Archive for month: June, 2014

As a leading compliance service provider for hedge funds, private equity firms, insurance groups and other financial institutions in Asia, CompliancePlus Consulting Limited held a cocktail reception  on 22^nd May at the Hong Kong Club to celebrate its 5th Anniversary. Over 150 guests including fund managers, strategists, analysts, traders and CFOs from various financial institutions participated in the event.. Please click the following link for details:

https://www.complianceplus.hk/complianceplus-celebrating-5th-anniversary-at-hong-kong-club/

1. SFC proposed to amend exemptions for disclosure obligations
2. SFC proposes greater flexibility for dissemination of prices and net asset values by authorized funds
3. Delta Asia Securities Limited reprimanded and fined HK$4 million for failing to safeguard clients’ securities
4. SFC banned Christopher Ma Chun Leung for ten years and Wong Man Chung for two years
5. Ernst & Young produces audit working papers in Hong Kong and appeals order over Mainland papers
6. SFC commenced proceedings against Greencool’s former chairman and seeks to freeze HK$1.59 billion of his assets to compensate investors
7. Court maintained sentence of market manipulator
8. Broker acquitted of illegal short selling
9. SFAT affirmed SFC decision to suspend Jenny Chan Pik Ha
10. Pacific Sun Advisors Limited and its director convicted of issuing advertisements without SFC authorization
11. SFC banned Li Tak Wa for 15 months

1. SFC proposed to amend exemptions for disclosure obligations

On 18 June 2014, the Securities and Futures Commission (SFC) began a one-month consultation on proposals to amend the Guidelines for the Exemption of Listed Corporations from Part XV of the Securities and Futures Ordinance (Disclosure of Interests) (the Guidelines).

Background

On 10 April 2014, the SFC and the China Securities Regulatory Commission (CSRC) jointly announced Shanghai-Hong Kong Stock Connect, a pilot program for establishing mutual stock market access between Shanghai and Hong Kong. The Shanghai Stock Exchange (SSE) and The Stock Exchange of Hong Kong Limited (SEHK) will enable investors in each market to trade eligible shares listed on the other market through local securities firms or brokers.

Amendments

The amendments would provide two additional categories for exemption under the Guidelines to cover participants of the SEHK as well as clearing participants of a recognized clearing house that are themselves clearing houses.

Under Shanghai-Hong Kong Stock Connect, orders from eligible Mainland investors will be routed to SEHK via a securities trading service company established by the SSE in Hong Kong. In addition, China Securities Depository and Clearing Corporation Limited (ChinaClear) will provide Mainland investors with clearing, settlement, custody and nominee services for SEHK-listed shares.

The securities trading service company and ChinaClear will each come under the existing disclosure obligations under Part XV of the Securities and Futures Ordinance (SFO) if they hold at least a 5% interest in an SEHK-listed company, but would be eligible for exemptions under the proposed amendments. The securities trading service company will be admitted as a participant of SEHK and China Clear will be admitted as a participant of Hong Kong Securities Clearing Company Limited (HKSCC).

Services provided by the securities trading service company are similar to those provided by an SEHK participant who is an SFC-licensed person while services provided by ChinaClear are similar to those provided by HKSCC. SEHK participants who are SFC-licensed persons and HKSCC are currently exempted from the Part XV disclosure requirements if certain conditions are met.

Submitting comments to SFC

The public is invited to submit their comments to the SFC on or before 17 July 2014. Written comments may be sent on line via the SFC site (www.sfc.hk), by email to [email protected], by post or by fax to 2810 5385.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR72

2. SFC proposes greater flexibility for dissemination of prices and net asset values by authorized funds

On 24 June 2014, the Securities and Futures Commission (SFC) began a one-month consultation on proposals to amend the Code on Unit Trusts and Mutual Funds (the Code).

Amendments

The proposals give collective investment schemes greater flexibility in determining the means for making public their offer and redemption prices, net asset values (NAVs) and notices of dealing suspension. More frequent dissemination of prices and NAVs would also be required.

The proposals take into account recent developments in information technology and existing market practices as well as regulatory requirements in major overseas markets.

Submitting comments to SFC

The public is invited to submit their comments to the SFC on or before 23 July 2014. Written comments may be sent on line via the SFC site (www.sfc.hk), by email to [email protected], by post or by fax to 2877 0318.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR76

3. Delta Asia Securities Limited reprimanded and fined HK$4 million for failing to safeguard clients’ securities

On 4 June 2014, the Securities and Futures Commission (SFC) issued a reprimand to Delta Asia Securities Limited (Delta Asia) and fined it HK$4 million for failing to reasonably ensure that client securities were properly safeguarded.

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. Delta Asia is also a participant of the Central Clearing and Settlement System (CCASS) of the Hong Kong Securities Clearing Company Limited (HKSCC) and it maintains a number of stock accounts in CCASS.

During the course of a limited review of Delta Asia’s operation conducted by the SFC’s Intermediaries Supervision Division (ISD) in April 2013, Delta Asia reported to ISD that there had been 35 incidents of settlement shortfalls between 17 March 2010 to 20 February 2013, with the shortfall temporarily covered by other shares or by purchase of the relevant shares on the next day. The SFC conducted an investigation into the activities of Delta Asia, including but not limited to its internal policies and controls in relation to trade settlement. In the course of the investigation, Delta Asia reported three additional incidents of settlement shortfalls to the SFC.

The SFC found that the settlement shortfalls reported by Delta Asia arose as a result of late delivery of physical script for settlement/ late registration of physical script delivered for settlement, or as a result of overselling due to a mistake made by the client/ by Delta Asia’s sales staff.

Use of client securities to settle the transactions of other clients

Between January 2010 and 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 occurred without the consent or authorization of the clients, whose shares were used for settlement, contravening the Securities and Futures (Client Securities) Rules on 36 occasions during the period.

In addition, the SFC found that on 2 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 settle 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 HKSCC 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.

Internal Control and Supervisory Failures

The SFC also found that Delta Asia did not have adequate internal controls and procedures in place in relation to the handling of shortfalls during the settlement process, thus allowing the practice of using client assets to settle other clients’ transactions to have gone unchecked for at least 3 years.

Although Delta Asia had a Stock Short Summary Report which identified the short positions of its clients, neither the management nor the compliance function reviewed this report. The settlement staff was left to review, and resolve issues arising out of, the report with little, if any, guidance and supervision from management. This shows that Delta Asia’s management took no active steps to supervise or monitor the operation of the settlement functions, and they simply relied on the settlement staff to identify and report any settlement issues to them.

Comment

Readers are reminded that Sections 6 and 10 of the Securities and Futures (Client Securities) Rules specify the circumstances in which intermediaries may withdraw or otherwise deal with client securities received or held on behalf of clients. The rules require intermediaries to take reasonable steps to ensure that client securities are not deposited, transferred, etc, except in the manner specified.

Readers are further reminded 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). A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients. A licensed person should also have in place and implement proper internal control procedures in relation to the handling of settlement shortfalls.

Readers should take note 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. In the present case, Delta Asia had clearly breached this fundamental obligation and prejudiced the interests of its clients.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR65

4. SFC banned Christopher Ma Chun Leung for ten years and Wong Man Chung for two years

On 9 June 2014, the Securities and Futures Commission (SFC) banned Mr. Christopher Ma Chun Leung and Mr. Wong Man Chung from re-entering the industry for ten years from 28 May 2014 to 27 May 2024 and two years from 30 May 2014 to 29 May 2016 respectively.

Background

Ma was licensed as a representative under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), and Type 7 (providing automated trading services) regulated activities and was accredited to Morgan Stanley Asia Limited, Morgan Stanley Hong Kong Futures Limited, and Morgan Stanley Hong Kong Securities Limited from July 1999 to May 2011.

Wong was licensed as a representative under the SFO to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), and Type 7 (providing automated trading services) regulated activities and was accredited to Morgan Stanley Asia Limited, Morgan Stanley Hong Kong Futures Limited, and Morgan Stanley Hong Kong Securities Limited (collectively Morgan Stanley) from June 1995 to November 2011.

SFC’s Investigation

The disciplinary actions follow an SFC investigation which found that Ma, the supervisor of a program trading desk, and Wong, a trader under Ma, had acted against the interests of clients and taken advantage of executions of orders of institutional clients in stocks traded on The Stock Exchange of Hong Kong Limited (SEHK). It was found that Ma and Wong had cancelled the trades executed on the SEHK for the clients and re-filled the client orders with trades at stock prices less advantageous to the clients. The cancellations and reallocations involved over 2,500 trades in 20 stocks which caused the institutional clients to pay a total of about HK$8 million more for their shares in 2009 and 2010.

In addition, Ma provided false or misleading information to his employer by altering the trading records which Morgan Stanley relied upon in making the submission to SFC during its investigation. Ma deleted and changed the time stamp and purchase quantity of the executed trades with a view to cover up the cancellation and re-allocation of the executed trades with stock prices less advantageous to the clients.

Disciplinary actions

The SFC considers that the misconduct of Ma and Wong seriously calls into question their fitness and properness to be licensed. Ma and Wong were banned for ten years from 28 May 2014 to 27 May 2024 and two years from 30 May 2014 to 29 May 2016 respectively.

Ma sought to review the SFC’s decision at the Securities and Futures Appeals Tribunal (SFAT) but eventually withdrew his application before the SFAT hearing.

Comment

Readers are reminded once again 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). General Principle 1 of the Code of Conduct requires licensed persons to act honestly, fairly, and in the best interests of its clients and the integrity of the market, when conducting regulated activities.

Readers should also note that SFC’s disciplinary actions against Ma and Wong are empowered by sections 194 to 196 of the Securities and Futures Ordinance (SFO), which provide that the SFC may revoke the license of a regulated person 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.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR67

5. Ernst & Young produces audit working papers in Hong Kong and appeals order over Mainland papers

On 20 June 2014, Ernst & Young (EY), reporting accountants and auditors of Standard Water, filed a Notice of Appeal in respect of a court order to produce documents held by its Mainland affiliate, EY Hua Ming (EYHM) in relation to an SFC investigation into the proposed listing of Standard Water.

Background

Standard Water applied for listing to the Stock Exchange of Hong Kong (SEHK) on 9 November 2009. In March 2010, EY informed the SEHK of its resignation as reporting accountants and auditors of Standard Water upon discovery of certain inconsistencies in documentation provided by the company. Shortly afterwards, Standard Water also withdrew its listing application. During an SFC investigation into the proposed listing of Standard Water, EY failed to provide the specified accounting records to the SFC citing they could not be produced as EY was not in possession of the records and that they could not be produced because of restrictions under PRC law.

The SFC subsequently brought the proceedings against EY in 2012 to compel the production of the specified records. The Court of First Instance rejected the cited arguments of EY and ordered them to produce the required material to the SFC. EY produced a disc of documents it held in Hong Kong and subsequently filed a Notice of Appeal in respect of the court order to produce documents held by its Mainland affiliate, EYHM.

The disc of documents produced to the SFC were found by EY on various hard drives in its Hong Kong office on the eve of the trial in this case, in March 2013, when production of the documents were refused by EY on the basis that the hard drives belonged to EYHM.

The SFC is investigating the materials contained in the disc produced to determine whether EY has fully complied with the court order and whether any further action needs to be taken against EY.

EY now informs the SFC that it needs another five weeks to complete its search of the hard drives in its Hong Kong office to find additional documents required to be produced to the SFC.

No date has been set for the hearing of EY’s appeal.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR78

6. SFC commenced proceedings against Greencool’s former chairman and seeks to freeze HK$1.59 billion of his assets to compensate investors

On 23 June 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 former chairman and chief executive officer, Mr Gu Chujun, and other senior executives of Greencool Technology Holdings Limited (Greencool), alleging market misconduct involving grossly overstating the company’s financial accounts for the years ended 31 December 2000 to 2004.

Background

Greencool was listed on the Growth Enterprise Market (GEM) of The Stock Exchange of Hong Kong Limited (SEHK) on 13 July 2000. On 1 August 2005, trading in Greencool shares was suspended and Greencool was subsequently delisted on 18 May 2007. On 5 March 2010, Greencool was struck off the register of non-Hong Kong companies by the Registrar of Companies of Hong Kong.

SFC’s investigation

The proceedings before the CFI have been commenced under section 213 of the Securities and Futures Ordinance against Gu, seeking, among other things, an injunction to freeze assets beneficially owned by Gu up to the value of about HK$1.59 billion, and an order for damages to compensate more than 1,300 minority shareholders. The SFC is alleging that Gu directed the fraud and should be ordered to compensate the minority shareholders who were led to acquire Greencool shares on the strength of the distorted financial results.

In the MMT proceedings, the SFC alleges Gu and eight other former senior executives of Greencool, and its former company secretary, were involved in gross overstatements of Greencool’s sales, profit, trade receivables, bank deposits, overstating Greencool’s net asset value and severely understating its bank loans, in annual reports and results announcements released between 2001 and 2005.

The SFC alleges that as a result of the overstatement of bank deposits and the non-disclosure of the bank loans, the net asset value of Greencool for the financial years ended 31 December 2000 to 2004 was overstated by approximately figures between RMB487 million and RMB1,062 million, which represent 43% to 80% of Greencool’s total net assets in these years.

The SFC has identified assets in Hong Kong, namely shares in other Hong Kong listed companies, which the SFC alleges are held for the benefit of Gu by nominees. The SFC is seeking interim orders freezing these shares for the purposes of facilitating compensation orders, if such orders are made by the CFI in the section 213 proceedings. The amount that the SFC is seeking to freeze, up to HK$1.59 billion, is the estimated losses suffered by minority shareholders together with accrued interest, the estimated gains received by Gu as a result of his alleged market misconduct together with accrued interest, and other costs that the CFI or the MMT may require Gu to pay in connection with both proceedings.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR77

 

7. Court maintained sentence of market manipulator

On 17 June 2014, the Eastern Magistrates’ Court maintained the original sentence of Mr. Chan Wing Fai after considering the Securities and Futures Commission’s (SFC) application to review his sentence.

Background

Between 21 September 2009 and 2 December 2009, Chan bought single board lots of shares of Sonavox International Holdings Limited (Sonavox) and PacMOS Technologies Holdings Limited (PacMOS), causing the price of Sonavox and PacMOS to increase by as much as 80% and 28%, respectively. The SFC alleged that Chan did not have a genuine intention to acquire the two companies’ shares through his single-board-lot bid orders, except for the purpose of marking up the share price of Sonavox and PacMOS.

Chan faced eight charges of creating a false or misleading appearance with respect to the price for dealings in the securities of Sonavox and PacMOS, contrary to section 295 of the Securities and Futures Ordinance (SFO).

Upon trial, Deputy Magistrate Mr. Winston Leung Wing Chung of the Eastern Magistrates’ Court found that the prosecution had failed to prove, beyond reasonable doubt, Chan’s manipulative intent. Chan was acquitted on all charges on 13 January 2012.

An appeal was made by the SFC. On 23 January 2014, the Court of First Instance agreed that the decision to acquit Chan was based on legal errors and subsequently allowed the SFC’s appeal of acquittal.

On 11 April 2014, the Eastern Magistrates’ court convicted Mr. Chan Wing Fai on seven counts of false trading. Chan was sentenced to one month’s imprisonment

Application to review sentence

The SFC was concerned that the court had not taken into account the fact that Chan had relevant prior convictions, having been convicted on 12 summonses of false trading in 2008, which merited a more serious penalty. An application to review sentence was filed by the SFC to the Magistrate.

The Deputy Magistrate Winston Leung Wing Chung, however, considers the original sentence is sufficient to punish the defendant and reflect the nature of Chan’s wrongdoing. The original sentence was maintained.

Comments

Market manipulation commonly includes the release of false or misleading information; the taking up of wash sales from one another within a certain trading period to increase the turnover of the stock or distort the actual share price; the placing of purchase orders at slightly higher prices or sale orders at lower prices to drive up or suppress the price of the securities when the market just opened (marking the open) and the drying up of stocks supply to exert undue upward price pressure on the stocks (cornering shares).

False trading takes place when a person does anything or causes anything to be done with the intention to create a false or misleading appearance of active trading in securities or futures contracts traded on a relevant recognized market, or by means of authorized automated trading services.

Readers should note that false trading is a form of market manipulation. It is a criminal offence and is a category of market misconduct under the Securities and Futures Ordinance (SFO) subject to severe punishment.

Readers are reminded that under section 274 of the SFO, unless the transaction in question is an off-market transaction, a person who directly or indirectly enters into or carries out any transaction of sale or purchase of securities that does not involve a change in the beneficial ownership is also considered to be intentionally creating a false or misleading appearance.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR71

8. Broker acquitted of illegal short selling

On 4 June 2014, the Eastern Magistrates’ Court, on 30 May 2014, found Mr. Wong Hung not guilty of illegal short selling five stocks in January 2012.

Background and allegation

Wong is licensed as a representative under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) regulated activity. He was accredited to Hung Sing Securities Limited at the material time and is currently accredited to KGI Asia Limited.

The Securities and Futures Commission (SFC) alleged that between 6 and 20 January 2012, Wong sold shares of five listed companies through his securities account when the total of all the shares he sold was more than the shares he held, contrary to section 170 of the SFO.

Acquittal

Magistrate Mr. David Chum Yau-fong found that since Wong placed a lot of orders each day, he could not exclude the possibility that Wong was careless about whether he was selling more shares than he held when placing the sell orders. Furthermore, the Magistrate found that the prosecution had failed to prove the case beyond reasonable doubt. Accordingly, Wong was acquitted of all charges.

Comment

Readers are reminded that the sales of securities when the person does not have a presently exercisable and unconditional right to sell them is strictly prohibited under Section 170 of the SFO.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR66

9. SFAT affirmed SFC decision to suspend Jenny Chan Pik Ha

On 10 June 2014, the Securities and Futures Commission (SFC) suspended Ms. Jenny Chan Pik Ha for four months from 9 June 2014 to 8 October 2014 following the determination of the Securities and Futures Appeals Tribunal (SFAT) to uphold the SFC’s decision to suspend her license but reducing the period of suspension from six months to four months.

Background and investigation

Chan is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to ICBC International Securities Limited and ICBC International Futures Limited between 20 May 2011 and 20 October 2011. Chan is currently accredited to KGI Asia Limited and KGI Futures (Hong Kong) Limited.

An SFC investigation found that between June 2011 and October 2011, Chan, who was then an account executive of ICBC International Securities Limited (ICBCI Securities), had failed to record and maintain proper audit trail of the orders placed by her clients. She failed to keep any written and/or telephone records in relation to a number of orders placed by her clients, and some of her dealing tickets were either not time stamped or time stamped only after the market had closed. Chan also accepted trade instructions from a third party without obtaining written authorization from her clients as required by ICBCI Securities. Furthermore, Chan deposited HK$300,000 from her personal bank account to a client’s account to settle a trade and verified on ICBC’s internal documentation that the deposit was from the client’s own funds.

Penalty and application for review

The SFC concluded that Chan’s conduct called into question her fitness and properness as a licensed person as Chan had failed to comply with the order recording requirements, and had failed to act with due skill, care and diligence in managing her clients’ accounts. Subsequently, the SFC suspended Chan for a period of six months. On 11 November 2013, Chan filed an application to the SFAT for a review of the penalty.

SFAT’s ruling

The SFAT upheld the SFC’s ruling to suspend Chan’s license but reduced the suspension period from six months to four months, taking into account that Chan’s application for transfer of accreditation after she left ICBCI Securities was delayed for about four months while the SFC’s investigation into her conduct was pending.

Comment

The SFAT’s ruling highlights that internal controls prescribed by licensed corporations, insofar as they seek to ensure competency and integrity in the manner in which employees carry out their dealing responsibilities, are not purely private guidelines between employers and employees, but constitute an integral part of the regulatory system that governs the securities industry.

In this case, the SFAT accepted that a breach of such internal controls may be the subject of disciplinary action of a public nature, as the breach constitutes a failure to comply with the public principles-based regulations governing intermediaries imposed by the SFC.

Readers are once again reminded 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). General Principle 2 demands that a licensed dealer must act with necessary skill and diligence, doing so in the best interests of clients and the integrity of the market.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR68

 

10. Pacific Sun Advisors Limited and its director convicted of issuing advertisements without SFC authorization

On 10 June 2014, Pacific Sun Advisors Limited (Pacific Sun) and its director Mr. Andrew Pieter Mantel were convicted at the Tsuen Wan Magistrates’ Court on four charges of issuing advertisements to promote a collective investment scheme without the authorization of the Securities and Futures Commission (SFC). Pacific Sun was fined HK$20,000 and Mantel was sentenced to four weeks’ imprisonment suspended for 12 months.

Background

Pacific Sun is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. Mantel, who is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities accredited to Pacific Sun, is a responsible officer of Pacific Sun.

Pacific Sun and Mantel were charged with issuing advertisements, between November and December 2011, promoting a collective investment scheme called “Pacific Sun Greater China Equities Fund” (the Fund) without first obtaining the SFC’s authorization for the advertisements. They were also charged with issuing an advertisement regarding the launch of the fund to the public by email on or around 2 and 3 November 2011 without the authorization of the SFC.

Pacific Sun and Mantel were initially acquitted in March 2013 after arguing that the advertisements fell within an exemption that applied to sales limited to professional investors. The SFC, on the other hand, submitted that the exemption did not permit advertisements that had not been authorized by the SFC to be issued to the public and that in this case there was no evidence the interests in the Fund were only intended or had only been sold to professional investors.

Appeal

The SFC filed for an appeal against the acquittal. In January 2014, The Court of First Instance issued a ruling clarifying that the advertisements in question did not fall within the exemption and ordered the case to be returned to the Magistrates’ Court for reconsideration. The Court of First Instance made it clear that the exemption only applies where the advertisement states on its face that the terms of the offer are limited to professional investors.

This ruling protects retail investors from the risks of direct marketing of inappropriate or risky investment products. Pacific Sun was fined HK$20,000 and Mantel was sentenced to four weeks’ imprisonment suspended for 12 months.

Comments

Readers should take note that under section 103 of the Securities and Futures Ordinance (SFO), a person commits an offence if he issues, or has in his possession for the purposes of issue, an advertisement, invitation or document for an investment scheme or financial product without first receiving authorization from the SFC under section 105

Readers are also reminded that under section 103(3)(k) of the SFO, an advertisement does not need SFC authorization when the advertisement is in respect of securities, structured products or interests in a collective investment scheme that are or are intended to be disposed of only to professional investors.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR69

11. SFC banned Li Tak Wa for 15 months

On 18 June 2014, the Securities and Futures Commission (SFC) banned Mr. Li Tak Wa from re-entering the industry for 15 months from 18 June 2014 to 17 September 2015.

Background and investigation

Li was licensed as a representative under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to Kaiser Securities Limited and Kaiser Futures Limited between 12 March 2004 and 30 November 2012.

The SFC’s investigation into Li’s conduct stemmed from a client complaint received by Kaiser Securities Limited. Upon investigation, the SFC found that Li had, among other things, conducted unauthorized trading in his client’s accounts at Kaiser and the client had suffered losses as a result.

The client was introduced to Li through a mutual friend and opened her accounts at Kaiser on 21 December 2009. Li was her account executive and he handled her account opening process. Li knew that the client owned and operated a toy manufacturing factory and was not married. He however allowed the client’s account opening forms to state that she was a housewife even though he knew that such information was incorrect. After the client opened her accounts at Kaiser, she verbally authorized Li to trade in her accounts on a discretionary basis. Li admitted that during the period from January 2010 and March 2012, he conducted trades in the client’s accounts on a discretionary basis without obtaining written authorization from the client.

The operation of discretionary accounts was not allowed at Kaiser Securities, and was discouraged at Kaiser Futures. According to a responsible officer of Kaiser Futures, special procedures had to be followed and approval had to be obtained before a discretionary account could be opened. Kaiser Futures had never received any formal request to open a discretionary account and did not know the Client authorized Li to operate her account on a discretionary basis.

Disciplinary action

Although there was evidence that the client verbally authorized Li to trade in her accounts on a discretionary basis, the absence of written authorization avoided monitoring and supervision by Li’s employer. Li also ignored the specific requirements in the Code of Conduct which required him to obtain the client’s prior written approval when conducting more than two day trades and opening short options positions in the client’s futures account, and deprived the client of an opportunity to make an informed decision before such transactions were conducted on her behalf.

The SFC considers Li’s conduct to have demonstrated a preparedness to ignore important safeguards and calls into question his fitness and properness to be a licensed person. Subsequently, Li was banned from re-entering the industry for 15 months from 18 June 2014 to 17 September 2015.

Comment

A “day trade” is a transaction whereby a licensed person executes in the same day an order to buy and an order to sell futures or options contracts on the same market in the same futures contract month, option series or currency contract type for the same client.

Readers should take note that under Paragraph 4 of Schedule 4 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), a licensed person should not accept, carry or initiate on behalf of a discretionary account more than two day trades in the futures market or open short options positions in a discretionary account, unless it has obtained from the client prior written approval specifically authorizing such transactions.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=14PR70

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

Receipt of this newsletter indicates that CompliancePlus has been using your email address to market to you the compliance services that CompliancePlus is able to provide you.

CompliancePlus provides compliance consulting services to financial companies, hedge fund managers and individuals. Our dedicated team of compliance officers has years of professional experience equipped with in-depth knowledge of both functional and compliance experience in managing and minimizing regulatory, operational and reputational risks. By partnering with CompliancePlus, our clients gain access to compliance solutions that they can trust and the latest knowledge of regulatory policies and procedures.

For enquiries, please email: [email protected] or call at (852) 3487-6903.

To subscribe, update your email address or unsubscribe, please email [email protected] 

Compliance is a constantly changing environment. The resources you need to stay up to date are not always easily accessible and rarely in a single location.  www.complianceplus.hk is updated on an ongoing basis from the perspective of compliance veterans.   We provide compliance resources, checklists, research articles, news on current market trends and regulatory updates all in one place.

CompliancePlus is an independent consulting firm whose team of compliance analysts has experience in fund authorization and restructuring of existing funds.  Our services include the assessment of new product feasibility, consulting on mutual fund setup, reviewing of fund prospectus and offering documentation, marketing materials and ongoing compliance support. For more information on how we can add value to your firm today, please call +852 3487 6903 or email us at [email protected]

1. SFC reprimands and fines Deutsche Bank Aktiengesellschaft HK$1.6 million for regulatory breaches
2. Court orders EY to produce accounting records to SFC
3. SFC resolves concerns over Citigroup’s algorithmic trading system
4. SFC reprimands and fines Kaiser HK$1.7 million for conducting unauthorized financial activities offshore
5. SFC reprimands and fines ICBC International Capital Limited and ICBC International Securities Limited HK$12.5 million each for failures related to IPO shares subscription
6. C.L. Management Services Limited and its director fined HK$1.5 million for unlicensed activities
7. SFC obtains court orders for GOME to receive HK$420 million compensation from founder and wife over breaches in share repurchase
8. SFC bans Helen Chow Hoi Ching and Choy Cheuk Tung for life
9. Futures manipulator sentenced to community service

1. SFC reprimands and fines Deutsche Bank Aktiengesellschaft HK$1.6 million for regulatory breaches

The Securities and Futures Commission (SFC) has reprimanded and fined Deutsche Bank Aktiengesellschaft (Deutsche Bank) HK$1.6 million for regulatory breaches and internal control failings.

Background

Deutsche Bank is a registered institution under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 4 (advising in securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities. Deutsche Bank is also an authorized institution under the supervision of the Hong Kong Monetary Authority.

The disciplinary action follows an SFC investigation into the failure of Deutsche Bank to disclose to Stock Exchange of Hong Kong Limited (SEHK) the changes to its percentage holdings in the issued share capital of Up Energy Development Group Limited on 27 occasions from 21 January 2011 to 25 August 2011. Three of these 27 occasions involved trading activity by Deutsche Bank; the remainder involved increases to the listed company’s total issued share capital.

Although Deutsche Bank had implemented an electronic position monitoring system to capture and monitor its positions globally, the system did not automatically capture equity positions that were processed and settled under the settlement system used in Singapore in its fixed income division. Deutsche Bank was aware of this limitation but failed to implement adequate procedures or training to guide the relevant business groups at Deutsche Bank to identify and report those equity positions that did not automatically feed into its electronic position monitoring system.

Disciplinary actions

Taking into account Deutsche Bank reported the matter to the SFC and has since strengthened its internal controls on the monitoring and disclosure of its equity positions in Hong Kong listed companies, SFC reprimanded and fined Deutsche Bank Aktiengesellschaft HK$1.6 million for regulatory breaches.

Comments

Readers are reminded that under Section 310(1) of the SFO provided that where a person acquires an interest in or ceases to be interested in shares comprised in the relevant share capital of a listed corporation; or where any change occurs affecting a person’s existing interest in shares in a listed corporation’s share capital, then in the circumstances specified in section 313(1), he comes under a duty of disclosure.

The notifiable percentage level for notifiable interests is 5% and the specified percentage level for changes to notifiable interests is 1%.

Where a person comes under a duty of disclosure under section 310, he should give notification to the listed corporation concerned and SEHK of the interests which he has, or ceases to have, in the shares of the listed corporation. The notification should be given at the same time or, if not practicable, one immediately after the other.

Recently, SFC had announced several enforcement actions on similar nature that some firms failed to meet with the regulatory reporting requirement such as on Large and Open Position Reporting. We recommend licensed firms should run regular testing on their compliance on this area such as short positing reporting compliance testing etc.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR59

2. Court orders EY to produce accounting records to SFC

On 23 May 2014, the Court of First Instance ordered EY must produce specified accounting records relating to its work as the reporting accountant and auditor for Standard Water Limited (Standard Water) to the Securities and Futures Commission (SFC).

Background

Standard Water applied for listing to the Stock Exchange of Hong Kong (SEHK) on 9 November 2009. In March 2010, EY informed the SEHK of its resignation as reporting accountants and auditors of Standard Water upon discovery of certain inconsistencies in documentation provided by the company. Shortly afterwards, Standard Water also withdrew its listing application. During an SFC investigation into the proposed listing of Standard Water, EY failed to provide the specified accounting records to the SFC citing they could not be produced as EY was not in possession of the records and that they could not be produced because of restrictions under PRC law.

The SFC subsequently brought the proceedings against EY in 2012 to compel the production of the specified records.

The Court of First Instance rejected the cited arguments of EY and ordered them to produce the required material to the SFC. Further, EY has been ordered to pay the SFC costs on an indemnity basis.  Auditors should not withhold information that is in their possession and sought by the SFC in connection with suspected misconduct in Hong Kong’s markets.

Comments

Readers are reminded that, under the Securities and Futures Ordinance (SFO), the SFC is empowered to request information from persons whom it believes may have information relevant to an investigation.  If a person fails to comply with such a request without a reasonable excuse, the SFC can bring proceedings under the SFO which empowers the Court of First Instance to inquire into the circumstances of non-compliance. The court can order the person to comply with the SFC’s request if it is satisfied that the person does not have any reasonable excuse for not complying. Readers are also reminded about the obligations of an accounting firm, or any other company based in Hong Kong to comply with requirements under Hong Kong law.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR60

3. SFC resolves concerns over Citigroup’s algorithmic trading system

On 14 May 2014, the Securities and Futures Commission (SFC) has reprimanded Citigroup Global Markets Asia Limited (Citigroup) for its failure to ensure that certain securities orders executed through its algorithmic trading system between April 2009 and May 2010 would not cause undue price impact to the market in resolving the SFC’s concerns over Citigroup’s algorithmic trading system.

Background

Citigroup is licensed under the Securities and Futures Ordinance to carry on business in 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) and Type 7 (providing automated trading services) regulated activities.

The SFC’s investigations into Citigroup’s use of algorithmic trading system to execute client orders on four occasions found that Citigroup’s execution in those cases resulted in a material increase or decrease in the price of the relevant stocks within a very short period of time, before the stock prices returned quickly to their original levels.

Disciplinary actions

Taking into account that the Citigroup co-operated with the SFC in resolving the its concerns and that the Citigroup had agreed to engage an independent reviewer to conduct a forward-looking review of its algorithmic trading system to ensure compliance with the new regulation on electronic trading which came into force on 1 January 2014. The SFC had decided against imposing a heavy fine on Citigroup. A public reprimand was issued against Citigroup for its failure to ensure that certain securities orders executed through its algorithmic trading system.

Comments

Readers are reminded that Chapter 18 and Schedule 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) on electronic trading came into effect on 1 January 2014. Licensed corporation should, among other things, effectively manage and adequately supervise the design, development, deployment and operation of its electronic trading system and ensure the system’s integrity, including security as stated under paragraph 1.2.4 of Schedule 7, which stresses the necessity of appropriate operating controls to prevent and detect unauthorized intrusion, security breach and security attack.

Licensed corporations should, as a matter of priority, review their existing internet trading systems, related policies, procedures and practices and make enhancements where needed, so as to establish and maintain a proper IT security management framework given that the SFC rules on electronic trading has taken effect since 1 January 2014.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR38

4. SFC reprimands and fines Kaiser HK$1.7 million for conducting unauthorized financial activities offshore

On 7 May 2014, the Securities and Futures Commission (SFC) has reprimanded Kaiser Securities Limited (Kaiser Securities) and Kaiser Futures Limited (Kaiser Futures) (collectively referred to as Kaiser) and fined them a total of HK$1.7 million for conducting unauthorized financial activities in breach of the laws of Macau. Kaiser Securities and Kaiser Futures were fined HK$1 million and HK$700,000 respectively.

Background

Kaiser Securities is licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity.  Kaiser Futures is licensed under the SFO to carry on Type 2 (dealing in futures contracts) regulated activity.

Between 2004 and 2011, Kaiser conducted securities business in Macau at the premises of Unified Securities (Macau) Limited (Unified) and provided services to clients in respect of their trading in securities, futures and options in the Hong Kong market in Macau through Unified.

Under the arrangement between Kaiser and Unified, Unified introduced Macau clients to Kaiser and provided general assistance to the clients in engaging Kaiser’s services. When clients in Macau wish to open accounts with Kaiser, Kaiser would send its licensed representatives to Unified to handle the account opening. In conducting trades in their accounts, the clients placed securities trading orders with Kaiser through internet, telephone or Unified’s staff, and received account statements from Kaiser on a regular basis.

Kaiser’s conduct contravened Article 118(1) of the Financial System Act of Macau because Kaiser did not have any authorization to carry on such a business in Macau. In July 2013, the Monetary Authority of Macao announced the decision of the Secretary for Economy and Finance of Macau to sanction Kaiser Securities and Kaiser Futures for their breach of the Financial System Act. Kaiser Securities was fined MOP 1,500,000 and Kaiser Futures was fined MOP 150,000 by the Macau authority.

Disciplinary action

Kaiser’s contravention of the laws of Macau cast doubt on their reputation, character and reliability and constitutes a breach of paragraph 12.1 of the Code of Conduct. The SFC publicly reprimanded Kaiser and fined them a total of HK$1.7 million pursuant to section 194 of the Securities and Futures Ordinance (SFO) for conducting unauthorized financial activities in breach of the laws of Macau. Kaiser Securities and Kaiser Futures were fined HK$1 million and HK$700,000 respectively.

Comments

Readers should note that the duty of a licensed person to demonstrate the qualities of sound reputation, character and reliability is not only restricted to their conduct in the Hong Kong market. It is also imperative for them to respect and comply with rules of relevant regulatory authority and laws of relevant jurisdictions, particularly those where Kaiser conduct their business activities.

Paragraph 12.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) provides that a licensed person should comply with, and implement and maintain measures appropriate to ensuring compliance with, the law and relevant regulatory requirements.

Readers are further reminded that a licensed corporation having employees or agents conducting business activities on its behalf in other jurisdictions (irrespective of whether such persons are licensed under the Securities and Futures Ordinance), is likely to be regarded by the Commission as responsible for their conduct. If these persons are not licensed under the laws or regulations of such other jurisdictions when they should be, or they otherwise conduct themselves in an improper manner, this may constitute a breach of paragraph 12.1 of the Code of Conduct and may also call into question the fitness and properness of such a corporation and/or individual to be, or remain, licensed under the Securities and Futures Ordinance.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR49

5. SFC reprimands and fines ICBC International Capital Limited and ICBC International Securities Limited HK$12.5 million each for failures related to IPO shares subscription

The reprimand and fine follows ICBC International Capital Limited (ICBCI Capital) and ICBC International Securities Limited (ICBCI Securities) (collectively ICBCI) an investigation into the practice and procedure adopted by ICBCI in relation to their role in the initial public offering of Powerlong Real Estate Holdings Limited (Powerlong) in 2009.

Background

An SFC investigation found that ICBI had, among others:

• failed 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;
• turned a blind eye to the lack of independence of Placees for the subscription of Powerlong’s shares allotted through its listing (the Offer Shares) on The Stock Exchange of Hong Kong Limited (SEHK); and
• failed to use reasonable efforts to ensure that submissions to the SEHK were true, accurate and not misleading.

An SFC investigation revealed that the Placees were referred to ICBCI Capital by ICBCI Securities which had been referred to them by Powerlong. The subscriptions of the Placees for the Offer Shares were accepted without conducting know-your-client due diligence to either ascertain their financial situation or confirm their independence from Powerlong.

The Offer Shares were re-priced due to insufficient demand. Thereafter, subscriptions of the Placees suddenly increased by as much as tenfold. ICBCI Securities failed to perform ongoing scrutiny to ensure that the Placees’ subscriptions were consistent with its knowledge of their financial situation. Further, no inquiry was made by ICBCI Capital to ascertain whether this was the case or the relationship between the Placees and Powerlong after a staff member of ICBCI Capital voiced suspicions.

Although the subscriptions of some of the Placees exceeded their declared net worth, ICBCI Capital nevertheless allocated the Offer Shares to them. As a result, massive debit balances were triggered after the Offer Shares were booked into their accounts. Margin financing of as much as 50%, which was not generally granted in international primary placings, was then extended by ICBCI Securities to certain Placees.

When some Placees raised questions regarding third-party settlement of their subscriptions, instead of questioning the reasons behind them, personnel of ICBCI Securities advised them to settle their allotment by various methods which ensured that the identity of the third-party depositors could not be traced.

Disciplinary Action

Further to the reprimand and fine of ICBCI, ICBCI has agreed to accept the disciplinary action and has committed to engage a firm of independent reviewers to undertake a comprehensive review of its systems and controls and to implement the recommendations made by the reviewer to the satisfaction of the SFC.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR58

6. C.L. Management Services Limited and its director fined HK$1.5 million for unlicensed activities

The Eastern Magistrates’ Court convicted C. L. Management and its director, Ms. Clarea Au Suet Ming (Au), on three counts of holding out as providing advisory services on corporate finance without a licence from the SFC after they pleaded not guilty.

Background

A Securities and Futures Commission (SFC) investigation found that between October 2010 and January 2012, C.L. Management had entered into service agreements with three companies for advising on their listing applications. The Eastern Magistrates Court accepted that the scope of services under these service agreements constituted advising on corporate finance and by entering into these service agreements, C.L. Management represented itself as being prepared to advise these three companies on their listing applications.

Comments

Readers are reminded that under the Securities and Futures Ordinance (SFO), advising on corporate finance is a regulated activity which requires a Type 6 (advising on corporate finance) licence from the SFC and under section 114(1)(a) and 114(8) of the SFO, a person commits an offence when the person, without reasonable excuse, carries / carried on a business in a regulated activity without a licence.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR57

7. SFC obtains court orders for GOME to receive HK$420 million compensation from founder and wife over breaches in share repurchase

On 5 May 2014, the Court of First Instance granted orders sought by the Securities and Futures Commission (SFC) in its proceedings against the former Chairman of GOME Electrical Appliances Holding Limited (GOME), Mr. Wong Kwong Yu and his wife, Ms. Du Juan, a former director of GOME, for them to compensate GOME HK$420 million and interest for their breaches of directors’ duties in certain share repurchases GOME conducted between 22 January and 5 February 2008 (Share Repurchase).

Background

The SFC commenced proceedings against Wong, Du and two companies in August 2009 alleging that Wong and Du organized a share repurchase, which took place between 22 January and 5 February 2008, to raise cash to repay a HK$2.4 billion personal loan to a financial institution which was due by 11 February 2008.

The Court of First Instance granted an interim injunction to freeze assets of up to HK$1,655,167,000 in August 2009. The injunction against the two companies was later discharged on 8 September 2009 upon deposit with the court of share certificates representing 779,255,678 shares of GOME and the injunction against Du was discharged on 2 March 2011.

Wong directed GOME to repurchase the majority of the 136,937,000 shares originally held by him which constituted approximately 70% of the total number of shares repurchased by GOME in the Share Repurchase.

Wong and Du have failed to ensure the share repurchase was properly authorized by GOME’s board. Wong did not make full disclosure of such personal interest as he may have had in the share repurchase as a seller of the GOME shares. Wong further admitted that he should not have participated in the meeting of the executive directors that authorized the Share Repurchase nor should he have participated in implementing the Share Repurchase.

For the purposes of resolving the SFC’s proceedings and seeking ratification from the minority shareholders, Wong and Du have agreed that they have breached their directors’ duties to GOME to act properly and in the best interests of GOME and to avoid making any unauthorized or improper gain at the expense of GOME.

Wong and Du agreed to pay GOME an aggregate amount of HK$420,608,765.75, representing the gains, together with accrued interest, received by Wong as a result of his sale of GOME shares to GOME as part of the share repurchase and the loss incurred by GOME

Wong and Du have also agreed to requisition a special general meeting of the Company (SGM) and to prepare a notice of meeting to be sent to all shareholders of GOME in which they will seek shareholders’ resolutions to ratify the share repurchase and their breaches of directors’ duties to the Company.

On 17 April 2014, independent shareholders passed resolutions at the SGM to ratify the Share Repurchase and Wong’s and Du’s associated breaches of directors’ duties; and the payment of compensation to GOME by Wong and Du in return for releasing Wong, Du and any others from all liabilities and claims arising from the Share Repurchase and breaches of duties.

Court order

The injunction to freeze assets of Wong up to the value of HK$1,655 million in order to secure assets to meet any compensation order was discharged by the court.  HK$420 million paid by Wong and Du into court for the purposes of compensating GOME was also released to GOME together with interest.

Hon Mr. Justice Harris of the Court of First Instance further ordered the undertakings of Shinning Crown Holdings Inc (Shinning Crown) and Shine Group Ltd (Shine Group), two companies through which Wong held his shares in GOME, be released. 779 million GOME shares the two companies deposited with the court used to satisfy any liability of Du is to be returned to Shinning Crown and Shine Group also.

Comments

Readers are reminded that under Rule 2 of the SFC’s Codes on Takeovers and Mergers and Share Buy-backs, a board of shareholders which receives an offer, or is approached with a view to an offer being made, must in the interests of shareholders, establish an independent committee of the board to make a recommendation (i) as to whether the offer is, or is not, fair and reasonable and (ii) as to acceptance or voting. As soon as reasonably practicable, the board must retain a competent independent financial adviser to advise the independent committee in writing in connection with the offer and in particular as to whether the offer is, or is not, fair and reasonable and as to acceptance and voting. The independent committee must approve the appointment of any independent financial adviser before the appointment is made.

Readers are further reminded that subject to the provisions of the Code on Share Repurchases, an issuer may purchase its shares on the HKEX. All such purchases must be made in accordance with rule 10.06. Rules 10.06(1), 10.06(2)(f) and 10.06(3) apply only to issuers whose primary listing is on the HKEX while the rest of rule 10.06(2) and rules 10.06(4), (5) and (6) apply to all issuers. The Code on Share Repurchases must be complied with by an issuer and its directors. Any breach of the Code by an issuer will be a deemed breach of the Exchange Listing Rules and the HKEX may in its absolute discretion take action to penalize any breaches.

Under Rule 10.06(2) of the Rules Governing the Listing of Securities on the HKEX, an issuer shall not purchase its shares on the HKEX for a consideration other than cash or for settlement otherwise than in accordance with the trading rules of the Exchange from time to time. Furthermore, an issuer shall not knowingly purchase its shares from a connected person and a connected person shall not knowingly sell shares to the issuer.

Readers should also take note that under section 213 of SFO, the Court of First Instance may grant an interim injunction to freeze assets of any person who contravened the SFO on the application of the SFC.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR52

8. SFC bans Helen Chow Hoi Ching and Choy Cheuk Tung for life

On 7 May 2014, the Securities and Futures Commission (SFC) has, in two separate actions, banned Ms. Helen Chow Hoi Ching, a former employee of The Royal Bank of Scotland N.V. (formerly known as ABN AMRO Bank N.V.), and Ms. Choy Cheuk Tung, a former employee of Standard Chartered Bank (Hong Kong) Limited, from re-entering the industry for life.

Background

Between January 2009 and March 2009, Chow transferred monies totaling HK$28,876,653 from four customers’ accounts without their authorizations to other customers’ accounts by forging the customers’ signatures on bank instruction forms. To conceal the unauthorized transfers, Chow changed the correspondence address of two of the customers by forging their signatures on bank instruction forms and sent false bank statements to one of them.

In July 2012, Choy misappropriated a total of HK$750,000 from a bank customer by forging the customer’s signature and made three transfers from the customer’s account into her husband’s account, and subsequently transferred a total of HK$700,000 into her own account.

Conviction and disciplinary actions

Chow was sentenced to imprisonment of four years by the District Court following conviction on one count of fraud on 11 September 2013.

Choy was sentenced to imprisonment of 18 months by the District Court following convictions of three counts of theft and three counts of dealing with property known or reasonably believed to represent proceeds of an indictable offence on 5 December 2013.

The SFC considers Chow and Choy are not fit and proper persons as a result of their convictions. Subsequently, they were banned from re-entering the industry for life.

Comments

Readers should note that under Section 71 of the Crimes Ordinance, a person who makes a false instrument, with the intention that he or another shall use it to induce somebody to accept it as genuine, and by reason of so accepting it to do or not to do some act to his own or any other person’s prejudice, commits the offence of forgery and is liable on conviction on indictment to imprisonment for 14 years.

Under Section 16A of the Theft ordinance, any person by any deceit and with intent to defraud induces another person to commit an act which results either in benefit to any person other than the second-mentioned person, he or she person commits the offence of fraud and is liable on conviction upon indictment to imprisonment for 14 years.

Furthermore, under Section 25 of the Theft ordinance, a person commits an offence if, knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence, he or she deals with that property. A person who commits this offence is liable on conviction upon indictment to a fine of HK$5,000,000 and to imprisonment for 14 years; or on summary conviction to a fine of HK$500,000 and to imprisonment for 3 years.

Readers are once again reminded 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). 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 or misfeasance, or by his being convicted of a criminal offence which is of direct relevance to fitness and properness.

Readers should also note that SFC’s disciplinary actions against Chow and Choy are empowered by sections 194 to 196 of the Securities and Futures Ordinance, which provide that the SFC may revoke the license of a regulated person 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.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR50

9. Futures manipulator sentenced to community service

On 14 May 2014, the Eastern Magistrates’ Court today sentenced a futures trader, Mr Ernest Fan Kwong Hung, to 200 hours of community service and fined him HK$59,430 for manipulating the final calculated opening prices (COP) of index futures contracts in the futures market.

Background

Fan has been a licensed representative to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities under the Securities and Futures Ordinance and was accredited to Sanfull Securities Limited and Sanfull Futures Limited respectively since 20 November 2008.

Fan was charged with the offences of manipulating the final COP of Mini-Hang Seng Index futures contracts during the morning Pre-Market Opening Period on six trading days between 25 January 2010 and 31 March 2010 following an investigation by the Securities and Futures Commission (SFC).

A COP is calculated during the Pre-Market Opening Period and serves as the market opening price for the corresponding product. A COP will be calculated only if the highest bid price of the limit orders entered into the Automated Trading System of the Exchange (HKATS) is greater than or equal to the lowest ask price of the limit orders. If more than one price satisfies this criterion, the COP will be calculated according to the established formula set forth in Rule 4.8.4 of Trading Procedures for Stock Index Futures and Stock Index Options Traded on HKATS.

Conviction

The Eastern Magistrates’ Court found Fan guilty on 30 April 2014 of six counts of false trading. On each of the six trading days, Fan placed a series of limit and auction orders in the Mini-Hang Seng Index futures contracts during the morning Pre-Market Opening Period with the intention, or being reckless as to whether, they had the effect of creating a false or misleading appearance with respect to its final COP.

The Magistrate also made a cold shoulder order against Fan, prohibiting him from directly or indirectly, in any way acquire, dispose of or otherwise dealing in any futures contracts in Hang Seng Index or Mini-Hang Seng Index in the Pre-Market Opening Period for six months without the leave of the court in Hong Kong.

Comments

Market manipulation commonly includes the release of false or misleading information; the taking up of wash sales from one another within a certain trading period to increase the turnover of the stock or distort the actual share price; the placing of purchase orders at slightly higher prices or sale orders at lower prices to drive up or suppress the price of the securities when the market just opened (marking the open) and the drying up of stocks supply to exert undue upward price pressure on the stocks (cornering shares).

False trading takes place when a person does anything or causes anything to be done with the intention to create a false or misleading appearance of active trading in securities or futures contracts traded on a relevant recognized market, or by means of authorized automated trading services.

Readers should note that false trading is a form of market manipulation. It is a criminal offence and is a category of market misconduct under the SFO subject to severe punishment. Any SFC licensee found to have taken part in market manipulation may have their license suspended or revoked.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR55

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

Receipt of this newsletter indicates that CompliancePlus has been using your email address to market to you the compliance services that CompliancePlus is able to provide you.

CompliancePlus provides compliance consulting services to financial companies, hedge fund managers and individuals. Our dedicated team of compliance officers has years of professional experience equipped with in-depth knowledge of both functional and compliance experience in managing and minimizing regulatory, operational and reputational risks. By partnering with CompliancePlus, our clients gain access to compliance solutions that they can trust and the latest knowledge of regulatory policies and procedures.

For enquiries, please email: [email protected] or call at (852) 3487-6903.

To subscribe, update your email address or unsubscribe, please email [email protected]