- SFC obtains court order to wind up China Metal Recycling (Holdings) Limited
- SFC bans Katherina Lo Ka Shun for two years for improper trading arrangement
- SFC bans former CEO of Ping An of China Securities (Hong Kong) Company Limited for 12 months over internal control failures
- SFC issues third-quarter report
- Court dismisses judicial review application by CITIC’s former director against SFC
- SFC welcomes appointment of Executive Director
- Market Misconduct Tribunal disqualifies Water Oasis’s former CEO and orders disgorgement for insider dealing
- SFC commences proceedings in Market Misconduct Tribunal over alleged false research report
- SFC issues Restriction Notice on Goodcape Securities Limited
- Court grants orders to restrain suspected boiler rooms
- SFC bans Jagjit Singh Dhillon from re-entering the industry for life over improper activities
- Unlicensed dealing prosecution transferred to District Court
- SFC obtains court orders against current and former directors of First China to compensate the company RMB18.69 million
- SFC signs MoU with ESMA on cooperation arrangements for Hong Kong-established central counterparties
- SFC unveils report on asset management
On 22 December 2014, the Securities and Futures Commission (“SFC”) commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Mr. Andrew Left of Citron Research, alleging market misconduct involving the publication of a research report on Evergrande Real Estate Group Limited (“Evergrande”) in June 2012.
Mr. Left resides in the United States and is the head of Citron Research, a US-based publisher of research reports on listed companies. The SFC alleges that on 21 June 2012, Mr. Left published a report on Citron Research’s website (www.citronresearch.com) that contained false and misleading information about Evergrande. The report stated, among other things, that Evergrande was insolvent and had consistently presented fraudulent information to the investing public.
On 21 June 2012, the day of the publication of the report, the share price of Evergrande fell sharply. In the morning, the share price of Evergrande reached a day high of HK$4.52 in the morning but then declined sharply to a day low of HK$3.6, down 19.6% from the previous day’s close of HK$4.48. The stock closed at HK$3.97, which was 11.4% down from the previous day’s closing price. By comparison, the Hang Seng Index declined 1.3% on the same day.
The SFC also alleges that shortly before publishing the report, Mr. Left sold 4.1 million shares of Evergrade which he subsequently brought back, making a nominal profit of over HK$2.8 million. Mr. Left made a total realised profit of approximately HK$1.7 million.
Readers should note that insider dealing is a criminal offence under section 270 of the Securities and Futures Ordinance (“SFO”). This includes the situation where a person connected with the corporation and having information which he knows is inside information in relation to the corporation either (i) deals in the listed securities of the corporation of their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives; or (ii) counsels or procures another person to deal in such listed securities or derivatives, knowing or having reasonable cause to believe the other person will deal in them.
For details, please refer to:
On 2 January 2015, the SFC issued a Restriction Notice on Goodcape Securities Limited (“GSL”) prohibiting the firm from carrying on all regulated activities under the SFO.
GSL is a corporation licensed under the SFO to carry on Type 1 regulated activity (dealing in securities) and operates as an introducing broker that communicates client orders or introduces clients to other licensed securities dealers. It is subject to the licensing conditions, among others, that GSL shall not conduct business other than (a) communicating offers to effect dealings in securities to Paul Securities Limited, in the names of the persons from whom those offers are received; and (b) introducing persons to Paul Securities Limited and Lamtex Securities Limited, in order that they may – (i) effect dealings in securities; or (ii) make offers to deal in securities. At present, GSL has about 60 active clients.
The purpose of the Restriction Notice is to preserve the assets of GSL and its clients, and to protect the interests of these clients and the investing public.
The SFC action follows a complaint to the SFC against GSL in relation to failing to return client securities to the complainant. An initial investigation indicates that GSL would not have sufficient resources to return these securities to the complainant. This calls into serious doubt the integrity of GSL and its fitness and properness to remain licensed, and therefore, the SFC considers that the issue of a Restriction Notice against GSL is desirable in the interest of the investing public or in the public interest. As a result, the SFC will continue its investigation and will make further announcements on this matter when appropriate.
The Restriction Notice is issued pursuant to sections 204 and 205 of the SFO. The notice in the present case prohibits GSL from carrying on all activities for which it is licensed, disposing of or dealing with any assets held by it or held on behalf of its clients, and assisting, counselling or procuring another person to dispose of or deal with any such property without the SFC’s prior written consent.
For details please refer to:
On 7 January 2015, the SFC obtained orders from the Court of First Instance (“CFI”) to restrain the following entities from carrying on unlicensed activities and suspending their websites:
- Broadspan Securities (“Broadspan”) using the website www.broadspansecurities.com
- Shepherds Hill Partners, Hong Kong (“Shepherds Hill”) using the website www.shepherdshillhk.com; and
- Rich Futures (HK) Limited (“Rich Futures”) using the website www.richfutureshk.com.
The SFC alleges the abovementioned entities are engaged in fraudulent boiler room activities and received monies from investors.
On 19 December 2014, the SFC obtained interim injunctions in the CFI to freeze approximately HK$4.3 million in the bank accounts held by six entities, namely Timeprime Limited; Lynwin Limited; Resmart Limited; Fieldmark Corporation Limited; DH Corporation Limited and SMD Partnership Limited. The interim orders will remain in force until the hearing of the SFC’s application for final orders against all the parties, the date of which has yet to be fixed.
The proceedings were brought under section 213 of the SFO, and the SFC is also seeking final orders against Broadspan, Shepherds Hill and Rich Futures including permanent injunctions and other orders to provide relief to any victims. The SFC’s investigation is continuing.
Boiler rooms usually claim to be licensed for regulated securities or futures business and issue related advertisements when they are not licensed or actually in that jurisdiction. Under section 114(1)(b) of the SFO, it is an offence for a person to hold himself out as carrying on a business in a regulated activity without a license. Under section 109 of the SFO, it is an offence to issue a related advertisement.
The usual way a boiler room works is that they call investors claiming to be in Place A but are actually in Place B. They ask the investors to invest in a financial product in Place C and to send money to an account in Place D. Often a boiler room will transfer money received from the investors from an account in one place to an account in another place almost as soon as it has been received. By the time the fraud has been discovered, the money has disappeared or been transferred out of reach. There is an Alert List on the SFC website which lists firms which are unlicensed in Hong Kong and are suspected to be targeting Hong Kong investors or claim to have an association with Hong Kong.
For details please refer to:
On 12 January 2015, the SFC has banned Mr. Jagjit Singh Dhillon, a former trader at Credit Suisse Securities (Hong Kong) Limited and Credit Suisse (Hong Kong) Limited (collectively “Credit Suisse”), from re-entering the industry for life over improper activities in two principal trading books for which he had responsibility.
Mr. Dhillon was licensed 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. His license was revoked when he left Credit Suisse on 9 June 2012. He is currently not licensed by the SFC.
The disciplinary action follows an SFC investigation which found that Mr. Dhillon, who was responsible for trading equity derivatives (including listed futures and both listed and OTC options relating to the Hang Seng Index, the Hang Seng China Enterprises Index, and the Korea Composite Stock Price Index in two principal trading books held in Credit Suisse International), took various steps to cover up the losses and the real level of risk exposure in his trading books between 8 and 17 May 2012, including booking fictitious trades and entering incorrect market data in the trading books. For example, on one occasion, Mr. Dhillon booked a sell trade for a listed index future in one of his trading books against an internal counterparty code. That was a fictitious transaction that was never settled. The next day, Mr. Dhillon cancelled the trade.
However, in the meantime, the fictitious trade created a positive P&L impact on Mr. Dhillon’s trading book overnight, as the listed index future in question closed at a price lower than the price at which Mr. Dhillon booked his fictitious sell trade. In addition, the fictitious trade dampened the equity market risk exposure of Mr. Dhillon’s trading book overnight, as such trading book was long equity exposure at the time the fictitious trade was booked. The effect of those trades was, therefore, that a profit was created in Mr. Dhillon’s trading book and a loss was created in the other trader’s trading book, because the price at which Mr. Dhillon’s trading book was sold, and the other trader’s trading book bought, the listed index future in question was higher than the closing price for that listed index future on that day.
The SFC referred the matter to the police in June 2012, and Mr. Dhillon was arrested by the police and holding charges were laid against him. The holding charges were withdrawn in May 2013 due to lack of co-operation from key witnesses and Mr. Dhillon left Hong Kong immediately.
Mr. Dhillon’s conduct led to an overstatement in the level of profits and an understatement in the level of risk exposure in his trading books, resulting in Credit Suisse having to make negative adjustments of US$5.4 million to the cumulative monthly profit and loss figures for its trading books on 18 May 2012, and recalculate the level of risk exposure recorded in its risk management systems. Mr. Dhillon also provided his supervisors with false information when they first became suspicious of the activities in his trading books.
In deciding the disciplinary action, the SFC has taken into account all relevant circumstances including that Mr. Dhillon’s conduct was intentional, dishonest and serious. The dishonest nature of his conduct demonstrates that he presents a serious risk to confidence in the financial market.
Section 129 of the SFO provides that, in considering whether a person is fit and proper, the SFC may consider, in addition to any other matter that the SFC may consider relevant, the person’s ability to carry on the regulated activity competently, honestly and fairly, and the reputation, character, reliability and financial integrity of the person. Mr. Dhillon’s dishonesty throughout the course of his conduct shows a lack of integrity on his part and presents a serious risk to confidence in the financial market. This is because confidence in the financial market relies, in part, on the trustworthiness of licensed persons. Readers should therefore be aware that conduct illustrating dishonesty would adversely reflect on his or her fitness and properness to remain licensed, and could lead to suspension or revocation of his or her license to carry out regulated activities.
For details, please refer to:
On 13 January 2015, the Eastern Magistrates’ Court granted an application by the Department of Justice (“DOJ”) to transfer to the District Court the first prosecution of a case for unlicensed dealings involving collective investment schemes (“CIS”).
On 31 May 2014, the SFC commenced the criminal proceedings at the Eastern Magistrates’ Court against IPFUND Asset Management Limited (“IPFUND”) and its sole director and shareholder Mr. Ronald Sin Chung Yin for carrying on a business, or holding out as carrying on a business, in a regulated activity in dealing in securities without a license in contravention of section 114 of the SFO. The securities in question are CIS. Both pleaded not guilty to four summonses on 3 July 2014.
The SFC alleged that between February 2011 and December 2011, IPFUND and Mr. Sin, both of whom have never been licensed by the SFC, offered and disposed of interests in 16 CIS to investors. IPFUND and Mr. Sin managed and controlled those CIS which were not authorized by the SFC.
The funds contributed by the investors were allegedly pooled for use in purchasing commercial properties in Hong Kong; upon the sale of those properties, part of the profit earned would be distributed among the investors in proportion to their contribution towards the purchase price, and IPFUND received consultancy fees based on profits earned from the trading of these commercial properties.
On 4 September 2014, the Eastern Magistrates’ Court gave directions to the SFC to consider whether it would be appropriate for the summonses to be tried in the District Court given the complexity of the subject matter, the number of witnesses and the estimated length of the trial. Further, on 24 October 2014, the case was adjourned for four weeks to enable an application to be made by the DOJ to transfer the case to the District Court. The case was further adjourned on 20 November 2014 to 13 January 2015.
Pursuant to section 114(3) of the SFO, no person shall perform any regulated function in relation to a regulated activity carried on as a business or hold himself out as performing any regulated function, unless such person carries on for a registered institution a regulated activity for which the registered institution is registered and his name is entered in the register maintained under section 20 of the Banking Ordinance. It is a criminal offence to contravene section 114(3) of the SFO without reasonable excuse, the maximum penalties of which are a fine of HK$1,000,000 and imprisonment for two years, and in the case of a continuing offence, a further fine for every day during which the offence continues.
Further, it is important for readers to note that a person who knowingly allows or facilitates an individual who is not a relevant individual to engage in any regulated function in relation to a regulated activity for a registered institution may be regarded as aiding and abetting a breach of section 114(3) of the SFO, and his fitness and properness for being a relevant individual may be called into question. Additionally, a registered institution and its staff members supervising the relevant lines of business may be subject to disciplinary action for inadequate controls and lack of supervision of staff to ensure compliance with section 114(3) of the SFO. It may therefore be beneficial for readers to seek the assistance of external compliance firms to ensure robust controls and supervisory systems are in place.
Moreover, under section 390 of the SFO, where the commission of an offence under the SFO by a corporation is proved to have been aided, abetted, counseled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of, any officer of the corporation, or any person who was purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and is liable to be proceeded against.
For details, please refer to:
On 19 January 2015, the CFI ordered three current and former directors of First China Financial Network Holdings Ltd (First China), to pay a total sum of RMB18,692,000 with interest as compensation to First China following findings of misconduct.
First China was listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited (“SEHK”) on 11 January 2002 (stock code 8123). The group provides financial services, such as stock brokerage, information and research, securities and futures trading, corporate finance and wealth management services. The three relevant directors are First China’s current chairman, Mr. Wang Wenming, its current chief executive officer Mr. Lee Yiu Sun and former chairman Mr. Richard Yin Yingneng.
Following a contested trial, the court found that Mr. Wang, Mr. Lee and Mr. Yin breached their duties to First China when they agreed to pay RMB18,692,000 special dividend to Fame Treasure Ltd. First China had earlier purchased GoHi Holdings Ltd (GoHi) and issued an announcement to the market on 16 December 2008 stating that the payment was part of a mutual understanding and agreement with Fame Treasure Ltd at the time of the acquisition of GoHi. The SFC argued and the court found that this was not the case and there had never been any such mutual understanding or arrangement. Details regarding these transactions are set out in the SFC’s petition attached to the press release dated 12 November 2012.
The court found that Mr. Wang, Mr. Lee and Mr. Yin caused First China to make a payment that First China was not required to make at all and ordered them to repay this amount to First China, and a further hearing will be rescheduled to determine whether disqualification orders should be made against Mr. Wang, Mr. Lee and Mr. Yin.
During the trial, it was revealed that a written resolution was recently passed by a non-executive director and four independent non-executive directors of First China to provide an indemnity to Mr. Wang and Mr. Lee for all professional and legal fees incurred by them concerning the defence of the SFC’s petition and all legal costs claimed by the SFC as a result.
The court found the indemnity was plainly inappropriate and a poor reflection on the company’s corporate governance. Consequently, Mr. Wang and Mr. Lee have either repaid or are in the course of repaying the legal costs First China paid on their behalf.
The SFC’s Executive Director of Enforcement, Mr. Mark Steward, said, “Listed company directors have a duty to safeguard shareholders’ funds. This means they should only be used for proper company purposes and the payment to Fame Treasure Ltd was clearly not for a proper purpose”, and “the SFC will continue to hold listed company directors to account and seek orders to remediate corporate losses where appropriate.”
Under section 214 of the SFO, the court may make orders disqualifying a person from being a company director or being involved, directly or indirectly, in the management of any corporation for up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs having being conducted in a manner involving defalcation, fraud or other misconduct. Readers should note that under the SFO, market misconduct includes:
- Insider trading;
- False trading;
- Price rigging;
- Stock market manipulation;
- Disclosure of information about prohibited transactions;
- Disclosure of false information or misleading information inducing transactions; and
- Fraud and deception.
For details, please refer to:
On 16 January 2015, the SFC and the European Securities and Markets Authority (“ESMA”) have entered into a Memorandum of Understanding (“MoU”) on cooperation arrangements in connection with Hong Kong-established central counterparties (“CCPs”) which have applied for recognition by ESMA.
The CCPs established in Hong Kong which have applied for recognition by ESMA are:
- Hong Kong Securities Clearing Company Limited;
- HKFE Clearing Corporation Limited;
- The SEHK Options Clearing House Limited; and
- OTC Clearing Hong Kong Limited.
The establishment of cooperation arrangements fulfils a precondition under European Market Infrastructure Regulation (“EMIR”) for ESMA to recognise these CCPs as eligible to provide services to clearing members or trading venues established in the European Union.
EMIR refers to Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, CCPs and trade repositories. EMIR provides for cooperation arrangements to be established between ESMA and non-European Union authorities whose legal and supervisory framework for CCPs have been deemed equivalent to EMIR by the European Commission.
For details, please refer to:
On 21 January 2015, the SFC published a second report in its risk-focused industry meeting series entitled “Asset Management: Looking Forward”.
The report follows a series of meetings conducted by the Risk and Strategy unit (“R&S”) from March to November 2014 with senior executives in the asset management industry. The first report in the series was entitled “Risk-focused Industry Meeting Series: G-SIFI Trends in Risk and Risk Mitigation” published on 18 December 2013. These meetings were non-supervisory in nature and the attending senior executives included business leaders, heads of risk and heads of compliance. In order to obtain a broad perspective, R&S engaged with global, local and China asset managers. The business mix of the asset managers included active, passive and alternatives. R&S also engaged with global regulatory counterparts, industry associations, consultants, stock exchanges, prime brokers, pension funds, sovereign wealth funds, family offices and individual investors.
The report highlights:
- Solid growth in asset management, with Asia (excluding Japan and Australia) recording the most rapid global growth in assets under management over the past five years;
- Importance of scale for asset managers, which in the case of Hong Kong can be achieved through greater connectivity with mainland China;
- Increased demand for complex asset management products with high-yield, multi-asset, unconstrained and alternative strategies;
- Increased investor focus on fees, contributing to growth in low cost and indexed products such as exchange-traded funds and passive funds;
- Distribution of retail funds moving online, with indications that online platforms are introducing competition on fees;
- Evolving international regulation, including focus on risk governance and risk culture of asset managers;
- Varying viewpoints on systemic risk in asset management, including risks resulting from interconnectedness of the financial system and the importance of robust liquidity risk management; and
- An emerging trend towards integration of environmental, social and corporate governance factors in investment risk assessment.
Mr. Ashley Alder, the SFC’s Chief Executive Officer, said, “As described in the report, the asset management industry is large and diverse. It is also fast evolving. The SFC will consider the topics discussed in this meeting series as part of its policy and strategic priority-setting.”
After the occurrence of the global financial crisis, it became evident that regulators and market participants need to have an active and open dialogue on the evolution of risk and risk mitigation to serve the common goal of promoting safer, fairer and more efficient markets. The abovementioned series of risk-focused industry meetings were designed to address this concern.
For details, please refer to:
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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