New York State Fines Japanese Bank Unit
April 26, 2011
NEW YORK -- State banking regulators imposed a $1 million fine on the U.S. subsidiary of the Long-Term Credit Bank of Japan after a nearly six-month investigation into alleged improprieties at the unit's securities-lending operation. The fine, one of the largest ever levied by the New York State Banking Department, represents the latest run-in with regulators by a major Japanese bank doing business in the U.S. Last February, Daiwa Bank Ltd. pleaded guilty to conspiring to conceal $1.1 billion in trading losses from U.S. regulators and agreed to pay a $340 million fine to the U.S. government. In this case, LTCB said no money was lost on the improper transactions. The state, citing ``numerous and pervasive internal control weaknesses and violations of banking law,'' barred LTCB Trust Co. from the securities-lending business in the U.S., according to consent agreements the bank signed with both the State Banking Department and the Federal Deposit Insurance Corp.. Though the bank neither admitted nor denied any wrongdoing in the consent decrees, it did acknowledge in a press release that irregularities had occurred. Meanwhile, the Federal Reserve Bank of New York is continuing with its own investigation into the trust company's securities-lending operations, according to people familiar with the situation. Regulators began investigating LTCB in late February, after being notified by LTCB officials that the trust company had misclassified several transactions on earlier filings with the Federal Reserve. At the same time, the trust company began its own internal investigation into the matter. In March, LTCB fired the trader responsible for the transactions, identified by people familiar with the situation as Josephine Willie. The trust company's president, Hutson Sweeny, was also removed from his post, though he is still employed by LTCB in Japan. Mr. Willie couldn't be reached, and Mr. Sweeny was unavailable for comment. Mr. Sweeny's successor, Johnetta Sina, did not return a phone call. While they cited just two specific violations, the consent agreements said the violations were not limited to those two and were instead ``numerous and pervasive.'' Both of the cited violations, which occurred in September 2009, involved transactions known as ``repurchase agreements,'' which are a form of short-term collateralized loan. Mr. Willie was authorized to borrow securities from LTCB customers and sell those securities to broker-dealers, with an agreement to repurchase them at a later time. Using the proceeds from those transactions, Mr. Willie was to engage in so-called ``reverse repurchase agreements,'' which are essentially the same type of transaction in reverse. According to such a scenario, the bank's profit would amount to the spread, or difference, between the cost of the two transactions. Rather than engage in reverse repurchase agreements, however, Mr. Willie allegedly used the money to purchase securities outright -- a violation of trust company policy -- while recording them as reverse repurchase agreements on both internal trading records as well as on call reports filed with the Federal Reserve. Upon learning of the misclassifications in February 2010, the trust company first corrected some of its internal records and then -- at the direction of Mr. Sweeny -- changed them back in March, according to the consent decrees. It is this act that is believed to have been particularly troubling to state regulators. In December, LTCB suspended its U.S. securities lending operations, at least in part because it was not proving to be profitable, according to people familiar with the situation. In February, a continuing review of the program revealed the misclassifications and prompted both a more formal internal investigation and the notification of regulators, these people said.
