Citibank (Hong Kong) has agreed to make an 80% repurchase offer to customers holding market-linked and equity-linked notes issued by Lehman Brothers, although it did not admit any liability.

The bank, which distributed the Lehman-guaranteed notes on a private placement basis between March 2007 and June 2008, said it would buy them back at a price equal to 80% of the total value of each eligible customer’s investment.

The total value of the repurchase offer is estimated to be about HK$1.06 billion ($136 million), covering about 92% of Citibank HK customers.

The announcement was made late last Friday by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA).

While they acknowledged that Citibank HK’s written guidelines to staff in relation to the sale of the securities was comparatively sound, the SFC said it had concerns regarding the bank’s implementation and supervision of the guidelines, procedures and controls.

These centred around the adequacy of disclosure of the credit risk of Lehman Brothers to customers; the sufficiency of the assessment of customers’ experience and level of tolerance to risk, including risk profiling; and the overall monitoring of the sales process.

“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,” commented Alexa Lam, the SFC’s acting chief investment officer.

“Good controls and supervision together with sound experience and judgment are needed to ensure recommended investment products are suitable for customers. This outcome is a demonstrably good one for affected customers and brings the matter to an appropriate conclusion.”

The HKMA also welcomed the resolution as reasonable, practical and in the public interest. “Eligible customers are encouraged to consider the offers positively,” says Arthur Yuen, the authority’s deputy chief executive.

The SFC said that in light of the repurchase scheme it would not impose disciplinary sanctions against Citibank HK and its current or former staff in relation to the distribution of these notes. The HKMA also said it would take no enforcement action.

Citibank HK’s offer price excludes the amount of coupon already paid to eligible customers, but includes an additional amount representing interest that would have been earned if the amount invested in the notes had been invested with Citibank HK on a fixed-term deposit.

Professional, corporate or experienced investors who, in the three years preceding their first purchase of the notes, carried out at least five transactions of structured and leveraged products were not considered eligible for the repurchase offer.

Citibank HK distributed 19 series of market-linked notes (MLNs) and 52 series of equity-linked notes (ELNs) between March 2007 and June 2008, of which $204.7 million (about HK$1.6 billion) worth remains outstanding, held by more than 1,400 customers.

Both the MLNs and ELNs were senior and unsecured debt obligations of the issuer and not backed by collateral. With a minimum subscription amount of HK$500,000, they were subject to the credit risk of the issuer/guarantor.

The MLNs were structured notes offered in US dollars, Hong Kong dollars, Aussie dollars and New Zealand dollars with a tenor from 2.5 to 4.75 years. They were principal protected, meaning the issuer agreed to repay 100% of the principal amount to the investor at maturity, and their potential return was linked to the performance of underlying equities.

The ELNs were structured notes offered in US dollars, Hong Kong dollars and British pounds with tenors from eight months to a year. They were not principal protected, and at maturity could be redeemed by the physical delivery of the worst performing stock at the strike price upon certain triggering events. Their potential return was linked to a basket of stocks traded in Hong Kong.

Following the regulators’ announcement, Citibank issued a statement saying its repurchase plan offered investors an opportunity to recoup the majority of their investment in Lehman Brothers’ related products in Hong Kong.

“Citibank is making this offer in the best interests of our clients without admitting any liability. The SFC considered the bank’s guidelines to staff were comparatively sound and provided a foundation for compliance with key regulatory requirements.

“We welcome the support of the regulators in Hong Kong who encourage eligible customers to positively consider this offer.”