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TOKYO, Oct 2 (Reuters) - Citigroup is being investigated by Japanese regulators for possible infractions related to its marketing of financial products and could face its third major punishment in Japan in 7 years, a source with knowledge of the matter said. Japan's Financial Services Agency (FSA) is probing whether Citigroup failed to offer sufficient explanations to customers about investment trusts, which are similar to mutual funds in the U.S., and other financial products, the source said. The regulator is also looking at whether controls against money laundering were sufficient, following punitive action in recent years for lax oversight in that area, the source said. The FSA plans to order Citigroup to report on its legal compliance and will then decide whether it deserves to be punished. Possible sanctions include having some operations suspended for a certain period of time, the source said. The source spoke on condition of anonymity because the probe into Citigroup specifically has not been made public. No one at the FSA, which carries out routine inspections on all banks, could be immediately reached for comment. "It is a matter of public record that the FSA is conducting an inspection and we don't comment on conversations with our regulators," a spokeswoman for Citigroup in Japan said without elaborating. News of the probe was first reported by Dow Jones. Sanctions would come as a fresh blow to Citigroup, which had its name tarnished in Japan in 2004 when regulators forced it to close its private banking business due to lax controls in the prevention of money laundering. It was punished again in 2009 for the same violation and forced to suspend retail bank marketing activities for a month. (Reporting by Noriyuki Hirata, Taiga Uranaka and Junko Fujita; Editing by Nathan Layne)

* Fight centers on status of claim from Lehman European arm * Trustee says should not be given customer status * If allowed, could limit reimbursement for other customers By Nick Brown Sept 30 (Reuters) - The trustee liquidating Lehman Brothers' (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) U.S. brokerage said an $8.9 billion claim from the failed investment bank's European affiliate is not entitled to the higher-priority payback status given to customers. Responding to an objection filed in August by Lehman Brothers Inc Europe, trustee James Giddens stood by his earlier decision to deny the claim customer status, saying it was not made on behalf of any customer. LBIE's claim would benefit the affiliate's general estate, "including the estate's trade creditors and bondholders," Giddens said in court papers lodged Friday in U.S. Bankruptcy Court in Manhattan. That would fly in the face of the Securities Investor Protection Act, whose purpose is to protect customers of failed brokerages, argued Giddens, an attorney at Hughes Hubbard & Reed. LBIE had challenged Giddens' interpretation of SIPA, saying nothing in the law inherently prevents affiliates from asserting valid customer claims. The objection came about 11 months after Giddens denied the claim customer status in September 2010. The claim relates to securities traded by LBIE and held on its behalf by the brokerage, Lehman Brothers Inc. The dispute, which is still likely more than a year away from trial, will be front-and-center in the fight over how to allocate LBI's finite resources. The brokerage has between $20 billion and $25 billion in assets, the bulk of which will probably go to customers. Customer claims have a higher reimbursement priority than the pool of general unsecured claims, which is where Giddens says LBIE's claim belongs. The brokerage has already committed $12.2 billion to customers, with several billion dollars in claims still pending. Granting the hefty LBIE claim customer status would hurt other customers' chances of full payback, the trustee said. Effectively, LBIE is undermining its own efforts to earn payback for its customers, Giddens said. Because more than two-thirds of the already-committed $12.2 billion is for LBIE customers, those customers would be among the parties impacted if the new claim was thrown into the mix. "Such a result would defeat the purposes of a SIPA liquidation and destroy the confidence of customers transacting in U.S. securities in the safety of their accounts," Giddens' office said in a statement. An attorney for LBIE did not return a call seeking comment Friday. Giddens, a court-appointed trustee, is charged with recovering as much money as possible to pay back public customers of the Lehman brokerage and maximize its estate for other creditors. He has already denied customer status to nearly $42 billion in claims, according to a report submitted by his legal team in August. The Lehman parent, Lehman Brothers Holdings Inc, has also objected to the denial of at least $7.9 billion in customer claims, though the parties say they are working to resolve that issue consensually. As Giddens works to recover money for LBI customers, the Lehman parent is in the midst of trying to end its bankruptcy. It has proposed a $65 billion creditor payback plan it hopes will receive bankruptcy court approval by year's end. [ID:nS1E78S0V4] The LBI liquidation is Securities Investor Protection Corp v. Lehman Brothers Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-1420. The Lehman bankruptcy is In re Lehman Brothers Holdings Inc, in the same court, No. 08-13555. (Reporting by Nick Brown)