Regulatory News (Dec 2014)

Newsletter – November 2014

Newsletter – November 2014

Contents:

  1. SFC bans Yan Chee Yung for life for defrauding client and misappropriating client money
  2. SFC bans Leung Wai Hung for 18 months for circumventing the order recording requirements
  3. SFC reprimands and fines Yue Siying for negligence
  4. Court dismisses judicial review against Takeovers Panel
  5. Joint Announcement of China Securities Regulatory Commission and SFC
  6. Regulators approve launch of Shanghai-Hong Kong Stock Connect
  7. Freezing injunction against Greencool’s ex-chairman extended pending SFC proceedings
  8. Circular to all Licensed Corporations and Registered Institutions concerning the U.S. Foreign Account Tax Compliance Act (FATCA)
  9. Circular to All Licensed Corporations on Internet Trading Information Security Management and System Adequacy

1.  SFC bans Yan Chee Yung for life for defrauding client and misappropriating client money

On 23 October 2014, the Securities and Futures Commission (“SFC”) banned Mr. Yan Chee Yung, a former employee of Chong Hing Securities Limited, from re-entering the industry for life for defrauding his clients and misappropriating client money.

Background

Yan was licensed under the Securities and Futures Ordinance (“SFO”) to carry on Type 1 regulated activity and was accredited to Chong Hing Securities Limited between 10 January 2011 and 11 February 2014. He was also a relevant individual engaged by Chong Hing Bank Limited to carry on Type 1 activities between 1 April 2003 and 10 February 2014, and Type 4 regulated activity between 1 April 2003 and 31 2010. Yan is currently not licensed by the SFC or registered with the Hong Kong Monetary Authority (“HKMA”).

The Sanction

The disciplinary action follows an SFC investigation which found that, between June 2006 and February 2014, Yan:

  • misrepresented to 18 clients of Chong Hing Securities Limited and Chong Hing Bank Limited that he could buy shares on their behalf at a price lower than market price and/or promised them that he would buy back the shares at a guaranteed price, and induced the clients to enter into private investment arrangements with him;
  • induced the clients to give him money to buy shares on their behalf and misappropriated their money and used it for his own personal expenses, gambling and settling credit card debts; and
  • falsified transaction records to gain clients’ trust

The legal proceedings were commenced under section 214 of the SFO. The first hearing of the petition presented by the SFC will be heard in the Court of First Instance (“CFI”) on 16 December 2014.

In deciding the sanction, the SFC took into account all relevant circumstances, including that:

  • Yan’s misconduct was gravely dishonest and lasted for more than seven years;
  • he abused the trust which his clients placed in him and his actions resulted in losses to the clients;
  • he admitted his misconduct during the SFC’s investigation; and
  • he had an otherwise clean disciplinary record.

The District Court further sentenced Yan to 36 months imprisonment after he was convicted of 18 counts of theft in relation to misappropriation of approximately HK$6.9 million from clients, following an investigation by the police.

Comment

Defrauding clients and misappropriating client money are very serious misconduct. Readers should note that such behavior will also reflect negatively on the fitness and properness of licensed individuals and corporations to carry out regulated activities of the SFC. This could lead to the suspension or revocation of SFC licences to carry out regulated activities.

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR129

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2.  SFC bans Leung Wai Hung for 18 months for circumventing the order recording requirements

On 3 November 2014, the SFC banned Mr. Leung Wai Hung from re-entering the industry for 18 months from 31 October 2014 to 30 April 2016.

Background

The disciplinary action follows an SFC investigation which found that from February 2011 to August 2013, Leung failed to make proper records of the order instructions from his clients and circumvented the order recording requirements of his employer.

During that period, Leung executed orders for holders of seven accounts which were designated as discretionary accounts but were never operated on a discretionary basis. All order instructions were in fact given by the clients by calling his mobile phone. However, Leung failed to make proper records of the order instructions. By designating the accounts as discretionary when they were not, Leung avoided the scrutiny of his employer on order recordings for those accounts.

The Sanction

Despite having investigated and finding no sign of any other misconduct, the SFC considers that Leung’s conduct calls into question his fitness and properness as a licensed person as Leung not only failed to record and maintain proper audit trail orders placed by his clients, but also misused the discretionary account arrangement to circumvent the order recording requirements.

Comment

Readers should note that keeping proper audit trial of client orders is a basic and fundamental requirement expected of licensed persons. Order instructions which are received from clients who have given discretionary authority to operate their accounts should be recorded in the same way as order instructions from other clients, in accordance with Paragraph 3.9 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”). Failure to comply with the Code of Conduct may call into question the individual’s fitness and properness to hold an SFC licence for conducting regulated activities.

For details please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR132

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3.  SFC reprimands and fines Yue Siying for negligence

On 4 November 2014, the SFC has reprimanded Ms Yue Siying and fined her HK$400,000 for negligence in handling a client’s trade orders.

Background

In December 2009, a client of UBS AG wanted to sell his shares in a stock to an unidentified buyer at agreed amounts and prices through manual cross trades. Yue, a client adviser at UBS AG, did not know how to carry out cross trades. Instead of placing cross trades as initially instructed by the client, Yue and her assistant coordinated with the buyer to conduct a series of on-exchange matched trades between 2 and 8 December 2009. The SFC has already formerly taken disciplinary action against Yue’s assistant, Ms Winnie Pang Wai Yan on 14 August 2014.

SFC findings

The SFC found that, in handling the client’s orders on 2 and 3 December 2009, Yue failed to:

  • make reasonable efforts to clarify and to ascertain the appropriate way to execute her client’s trading instructions when she was unsure about them;
  • make diligent enquiries on the relevant transactions to ascertain the client’s intention;
  • report the matter to the Compliance Department of UBS AG; and
  • refrain from or causing her assistant to refrain from acting on the client’s instructions before she was satisfied that the orders and their execution did not affect the best interests of the integrity of the market.
The SFC considers that Yue’s failures called into question her fitness and properness as a registered person.

In deciding the disciplinary action, the SFC took into account that:

  • Yue did not make any personal benefit out of the transactions in question;
  • there is insufficient evidence to prove to the requisite standard that the matched trades were carried out with manipulative intent;
  • the matched trades had minimal impact on the nominal price of the stock; and
  • Yue has an otherwise clean disciplinary record with the SFC.

Comment

Readers should note that under sections 274(5)(b) and 295(5)(b) of the SFO, a person may have committed the offence of false trading or be regarded as having engaged in the market misconduct of false trading if a person offers to sell securities at a price that is substantially the same as the price at which he has made or proposes to make, or he knows an associate of his has made or proposes to make, an offer to buy substantially the same number of securities, unless the transaction in question is an off-market transaction. This type of trading is commonly known as matched orders. This would reflect negatively on the licensed individual’s fitness and properness to be licensed by the SFC.

For a copy of the Statement of Disciplinary Action, please visit: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=14PR133&appendix=0

For details please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR133

 

4.  Court dismisses judicial review against Takeovers Panel
On 7 November 2014, the CFI has dismissed a judicial review of the decision of the Takeovers and Mergers Panel (“Takeovers Panel”) not to stay disciplinary proceedings instituted by the Executive of the SFC.
Background

The applicants of the judicial review – A, B and C – whose names were suppressed by the order of the court, are also defendants in a criminal trial scheduled to be heard at the High Court in March 2015. The applicants, together with two other persons, are the subject of disciplinary proceedings before the Takeovers Panel over an alleged breach of the Code on Takeovers and Mergers.In October 2013, A, B and C applied for a stay of the disciplinary proceedings until the completion of the criminal trial. The Chairperson of the Takeovers Panel refused their application in February 2014 following an oral hearing. Subsequently, they applied for judicial review of the Chairperson’s decision.In rejecting the judicial review, the CFI pointed out there is no real risk of prejudice to the criminal trial if the disciplinary proceedings continue. The Court also found the Chairperson of the Takeovers Panel did not err in law and was satisfied that the Chairperson’s decision was not unreasonable. The SFC’s disciplinary proceedings against A, B and C are continuing.

Comment

This case confirms that the appropriate test for determining whether to stay disciplinary proceedings when there are concurrent criminal proceedings involving the same parties is whether there is a real risk of prejudice to the criminal trial of the disciplinary proceedings continued.

To view the judgment available on the Judiciary’s website, please visit: www.judiciary.gov.hk

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR135

 

5.  Joint Announcement of China Securities Regulatory Commission and SFC
On 10 November 2014, the China Securities Regulatory Commission (“CSRC”) and the SFC have approved the official launch by the Shanghai Stock Exchange (“SSE”), the SEHK, China Securities Depository and Clearing Corporation Limited (“ChinaClear”) and Hong Kong Securities Clearing Company Limited (“HKSCC”) of the pilot programme to provide mutual trading access between the Shanghai and Hong Kong stock markets (“Shanghai-Hong Kong Stock Connect”). Trading through the Shanghai-Hong Kong Stock Connect has commenced on 17 November 2014.
Background

Since the issuance of the joint announcement by the SFC and CSRC on 10 April 2014, the two Commissions have worked closely together to prepare for the launch for the Shanghai-Hong Kong Stock Connect. The necessary trading and clearing rules and other relevant rules, the daily and aggregate quota mechanisms and other regulatory and operational arrangements have now been formalised. The stock exchanges and the clearing houses have completed a series of market rehearsals with market participants in both markets and reported that the systems are ready and contingency plans are in place. Numerous market training and investor education programmes have been conducted.The CSRC and SFC have agreed on the principles and arrangements for cross-boundary regulatory enforcement cooperating relating to the Shanghai-Hong Kong Stock Connect and signed the Memorandum of Understanding between the CSRC and the SFC on Strengthening Regulatory and Enforcement Cooperation under Shanghai-Hong Kong Stock Connect (“Enforcement MOU”). The Enforcement MOU strengthens the enforcement cooperation between the CSRC and SFC, and signifies their joint commitment to take effective action against cross-boundary illegal activities and market misconduct to maintain an orderly market and protect investors under the Shanghai-Hong Kong Stock Connect.The CSRC and SFC have also established arrangements and procedures for cross-boundary liaison and cooperation of any contingency or major event that affects the pilot programme, and for referring and handling related investors’ complaints. In addition, the Mainland’s Investor Protection Bureau and Hong Kong’s Investor Education Centre (“IEC”) have established an arrangement to cooperate on investor education relating to the Shanghai-Hong Kong Stock Connect, and will continue their efforts after the launch of the pilot programme.

Comment

Readers who intend to participate under the Shanghai-Hong Kong Stock Connect should familiarize themselves with the applicable regulatory requirements and operational rules and ensure that proper internal controls and risk management are in place. In particular, investors should be aware of the differences between the laws, regulations and rules of, and market practices in, Mainland China and Hong Kong and should take appropriate action to ensure compliance and manage their risks when investing through the Shanghai-Hong Kong Stock Connect. In order to do so, readers may opt to seek advice from independent compliance consultants with in-depth expertise such as CompliancePlus.

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR136

 

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6.  Regulators approve launch of Shanghai-Hong Kong Stock Connect
On 10 November 2014, the SFC and the CSRC approved the launch of the Shanghai-Hong Kong Stock Connect pilot scheme following the finalisation of all necessary regulatory approvals and relevant regulatory operational arrangements required for its commencement.
Background

The Stock Connect is a pilot programme for establishing mutual stock market access between Hong Kong and the Mainland. The Joint Announcement by the CSRC and SFC dated 10 April 2014 outlines the principles under which the Stock Connect is expected to operate (http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/corporate-news/doc?refNo=14PR41). Pursuant to the abovementioned Joint Announcement dated 10 November 2014, trading through the Stock Connect has commenced on 17 November 2014.Mr. Carlson Tong, chairman of the SFC, said, “We welcome today’s announcement which is the result of close and intensive cooperation between the SFC and the CSRC over the past few months. In particular, the two regulators have established innovative and robust mechanisms in protecting the integrity of both markets when the pilot programme commences.”

The regulatory arrangements for the Stock Connect include a new benchmark for cross-boundary regulatory operation including the timely provision of client and order data to facilitate real time surveillance of market activity by the SFC and the CSRC for markets in Hong Kong and Shanghai respectively under the pilot programme.

As mentioned above, the two regulators also entered into a MOU dated 17 October 2014 on strengthening cross-boundary regulatory and enforcement cooperation under the pilot programme.

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR137

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7.  Freezing injunction against Greencool’s ex-chairman extended pending SFC proceedings
On 14 November 2014, the CFI granted an order for the interim freezing injunction against Mr. Gu Chujun, the former chairman and Chief Executive Officer of Greencool Technology Holdings Limited, to continue until the conclusion of section 213 proceedings commenced by the SFC against Gu in June 2014.
Background

Greencool was a company listed on the Growth Enterprise Market (“GEM”) of the SEHK on 13 July 2000. After seven years of investigation work across several jurisdictions, the SFC commenced proceedings in the CFI against Mr. Gu and other senior executives of Greencool, alleging market misconduct involving grossly overstating the company’s financial accounts for the years ended 31 December 2000 to 2004.The Injunction

The interim freezing injunction restrains Gu from disposing of his assets, in the form of 107,290,000 shares in Hisense Kelon Electrical Holdings Limited, held in the name of several individual and overseas corporate third parties, up to the value of HK$1.2 billion.

Comment

As mentioned above, licensed individuals or corporations may be guilty of market misconduct under section 245 of the SFO if they commit the following offences:

  • insider dealing;
  • false trading;
  • price rigging;
  • disclosure of information about prohibited transactions;
  • disclosure of false or misleading information inducing transactions; and
  • stock market manipulation.

The consequences of market misconduct offences are very serious, as the court is empowered to make a wide range of orders, such as injunctions, cease and desist orders, or cold shoulder orders, as sanctions. Furthermore, the committal of these offences may reflect adversely on the individual or corporation’s fitness or properness to remain licensed by the SFC to conduct regulated activities. Readers may ensure that they are in full compliance of section 245 of the SFO by conducting regular reviews of internal procedures or seeking professional advice of external compliance consultants.

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR138

8.  Circular to all Licensed Corporations and Registered Institutions concerning the U.S. Foreign Account Tax Compliance Act (FATCA)

On 13 November 2014, the SFC issued a circular concerning the U.S. Foreign Account Tax Compliance Act (FATCA) for the purpose of informing Licensed Corporations (LCs) and Registered Institutions (RIs) that the government of the Hong Kong SAR (HKSAR) and the United States of America (US) have signed Inter-Governmental Agreement (IGA) on 13 November 2014, which is intended to facilitate compliance with the FATCA by Financial Institutions (FIs) in Hong Kong.

Background

The FATCA is an anti-tax evasion regime enacted by the US to detect US taxpayers who use accounts with non-US financial institutions to conceal income and assets from the US Internal Revenue Service (IRS).

FIs outside the US are required by the FATCA to report financial account information of US taxpayers to the US IRS. The due diligence and reporting requirements under FATCA will target specified US taxpayers including US citizens, or US resident individuals, or specified entities established in the US or controlled by US persons. Relevant institutions will face repercussions of a 30% withholding tax imposed by the US IRS on relevant US-sourced payments to them should they fail to comply with the act.

IGA

There are two models of IGAs. A model 1 IGA essentially requires FIs outside the US to report account information of US taxpayers to their own government, which will commit to exchanging such information at a government level with the US IRS on an automatic basis.  A model 2 IGA, which Hong Kong and the US have concluded, essentially requires FIs to report the relevant account information of US taxpayers to the US IRS directly, supplemented by group requests made by the US IRS, on a need basis, for exchange of information on relevant US taxpayers at a government level.

The IGA outlines the following:

  • Reporting and Exchange of Information between HKSAR and US IRS;
  • Application of FATCA to HKSAR FIs;
  • Verification and Enforcement; and
  • Consistency in the Application of FATCA to Partner Jurisdictions.
The IGA also set out a non-exhaustive list as below:(i) Directives to HKSAR FIsThe Directives to HKSAR FIs covers the treatment of:
  • Financial accounts maintained by Reporting HKSAR FIs that has been identified as U.S Accounts as of June 30, 2014;
  • Accounts of, or obligation to, Nonparticipating FIs expects to pay a Foreign Reportable Amount as of June 30, 2014;
  • New accounts identified as U.S. Accounts, obtain from each account holder consent to report; and
  • New accounts opened by, or obligations entered into with, a Nonparticipating FI on or after July 1, 2014, obtain from each such Nonparticipating FI consent to report.

(iii) Due Diligence Obligations for identifying and reporting on U.S accounts and on payments to certain nonparticipating FIs;

(iii) Entities treated as exempt beneficial owners or deemed-compliant Foreign FIs

Please note that the above is by no means exhaustive, please refer to the full IGA for further details.

The HKSAR Government has published the IGA and an updated set of frequently asked questions (FAQs) providing background information. The press release, the IGA and the updated FAQs are available through the following links:

Press release: http://www.fstb.gov.hk/fsb/ppr/press/doc/pr131114_e.pdf

IGA: http://www.fstb.gov.hk/fsb/topical/doc/HK-USIGA.pdf

FAQs: http://www.fstb.gov.hk/fsb/topical/doc/fatca-faq2_e.pdf

Comment

LCs and RIs are strongly encouraged to consider whether they are affected by the obligations imposed on under FATCA and to take appropriate action. If LCs and RIs are in doubt concerning their obligations under FATCA, they are encouraged to seek appropriate compliance advice.

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=14EC46

 

9.  Circular to All Licensed Corporations on Internet Trading Information Security Management and System Adequacy
The SFC has recently completed a series of reviews of internet trading systems of selected licensed corporations (“LCs”) with a view of assessing the effectiveness of their information security management and system security controls.
On 26 November 2014, the SFC issued a circular on Internet Trading Information Security Management and System Adequacy listing out major design and control deficiencies that might expose the LCs and their clients to security and integrity risks that were highlighted during the course of the review such as no formal IT management policies and procedures for change management, business continuity and disaster recovery management; lack of comprehensive and regular IT risk assessment or IT audit conducted by party(ies) independent of the system development and maintenance functions; lack of incident reports or insufficient incident details (e.g. root cause analysis, remedial actions) for certain material system delays or system failures etc.The SFC also include an appendix outlining the suggested controls and procedures for reducing internet hacking risks as below that are very useful to LCs to provide secure internet trading services and ensure system and data integrity effectively.The suggested controls and procedures
  • Implement an effective IT governance with the establishment of formal policies and procedures and information security management system to protect all key information assets (e.g. internet trading system and client personal information);
  • Establish an independent and qualified IT and security risk management function, or give overseeing responsibility to senior management personnel for monitoring and overseeing IT and security risks, including IT related regulatory compliance matters;
  • Provide security awareness training to staff on a regular basis;
  • Appoint, on a regular basis, qualified party(ies) to conduct comprehensive security penetration tests emulating real-life threats that could cover system applications and network infrastructure supporting the internet trading systems to identify security vulnerabilities which may expose the internet trading systems to security risks;
  • Assign party(ies) who is/are independent of the system development and maintenance functions to conduct comprehensive IT risk assessment or IT audit on a regular basis;
  • Provide updated security tips on the internet trading systems including web and mobile applications to clients;
  • Arrange service level agreements with major vendors (including intra-group entities) providing for sufficient levels of maintenance and technical assistance with quantitative details;
  • Establish contractual terms with vendors (including intra-group entities) to mandate the removal/destruction of data stored at the vendors’ systems and backups in the event of contract termination;
  • Include reasonable indemnification or liability in contractual agreements with major vendors (including intra-group entities);
  • Establish formal privileged account management procedures with adequate checks and balances;
  • Grant access to privileged accounts only after due and careful consideration by management.
  • Review the validity of user and system accounts and appropriateness of their access rights on a regular basis;
  • Implement effective password policy by appropriate settings, for example, minimum password length and maximum password age;
  • Enhance application features and operating procedures so that the internet trading systems could generate initial passwords or reset passwords and send passwords to clients without disclosing the same to persons other than the clients;
  • Establish test cases to ensure all critical functions are properly tested before deployment and perform post-implementation review to ensure reliability of system after modifications;
  • Implement a secure network architecture, for example, set up a Demilitarised Zone using at least a two-tier firewall structure and set up resilience structure for key network devices and servers;
  • Implement an Intrusion Detection System (“IDS”) or Intrusion Prevention System (“IPS”) to mitigate the risk of advanced and persistent network attacks;
  • Maintain proper audit logs with details of user activities on the internet trading systems and review the audit logs regularly to detect potential problems and plan preventive measures.
  • Implement monitoring and surveillance mechanism to pro-actively identify suspicious websites and mobile applications;
  • Implement proper incident and escalation procedure to maintain incident reports with details of incidents (e.g. root cause analysis, remedial actions) and escalation requirement when in case of material system delays or system failures;
  • Establish a disaster recovery/secondary site to continue internet trading services or make alternative arrangements in the event of primary site outage with a view to minimising disruption of internet trading services provided to clients;
  • Conduct disaster recovery drill at least annually and update the disaster recovery plan after the post-mortem analysis;
  • Formulate relevant communication protocols and procedures to notify clients and relevant authorities/regulatory bodies of internet trading system outage and major security incidents (e.g. when suspicious websites/mobile applications or phishing emails have been identified) on a timely basis; and
  • Maintain appropriate backup mechanism on internet trading systems including operating systems, databases and network components.

Please note that the above is by no means exhaustive, please refer to the circular and appendix for further details.

Comment:

Readers are recommended to read the circular and the appendix in details. IT security and internet trading system have been areas of getting more regulatory concerns than before. Senior management of LCs are responsible for supervising their firms’ operations to provide secure internet trading services and ensure system and data integrity in the interests of clients. Senior management of LCs should regularly review their internet trading systems, network infrastructure, related policies, procedures and practices and consider enhancements with reference to the relevant electronic trading requirements and seek advice and compliance recommendations from compliance consultants as and when necessary.

Press release:

http://www.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=14EC48

Suggested Controls and Procedures:

http://www.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/openAppendix?refNo=14EC48&appendix=0

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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Regulatory News (Nov 2014)

Newsletter – October 2014

Newsletter – October 2014

Contents:

  1. SFC seeks court orders against former chairman and directors of Sinogreen
  2. SFC revokes license of John David Lawrence and fines him HK$900,000
  3. Market participants urged to comply with short position reporting
  4. Market Misconduct Tribunal bans Tiger Asia and Bill Hwang from trading securities in Hong Kong
  5. SFC obtains disqualification order against former executive director of Tack Fiori International Group Limited
  6. SFC bans Roger Albert John and Hamish Gordon Cruden from re-entering the industry for life
  7. Takeovers Panel rules no mandatory general offer obligation triggered for China Oriental
  8. SFC signs Memorandum of Understanding with CSRC to strengthen enforcement cooperation under Shanghai-Hong Kong Stock Connect
  9. SFC bans Yan Chee Yung from re-entering the industry for life
  10. SFC suspends Ho Siu Po’s license for seven months

1.   SFC seeks court orders against former chairman and directors of Sinogreen

On 8 October 2014, the Securities and Futures Commission (“SFC”) commenced legal proceedings in the Court of First Instance (“CFI”) against the former chairman (Mr. Tong Shek Lun) and two former directors (Ms Kinny Ko Lai King and Ms Regina Chung Wai Yu) of Sinogreen Energy International Group Limited (“Sinogreen”)

Background

Sinogreen was formerly known as Karce International Holdings Company Limited and was listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”) on 13 March 1998. Sinogreen was principally engaged in the business of manufacturing and trading electronic products, conductive silicon rubber keypads, printed circuit boards,  telecommunication products and investment holdings.

The legal proceedings were commenced under section 214 of the Securities and Futures Ordinance (“SFO”). The first hearing of the petition presented by the SFC will be heard in the CFI on 16 December 2014.

Allegations

The SFC alleges that Tong, Ko and Chung breached their duties as directors of Sinogreen by disposing of a subsidiary in 2008 resulting in losses to the company. The SFC is seeking court orders to disqualify the three former directors as company directors and compensate Sinogreen for the losses allegedly caused by their misconduct.

The SFC’s action follows an investigation into Sinogreen’s disposal of a subsidiary, Jet Master Limited, which engaged in the manufacturing of printed circuit boards on the Mainland (“the Disposal”). The SFC alleges that:

  • In the course of negotiating the Disposal with the purchaser, Tong entered into a secret agreement with the purchaser via a private company (Extract Group Limited) and received a secret profit of US$1 million.
  • Tong was required but failed to make full and proper disclosure of his interests in the arrangement with the purchaser to Sinogreen, his fellow directors, the SEHK and Sinogreen’s shareholders.
  • Ko and Chung failed to act with due care and diligence and to make full and proper inquiries about the Disposal before approving it.
  • Tong, Ko and Chung failed to ensure Sinogreen fully complied with disclosure and approval requirements under the Listing Rules of SEHK (the “Listing Rules”).. In particular, the SFC alleges that when taking into account the consultancy agreement Tong signed with Extract Group Limited, the Disposal should have been treated as both a major transaction and a connected transaction under the Listing Rules. Therefore, Sinogreen had failed to comply with the disclosure and approval requirements applicable to a major transaction and a connected transaction

Comment

Readers should note that depending on the transaction classification under Rule 14.06 of the Listing Rules, listed issuers are subject to different obligations. These classifications are made using the percentage ratios set out in Rule 14.07 of the Listing Rules, according to which the Disposal was a disclosable transaction, meaning a transaction or a series of transactions (aggregated under rules 14.22 and 14.23) by a listed issuer where any percentage ratio is 5% or more, but less than 25%. Such transactions are subject to reporting, publication of announcement and circular requirements but is exempt from the shareholders’ approval requirement under Chapter 14 of the Listing Rules.

Furthermore, pursuant to section 214 of the SFO, if a director is found to be wholly or partly responsible for the company’s affairs which were conducted in a manner involving fraud, misfeasance or other misconduct towards it or its members or resulting in members not having been given all the information that they might reasonably expect, the court may:

  • make orders to disqualify a person from being a director or being involved, either directly or indirectly, in the management of any corporation for up to 15 years under section 214 of the SFO;
  • order a company to bring proceedings in its own name against any person specified in the order; and
  • make any other order it considers appropriate.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR117

2.  SFC revokes license of John David Lawrence and fines him HK$900,000

On 9 October 2014, SFC revoked the Types 1, 4, and 9 license of John David Lawrence, a representative of PFC International Company Limited (“PFC”), and fined him HK$900,000 for failings relating to his sale of the EEA Life Settlements Fund (the “Fund”) to clients.

The Fund

The Fund is a traded life policy investment, or a viatical settlement, which acquired and traded in outstanding life insurance policies issued in the United States. It is not a product authorised by the SFC.

On 28 November 2011, the UK Financial Services Authority issued a guidance consultation on traded life policy investments. It also indicated its intention to consult on a ban of all marketing of those products to retail investors as they were complex and high risk, and thus unlikely to be suitable for retail investors. On 30 November 2011, the Board of Directors of the Fund decided to suspend dealings in the Fund. The suspension was lifted on 1 January 2014 after a restructuring of the Fund came into effect.

Background

An SFC investigation revealed that despite PFC’s classification of the Fund as “execution only” with a number of risk factors that should be disclosed to clients, Lawrence, who was the chairman and a responsible officer of PFC at the material time, sold the Fund to 31 client accounts involving a transaction amount of approximately HK$28 million from March 2009 to October 2011.

Under PFC’s compliance manual, “execution only” funds can only be purchased according to clients’ requests. Account managers are not allowed to promote or give advice to clients on these funds. Lawrence was the only account manager of PFC who had sold the Fund to clients. Additionally, a significant number of clients who bought the Fund through Lawrence were elderly clients of over 65 years old or above, despite the liquidity risk of the Fund and the risk of deferral of redemption requests associated with the Fund.

The SFC found that Lawrence had failed:

  • to ensure the suitability of the Fund to his clients;
  • to ensure that the risks associated with the Fund were fully disclosed to his clients;
  • to document the investment advice given to his clients in respect of the Fund, and the rationale underlying the advice and to provide clients with a copy of the written advice; and
  • as a member of PFC’s senior management, to set appropriate standards for his staff to follow to ensure the suitability of products recommended to clients.

Lawrence’s misconduct calls into question his fitness and properness to remain a licensed person as he disregarded the firm’s due diligence result. Furthermore, he ignored his fundamental duty to ensure the suitability of his investment recommendation and to present balanced views regarding the Fund. Moreover, as the Chairman of PFC and a member of senior management at the material time, Lawrence failed to set appropriate standards for his staff to follow and failed to ensure that PFC’s investment advisory functions were properly directed and managed to serve the best interests of his clients.

In deciding on the penalty, the SFC took into account his financial position, his cooperation and his otherwise clean disciplinary record.

Comment

General Principle 2 (diligence) and paragraphs 3.4 (advice to clients: due skill, care and diligence) and 5.2 (know your client: reasonable advice) of the SFC Code of Conduct require licensed individuals to ensure that, through the exercise of their due diligence, their investment recommendations to clients are based on thorough analysis and are reasonable in all relevant circumstances. In this case, in assessing the suitability of the Fund to clients, Lawrence should have considered diligently whether the investment return characteristics and risk exposures of the Fund are suitable for the specific clients and are in the best interests of the clients, taking into account the clients’ investment objectives, investment horizon, risk tolerance and financial circumstances. The onus is on Lawrence, and not the clients, to show that the Fund was an appropriate one for the clients.

A failure to comply with the Code of Conduct reflects negatively on an individual’s fitness and properness to be licensed under Paragraph 7.1 of the Fit and Proper Guidelines, and could lead to serious consequences such as fines, suspension and revocation of a SFC license. Licensed individuals and corporations should therefore note that consistently reviewing internal controls and procedures is extremely important to maintain a high standard of diligence and integrity to avoid breaching regulatory requirements.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR118

3.  Market participants urged to comply with short position reporting

On 9 October 2014, the SFC issued a reminder to all market participants to comply with the requirements under the Short Position Reporting Regime (“Regime”). This was triggered by the SFC’s identification of deficiencies and shortcomings since the implementation of the Securities and Futures (Short Position Reporting) Rules (“Rules”).

Since the commencement of the Regime in June 2012, the SFC found that some market participants were late in filing reports on their short positions as required by the Rules due to oversight or delays arising from change of personnel or overseas public holidays. The SFC has clarified that it does not regard any of these lapses as reasonable excuses, and that it expects market participants to have appropriate procedures in place to cope with every eventuality to ensure compliance with the Rules.

In the event where reports have been inaccurate or late due to market participants having appointed agents, market participants should note that a person who has a reportable short position remains legally responsible even if the appointed agent fails to comply with the Rules. Therefore, market participants who wish to appoint agents to report short positions on their behalf should ensure that their appointed agents have the necessary expertise and sufficient operational capacity to do so, and should monitor their agents’ performance on a regular basis.

In some cases, obvious errors were made in the reports filed, indicating that some market participants had failed to check their reportable short positions before submitting their reports to the SFC (such as making the effort to verify significant changes in short positions from previous reports). The SFC reiterated that it expects proper care to be exercised in calculating reportable short positions to ensure the accuracy of information contained in reports. An SFC-licensed corporation may also face disciplinary action for any failure to take proper care to ensure reports are accurate.

Comment

Readers should be aware that a contravention of the Rules without reasonable excuse may constitute a criminal offence and may call into question the adequacy of internal controls of SFC-licensed corporations. Specifically, under the Securities and Futures (Offences and Penalties) Regulation, any person who, without reasonable excuse, contravenes Rule 4(2) or Rule 4(4) of the Rules commits an offence and is liable on conviction to a maximum penalty of HK$100,000 fine and two years’ imprisonment. Market participants should therefore implement measures to ensure accurate and timely reporting of short positions, as the SFC will take appropriate action with respect to any failure to comply with the Rules.

The Securities and Futures (Short Position Reporting) Rules can be viewed online via Hong Kong’s Department of Justice Bilingual Laws Information System: http://www.legislation.gov.hk/eng/home.htm

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR119

4.  Market Misconduct Tribunal bans Tiger Asia and Bill Hwang from trading securities in Hong Kong

On 9 October 2014, the Market Misconduct Tribunal (“MMT”) held that Tiger Asia Management LLC (“Tiger Asia”) and two of its senior officers, Mr. Bill Sung Kook Hwang and Mr. Raymond Park engaged in market misconduct in Hong Kong.

Background

Tiger Asia is a New York-based asset management company specialising in equity investments in China, Japan and Korea. The three senior officers in question are Mr. Bill Sung Kook Hwang, Mr. Raymond Park and Mr. William Tomita (the “Three Senior Officers” or collectively, the “Tiger Asia Parties”). Tiger Asia has no physical presence in Hong Kong.

Park joined Tiger Asia in April 2006 and, at all times since, his job titles have consisted of Managing Director and Head of Trading. His responsibilities included managing the trading desk, supervising orders and managing broker relationships. Tomita joined Tiger Asia in April 2008 and supported the trading activities led by Park. Both Park and Tomita reported to portfolio manager, Hwang, whom the SFC alleged made the trading decisions for the trades in shares of China Construction Bank Corporation (“CCB”). Subsequently, similar allegations have been made regarding Tiger Asia’s trading of shares in Bank of China Limited (“BOC”).

Proceedings have formerly been instituted in the High Court between August 2009 until 20 December 2013 when a decision was made by the CFI to order the Tiger Asia Parties to pay HK$45,266,610 to investors affected by their insider dealing involving shares of BOC and CCB. The restoration amount represents the difference between the actual price of BOC and CCB shares sold by Tiger Asia and the value of those shares taking into account the inside information known to Tiger Asia (as assessed by expert evidence). This is because where a person has contravened a provision of the SFO, the court is able, under section 213(2)(b) of the SFO, to make orders requiring a person to take steps as directed by the court, including steps to restore the parties to a transaction to the position they were in (or a substantially similar position) before the transaction was entered into.

In the High Court proceedings, the Tiger Asia Parties made admissions in a statement of agreed and admitted facts filed in the CFI by the SFC that they had contravened Hong Kong’s laws prohibiting insider dealing when dealing in the shares of BOC and CCB shares.

Proceedings in the MMT

On 15 July 2013, the SFC instituted proceedings in the MMT against Tiger Asia and the Three Senior Officers in relation to dealings in the securities of BOC and CCB. This was the first time the SFC had instituted proceedings in the MMT directly, pursuant to section 252A of the SFO. This provision was introduced in 2012 and gives the SFC direct access to the MMT. Formerly, only the Financial Secretary could initiate proceedings in the MMT.

The SFC did not pursue criminal charges against the Tiger Asia parties given the significant risk that criminal charges in Hong Kong are barred on the ground of double jeopardy because the parties had already been prosecuted in relation to the same conduct in the United States in proceedings that were criminal or would be viewed as criminal proceedings under Hong Kong law.

The MMT’s decision

The MMT, chaired by The Honourable Mr. Justice Michael Hartmann with Ms Florence YS Chan and Mr. Gary KL Cheung, held that the Tiger Asia Parties had engaged in market misconduct in Hong Kong, and ordered that Tiger Asia and Hwang be banned from trading securities in Hong Kong for a period of four years (the maximum period is five years) without leave of the court. The MMT has also issued cease and desist orders against both Tiger Asia and Hwang. While the Tiger Asia Parties admitted they had contravened Hong Kong’s laws prohibiting insider dealing when dealing in shares of BOC and CCB, Tiger Asia and Hwang had argued that no orders should be made against them by the MMT.

In its decision, the MMT found that Hwang’s conduct constituted “serious misconduct” and showed that “little trust can be placed in Bill Hwang’s integrity”. Thus in determining a banning period of four years, the MMT warned that “this heralds a sterner approach in respect of protective measures provided under our law. We are, however, unanimously of the view that the protection of our market is a matter of such public importance, and cold shoulder orders so central to providing that protection, that market operators who, by their actions, show they cannot be trusted must from now on expect orders that exclude them from the market for more lengthy periods of time”.

Furthermore, the SFC’s Executive Director of Enforcement, Mr. Mark Steward, said: “Tiger Asia and Hwang abused the trust of the Hong Kong market, flouted Hong Kong’s laws and damaged the financial interests of thousands of investors who had no means of protecting themselves from such misconduct. They were wrong if they thought this could be done with impunity because they were situated beyond Hong Kong.”

Although the MMT found that Park had engaged in market misconduct, they decided to make no order in relation to him given the evidence that he has suffered an incurable and seriously debilitating brain injury and is in no position to pose any threat to the integrity of the Hong Kong market.

Comment

Readers should note that if the MMT finds there has been market misconduct, it is empowered to make a range of orders, including orders prohibiting a person from acquiring or disposing of or otherwise dealing in securities, futures contracts or leveraged foreign exchange contracts in Hong Kong without leave of the Court for a period of up to five years (e.g. cold shoulder orders, cease and desist orders, etc.).

According to section 257 (1)(b) of the SFO, a cold shoulder order is an order that the person shall not, without the leave of the CFI, in Hong Kong, directly or indirectly, in any way acquire, dispose of or otherwise deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any securities, futures contract, leveraged foreign exchange contract or collective investment scheme for the period (not exceeding five years) specified in the order. Alternatively, a cease and desist order is defined under section 257(1)(c) of the SFO as an order that the person shall not again perpetrate any conduct which constitutes such market misconduct.

Given the severe consequences of market misconduct, licensed individuals and corporations should consistently conduct checks or consult independent advisors to ensure that they are in full compliance with the relevant provisions under section 245 of the SFO, which comprises of the following offences:

  • insider dealing;
  • false trading;
  • price rigging;
  • disclosure of information about prohibited transactions;
  • disclosure of false or misleading information inducing transactions; and
  • stock market manipulation.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR120

5.  SFC obtains disqualification order against former executive director of Tack Fiori International Group Limited

SFC obtained a disqualification order in the High Court against Mr Norman Ho Yik Kin, a former executive director of Tack Fat Group International Limited (“Tack Fat”), now known as Tack Fiori International Group Limited.

Background

The SFC commenced proceedings against Ho and three other former diretors of Tak Fat on 14 March 2014. In addition to seeking disqualification orders, the SFC also sought orders that Ho repays Tak Fat or other entities as the court sees fit HK$26 million, being the subscription price of the 40 million shares in Tak Fat which were allotted to his nominees to gain an advantage over other members of the company and the investing public, and/or accounts for any profits he has made through the trading of those shares.

Ho was disqualified from being a director or being involved in the management of any listed or unlisted corporation, without leave of the court, for a period of six years effective from 9 October 2014.

Admissions

The order was made after Ho admitted that he:

  • failed to ensure that Tack Fat gave its shareholders all the information that they might reasonably expect, and to comply with the disclosure requirements under the Listing Rules;
  • abdicated his responsibilities as a director of a publicly listed company;
  • breached his duties as a director in failing to exercise reasonable care and diligence in the management of Tack Fat, to act in good faith and in the best interests of Tack Fat, and to implement a sound and prudent system of financial control so as to minimise the risk of misappropriation of company assets; and
  • partly responsible for the business or affairs of Tack Fat having been so conducted.

Ho admitted also that he signed attendance sheets annexed to minutes of board meetings in which substantial transactions were purportedly agreed when he did not attend any such meeting. These meetings supposedly ratified real transactions, including a deal with a money lender in which Tack Fat charged substantial assets which should have been disclosed to the shareholders but it was not, and another meeting in which Tack Fat approved a sham transaction involving an undisclosed connected party in an acquisition of 40% of a Cambodian timber company. Ho admitted that at least one of the two board meetings approving the acquisition did not take place. He also conceded he did not understand the duties of a director and was conducting the affairs of Tack Fat without exercising proper independent judgment in fulfilling his duties as an executive director of a listed company.

The Court’s judgment

In delivering his judgment, The Honourable Mr. Justice Lam stated that since Ho was acting irresponsibly and with marked indifference to his duty as a director of Tack Fat, a disqualification order for six years would be appropriate.

Mr. Mark Steward, the SFC’s Executive Director of Enforcement, said: “Directors cannot abdicate their duties to safeguard the company’s interests and keep members properly informed. It is even worse if directors connive in records of meetings that have not taken place and in decisions that are detrimental to the company. The consequences will be serious as today’s decision by the court demonstrates. ”

Comment

Under section 214 of the SFO, the court may, inter alia, make orders to disqualify a person from being a director or being involved, directly or indirectly, in the management of any corporation for a period up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs having been conducted in a manner, amongst other, involving defalcation, fraud, misfeasance or other misconduct towards it or its members.

Readers should also note that such behavior constitutes market misconduct and will also reflect negatively on the fitness and properness of licensed individuals and corporations to carry out regulated activities of the SFC.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR121

6.  SFC bans Roger Albert John and Hamish Gordon Cruden from re-entering the industry for life

On 14 October 2014, the SFC banned Mr. Roger Albert John and Mr. Hamish Gordon Cruden, both former directors and responsible officers of Salisbury Securities Limited (“Salisbury”), from re-entering the industry for life.

Background

Salisbury was licensed under the SFO to carry on Types 1, 4 and 9 regulated activities. It was engaged principally in the business of securities trading and has about 100 clients.

The SFC issued a Restriction Notice on 18 March 2013, prohibiting the firm from carrying on its regulated activities under the SFO and dealing with client assets until further notice. At the time, Salisbury had about 100 active clients.

On 21 June 2013, the SFC made an urgent application to the High Court seeking the appointment of provisional liquidators for Salisbury on 21 June 2013.  The SFC’s application was based on a number of concerns about the whereabouts of nearly HK$9 million worth of securities and sales proceeds belonging to Salisbury’s clients. The SFC also asserted that it had been misled by Salisbury about its liquid capital calculations and its holdings in clients’ securities accounts.

Further, on 28 August 2013, the CFI ordered that Salisbury be wound up on the application of the SFC.

The sanction

The disciplinary actions in question follow an SFC investigation which found that Salisbury:

  • misused or misapplied securities and sale proceeds belonging to other clients to settle another client’s instructions and to discharge its own operational expenses;
  • failed to maintain the required minimum level of liquid capital from April 2012 to February 2013; and
  • provided false and misleading information to the SFC about the level of its liquid capital in financial retursn submitted to the SFC.

The SFC also found that Cruden, who moved to Manila in 2011 but remained as a director and responsible officer of Salisbury, nevertheless failed to keep himself informed as to the business of Salisbury and did not visit Salisbury’s office despite making regular trips back to Hong Kong. As part of Salisbury’s senior management, Cruden’s failure to participate at all in the management of Salisbury contributed to the breaches and failures of the company for which he must be equally responsible.

The disciplinary actions against John and Cruden follow the abovementioned restriction notice and winding up order obtained from the court.

Comment

Market participants should be aware that they are under various obligations if the holding of client money or securities are involved. These serve to protect the assets of both the firm and of clients. For instance, pursuant to section 4 of the Securities and Futures (Client Money) Rules, a licensed corporation who receives or holds client money is required to establish and maintain segregated accounts with an authorised financial institution and to designate such accounts as trust account or client account. Intermediaries also have the duty under section 10(1) of the Securities and Futures (Client Securities) Rules to reasonably ensure that client securities are not deposited, transferred, lent, pledged, re-pledged or otherwise dealt with. If these rules are not complied with, the SFC may issue Restriction Notices to protect existing assets of the firm including client assets.  The Restriction Notice ensures that any assets currently held by firm in question are not transferred while inquiries continue.

In addition to internal procedural checks to prevent market misconduct offences, licensed corporations may find it useful to engage in external advisors to ensure that they are compliant with section 6(1) of the Securities and Futures (Financial Resources) Rules, which requires licensed corporations to maintain at all times no less than the minimum required liquid capital. Schedule 1 of the Securities and Futures (Financial Resources) Rules set out in Table 2 the required liquid capital.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR124

7.  Takeovers Panel rules no mandatory general offer obligation triggered for China Oriental

On 15 October 2014, the Takeovers and Mergers Panel (the “Panel”) upheld the Takeovers Executive’s (the “Executive”) ruling that the completion of certain transactions between ArcelorMittal, a substantial shareholder of China Oriental Group Company Limited (“China Oriental”), and counterparties involving shares of China Oriental on 30 April 2014 did not give rise to a mandatory general offer obligation under the Code on Takeovers and Mergers (“Takeovers Code”) by ArcelorMittal to acquire all the shares of China Oriental.

Background

Following a general offer by ArcelorMittal for shares in China Oriental in 2008, ArcelorMittal and Mr. Han Jingyuan, chairman of China Oriental, held 47% and 45% shares of China Oriental, respectively. As a result, the minimum public float requirement under the Listing Rules was not satisfied.

ArcelorMittal subsequently sold 9.9% and 7.5% of shares in China Oriental it owned to ING Bank (“ING”) and Deutsche Bank (“DB”), with a view to satisfying the requirement of the Listing Rules. As part of the transactions at the time, ArcelorMittal granted ING and DB put options entitling them to sell back the shares of China Oriental to ArcelorMittal at the original purchase price (with adjustments).

The put options expired on 30 April 2014 and ArcelorMittal proposed to extend the arrangement with the put option with ING for one year on amended terms. It also proposed to close the arrangement with DB and enter into an arrangement with Macquarie Bank Limited (“Macquarie”) which was similar to the amended arrangement with ING. These transactions were to be completed simultaneously. ArcelorMittal, whose shareholding in China Oriental was 29% at the time, consulted the Executive who confirmed on a consultation basis that a mandatory general offer would not be triggered as a result of these transactions.

As a result of the new arrangements between ArcelorMittal and the counterparties, i.e. ING and Macquarie, the independent non-executive directors of China Oriental applied to the Executive for a formal ruling that a mandatory general offer had been triggered by ArcelorMittal.

The Executive ruled on 21 August 2014 that ArcelorMittal had not triggered a mandatory general offer. On 1 September 2014, the independent non-executive directors of China Oriental applied to the Panel to review the Executive’s ruling.

The Panel’s decision

The Panel met on 25 September 2014 to consider the matter and concluded that the completion of the agreements between DB and ArcelorMittal on the one hand and ArcelorMittal and Macquarie on the other did not result at any time in ArcelorMittal acquiring additional voting rights as these voting rights passed directly from DB to Macquarie.

The Panel also ruled that Macquarie and ArcelorMittal are presumed to be acting in concert by virtue of the financial arrangements between them and the presumption had not been rebutted. The Panel further ruled that given the similarity of the arrangements, it would follow that both ING and DB were also parties presumed to be acting in concert with ArcelorMittal.

Since ArcelorMittal and its concert parties, i.e. DB, ING and Macquarie, held a combined 47% stake in China Oriental throughout the existence of such arrangements, the Panel concluded that the arrangements did not increase the concert parties’ aggregate holding; and did not cause any member of the concert party group to cross a mandatory offer trigger point, or any significant change to the concert party with the substitution of Macquarie for DB. As a consequence, a mandatory offer obligation had not arisen.

Comment

A mandatory offer is one which must be made in accordance with the conditions set out Rule 26 of the Takeovers Code. It must be made to the holders of each class of equity share capital of the company, whether the class carries voting rights or not, and also to the holders of any class of voting non-equity share capital in which such person, or persons acting in concert with him, hold shares.

Under the Rule 26 of Takeovers Code, a mandatory offer can be triggered (subject to the granting of a waiver by the Executive) where:

  • any person acquires, whether by a series of transactions over a period of time or not, 30% or more of the voting rights of a company;
  • two or more persons are acting in concert, and they collectively hold less than 30% of the voting rights of a company, and any one or more of them acquires voting rights and such acquisition has the effect of increasing their collective holding of voting rights to 30% or more of the voting rights of the company;
  • any person holds not less than 30%, but not more than 50%, of the voting rights of a company and that person acquires additional voting rights and such acquisition has the effect of increasing that person’s holding of voting rights of the company by more than 2% from the lowest percentage holding of that person in the 12 month period ending on and inclusive of the date of the relevant acquisition; or
  • two or more persons are acting in concert, and they collectively hold not less than 30%, but not more than 50%, of the voting rights of a company, and any one or more of them acquires additional voting rights and such acquisition has the effect of increasing their collective holding of voting rights of the company by more than 2% from the lowest collective percentage holding of such persons in the 12 month period ending on and inclusive of the date of the relevant acquisition.

For the purposes of the Takeovers Code, persons acting in concert are persons who, pursuant to an agreement or understanding, actively cooperate to obtain or consolidate “control” of a company (i.e. holding 30% or more of its voting rights) through an acquisition of voting rights.  The Takeovers Code presumes a person (other than an authorised institution under the Banking Ordinance) who provides financial assistance to another for the acquisition of voting rights to be acting in concert with each other, unless the contrary is established.

The Panel’s decision can be accessed at:

http://www.sfc.hk/web/EN/files/CF/pdf/Takeovers%20and%20Mergers%20Panel%20-%20Panel%20Decision/China%20Oriental%20Decision%EF%BC%BFFinal%20version%EF%BC%BF141014%20%28e%29.pdf

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR126

8.  SFC signs Memorandum of Understanding with CSRC to strengthen enforcement cooperation under Shanghai-Hong Kong Stock Connect

On 17 October 2014, the SFC and the China Securities Regulatory Commission (“CSRC”) entered into a Memorandum of Understanding (“MoU”) on strengthening cross-boundary regulatory and enforcement cooperation under the proposed Shanghai-Hong Kong Stock Connect pilot programme (“Stock Connect”).

The Stock Connect is a pilot programme for establishing mutual stock market access between Hong Kong and the Mainland.

The MoU was signed by the Chairman of the SFC, Mr Carlson Tong and the Chairman of the CSRC, Mr Xiao Gang. Mr Tong commented that the purpose of the MoU is to “establish an enhanced platform for infomration sharing, alerts, investigative assistance and joint investigations for both the SFC and the CSRC so together we can act to protect the integrity of both Hong Kong and Shanghai markets under the Stock Connect pilot programme”. Mr Xiao Gang goes further to state that the signing of the MoU serves as a “pre-requisite for the smooth commencement of the Stock Connect pilot programme and further enhances cross-boundary regulatory and enforcement cooperation between both sides, which is conducive to the upholding of openness, fairness and integrity of the markets and of the legitimate interests of investors, thereby promoting the healthy development of both capital markets.”

Under the MoU, the SFC and the CSRC agreed to:

  • provide for the sharing of information and data of risks and alerts about potential or suspected wrongdoing in either the Hong Kong or Shanghai stock markets under Stock Connect;
  • establish a commitment and a process for joint investigations;
  • ensure complementary enforcement action can be taken where there is wrongdoing in both jurisdictions; and
  • make sure enforcement actions in both jurisdictions operate to protect the investing public of both the Mainland and Hong Kong, including actions that may be necessary to provide financial redress or compensation to affected investors.

The MoU will be activated upon the launch of the pilot programme subject to the finalisation of all necessary approvals, market readiness and relevant operational arrangements.

The MoU is posted on the SFC website, at:

http://www.sfc.hk/web/EN/about-the-sfc/collaboration/mainland/shanghai-hong-kong-stock-connect.html

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR127

9.  SFC bans Yan Chee Yung from re-entering the industry for life

On 23 October 2014, the SFC has banned Mr Yan Chee Yung, a former employee of Chong Hing Securities Limited, from re-entering the industry for life for defrauding his clients and misappropriating client money.

Background

Yan was licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity and was accredited to Chong Hing Securities Limited between 10 January 2011 and 11 February 2014. He was also a relevant individual engaged by Chong Hing Bank Limited to carry on Type 1 (dealing in securities) regulated activity between 1 April 2003 and 10 February 2014, and Type 4 (advising on securities) regulated activity between 1 April 2003 and 31 December 2010.

The SFC found that, between June 2006 and February 2014, Yan:

  • misrepresented to 18 clients of Chong Hing Securities Limited and Chong Hing Bank Limited that he could buy shares on their behalf at a price lower than market price and/or promised them that he would buy back the shares at a guaranteed price, and induced the clients to enter into private investment arrangements with him;
  • induced the clients to give him money to buy shares on their behalf and misappropriated their money and used it for his own personal expenses, gambling and settling credit card debts; and
  • falsified transaction records to gain the clients’ trust.

In deciding the sanction, the SFC took into account all relevant circumstances including that:

  • Yan’s misconduct was gravely dishonest and lasted for more than seven years;
  • he abused the trust which his clients placed in him and his actions resulted in losses to the clients;
  • he admitted his misconduct during the SFC’s investigation; and
  • he had an otherwise clean disciplinary record.

The Court’s judgment

Yan was sentenced to imprisonment of 36 months after he was convicted of 18 counts of theft in relation to the misappropriation of approximately HK$6.9 million from clients.

Comment

Readers are reminded that a licensed person is under a duty to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct).  Paragraph 7.1 of the Fit and Proper Guidelines provides that a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty, misfeasance or other market-related crimes, or even by the SFC’s findings in the absence of an unfavourable court’s finding.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=14PR129

10.  SFC suspends Ho Siu Po’s licence for seven months

On 20 October 2014, the SFC suspended the license of Mr. Ho Siu Po for seven months from 16 October 2014 to 15 May 2015.

Background

The SFC found that between 2011 and April 2013, Ho, who was a licensed representative of DBS Vickers (Hong Kong) Limited (DBS):

  • conducted transactions in client accounts on a discretionary basis; and
  • accepted cash deposits directly from a client and in turn made seven deposits to DBS’ account on behalf of the client.

Ho’s conduct was in breach of DBS’ internal policies, which prohibited staff from exercising discretionary authority for clients and receiving cash deposits directly from clients. These policies are designed to protect DBS operations and its clients from financial loss arising from improper conduct.

The SFC concluded that Ho has not met the standards required of him under the Code of Conduct as he failed to act with due skill, care and diligence in performing his duties as a licensed representative. As such, Ho’s fitness and properness was called into question.

In deciding the sanction, the SFC took into account all relevant circumstances, including:

  • Ho’s conduct demonstrates his disregard for the Code of Conduct and DBS’ internal control policies; and
  • Ho’s conduct exposed DBS to potential regulatory and compliance risk

Comment

Licensed individuals or corporations should note that pursuant to General Principle 2 of the Code of Conduct states that “in conducting its business activities, a licensed or registered person should act with due skill, care and diligence, in the best interests of its clients and integrity of the market”. To ensure this level of diligence, licensed corporations should, according to paragraph 4.3 of the Code of Conduct, “have internal control procedures and financial operational capabilities which can be reasonably expected to protect its operations, its clients and other licensed or registered persons from financial loss arising from theft, fraud and other dishonest acts, professional misconduct or omissions”. It is important for readers to comply with these provisions because infringement may reflect negatively on their fitness and properness and result in fines, or suspension or revocation of their licence to carry out regulated activities.For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR128

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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Regulatory News (Oct 2014)

Newsletter – September 2014

Newsletter – September 2014

  1. SFC commences proceedings against CITIC, its former chairman and executive directors
  2. SFC suspends Eric Shum Kam Chi for three years for sponsor failures
  3. SFC publishes annual review of the Stock Exchange of Hong Kong’s performance in regulating listing matters
  4. SFC publishes consultation conclusions on amendments to professional investor regime and further consults on client agreement requirements
  5. Court convicts unlicensed investment portfolio manager

1.  SFC commences proceedings against CITIC, its former chairman and executive directors

On 11 September 2014, the Securities and Futures Commission (“SFC”) has instituted proceedings in both the Court of First Instance (“CFI”) and the Market Misconduct Tribunal (“MMT”) against CITIC Limited (“CITIC”), formerly known as CITIC Pacific Limited, and five of its former executive directors, namely chairman Mr Larry Yung Chi Kin, managing director Mr Henry Fan Hung Ling, deputy managing directors Mr Leslie Chang Li Hsien, Mr Peter Lee Chung Hing, and executive director Mr Chau Chi Yin (“the five directors”).

The allegations

The SFC alleged that CITIC and the five directors engaged in market misconduct involving disclosure of false or misleading information on CITIC’s financial position arising from the massive losses incurred by CITIC over its investment in leveraged foreign exchange contracts in 2008 contrary to sections 227 or 298 of the Securities and Futures Ordinance (“SFO”). Both market misconduct provisions prohibit the distribution of materially false or misleading information that is likely to induce another person to subscribe for or buy securities or is likely to have a price effect on the company’s securities.

According to the SFC, CITIC issued a circular on 12 September 2008 that contained a false or misleading statement about its financial position (“the Circular”). The Circular was published on the Stock Exchange of Hong Kong Limited (“SEHK”) listed company announcement system on the Hong Kong Exchanges and Clearing Limited (“HKEx”) website on 12 September after market close, and was distributed to its shareholders on 16 September 2008. It concerned an unrelated transaction and disclosed that “the Directors are not aware of any adverse material change in the financial or trading position of the Group since 31 September 2007”. However, in a market announcement on 20 October 2008, CITIC disclosed that it suffered a massive realised and mark to market loss up to that date arising from a number of leveraged foreign exchange contracts which CITIC had entered into to manage currency risk of its Australian iron ore mining project exposure (“the Profit Warning”). The SFC therefore alleges that the five directors were aware of the huge financial exposure arising from those contracts on 7 September 2008, before the Circular was issued.

The prices of CITIC shares, which were suspended from trading on 20 October 2008 before the Profit Warning, fell 55% from HK$14.52 to close at HK$6.52 on 21 October 2008 when trading resumed.

Relief sought

The SFC is seeking restoration or compensation orders under section 213 of the SFO in the Court of First Instance to compensate or restore the pre-transaction positions of up to 4,500 investors who purchased CITIC shares between the date on which the SFC alleges the false or misleading information was announced and the date on which the true financial position was disclosed. The SFC is also seeking for CITIC and the five directors to be sanctioned by the MMT.

The amount that CITIC may be required to pay will need to be the subject of assessment by the CFI if liability is established.  It may depend on variables such as the total purchases during the relevant period, the purchaser’s acquisition price, sale price, or whether the purchaser continues to hold shares.

Comment

Under the market misconduct provisions of the SFO, licensed persons are prohibited from distributing materially false or misleading information that is likely to induce another person to subscribe for or buy securities or is likely to materially affect the price on the relevant securities. It is therefore important that licensed individuals and ensure at all times that promulgated information is accurate.

If a licensed person is found guilty of market misconduct provisions, he may thus not be considered fit and proper to continue being licensed. Pursuant to Paragraph 7.1 of the Fit and Proper Guidelines, a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty, misfeasance or other market-related crimes, or even by the SFC’s findings in the absence of an unfavourable court’s finding.

Readers should also note that this case will be very significant in establishing precedent governing the calculation of what may be required to restore a shareholder who has traded in a market affected by false or misleading information.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR108

2.  SFC suspends Eric Shum Kam Chi for three years for sponsor failures

On 16 September 2014, the SFC suspended Mr Eric Shum Kam Chi (“Shum”) as a representative in all regulated activities and withdrawn approval for him to act as a responsible officer for three years from 15 September 2014 to 14 September 2017 for serious deficiencies in the sponsor work relating to the listing of Sino-Life Group Limited (“Sino-Life”) on the Growth Enterprise Market (“GEM”) of the SEHK. Mr Shum was previously a responsible officer and sponsor principal of Sun Hung Kai International Limited (“Sun Hung Kai International”) which acted as the sole sponsor for Sino-Life.

Background

On 27 January 2014, the Securities and Futures Appeals Tribunal (“SFAT”) affirmed the decision of the SFC to sanction Sun Hung Kai International. It took disciplinary action by reprimanding the company, fining it HK$12 million, and suspending its licence to provide advisory service on corporate finance for one year.

An SFC investigation revealed that Sun Hung Kai International had failed to conduct proper due diligence between October 2007 and September 2009 on Sino-Life’s business in relation to a number of material issues, and had placed undue reliance on the work delegated to external experts.

It was discovered that Sun Hung Kai International’s regulatory breaches were attributable to Shum who failed to discharge his duties as its senior management. The SFC found that as head of the firm’s transaction team, Shum had failed to:

  • assess the accuracy and the completeness of the information submitted by Sino-Life to demonstrate that it had satisfied the financial requirements to list on the GEM;
  • ascertain the existence of various encumbrances on the title of a major business deal of Sino-Life in Taiwan;
  • properly assess the business of Sino-Life’s wholly-owned subsidiary in Taiwan;
  • ensure true, accurate and complete disclosure was made to the SEHK and in Sino Life’s Prospectus and sponsor declaration; and
  • keep proper books and records in relation to the sponsor work conducted.

Shum originally sought to review the SFC’s decision at the SFAT, but withdrew his application before the SFAT hearing.

The Penalty

In deciding the penalty, the SFC took into account:

  • the fact that although Shum had knowledge of the fact that Sun Hung Kai International was selective in its disclosure to the SEHK during the listing process, he still signed the sponsor declaration announcing that all information submitted to the SEHK was true, accurate and complete to his knowledge; and
  • Shum’s otherwise clean disciplinary record.

Comment

In failing to discharge his duties as senior management, Shum had breached the regulatory requirements under the Code of Conduct, which requires a licensed individual to exercise due skill, care and diligence (General Principle 2), ensure the maintenance of appropriate standards of conduct and adherence to proper procedures (General Principle 9) and diligently supervise subordinates and sponsor work undertaken by the firm (Paragraph 4.2). This reflects negatively on an individual’s fitness and properness to be licensed, under Paragraph 7.1 of the Fit and Proper Guidelines and could lead to serious consequences such as fines, suspension and revocation of a SFC licence. Readers should therefore note that consistently reviewing internal controls and procedures is extremely important to maintain a high standard of diligence and integrity in order to avoid breaching regulatory requirements particularly those relating to responsible officer.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR110

3.  SFC publishes annual review of the Stock Exchange of Hong Kong’s performance in regulating listing matters

On 19 September 2014, the SFC published its annual review of the SEHK’s performance in its regulation of listing matters during 2013

In Government’s Consultation Conclusions on Proposals to Enhance the Regulation of Listing published in March 2004, the Government recommended that the SFC should prepare annual reports on its reviews regarding SEHK’s performance of its listing functions.

In this year’s annual report, the SFC found that the operational procedures and decision-making processes reviewed were appropriate in enabling the SEHK to discharge its statutory obligations in maintaining an orderly, informed and fair market. The SFC also identified certain areas for the SEHK to focus on in enhancing its performance.

For full report, please visit:

http://www.sfc.hk/web/files/ER/Reports/report_HKEx_%20audit_2014_EN.pdf

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR111

4.  SFC publishes consultation conclusions on amendments to professional investor regime and further consults on client agreement requirements

On 25 September 2014, the SFC released consultation conclusions on the proposed amendments to the professional investor regime and launched a further consultation on client agreement requirements

Background

On 15 May 2013, the SFC issued a consultation paper on proposed amendments to the professional investor regime and the client agreement requirements. After reviewing all the comments received during the consultation, the SFC has decided to proceed with the proposal not to allow intermediaries when serving individual professional investors to be exempt from the suitability requirement and other fundamental requirements that have a significant bearing on investor protection under the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code”).

The Suitability Requirement

The suitability requirement is the pillar of the Code and ensures the suitability of a recommendation or solicitation for a client is reasonable in all circumstances. The other fundamental requirements inherently linked with the suitability requirement or that have significant bearing on the Code include, among other things, the need to disclose certain transaction related information, the need to enter into a written agreement and the provision of relevant risk disclosure statements. Mr Ashley Alder, the SFC’s Chief Executive Officer, said that in arriving at a balanced outcome, the SFC considered the views of respondents carefully to ensure that individual investors who are classified as professional investors are adequately protected.

Other features

Other features of the revised professional investor regime include:

  • individual professional investors and corporate professional investors will continue to be allowed to participate in private placement activities;
  • the minimum monetary threshold for qualifying as individual professional investors and corporate professional investors will be maintained at the current levels (under the Securities and Futures (Professional Investor) Rules, the minimum portfolio threshold for individual professional investors is HK$8 million and the minimum total assets threshold for corporate professional investor is HK$40 million); and
  • a principles-based criteria that will replace the specific tests now used to assess whether exemptions to the Code requirements apply when intermediaries serve corporate professional investors. For the purposes of clarification, the SFC will publish frequently-asked-questions on the assessment criteria, which will apply to investment vehicles owned by individual professional investor and by family trusts. If investment vehicles can satisfy the assessment criteria, intermediaries serving them can be exempt from the suitability requirement.

Implementation and Further Consultation

The amendments relating to the professional investors regime will become effective on 25 March 2016, and a separate internal study of the suitability requirement, including the gathering of industry views, will be conducted in due course.

Furthermore, in response to market feedback, the SFC has modified its proposals on client agreement requirements and now seeks to further consult the public on the wording of a proposed new clause to be incorporated into all client agreement as a contractual term. The SFC will provide intermediaries with further guidance on the description of actual services in their client agreements, and proceed with the proposed Code amendments that provide that client agreements should not contain terms which are inconsistent with the obligations under the Code or mis-describe the actual services provided to the client. All proposals relating to client agreement requirements will take effect on a date specified when the further public consultation of the proposed new clause is concluded.

The SFC is inviting the public to submit their comments on or before 24 December 2014 in relation to the proposed new clause. Written comments may be sent via the SFC website (www.sfc.hk), by email to client_agreement@sfc.hk, by post or by fax to 2284 4460.

Comments

In preparation for the new regime, readers may submit their comments regarding both the suitability requirement and the proposed new clause. Intermediaries may find it useful to adopt the SFC’s suggestions regarding client agreements to ensure that they remain in compliance with their obligations under the Code and do not provide misleading information to the client. In particular, the revised regime’s new principle-based criteria may be particularly useful to intermediaries with investment vehicle clients, to assess whether they may be exempted from the suitability requirement.

To see the full consultation paper, please see:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=13CP1

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR113

5.  Court convicts unlicensed investment portfolio manager

On 26 September 2014, the Eastern Magistrates’ Court convicted Mr Tam Kwok Pui of providing asset management service without obtaining a licence from the SFC

Background

An investigation by the SFC found that between 1 March 2011 and 31 August 2012, Tam, whilst unlicensed, recruited a client through an investment seminar he organised and provided the client with asset management services which included managing a portfolio of securities and futures contracts for the client. The services he provided required him to satisfy the SFC that he was fit, proper and competent in asset management. He never sought SFC’s approval and was thus not authorized to provide these services.

Sanction

Tam pleaded guilty and was fined HK$10,000 for the offence. The court also ordered him to pay the SFC’s investigation costs.

Comment

Pursuant to section 114 of the SFO, it is an offence to carry on a business of providing asset management services or other regulated activities without a licence from the SFC. To obtain a Type 9 licence for asset management, an individual must prove that he is fit and proper in compliance with the Fit and Proper Guidelines, and has the requisite competence to provide the relevant regulated services. To secure SFC licences, prospective licensees may seek advice from independent compliance consultants such as CompliancePlus.

Investors may also check the SFC’s Public Register of Licensed Persons and Registered Institution on the SFC website (www.sfc.hk) to ensure that people who provide asset management services are properly licensed.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR114

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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Regulatory News (Sep 2014)

Newsletter – August 2014

Newsletter – August 2014

  1. SFC bans Manesh Vijaykumar Samtani for life
  2. SFC bans former broker Chan Yuk Hing for three years for false trading
  3. Market manipulator fined and sentenced to community service
  4. SFC suspends Chan Hung Nin for 15 months for unauthorised trading in client’s account
  5. SFC reprimands and fines Winnie Pang Wai Yan for negligence in handling client’s trade orders
  6. SFC commences Market Misconduct Tribunal proceedings against former CEO of Water Oasis Group Limited for alleged insider dealing
  7. SFC reprimands and fines Hung Lai Ping for manager and supervisory failures
  8. SFC issues first-quarter report
  9. SFC issues supplemental consultation conclusions on regulation of IPO sponsors
  10. Roger Tsui Chi Fung banned for providing false information to SFC

1. SFC bans Manesh Vijaykumar Samtani for life

On  4 August 2014, the Securities and Futures Commission (“SFC”)  banned Mr. Manesh Vijaykumar Samtani from re-entering the industry for life.

Background

Mr. Samtani was licensed as a representative to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance (“SFO”) and was accredited to KGI Asia Limited from 20 March 2008 to 28 November 2012 and to KGI Futures (Hong Kong) Limited from 11 August 2008 to 28 November 2012.  Mr. Samtani is currently not a licensed person.

According to the findings of SFC, from July 2011 to November 2012, Mr. Samtani provided six clients with false screenshots of KGI’s trading platform and other false information to conceal trading losses and mislead the clients on the transactions conducted in their accounts and their actual account balances. The SFC also found that Mr. Samtani failed to follow his client’s specific instructions on the handling of their accounts and conducted transactions in their accounts contrary to their express instructions without their authorization.

Disciplinary action

Mr. Samtani provided false screenshots and other false information to the clients of his then employers, KGI, to mislead them as to the transactions in their accounts and the true net asset value of their accounts, in breach of the General Principle 1 of the Code of Conduct (honesty and fairness).

As regards conducting unauthorised transactions in the clients’ accounts, Mr. Samtani was in breach of paragraph 7.1 of the Code of Conduct (authorisation and operation of a discretionary account).

The SFC decides that Mr. Samtani is not a fit and proper person as a result of his misconducts; specifically the SFC took into account that Mr. Samtani’s conduct was dishonest, that he had abused the trust and confidence his clients and employers placed in him, and that his actions seriously jeopardised his clients’ interests and resulted in financial losses of more than HK$8 million to the clients.

Comment

Readers are once again reminded that a licensed person is under a duty to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct).  Paragraph 7.1 of the Fit and Proper Guidelines provides that a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty, misfeasance or other market-related crimes, or even by the SFC’s findings in the absence of an unfavourable court’s finding.

Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. It is also the duty of a licensed person to abide by the Code of Conduct. A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients.  The SFC also reminds against the disclosure of passwords to the online trading accounts to anyone.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR96

2. SFC bans former broker Chan Yuk Hing for three years for false trading

On 4 August 2014, the SFC banned Mr. Chan Yuk Hing, a former broker, from re-entering the industry for three years from 1 August 2014 to 31 July 2017.

Background

On 29 June 2012, the Eastern Magistrates Court found Chan and his client, Mr. Paul Frederic Chane Yin, guilty of market manipulation in shares of Multifield International Holdings Limited (Multifield) in 2009. An SFC investigation found that through Chan, Chane purchased 50,000 Multifield shares at an average price of HK$0.2261 in the morning trading session of 23 November 2009. However, during the afternoon session, Chan asked Chane to buy Multifield shares at the best ask price which was HK$1.00 per share, four times the prevailing market price of HK$0.25, and suggested Chane to buy a single board lot of 2,000 shares. Chane agreed, and as a result, the price of Multifield shares rose four-fold to HK$1.00. Shortly before trading closed that day, Chane sold the 50,000 shares he had bought at an average price of HK$0.2261 for an average selling price of HK$0.4258.

Court Ruling

The Court held that there was no economically sensible reason for Chane to buy a single board lot at a price of four times the prevailing price. Therefore, it found that both Chan and Chane intended to create a false or misleading appearance of the price for Multifield shares to enable Chane to later sell his shares at an artificially inflated price.

On 13 July 2012, the Eastern Magistracy sentenced Chan and Chane to serve 80 hours and 100 hours of Community Service respectively. Chane was also fined HK$8,000, and both were ordered to pay investigation costs to the SFC. Subsequently, Chan and Chane’s appeals against their convictions were both dismissed in the Court of First Instance (“CFI”) on 13 January 2014.

The Ban

Consequently, the SFC has concluded that Chan has been guilty of misconduct and thus not fit and proper to be licensed. He was previously licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity, and was accredited to KGI Asia Limited between January 2008 and August 2010.

Comment

Readers should take note that a genuine buyer in a market of genuine supply and demand is one who aims to purchase shares at the lowest possible price. By doing otherwise, their conduct would constitute false trading contrary to Section 295(1)(b) of the Securities and Futures Ordinance (“SFO”). This calls his or her fitness and properness into question, and could lead to his or her license being suspended.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR95

3. Market manipulator fined and sentenced to community service

On 7 August 2014, the Eastern Magistrates’ Court sentenced Mr. Wong Pok Wang to 180 hours of community service and fined him HK$16,320 for manipulating the indicative equilibrium price (“IEP”) of derivative warrants and callable bull/bear contracts (“CBBCs”) during the Pre-opening Sessions.

Background

On 22 July 2014, the Eastern Magistrates’ Court found Wong guilty of 13 counts of false trading in eight derivative warrants and CBBCs between 15 October 2010 and 14 February 2011, following an allegation by the SFC. The SFC alleged that Wong created price ranges for the final IEP for the aforementioned derivative warrants and CBBCs by placing high priced at-auction limit buy orders of small sizes (usually a single board lot) and low priced at-auction limit sell orders (of significant sizes) during the Order Input Period. An IEP is the price during the Pre-opening Sessions at which the maximum number of shares could be traded if order matching occurred at the same time, and is calculated and determined by the orders inputted by investors during the Pre-opening Sessions. Within five seconds before the close of the Pre-order Matching Period, Wong placed at-auction buy orders (of relatively large sizes) for derivative warrants or CBBCs, pushing the final IEPs to the upper end of the price range by 9% to 39% on nine occasions. In this way, Wong sold the derivative warrants and CBBCs on a net basis at prices that were artificially high and profited from the trades. The Court held that Wong’s order placing activities made no economic sense and that he obtained illicit gains of HK$16,320 from his manipulative trades in the derivative warrants and CBBCs.

Sentencing

On 7 August 2014, the Eastern Magistrates sentenced Wong to 180 hours of community service and fined him HK$16,320. The fine imposed is equivalent to the profit made by Wong from selling the derivative warrants and CBBCs at prices artificially pushed higher by his manipulative orders.

Comment

This case illustrates the gravity of potential sentences for offences of false trading, contrary to Section 295 of the SFO. In addition to calling the individual’s fitness and properness into question, persons who commit these offences could be liable on conviction on indictment to a fine of up to HK$10,000,000 and imprisonment for up to 10 years, or on summary conviction, a fine of HK$1,000,000 and to imprisonment for up to 3 years. Furthermore, once convicted, the individual may be subject to disciplinary actions of the SFC under Section 195 of the SFO, by reason of being convicted of an offence with impugns on the fitness and properness of the licensed person to remain licensed. Readers should therefore be carefully ensure that their actions are not in breach of those provisions.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR97

4. SFC suspends Chan Hung Nin for 15 months for unauthorised trading in client’s account

The SFC suspended Mr. Chan Hung Nin for 15 months from 8 August 2014 until 7 November 2015 for breaching the Code of Conduct.

Background

Chan was licensed under the SFO to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities, and is accredited to Celestial Limited and Celestial Commodities Limited (“Celestial”).

The disciplinary action follows an investigation stemmed from a complaint by the client (“Client”), who alleged, inter alia, that Chan conducted unauthorised trades in his account (“Account”). The Account traded actively in stocks and CBBCs between 2 April 2011 and 21 August 2012 without the Client’s specific authorisation. According to Celestial’s records, the Client never signed a Power of Attorney to authorise Chan or any other third party to operate the Account.

When conducting periodic checks on trades without telephone recordings of order placing and confirmation, Celestial identified six such instances in the Account. On four instances where the Client could be reached, the Client falsely represented to Celestial that he had placed the relevant orders by calling Chan’s mobile phone. The SFC found that Chan had asked the Client to make such false representations to Celestial in order to conceal the fact that he was operating the account on a discretionary basis, and the fact that the Client did so suggests that he had impliedly authorised Chan to conduct the trades in question.

The Sanction

In deciding the sanction, the SFC took into account all the relevant circumstances including:

  • Chan’s act of coaching the client to lie is deliberate and dishonest;
  • Chan is still licensed and serving clients;
  • Chan had more than 20 years of experience in the industry at the time of his misconduct; and
  • Chan has an otherwise clean disciplinary record.

Comment

Readers should note that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”). If an individual breaches the requirements on discretionary accounts as set out in Paragraph 7.1 of the Code of Conduct, the SFC could conclude that the individual is not fit and proper to be licensed. Licensed corporations should also be aware that, pursuant to the Code of Conduct, tape records must be kept for a minimum period of at least 6 months.

The SFC’s disciplinary actions against Chan are empowered by Sections 194 to 196 of the SFO, which provides that the license of a regulated person may be suspended if he is found to be guilty of misconduct or is not fit and proper to be or to remain the same type of regulated person. As in the present case, the sanction imposed may be aggravated by the individual’s experience in the industry, since it implies that they should have been aware of the aforementioned requirements.

This may be aggravated by the individual’s experience in the industry, which implies that they should have been aware of the aforementioned requirements, thus attracting harsher sanctions.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR98

5. SFC reprimands and fines Winnie Pang Wai Yan for negligence in handling client’s trade orders

On 14 August 2014,  the Securities and Futures Commission (SFC) reported that Ms Winnie Pang Wai Yan had been publicly reprimanded and fined HK$120,000 for negligence in handling a client’s trade orders.

Background

Pang has been registered as a relevant individual with the Hong Kong Monetary Authority and engaged by UBS AG to carry on Type 1 (dealing in securities) regulated activity since 20 February 2006.

Pang was a client advisor assistant at UBS AG at the material time. In December 2009, a client at UBS AG wanted to sell his shares in a stock to an identified buyer at agreed amounts and prices through manual cross trades. Instead of placing cross trades as initially instructed by the client, Pang coordinated with the buyer to conduct a series of on-exchange matched trades between 3 and 8 December 2009.

Negligence

Under the Securities and Futures Ordinance (“SFO”), market misconduct of false trading in the form of matched orders is strictly prohibited.

The SFC found that, in handling the client’s orders, Pang did not exercise due care, skill and diligence in the best interests of the client by failure to make enquiries in relation to the relevant transactions to ascertain the client’s intention, report the matter to the Compliance Department of UBS AG, and refrain from acting on the client’s instructions before she was satisfied that the orders and their execution did not affect the best interests of the integrity of the market.  Pang thus was in breach of General Principle 2 of the Code of Conduct.

The SFC considers that Pang’s failures called into question her fitness and properness as a registered person.  In particular, the SFC took into account Pang’s financial situation, that Pang did not make any personal benefit out of the transactions in question, that there is insufficient evidence to prove to the requisite standard that the matched trades were carried out with manipulative intent, that the matched trades had minimal impact on the nominal price of the stock, that Pang co-operated with the SFC in resolving the disciplinary action and that Pang has an otherwise clean disciplinary record with the SFC.

Comment

Readers should take note that pursuant to section 274(5)(b) and section 295(5)(b) of the SFO, a person may have committed the offence of false trading or be regarded as having engaged in the market misconduct of false trading if a person offers to sell securities at a price that is substantially the same as the price at which he has made or proposes to make, or he knows an associate of his has made or proposes to make, an offer to buy substantially the same number of securities, unless the transaction in question is an off-market transaction. This type of trading is commonly known as matched orders.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR101

6. SFC commences Market Misconduct Tribunal proceedings against former CEO of Water Oasis Group Limited for alleged insider dealing

On 14 August 2014, the Securities and Futures Commission (SFC) reported that proceedings had been commenced in the Market Misconduct Tribunal (MW) against Ms Salina Yu  Lai Si, the former Chief Executive Officer of Water Oasis Group Limited (Water Oasis), for alleged insider dealing in Water Oasis shares.

Background

Water Oasis was listed on the Stock Exchange of Hong Kong Limited in March 2002, which principally distributes skincare products in Hong Kong, Macau, Taiwan, Singapore and the Mainland and operates beauty salons, spas and medical beauty centres in Hong Kong and the Mainland.  At the material time, Ms Yu was the Chief Executive Officer, a substantial shareholder and an executive director of Water Oasis.  Ms Yu resigned as Water Oasis’ Chief Executive Officer and executive director on 6 July 2012.

SFC’s allegation

The SFC alleges that on 20 January 2012 at around 10 am, H2O Plus LLC (H2o) informed Ms Yu that it would terminate Water Oasis’ exclusive distributorship in H2O’s products in the Mainland and Taiwan with immediate effect and shortly after being notified by H2O, Ms Yu proceeded to sell all her Water Oasis shares in one of her securities trading accounts on the same day prior to an announcement by Water Oasis, and avoided a loss of around of around HK$281,346. Subsequently on 20 January 2012 at 10:13 pm, Water Oasis issued an announcement about the termination of the exclusive distribution rights in H2O products.

The SFC also alleges that both the news about the termination of the exclusive distribution rights and the significance of the contribution of H2O’s operations in the Mainland and Taiwan to the net profit of Water Oasis were not publicly known and were material to Water Oasis’s share price. This allegation is backed up by the fact that on 26 January 2012, the first trading day after Water Oasis made the announcement on 20 January 2012, its share price dropped by 14.08% to close at HK$1.22 and on the same day, the Hang Send Index rose 329 points or 1.64% to the level of 20,439.

Comment

Readers, especially for those that are privy  to secret price-sensitive information,  are reminded that information of this sort must be handled with utmost care.  Acquisition of or disposal of relevant securities immediately after obtaining such information should be avoided.  In case of doubt, readers should readily seek professional advice on regulatory and legal compliance.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR100

7. SFC reprimands and fines Hung Lai Ping for manager and supervisory failures

The Securities and Futures Commission (SFC) has issued a reprimand to Ms Hung Lai Ping, a former responsible officer of Delta Asia Securities Limited (Delta Asia), and fined her HK$150,000 for managerial and supervisory failures.

Background

Delta Asia is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 3 (leveraged foreign exchange trading) and Type 4 (advising on securities) regulated activities.  Hung is licensed under the SFO to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. During the period from April 2007 to June 2012, Hung was accredited to Delta Asia and approved to act as its responsible officer.

Findings of the SFC

The SFC found that during the period from January 2010 to February 2013, Delta Asia used shares belonging to clients and held in segregated client accounts at the Central Clearing and Settlement System (CCASS) to settle transactions for its other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date.  This was done without the consent or authorisation of the clients whose shares were used for settlement in contravention of the Securities and Futures (Client Securities) Rules on 36 occasions during the period.  Sections 6 and 10 of the Securities and Futures (Client Securities) Rules respectively specifies the circumstances in which intermediaries may withdraw or otherwise deal with client securities received or held on behalf of clients and requires intermediaries to take reasonable steps to ensure that client securities are not deposited, transferred, etc, except in the manner specified in the rules.

In addition the SFC found that on two occasions during the period, Delta Asia had transferred shares belonging to clients and held in the CCASS segregated client accounts to its CCASS clearing account, with a view to settling the transactions for Delta Asia’s other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date. However, the transferred shares were eventually not sent to the Hong Kong Securities Clearing Company Limited for settlement purpose as a result of the netting of Delta Asia’s positions in the same security on the same day. This occurred without the consent or authorization of the clients whose shares were transferred and were in breach of the Securities and Futures (Client Securities) Rules notwithstanding that the transferred shares were eventually not used for settlement purpose.

The SFC also found that Delta Asia failed to implement proper controls to safeguard client securities and to supervise the staff of Delta Asia in discharging its settlement function, thus allowing the unauthorized transfers of client securities from Delta Asia’s CCASS segregated client accounts to its CCASS clearing account to have gone unchecked for more than three years.

Ms Hung’s negligence

The SFC is of the view that Delta Asia’s settlement malpractice and failures were attributable to negligence on the part of Hung.

Hung was responsible for overseeing the compliance function and all front and back office operations of Delta Asia, including its settlement functions. In her capacity as a responsible officer and a member of senior management, Hung bore primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by Delta Asia, for properly managing the risks associated with the business of Delta Asia, and for supervising diligently persons employed or appointed by Delta Asia to conduct business on its behalf.

Hung has failed to fulfil such responsibility and her failure has manifested itself in the failures that Delta Asia, under her management, has displayed. As a result, the SFC held that Hung had breached General Principles 2, 9 and paragraphs 4.2 and 14.1 of the Code of Conduct. In deciding the sanctions, the SFC took into account that Hung has accepted the SFC’s findings.

Comment

The SFC stresses once again that safe custody of client assets is a fundamental obligation of licensed corporations. Any transgression of this obligation, even if the relevant clients are made whole again, cannot be tolerated.

The SFC has also taken disciplinary action against Delta Asia as a result of the same investigation. This illustrates that the relevant institution alongside the responsible officers/individuals will be penalised for the failure to put sufficient internal control in place.  To preserve the public image of the institution, readers should be noted that it is not sufficient that institutions solely rely on the ethics of employees, and a system of internal control is of equal importance.  If necessary, professional advice on compliance issues should be sought without delay.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR102

 

8. SFC issues first-quarter report

On 20 August 2014, the SFC published its Quarterly Report summarising key developments from April to June 2014.

Regulatory update

Of particular significance are the Securities and Futures (Amendment) Ordinance 2014, gazetted in April, which established a framework for the regulation of the over-the-counter derivatives market, and a circular issued by the SFC which set out a guidance on robust internal product approval and design processes for investment products. To encourage more meaningful disclosure, the SFC also requested listed companies to provide specific numbers in their profit alerts and warnings wherever possible.

Shanghai-Hong Kong Stock Connect Pilot Scheme

On 10 April 2014, the China Securities Regulatory Commission and the SFC approved the development of a pilot programme (the “Scheme”) for establishing mutual stock market access between Mainland China and Hong Kong. When launched, the Scheme will operate between the Shanghai Stock Exchange (“SSE”), China Securities Depository and Clearing Corporation Limited (“ChinaClear”), Hong Kong Securities Clearing Company Limited (“HKSCC”).

Enforcement

In the first quarter, the SFC successfully prosecuted 10 individuals or corporations for market misconduct and disciplined 17 licensees, with fines totalling over HK$39 million.

The SFC also reprimanded ICBC International Capital Limited (ICBCI) and fined them a total of HK$25 million regarding their role in an initial public offering.  ICBCI failed, inter alia, to conduct customer due diligence and perform ongoing scrutiny of accounts of certain placees referred by Powerlong (Placees) to ensure that the transactions being conducted were consistent with its knowledge of the Placees, taking into account their source of funds, and turned a blind eye to the lack of independence of Placees for the subscription of Powerlong’s shares allotted through its listing on the Stock Exchange of Hong Kong Limited.

The SFC also obtained a judgment which ordered Ernst & Young Hong Kong to produce to the SFC specified accounting record relating to its work as the reporting accountant and auditor for Standard Water Limited.

For further details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR103

For full report please see: http://www.sfc.hk/web/files/ER/Reports/QR/201404-06/Eng/00_Eng%20Full.pdf

 

9. SFC issues supplemental consultation conclusions on regulation of IPO sponsors

On 22 August 2014, the Securities and Futures Commission (SFC) released supplemental consultation conclusions on prospectus liability, reaffirming that IPO sponsors are subject to existing statutory civil and criminal liability for defective prospectuses.

Initial consultation conclusions

On 9 May 2012, the SFC issued a Consultation Paper on the Regulation of Sponsors, which contained a number of proposals designed to enhance Hong Kong’s sponsor regulatory regime and consolidate all key sponsor obligations in the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”). The Paper invited comments on two broad areas: (i) the regulatory regime for sponsors conduct; and (ii) legislative amendments to clarify sponsors’ civil and criminal liability under existing legislation concerning misstatements in prospectuses. The consultation period ended on 31 July 2012 and 71 responses were received. The SFC released Consultation Conclusions on the Regulation of IPO Sponsors on 12 December 2012. The Conclusions were made in response to concerns expressed in the Consultation Paper that standards of sponsor work have fallen short of expectations. For that reason, the SFC consulted the market on proposals aimed at improving market confidence and the overall quality of sponsor work.

In relation to prospectus liability of sponsors, the SFC concluded in its initial consultation that although there was a strong argument that sponsors were already covered by the relevant legislation, given the lack of relevant case law and varying views expressed by sponsors and others, it may be helpful to specify sponsors in the Companies (Winding Up and Miscellaneous Provisions) Ordinance) (“CWUMPO”) as a category of persons who authorise the issue of prospectuses. Amending Sections 40 and 342F of CWUMPO would make it explicitly clear to all market participants that sponsors are potentially liable under the Ordinance.

However, it remained unclear whether or not such an amendment was necessary, since sponsors were already persons who authorise the issue of a prospectus within the meaning of the CWUMPO (Sections 40(1)(d), 40A(1) and 342F(1)), and are therefore potentially liable.

Supplemental consultation conclusions

Since the release of the Consultation Conclusions, the SFC has engaged with industry participants and other interested parties in further consultations on the proposed legislative amendments. The supplemental consultation conclusions sets out the SFC’s position on the need for further legislative amendments following these consultations and further analysis.

In this subsequent conclusion, the SFC reaffirmed its view that its original position in the Consultation Paper, namely that sponsors are already covered under the existing law, is correct. Thus, sponsors are among those persons who have potential statutory criminal and civil liability under the CWUMPO for untrue statements (including material omissions) in a prospectus. As such, the proposed legislative amendments in the initial consultation conclusions and Consultation Paper will not be pursued as they serve no purpose.

For further details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR104

For full report please see:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openConclusionAppendix?refNo=12CP1&appendix=0

10. Roger Tsui Chi Fung banned for providing false information to SFC

The SFC has banned Mr. Roger Tsui Chi Fung, a former licensed representative, from re-entering the industry for nine months from 15 August 2014 to 14 May 2015.

Background

Tsui was licensed under the Securities and Futures Ordinance (“SFO”) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities and was accredited to various licensed corporations between 2000 and 2011. He is currently not accredited to any licensed corporation.

Providing false or misleading information

On 15 Jan 2014, the Eastern Magistrates’ Court convicted Tsui after he pleaded guilty to two counts of providing false or misleading information to the SFC in his capacity as a SFC license holder. He was fined HK$8,000 and ordered to pay the SFC’s investigation costs.

The court heard that, on or around 29 January and 24 August 2009 respectively, Tsui had on each of the dates submitted to the SFC an annual licensing return. In each return, Tsui declared that during the relevant reporting periods, there was no change in the information about him that had been provided to the SFC, including information about his disciplinary record.

The declarations in the two annual returns were false or misleading as the SFC’s investigation revealed that the Financial Industry Regulatory Authority of the United States (“FINRA”) had disciplined Tsui and the sanction imposed on Tsui during the reporting periods was covered by both annual returns.

The sanction

As mentioned above, Sections 194 to 196 empower the SFC to suspend the license of a regulated person if he is found to be guilty of misconduct or not fit and proper to remain the same type of regulated person. The SFC has found that by providing false information regarding his disciplinary record, Tsui is not fit and proper to remain licensed. As such, he has been banned from re-entering the industry for nine months.

Comment

Under Section 384 of the SFO, it is a criminal offence to provide to a specified recipient (including the SFC) any information which is false or misleading in a material particular. This includes but is not limited to information regarding a licensee’s disciplinary record, and the annual return that the licensee is required to submit under Section 138(4) of the SFO. It is therefore important for licensed individuals to ensure that they provide accurate information to the SFC at all times, and failure to do so could result in the suspension or revocation of an SFC license.

For further details please see: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR106

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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Regulatory News (Aug 2014)