The Securities and Exchange Surveillance Commission said Tuesday it has urged the Financial Services Agency to take punitive administrative action against the Tokyo branch of Citibank over violations of Japanese security law.

The securities industry watchdog said inspections of Citibank found that two vice presidents misled customers on the nature of structured bonds, which were purchased at several hundred million yen apiece.

The SESC also said another employee broke the Security and Exchange Law in April 2003 by extending credit to a customer on condition that the borrower also purchase structured bonds, a high-risk financial product. The customer had wanted to start an overseas venture.

One vice president pitched structured bonds in June and August last year, falsely saying that the bonds could be sold at a certain price anytime before maturity, even though it was difficult to do so due to the low level of liquidity, the SESC said.

Another assured a customer last July that interest could be earned on a structured bond without risk to the principal, although both interest and principal are subject to exchange-rate fluctuations. The two vice presidents still work at Citibank.

Based on the SESC’s findings, the FSA will decide what action to take against Citibank. Past violations involving misleading securities information have earned penalties ranging from improvement orders to 30-day suspensions of operations, an SESC official said, adding that all penalties are decided on a case-by-case basis.

The three employees were quoted by the SESC as saying they did not think their actions infringed on the regulations. The SESC said the employee who loaned money said that what he did was a “common practice.”

Citibank said it “regrets this matter and takes this situation very seriously” and that it “will undertake all necessary corrective actions.”

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