Japan FSA Recommends for Administrative Action Against Citigroup
Contents of the Recommendation
Pursuant to Article 20, paragraph 1 of the Act for Establishment of the Financial Services Agency (FSA), today, on December 9, 2011, the Securities and Exchange Surveillance Commission (SESC) issued a recommendation that the Prime Minister and the Commissioner of the FSA take administrative action and any other appropriate measures against Citigroup Global Markets Japan Inc.* (hereinafter referred to as the “Company”). This recommendation is based on the findings of an inspection, whereby the following breaches of laws and regulations by the Company were identified.
*Location: Chiyoda-Ku, Tokyo
President and CEO: Mr. Brian Mccappin
Capital: 96,300 million JPY
Number of officers and employees: 729
Registration types: Type I Financial Instruments Business Operator
Type II Financial Instruments Business Operator
Summary of the findings
(1) Inadequate response to the administrative order
In response to the order by the FSA pursuant to Article 56-2, paragraph 1 of the Financial Instruments and Exchange Act (FIEA), the Company submitted a report regarding the involvement of directors/employees in Euroyen TIBOR (hereinafter referred to as “TIBOR”) and Yen LIBOR.
The SESC, through its inspection, verified the accuracy and sufficiency of the content of the report, and revealed that the report lacked a description of important matters regarding inappropriate approaches against submitting rates and contained an untruthful description, the conclusion of the report was derived from this untruthful description, and therefore the contents of the report were inappropriate.
The lack of important matters and the untruthful description in the report are acknowledged to violate the administrative order by the FSA Commissioner based on Article 56-2 of the FIEA, and the Company’s actions related to the report are acknowledged to fall under Article 52, paragraph 1 (vi) of the FIEA, which stipulates “violation of the disposition given by government agencies under laws and regulations pertaining to Financial Instruments Business.”
(2) Inappropriate actions related to TIBOR
The Head of the G10 Rates in the Company(at that time; hereinafter referred to as “Director A”)had continuously conducted approaches such as requesting a person in charge of submitting the TIBOR rates of Citibank Japan Ltd. (hereinafter referred to as “Submitting Personnel”) to change its rates since around April 2010 at the latest, and a JPY Rates trader at the G10 Rates (hereinafter referred to as “Trader B”)had continuously conducted approaches such as requesting persons in charge of submitting the TIBOR rates of other banks (or securities firms belonging to their financial conglomerates, hereinafter, including Submitting Personnel, referred to as “Submitting Personnel, etc.”) since Trader B joined the Company in December 2009, for the purpose of fluctuating TIBOR so as to give advantages to the Derivatives Transactions related to yen rates which Director A and Trader B were conducting.
The actions conducted by Director A and Trader B are acknowledged to be seriously unjust and malicious, and could undermine the fairness of the markets, considering that three-month TIBOR is the underlying asset of Three-month Euroyen Futures listed on Tokyo Financial Exchange Inc., Director A and Trader B conducted transactions of Three-month Euroyen Futures on Tokyo Financial Exchange Inc., and TIBOR is a significantly important financial index as a basic interest rate when banks raise or lend money. Therefore, the aforementioned actions by Director A and Trader B are acknowledged to have a serious problem from the viewpoints of the public interest and protection of investors.
Furthermore, Trader B had also continuously conducted inappropriate approaches such as requesting to change the Yen-LIBOR rates that Citibank group submitted, since December 2009.
In spite of recognizing these actions, the President and CEO (hereinafter referred to simply as the “CEO”), who was also responsible for the G10 Rates, overlooked these actions and the Company did not take appropriate measures, therefore, the Company’s internal control system is acknowledged to have a serious problem.
As mentioned above, i) Director A and Trader B are acknowledged to have conducted approaches against Submitting Personnel, etc. for Market Transactions of Derivatives which they were conducting under the Company’s proprietary trading legally defined as Financial Instruments Business, ii) the actions are acknowledged to be unjust and malicious, from the viewpoints of the public interest and protection of investors, and could undermine the fairness of the markets, iii) Trader B conducted approaches regarding not only TIBOR but also Yen-LIBOR, and iv) the Company’s internal control system is acknowledged to have a serious problem. Therefore, the Company’s actions are acknowledged to fall under Article 52, paragraph 1 (ix) of the FIEA, which stipulates “when a wrongful act or extremely unjust act has been conducted with regard to Financial Instruments Business, and when the circumstances are especially serious”.
(3) Sales activity without necessary registration of a Sales Representative by a senior executive
Director A had conducted Market Transactions of Derivatives since November 12, 2009.
However, the Company had not registered Director A as a Class-1 Sales Representative with Japan Securities Dealers Association, which is necessary to conduct Market Transactions of Derivatives, until June 16, 2010.
The CEO has not taken appropriate measures, such as directing related sections including the Compliance Division to address this issue, even after the CEO recognized that Director A conducted sales activities without necessary registration. Therefore, the Company’s internal control system is acknowledged to have a serious problem.
The Company had the employee conduct duties of Sales Representatives without necessary registration. The aforementioned action of the Company is acknowledged to constitute a breach of Article 64, paragraph 2 of the FIEA.