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New York State Fines Unit of Japanese Bank $1 Million

August 14, 1996

NEW YORK (AP) _ The U.S. unit of Long-Term Credit Bank of Japan was fined $1 million for falsifying bond trading records and other banking violations, state banking regulators said Wednesday.

The penalty was one of the largest ever by the New York State Banking Department and is the latest scrape between domestic regulators and a Japanese bank. In addition to the fine the bank’s New York-based trust unit was barred from the securities lending business.

Early this year, U.S. authorities fined Daiwa Bank Ltd. of Japan $340 million for a delay in reporting a $1.1 billion bond trading loss at its New York subsidiary.

The penalty against Long-Term Credit Bank was first reported Wednesday by The Wall Street Journal.

The scandal centers around a trader at the bank who allegedly conducted unauthorized securities transactions and faked records to conceal the trades. The bank acknowledged in a statement that ``irregularities″ had occurred.

Neither the bank nor regulators identified the trader. But people familiar with the matter, speaking on condition of anonymity, identified him as Joseph Melillo and said he was fired by the bank in March.

Melillo, who has not been charged, could not be reached for comment. A Federal Reserve investigation is continuing, a person familiar with the matter said. A spokesman at the Federal Reserve Bank of New York declined to comment.

According to the consent order with the state, a securities trader at the trust company routinely violated company policy by engaging in unauthorized transactions using securities from LTCB customers.

The trader was authorized to borrow securities held in trust for customers and then sell them to broker-dealers, with an agreement to later repurchase them. Melillo was to later use proceeds from those transactions to engage in ``reverse repurchase agreements,″ basically the same kind of transaction in reverse.

Instead of these reverse deals, though, Melillo allegedly used the money to buy securities outright while recording them as reverse repurchase agreements on company records and on reports filed with the Federal Reserve.

Bank officials learned about the unauthorized trades in February 1995 and corrected some of the records. But in March 1995, the bank said, its president instructed the records to be changed back to reflect the trades as reverse repurchase agreements.

The president, Koichiro Tomita, has since been removed from his post and was reassigned to the company’s operations in Japan. He could not be reached for comment.

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