs and MLNs were senior and unsecured debt obligations of the issuer. They were not backed by any collateral and subject to the credit risk of the issuer/guarantor.
Hong Kong Monetary Authority:
Rhonda Lam at 2878 1480 or Queenie Yip at 2878 1687