UNITED STATES OF AMERICA
In the Matter of
THE STATE BANK OF INDIA and
|ORDER INSTITUTING PROCEEDINGS,
MAKING FINDINGS, AND IMPOSING
A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") against The State Bank of India ("SBI") and Citibank, N.A ("Citibank"). Accordingly, it is hereby ordered that public cease-and-desist proceedings pursuant to Section 8A of the Securities Act be, and hereby are, instituted against SBI and Citibank.
In anticipation of the institution of these public cease-and-desist proceedings, SBI and Citibank have each submitted an offer of settlement ("Offers of Settlement") which the Commission has determined to accept. Solely for the purposes of these proceedings, and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained in this Order Instituting Proceedings, Making Findings, and Imposing A Cease-and-Desist Order pursuant to Section 8A of the Securities Act of 1933 ("Order"), SBI and Citibank consent to the entry of the Order, the findings and the remedial sanctions set forth below.
On the basis of this Order and the Offers of Settlement submitted by SBI and Citibank, the Commission finds that:
1. This matter involves an unregistered offering of securities in the United States by SBI and Citibank. The "Resurgent India Bonds" ("RIBs") offered and sold by SBI and Citibank were securities within the meaning of the Securities Act. Between August 5, 1998 and August 24, 1998, SBI sold in the United States a total of $532 million of the RIBs to Non-Resident Indians ("NRIs") and partnerships, corporations and other entities principally owned by NRIs ("OCBs").1 Of that amount, Citibank sold approximately $160 million of the RIBs. SBI did not file a registration statement with the Commission, and no exemption from registration was applicable. Accordingly, SBI and Citibank violated Section 5 of the Securities Act.
2. SBI, the largest commercial bank in India, was incorporated under the State Bank of India Act of 1955 and is headquartered in Mumbai, India. In the United States, SBI has offices and conducts business in New York City ("SBI New York"), and in Washington, D.C., Chicago, Los Angeles and San Jose.
3. SBI Capital Markets, Ltd. ("Subsidiary") is a leading merchant bank in India and its business is comparable to that of an investment bank in the United States. SBI's Subsidiary frequently underwrites securities offerings in India, including debt instruments. Subsidiary is 86.16% owned by SBI, the balance of it being owned by Asian Development Bank, a division of the World Bank. SBI's Subsidiary has no offices in the United States.
4. Citibank is a national banking association organized under the National Bank Act of 1864 and maintains its head offices in New York City. Citibank's NRI Services division ("NRI Services") sells both securities, including stocks, bonds and mutual funds, and bank deposit products to NRIs living in the United States through its employees some of whom are licensed securities brokers. NRI Services maintains offices in Citibank locations in New York City, Chicago, Houston and California.
SBI Directly, and Indirectly through Its Subsidiary and Other Entities,
Offered and Sold Unregistered Securities in the United States
5. On June 1, 1998, the Indian Finance Minister announced in a budget speech in the Indian Parliament that SBI would soon offer to NRIs throughout the world instruments entitled "Resurgent India Bonds." The Indian Finance Minister also announced that the Indian Government would provide tax concessions to subscribers of the RIBs. Shortly thereafter, Indian newspapers reported that SBI hoped to raise more than $2 billion of foreign currency through the issue of RIBs.
6. On July 8, 1998, in a press conference and press release in India, SBI announced the details of the RIB offer, stating "[SBI] plans to shortly come out with an offer of a 5 year foreign currency denominated bond, christened `Resurgent India Bonds.'" SBI's press release also detailed the characteristics of the RIBs by announcing that the RIBs would:
(a) be available "for investment" by NRIs and OCBs throughout the world; (b) be issued in Dollar, Pound Sterling and Deutsche Mark denominations; and (c) carry interest rates of 7.75%, 8% and 6.25% per annum, respectively, for a term of five years.
7. SBI's July 8, 1998 announcement also described the following features of the RIBs:
(a) "the investor" would have an option of receiving interest every half year or cumulatively; (b) the RIBs were transferable between NRIs and OCBs, and giftable to Indian residents; (c) the RIBs' interest income would be free from income, wealth and gift taxes in India; (d) banks would be permitted to provide loans against the RIBs' principal and interest; (e) the RIBs could be prematurely "encashed" without penalty; and (f) the proceeds of the sale of RIBs would be used mainly for infrastructure development in India.
8. On July 25, 1998, a second SBI press release reported that "subscription" to the RIBs would open on August 5, 1998. This press release further described the following features of the RIBs:
(a) NRIs and OCBs could "invest in the bonds" which have a "tenure" of five years; (b) "[t]he bonds will also be easily transferable" among NRIs and OCBs; (c) "the bonds" would be offered in three currencies; (d) the "coupon rates are 7.75% per annum for USD bonds;" (e) "investors" would have the option to receive the interest every six months or cumulatively; (f) the principal and interest earned would be fully repatriable; and (g) SBI had an "aggressive marketing strategy" including the use of "road shows" at NRI centers in India and abroad to "mobilize subscriptions" worldwide.
SBI Appointed Its Subsidiary as "Lead Arranger" to Retain "Brokers," "Sub-Brokers" and "Collecting Banks" for the RIB Offering
9. On or about July 8, 1998, SBI announced that Subsidiary, the leading merchant bank and securities underwriter in India, would be the "lead arranger" of the RIB offering and that Subsidiary was appointed to retain various entities throughout the world to act as "brokers" and "sub-brokers" to market RIBs worldwide. Through Subsidiary, SBI coordinated the marketing efforts for RIBs throughout the world, including in the United States, which also included advertisements on television and the Internet and in newspapers.
10. During the third week of July 1998, SBI, through its Subsidiary, entered into agreements with Indian and foreign banks, including SBI New York, as well as with Citibank and at least a dozen other persons and entities operating in the United States and India to act as "brokers" for the purpose of "mobilizing subscriptions from eligible investors" in the United States, and elsewhere in the world. These entities and individuals each executed a brokerage agreement ("Brokerage Agreements"), which provided that the referenced persons were appointed "broker[s] for mobilizing subscriptions from eligible investors for the issue," and that the broker would receive a "brokerage" commission for the funds it mobilized. The Brokerage Agreements also provided each person with a broker code number that would be placed in a box on the subscription agreements executed by the investors. In addition, the Brokerage Agreements also allowed the brokers to hire "sub-brokers" who would be assigned "sub-broker code[s]" that would also be listed on the subscription agreements.
11. Also in July 1998, SBI appointed "collecting banks" to act as regional centers where applications would be collected, processed and forwarded to SBI. SBI appointed banks, including SBI New York and Citibank, to be collecting banks in the United States.
The Marketing And Offer of RIBs in the United States
12. In the United States, the marketing of RIBs was principally conducted by employees of SBI New York and Citibank. SBI New York's marketing efforts were directed and overseen by SBI and its Subsidiary. Those marketing efforts were widespread and aggressive, and targeted approximately 1 million NRIs living in the United States, many of whom were also United States citizens.
13. SBI prepared a document titled Terms of Offer ("Terms of Offer") that SBI, its Subsidiary and SBI New York, as well as Citibank distributed to prospective purchasers of the RIBs. The Terms of Offer explained the features of the RIBs, repeating many of the characteristics that were described in SBI's press releases dated July 8, 1998 and July 25, 1998. Among other features, the Terms of Offer stated that:
(a) RIBs would be available "for investment" by NRIs and OCBs throughout the world; (b) RIBs would be issued in different denominations in Dollar, Pounds Sterling and Deutsche Marks; (c) RIBs carry interest rates of 7.75%, 8% and 6.25% per annum, respectively, for a term of five years; (d) the principal "invested" and interest earned in RIBs would be fully repatriable; (e) "the investor" would have the option of receiving interest every half year or cumulatively; (f) RIBs were transferable between NRIs and OCBs, and giftable to Indian residents; (g) the RIBs' interest income would be free from income, wealth and gift taxes in India; (h) banks would be permitted to provide loans against the RIBs' principal and interest; and (i) the RIBs could be prematurely "encashed" without penalty.
14. The Terms of Offer prominently displayed in large bold capitalized letters, the heading "RESURGENT INDIA BONDS." Further down, in a smaller print size, the Terms of Offer described the RIBs as: "bank instruments representing foreign currency denominated deposits in India in the form of promissory notes." The Terms of Offer, as well as SBI's and its Subsidiary's newspaper and television advertisements, also displayed the following statement:
THE RIBS CONSTITUTE OBLIGATIONS OF SBI CENTRAL OFFICE, MUMBAI, INDIA AND ARE NOT THE OBLIGATIONS OF ANY FOREIGN OFFICE OF SBI OR ITS SUBSIDIARIES. FURTHER, THE RIBS ARE NOT FDIC INSURED DEPOSITS IN THE USA, NOR ARE THEY INSURED BY ANY OTHER INSURANCE COMPANY. SBI DOES NOT REGARD THE RIBS AS SECURITIES FOR THE PURPOSE OF THE FEDERAL SECURITIES LAWS. PROSPECTIVE DEPOSITORS MUST RELY UPON THEIR OWN EXAMINATION OF THE TERMS OF OFFER IN MAKING A DECISION REGARDING THE RIBS. THESE INSTRUMENTS HAVE NOT BEEN APPROVED OR CLEARED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. SBI HAS NOT SOUGHT TO OBTAIN THE APPROVAL OR CLEARANCE OF THE SEC FOR OFFERING OF RIBS IN THE UNITED STATES.2
15. As stated above, the RIBs are not insured by the Federal Deposit Insurance Corporation nor carry any other insurance in the United States. U.S. subscribers paid for RIBs in dollars, receive interest payments in dollars and will receive repayment of their principal in dollars at maturity. Investors thus rely on SBI to be able to continue to make these dollar payments despite any future fluctuations in the U.S. Dollar-Rupee exchange rate. Although there was no mention of insurance protection in India in the Terms of Offer or other offering materials, it appears that the RIBs are afforded some insurance protection by India's Deposit Insurance Corp. and Credit Guarantee Corporation. This insurance is limited to approximately $2,500 per subscriber. Investments in the RIBs in the United States averaged $20,000 per subscriber.
16. On or about August 5, 1998, through August 24, 1998, SBI directly, and through its Subsidiary, marketed the RIBs through: (1) mass mailings to 30,000 to 40,000 NRIs residing in the United States which included a letter from the Indian Ambassador stating that the Government of India endorsed the RIBs; (2) full page newspaper advertisements in ethnic Indian newspapers published in the United States; (3) television advertisements placed on ethnic Indian channels; (4) an Internet website which allowed NRIs to download the RIBs subscription agreement and the Terms of Offer; (5) cold calls to NRIs; and (6) and road shows at specified NRI centers in the United States at some of which a slide show was shown.
17. SBI's marketing campaign featured the name "RESURGENT INDIA BOND," which SBI and its Subsidiary displayed in all of their marketing materials in large bold capital letters. In addition, these marketing materials repeatedly referred to the RIBs as "bond[s]" and "investment[s]," and used terms commonly associated with securities offerings, such as: (1) "broker" and "sub-broker;" (2) "offer;" (3) "issue;" (4) "subscription;" (5) "coupon rate;" (6) "liquidity;" and (7) "maturity." While some materials also referred to "deposits," that term appeared in smaller print and in less visible locations. These marketing materials also stated that: (1) the RIBs are free of income, wealth and gift taxes in India; (2) the RIBs are "easily transferable" by "signature and delivery;" and (3) the proceeds of the RIBs would be used to finance infrastructure projects in India. Although SBI treated RIBs in its books and records as well as in its banking regulatory reports in India as deposits, SBI used the word "Bond" in the title of the instrument and to describe the RIBs in its offering materials.
Citibank's Marketing of the RIBs
18. The RIBs were also marketed in the United States by Citibank's NRI Services through: (1) mass mailings of 50,000 postcards to United States residents; (2) mailing 10,000 application forms to persons who expressed interest in the RIBs; (3) an Internet website identifying Citibank that offered the RIBs and that allowed NRIs to download the subscription agreement and Terms of Offer; and (4) eight employees of a telemarketing firm who made at least 16,000 unsolicited calls to NRIs. Some of Citibank's employees who sold the RIBs (7 of 18 employees) were employed jointly by Citibank and its investment services division whose salespeople hold Series 7 and 63 licenses, and sell securities such as stocks, bonds and mutual funds to their NRI clients -- many of whom also purchased the RIBs.
19. Citibank's marketing materials repeatedly referred to the RIBs as "bond[s]" and "investment[s]," and frequently used terms commonly associated with securities offerings, including: (1) "invest;" (2) "issue;" (3) "offer;" (4) "tenure;" (5) "subscription;" and (6) "transferability." Citibank's marketing materials also touted characteristics of the RIBs that are also characteristics of government bonds, such as: (1) tax benefits; (2) transferability; and (3) proceeds to be used for infrastructure projects in India. While using such terms as "bond" and "investment," some of Citibank's documents also described the RIBs as "5-year fixed return deposit[s]."
The Sale of the RIBs
20. Between August 5, 1998 and August 24, 1998, SBI directly, and through the marketing efforts of its Subsidiary, SBI New York and Citibank, raised approximately $532 million from NRIs and OCBs in the United States in the RIB Offering (SBI and its Subsidiary raised more than $4 billion worldwide). SBI directly raised $182 million from approximately 12,000 NRIs and OCBs in the United States who subscribed to the RIBs through SBI's branches in New York and the rest of the country. Citibank directly raised approximately $160 million from at least 5,000 NRIs and OCBs in the United States who subscribed to the RIBs through Citibank's locations in the United States.
21. In October 1998, SBI mailed to RIB subscribers in the United States, and throughout the world, "Bond Certificates" that evidenced their RIBs ownership. The bond certificates state that they are "obligations" of SBI and that they are not insured by the FDIC or any other insurer. SBI included a cover letter to each subscriber, which repeatedly referred to the RIBs as "bonds." Moreover, on their face, the "Bond Certificates" are identified as "Resurgent India Bonds" and refer to the holder of the note as "the bondholder." A reference to bank deposits was made only in smaller print letters on the face of those instruments.
22. No registration statement was filed with the Commission concerning the offer and sale of the RIBs.
23. Sections 5(a) and 5(c) of the Securities Act ("registration provisions") generally prohibit the offer or sale of securities unless there is a registration statement on file with the Commission or in effect as to those securities. The registration provisions are violated when there is: (1) an offer or sale of securities; (2) the absence of a registration statement on file with the Commission or in effect covering the securities in question; and (3) the use of the mails, or any means or instrument of transportation or communication in interstate commerce. Raiford v. Buslease, Inc., 825 F.2d 351, 354 (11th Cir. 1987) (citing Swenson v. Engelstad, 626 F.2d 421, 424-25 (5th Cir. 1980)).
24. Section 2(1) of the Securities Act, as well as Section 3(a)(10) of the Securities Exchange Act of 1934, defines "securities" as including "stocks," "bonds," and " notes." Instruments named "bonds," or "stocks," are presumed to be securities because they bear the "traditional name[s]" of instruments perceived by the public to be securities and "which will lead a purchaser justifiably to assume that the federal securities laws apply." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849 (1975).
25. The Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990), fashioned a test to determine if certain notes are not securities. In Reves, the Supreme Court noted that Congress was determined to assure the protection of investors by enacting "a definition of `security' sufficiently broad to encompass virtually any instrument that might be sold as an investment." Id. at 60.
26. The Reves test begins with the presumption that all notes are securities. Reves, 494 U.S. at 64. The presumption that a note is a security may be rebutted by a showing that the note either is, or bears a strong resemblance to, an item on the judicially crafted list of exemptions.3 In order to determine whether such resemblance exists, the Court has applied the "family resemblance test" which requires consideration of the following four factors: (1) the motivation of the parties; (2) the plan of distribution; (3) the reasonable expectations of the investing public; and (4) the existence of factors which would reduce the risk of the instrument. Reves, 494 U.S. at 65. No one factor by itself is dispositive. Id.
27. With respect to the parties' motivation, the Reves Court held that if the seller's purpose is to finance substantial investments and the buyer is interested primarily in the profit the instrument is likely to generate, the instrument is likely to be a security. Id. at 66. Here, both factors were present.
28. The note is also likely to be a security under the second prong of the test if an analysis of the plan of distribution reveals "common trading for speculation or investment." Id. at 68. Under Reves, offers and sales to a broad segment of the public are sufficient to establish common trading. Id. Moreover, in Stoiber v. SEC, 161 F.3d 745, 750 (D.C. Cir. 1998), the D.C. Circuit Court held that solicitations of individuals, as compared to solicitations of sophisticated institutions, evidence "common trading." Here, SBI and Citibank made offers and sales to a broad segment of the public - NRIs and OCBs in the United States.
29. Under the third factor, district courts should consider instruments to be securities on the basis of public expectations, "even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not securities as used in that transaction." Reves, 494 U.S. at 66. In Stoiber, the D.C. Circuit Court noted that the Supreme Court in Reves described this factor as "a one-way ratchet" that "allows notes that would not be deemed securities under a balancing of the other three factors nonetheless to be treated as securities if the public has been led to believe they are. It does not, however, allow notes which under the other factors would be deemed securities to escape the reach of regulatory laws." Stoiber, 151 F.2d at 751. Here, in view of the ways in which the RIBs were marketed and described, the investing public reasonably expected that they were investing in securities.
30. Because the first three Reves factors militate strongly in favor of finding that the RIBs as notes are securities, this order does not address the fourth Reves factor. 4
31. The RIBs, as offered and sold by SBI in the United States, directly and through its Subsidiary, Citibank and other entities, were securities in the form of bonds or notes. There is no basis to rebut the presumption that the RIBs, as "notes," are securities. The RIBs are not on the list of exempt instruments, nor, under the Reves analysis, do they bear a resemblance to such instruments.
32. As described in Section III, SBI violated Sections 5(a) and (c) of the Securities Act, by offering and selling securities, i.e. the RIBs, that were not registered with the Commission.
33. As described in Section III, Citibank violated Sections 5(a) and (c) of the Securities Act, by offering and selling securities, i.e. the RIBs, that were not registered with the Commission.
In view of the foregoing, the Commission finds that it is appropriate to impose the sanctions specified in the Offers of Settlement submitted by SBI and Citibank.
Accordingly, IT IS ORDERED that:
A. SBI cease and desist, pursuant to Section 8A of the Securities Act, from committing or causing any violation and any future violation of Sections 5(a) and (c) of the Securities Act;
B. SBI comply with its undertaking to provide, within 30 days of the Order: a) copies of the Order to the Subsidiary's Chief Executive Officer and each member of the Subsidiary's Board of Directors; and b) provide to the Commission's Division of Enforcement, Attn: Alexander M. Vasilescu, Senior Trial Counsel, an affidavit attesting that copies of the Order had been provided to the above-referenced officers and directors of the Subsidiary; and
C. Citibank cease and desist, pursuant to Section 8A of the Securities Act, from committing or causing any violation and any future violation of Sections 5(a) and (c) of the Securities Act.
By the Commission
Jonathan G. Katz
|1|| The $532 million raised from NRIs residing in the United States consists of a) $517 million in Dollar denominated RIBs; b) £10.45 million in Pound Sterling denominated RIBs; and c) Deutsche Mark 5.68 million in Deutsche Mark denominated RIBs. |
|2||The television advertisement displayed this disclaimer for approximately three seconds, which did not allow the viewer to read more than one or two lines.|
|3||Types of notes that are not securities include the note delivered in consumer financing, the note secured by a mortgage on a home, the short term note secured by a lien on a small business or some of its assets, the note evidencing a character loan to a bank customer, short term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open account debt incurred in the ordinary course of business. Id. at 65.|
|4||494 U.S. at 65. Risk reducing factors under the fourth factor include alternate regulatory schemes governing the investments. Id. at 66, 68, citing Marine Bank v. Weaver, 455 U.S. 551 (1982) (certificates of deposit subject to FDIC insurance are not securities). The Supreme Court has not specifically addressed the issue of whether a foreign regulatory scheme can satisfy the fourth Reves factor. In a pre-Reves decision, the Ninth Circuit held under Marine Bank that a Mexican certificate of deposit was not a security where the certificate was subject to Mexican regulation that provided "certificate holders the same degree of protection against insolvency as does the federal system in this country." Wolf v. Banco Nacional de Mexico, 739 F.2d 1458 (9th Cir. 1984), cert. denied, 469 U.S. 1108 (1985). Conversely, in a post-Reves decision, the Tenth Circuit held that a state, as opposed to a federal, regulatory scheme cannot satisfy the fourth Reves factor. Holloway v. Peat, Marwick, Mitchell & Co., 900 F.2d 1485, 1488 (10th Cir. 1990), cert. denied 498 U.S. 958 (1990).|
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