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Bank Arm to Pay $606M Restitution

December 17, 2001

NEW YORK (AP) _ A New York bank’s securities arm must pay a record $606 million in restitution after admitting Monday that it conspired with a New Jersey investment adviser to hide hundreds of millions of dollars in losses from Japanese investors.

Lawyers for Republic New York Corp.’s securities subsidiary, Republic New York Securities Corp., entered guilty pleas in U.S. District Court in Manhattan to two securities charges, including conspiracy, before Judge Richard Conway Casey.

The plea capped a deal discussed last week in a sealed proceeding, the judge said.

In its plea, the firm admitted that some employees overstated the value of assets in the accounts of Martin Armstrong, a New Jersey investment adviser awaiting trial on charges that he cheated Japanese investors out of hundreds of millions of dollars.

``The losses to investors were astronomical and the loss to investor confidence immeasurable,″ U.S. Attorney Mary Jo White said at a news conference after the plea.

The losses resulted when the securities outlet’s best customer _ Armstrong _ began losing millions of dollars, authorities said.

Armstrong, who was charged in September 1999 with 14 counts of securities fraud and wire fraud, allegedly created a massive ``Ponzi″ scheme in which earlier investors were paid off with money gathered from new investors.

Promising financial stability and steady profits, Armstrong allegedly induced about 139 victims, primarily publicly held corporate investors, to buy more than $3 billion of what he called ``Princeton Notes.″

When the scheme collapsed, about 60 investors had lost more than $600 million, prosecutors said.

``Typically, when accused Ponzi schemes come crashing down, the money is gone and there’s little if anything left to compensate investors,″ said Wayne Carlin, director of the northeast regional office of the Securities and Exchange Commission.

He said the $606 million to be paid back to investors represented a ``remarkable level of restitution for the victims of this crime.″

In its plea, Republic Securities admitted it had lied about the value of assets in accounts Armstrong controlled and had misrepresented his trading performance as it wrongfully commingled investor funds.

While the scheme unfolded from 1992 through 1999, Republic Securities was a subsidiary of Republic New York Corp. and an affiliate of Republic National Bank of New York.

Republic Securities is now a subsidiary of HSBC USA Inc., which merged in December 1999 with Republic New York Corp. and Republic National Bank of New York.

In a statement, HSBC USA President Youssef A. Nasr said the company was ``pleased that today’s settlement will put the Princeton Note matter largely behind us.″

The company said the restitution also will resolve 17 lawsuits filed in federal court in Manhattan by 51 Princeton noteholders.

Carlin said Republic Securities will no longer operate as a securities dealer.

``This brings a fitting end to a broker-dealer that was kept afloat largely by the commissions and fees that resulted from this fraud,″ he said.

White said the restitution was over 17 times more than the $35 million in commissions Republic Securities was paid by Armstrong to service his accounts and nearly seven and a half times the current capital of Republic Securities.

She said it was believed to be the largest criminal restitution order ever entered against a single criminal defendant that will be fully paid.

The prosecutor said the actions of Republic Securities was the ``epitome of how a financial institution must not conduct its business.″

She said the misconduct occurred ``in the face of repeated red flags and at the highest levels of Republic Securities management.″

``Rather than joining in or turning a blind eye to suspicious activities by their customers and employees, financial institutions must properly investigate, stop and report such conduct to the appropriate law enforcement and regulatory authorities,″ she said.

In Washington, the Commodity Futures Trading Commission announced a related agreement with Republic Securities in which it is paying a $5 million civil fine and agreeing to refrain from future violations of federal commodities laws.

Republic Securities neither admitted to nor denied the CFTC’s allegations that it ``aided and abetted a commodity-futures trading fraud perpetrated against investors around the world.″ The federal agency also revoked its commodity trading registration.

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