Regulatory News (Dec 2016)

Newsletter – November 2016

Content

  1. Court convicts Gold Root Global Investments Limited of unlicensed dealing
  2. SFC revokes licenses of Richmond Asset Management Limited and its responsible officer Graham frank Bibby and bans him for 10 years
  3. SFC bans Lawrence Lai for 10 years
  4. Market Misconduct Tribunal finds AcrossAsia Limited, its CEO and former chairman culpable of late disclosure of inside information
  5. Court of Final Appeal dismissed leave application of C.L. Management Services Limited and its sole owner
  6. SFC bans Derek Ong for 10 years
  7. SFC bans Benedict Ku Ka Tat for one year and fines him HK$150,000
  8. SFC publicly censures Zheng Dunmu and imposes a cold-shoulder order for breach of the Takeovers Code
  9. SFC proposes to enhance asset management regulation and point-of-sale transparency

1. Court convicts Gold Root Global Investments Limited of unlicensed dealing

On 27 October 2016, the Eastern Magistrates’ Court convicted Gold Root Global Investments Limited (“GRG Investments”) of dealing in futures contracts through its website between March and April 2013 without a licence from the SFC.

Background

GRG Investments pleaded guilty and was fined HK$10,000 and ordered to pay the SFC’s investigation costs.

Dealing in futures contracts for others as a business needs a SFC licence, but GRG Investments never applied to the SFC for a licence.

The SFC is also prosecuting Mr Jacky Chan Cheuk Ki and Mr Chiang Ching Fung, respectively, the former Dealing Director and Chief Executive Officer of GRG Investments, for aiding, abetting, counselling, procuring or inducing or consenting to or conniving in the commission of GRG Investments’ offence.  They both pleaded not guilty.

The case of Chan and Chiang was adjourned to 8 December 2016 for a pre-trial review.

The SFC reminds investors not to deal with unlicensed firms or people in order to protect their own interests. Investors can visit the SFC website (www.sfc.hk) to check whether a firm or person is licensed.

Comment

Readers are reminded that under section 390 of the SFO, if an offence under the SFO by a corporation is proved to have been aided, abetted, counselled, 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 and punished accordingly.

For further details, please refer to:

https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR109

2. SFC revokes licenses of Richmond Asset Management Limited and its responsible officer Graham frank Bibby and bans him for 10 years

On 31 October 2016, the SFC has revoked the licences of Richmond Asset Management Limited (“Richmond Asset Management”) and its responsible officer and sole owner, Mr Graham Frank Bibby, and banned him from re-entering the industry for a period of 10 years effective from 31 October 2016 to 30 October 2026.

Background

The disciplinary actions follow a review of the SFC’s decision to sanction Richmond Asset Management and Bibby by the Securities and Futures Appeals Tribunal (“SFAT”).

The SFC’s investigation found that Richmond Asset Management and Bibby are not fit and proper persons in that they procured investment funds from customers which were invested in assets which Bibby and his wife held substantial undisclosed interests. Specifically, Richmond Asset Management and Bibby obtained approximately US$5 million from 36 clients to invest in a company and a plot of land in Phuket of Thailand (“Phuket Land”) in which Bibby and his wife held substantial undisclosed interests.

The clients’ funds procured by Richmond Asset Management and Bibby were routed into three unauthorized funds (“Optimizer Funds”). Richmond Asset Management and Bibby were not only the investment advisers for the Optimizer Funds but also held management powers over the funds.

Richmond Asset Management and Bibby directed monies invested in the Optimizer Funds into two other funds (“Asia Property Funds”) in which Richmond Asset Management and Bibby were also advisers and investment managers.

In November 2007 the Asia Property Funds advanced a loan to The Fairway Holding Company Limited (“Fairway”), a Thailand-based company in which Bibby and his wife held a combined stake of 75%. The loan – essentially monies invested in the Asia Property Funds from the Optimizer Funds – were then used by Fairway to fund the purchase of the Phuket Land. Bibby also paid part of the purchase price of the Phuket Land.

The Optimizer Funds have been suspended since April 2010 and redemption requests from clients have been unsatisfied. The Optimizer Funds have been in limbo since suspension with the Asia Property Funds having become its major assets whilst the Phuket Land remains unsold and Fairway has defaulted on the loan owed to the Asia Property Funds.

Comment

Richmond Asset Management and Bibby failed to properly avoid and disclose potential conflicts of interest to its clients, abusing clients’ trust. In so doing they demonstrate they are unfit to be licensed to conduct regulated activities.

In particular, Bibby played a central role in managing how the clients’ monies in their portfolios were invested and he initiated the structure of funds to channel the clients’ investments to a company and a property in which he and his wife have substantial interests.

Readers are reminded that, according to the General Principle 1 in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”), a licenced or registered person should try to avoid conflicts of interest and when it cannot be avoided, the licensed or registered should ensure that the clients are fairly treated.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR111

3.  SFC bans Lawrence Lai for 10 years

On 2 November 2016, the SFC has prohibited Mr Lawrence Lai, a former representative of UOB Kay Hian (Hong Kong) Limited and UOB Kay Hian Futures (Hong Kong) Limited (collectively, “UOB Hong Kong”), from re-entering the industry for 10 years from 2 November 2016 to 1 November 2026 for breach of the Code of Conduct.

Background

The disciplinary action follows an SFC investigation into the trading of Nikkei Futures contracts in an account of UOB Hong Kong after a tsunami struck Japan on 11 March 2011.

The SFC found that Lai:

  • falsely declared that he was not related to a holder of a client account;
  • carried out discretionary trading in secret and without proper authorization;
  • caused inaccurate and misleading account statements to be issued to a client;
  • misled his employer that he was reducing the risk exposure of the client’s account when in fact he was substantially increasing the risk position; and
  • acted against the best interests of the client by trading without sufficient equity in the account to meet the margin requirement and margin call, which resulted in a trading loss of nearly HK$50 million.

Comment

Lai’s conduct, which fell short of the standard set out in the Code of Conduct, casts doubts on his fitness and properness to be a licensed person.

In coming to the decision to prohibit Lai from re-entering the industry for 10 years, the SFC took into account all relevant circumstances, including the misconduct occurred five years ago in 2011.

Readers are reminded that, according to General Principle 1 of the Code of Conduct, a licensed person should act honestly, fairly, and in the best interests of its clients and the integrity of the market. Also, according to paragraph 7.1 of the Code of Conduct, written authorization must be obtained to manage discretionary account of clients.

For a copy of the Statement of Disciplinary Action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR112&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR112

4.  Market Misconduct Tribunal finds AcrossAsia Limited, its CEO and former chairman culpable of late disclosure of inside information

On 7 November 2016, the Market Misconduct Tribunal (“MMT”) today found that AcrossAsia Limited (“AcrossAsia”), its former chairman, Mr Albert Saychuan Cheok and chief executive officer, Mr Vicente Binalhay Ang failed to disclose inside information as soon as reasonably practicable as required under the Securities and Futures Ordinance (“SFO”) following proceedings brought by the SFC.

This is the first time the MMT made a finding of breaches of the new disclosure obligations imposed on listed companies since they became effective on 1 January 2013.

Background

AcrossAsia, Cheok and Ang admitted that they had been late in disclosing inside information about a petition filed by AcrossAsia’s subsidiary and major creditor, PT First Media Tbk, against AcrossAsia and a related summons. Cheok and Ang also admitted that they had been negligent which resulted in AcrossAsia’s breach of the disclosure requirement.

In late December 2012, PT First Media Tbk filed a petition under the Indonesian Law on Bankruptcy and Suspension of Obligation for Payment of Debts against AcrossAsia and the Central Jakarta District Court (“CJDC”) issued a summons to AcrossAsia. AcrossAsia did not disclose this information until 17 January 2013.

The SFC alleged that the failure of AcrossAsia, Cheok and Ang to ensure timely disclosure of these court documents had resulted in the investing public not knowing about the possible insolvency of AcrossAsia and the possible loss of control over its major asset, and consequentially, the material increase in financial risks faced by AcrossAsia at the time.

The SFC considers that listed corporations should disclose inside information that has come to their knowledge as soon as reasonably practicable. Timely disclosure of inside information is central to the orderly operation of the market and underpins the maintenance of a fair and informed market.

Comment

AcrossAsia failed or may have failed to disclose to the public inside information constituted by the “Petition for Suspension of Obligation for Payment of Debts” and the Summon dated 28 December 2012 by the CJDC as soon as reasonably practicable after the said inside information had come to its knowledge, contrary to section 307(B) of the SFO.

Cheok and Ang, both officers of AcrossAsia, were or may be guilty of reckless or negligent conduct in failing to ensure AcrossAsia’s compliance with its disclosure obligation, wherein such conduct resulted in the breach of a disclosure requirement by AcrossAsia. Cheok and Ang were accordingly also in breach of a disclosure requirement pursuant to section 307G(2)(a) of the SFO.

The MMT will hear from all parties concerning the orders to be imposed on AcrossAsia, Cheok and Ang on 11 November 2016.

More evidence and detail will be revealed in the upcoming hearing. Our newsletter will continue to follow up on the any further updates.

For a copy of the MMT report, please refer to:

http://www.mmt.gov.hk/eng/rulings/AcrossAsia_Ltd%20_22072015_e.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR114

 

5.  Court of Final Appeal dismissed leave application of C.L. Management Services Limited and its sole owner

On 15 November 2016, the Court of Final Appeal (“CFA”) has dismissed C.L. Management Services Limited (“C.L. Management”) and its sole owner and director Ms Clarea Au Suet Ming’s application for leave to appeal against their convictions for holding out to provide advisory services on corporate finance without a licence from the SFC.

Background

On 29 April 2014, C.L. Management and Au were convicted on three holding out charges and fined HK$1.5 million.  Au was also sentenced to a six months’ imprisonment suspended for 18 months.  The Court of First Instance subsequently dismissed their appeals against the convictions.

C.L. Management and Au argued in their CFA leave application that there was an important question of law regarding whether the offence of holding out as carrying on a business of regulated activity without a licence under the Securities and Futures Ordinance requires proof of mental element.

Comment

The CFA held that there was no arguable basis for granting leave to appeal.  It is found that the question of whether a conviction could be sustained without proof of mental element did not arise on the facts of this case.

Readers are reminded that under Section 114(1)(b) and 114(8) of the SFO, a person commits an offence when the person, without reasonable excuse, holds/held out as carrying on a business in a regulated activity without a licence. Readers are also reminder that breaching the SFO Section 114 (1) can result in a maximum penalty of a fine of HK$5 million and imprisonment for 7 years. In the case of a continuing offence, a further fine of HK$100,000 will be imposed on the offender for every day during which the offence continues.

For a copy of the determination statement, please refer to:

http://legalref.judiciary.gov.hk/lrs/common/ju/ju_frame.jsp?DIS=106745&currpage=T

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR120

 

6. SFC bans Derek Ong for 10 years

On 17 November 2016, the SFC has prohibited Mr Derek Ong, a former representative of Deutsche Securities Asia Limited, from re-entering the industry for 10 years from 17 November 2016 to 16 November 2026 for conspiring to manipulate the Korean Composite Stock Price Index 200 (“KOSPI200”) in November 2010.

Background

In February 2011, the Securities and Futures Commission in Korea took enforcement action against Deutsche Securities Korea Co. (“DSK”) for market manipulation through the exploitation of spot-futures and the setting up of speculative derivative position that benefited from the price fall of KOSPI200 during the closing auction period on 11 November 2010.

Ong was the managing director in charge of the Absolute Strategy Group (“ASG”), a subdivision of Global Market Equity of Deutsche Bank AG, for Asian region except Japan, in Hong Kong.

Around September 2010, ASG was brought to the attention that it should unwind its position in light of the balance sheet pressure of Deutsche Bank AG. Eventually, Ong decided to unwind the index arbitrage position of about KRW2,442.4 billion worth of constituent stocks of KOSPI200 during the closing auction period on 11 November 2010.

Instead of solely unwinding the index arbitrage position of Korean stocks, ASG put on a speculative derivative position of about KRW2,473.4 billion comprising short position in synthetic futures and long position in put options before the unwinding.

During the final minutes of trading, ASG successively submitted seven sell orders to dispose its holding of Korean stocks. The order prices for the sell orders were 4.5% or 10% lower than the stock prices before the closing auction period. These orders accounted for 90.5% of the total number of shares traded and 92.0% of the total KRW amount traded during the closing 2 auction period on 11 November 2010. As a result, KOSPI200 was driven down by 2.79%.

Traders of Deutsche Bank AG located in Hong Kong were found to have originated the manipulative order instructions.  The manipulation was referred to the prosecution office in Korea to criminally prosecute DSK and the involved traders for violation of the Financial Investment Services and Capital Markets Act.

Following a trial at the Seoul Central District Court, DSK and a Korea-based trader, who executed the manipulative orders, were found guilty of manipulating KOSPI200 for the purpose of making illegal profits for Deutsche Bank AG and DSK.  Deutsche Bank AG and DSK were ordered to forfeit about KRW43,695 million profit derived from the manipulative trades. The traders in Hong Kong were not convicted because of their absence from the trial. However, the Court concluded that the traders in Hong Kong conspired to manipulate KOSPI200. Korean trader were sentenced to five years of imprisonment and fined DSK KRW1.5 billion on 25 January 2016.

Ong was one of the traders in Hong Kong.  He was responsible for the decision to liquidate the holding of Korean stocks, which caused KOSPI200 to fall 2.79%, and to establish an option position to profit from the KOSPI200 fall.  His conduct has cast serious doubts on his fitness and properness to be a licensed person.

Comment

Given that Ong was instrumental to the violation of the manipulation law in Korea, the SFC is of the opinion that he is not a fit and proper person to be licensed.

Readers are reminded that, according to section 7.1.1 in the Fit and Proper Guidelines issued by the SFC, if an individual is convicted of a criminal offence or is the subject of unresolved criminal charges which are of direct relevance to fitness and properness, without proper and detailed explanation, the SFC is not likely to be satisfied that a person is fit and proper.

For a copy of the Statement of Disciplinary Action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR121&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR121

 

7. SFC bans Benedict Ku Ka Tat for one year and fines him HK$150,000 

On 21 November 2016, SFC has prohibited Mr Benedict Ku Ka Tat, a former employee of The Pride Fund Management Limited, from re-entering the industry for one year from 18 November 2016 to 17 November 2017 and fined him HK$150,000 for failings relating to his sale of a fund to a client.

Background

An SFC investigation revealed that when Ku recommended a fund to a client in 2008, he failed to provide her with material information on the commission she would be charged for investing in the fund and his personal benefit from the commission.

In March 2008, Ku introduced his friend, Client H, to the Fund. Unbeknown to the Client H, Ku received HK$93,600 as commission, equivalent to 12 percent of the client’s intended investment of HK$780,000.

Also, the SFC found that Ku has failed to ensure that the Fund was suitable to Client H. Apart from Ku’s informal understanding of Client H’s personal background as a friend, he did not conduct proper “know your client” process, including seeking adequate information from Client H to understand her financial situation, investment experience, investment objectives and risk tolerance.

Apart from Ku’s alleged understanding that Client H had investment experience and could bear higher risks, he did not appear to know Client H’s personal circumstances and financial situation. There was no formal assessment of whether the Fund was suitable to Client H in view of her personal circumstances. There were no documentary records of the rationale of his recommendation of the Fund to Client H, and why he considered the Fund to be suitable to her.

The SFC found that Ku failed to ensure that the fund he recommended was suitable for the client in view of her personal circumstances. Ku failed to conduct proper “know your client” process, including seeking adequate information about the client’s financial situation, investment experience, investment objectives and risk tolerance.

In deciding the penalty, the SFC took into account all relevant circumstances, including that this was a one-off incident.

Comment

Ku has breached multiple sections of the Code of Conduct, including:

  • General Principle 2     (Diligence)
  • General Principle 5     (Information for clients)
  • Paragraph 3.4             (Advice to clients: due skill, care and diligence)
  • Paragraph 5.2             (Know Your Client: Reasonable Advice)

Having considered all the circumstances, the SFC is of the view that Ku is not fit and proper to be a licensed person for the purpose of Section 194 of the SFO. Ku is banned for 1 year and fined for HK$150,000.

For a copy of the Statement of Disciplinary Action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR122&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR122

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8. SFC publicly censures Zheng Dunmu and imposes a cold-shoulder order for breach of the Takeovers Code 

On 22 November 2016, the SFC has publicly censured and imposed a 24-month cold-shoulder order against Zheng Dunmu for breaching the mandatory general offer obligation of the Takeovers Code.

Background

At the relevant time, Zheng was chairman, executive director and a controlling shareholder of Changgang Dunxin Enterprise Company Limited and held a 56.25% interest in Changgang Dunxin indirectly through three companies wholly owned by him. Part of this interest was pledged to a lender as collateral for a loan.

On 23 February 2015, the lender sold the pledged shares, reducing Zheng’s indirect interest in Changgang Dunxin to 46.18%. Shortly after becoming aware of the disposals, Zheng personally acquired 1.01% and 2.97% of Changgang Dunxin on 26 and 27 February 2015 respectively. A mandatory general offer obligation under the Takeovers Code was triggered on 27 February 2015 as Zheng increased his interest in Changgang Dunxin to 50.16%, but no offer was made.

Zheng told the Executive Director of the SFC’s Corporate Finance Division  or his delegate that he was not aware of the mandatory general offer obligation. He accepts that he has breached the Takeovers Code and deprived Changgang Dunxin’s shareholders of the right to receive a general offer for their shares. Zheng agreed to the current disciplinary action against him.

Zheng will be denied direct or indirect access to the Hong Kong securities market for a period of 24 months commencing on 22 November 2016 to 21 November 2018.

Comment

Readers are reminded that under Rule 26.1 (d) of the Takeovers Code, when two or more persons are acting in concert, and they collectively hold not less than 30%, but not more than 50%, of the voting rights of a company, and any one or more of them acquires additional voting rights and such acquisition has the effect of increasing their collective holding of voting rights of the company by more than 2% from the lowest collective percentage holding of such persons in the 12 month period ending on and inclusive of the date of the relevant acquisition, that person shall extend offers, on the basis set out in this Rule 26, to the holders of each class of equity share capital of the company, whether the class carries voting rights or not.

For a copy of the Executive Statement, please refer to:

http://www.sfc.hk/web/EN/files/CF/pdf/Cold-Shoulder/Executive%20decisions%20and%20statement%20(ENG)%2020161122.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR123

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9. SFC proposes to enhance asset management regulation and point-of-sale transparency 

On 23 November, 2016, the SFC launched a three-month consultation on proposals to enhance the regulation of the asset management industry in Hong Kong to better protect investors’ interests and ensure market integrity. 

Background

The SFC formulated the proposals following a review of the major international regulatory developments, and taking into account observations and views of industry stakeholders.

“A robust and responsive regulatory regime is fundamental to the development and growth of an international asset management centre. As part of the SFC’s broader initiative to enhance Hong Kong’s position as a major international asset management centre, it is important to ensure that our regulations are properly benchmarked to evolving international standards,” said Mr Ashley Alder, the SFC’s Chief Executive Officer.

The proposed changes will be made to the SFC’s Fund Manager Code of Conduct (“FMCC”) and the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). Details are set out in the consultation paper.

Comment

The key areas of enhancements under the FMCC are in respect of securities lending and repurchase agreements, custody of fund assets, liquidity risk management, and disclosure of leverage by fund managers.

The proposed changes to the Code of Conduct aim to address the potential conflicts of interest in the sale of investment products and enhance disclosure at the point-of-sale by:

(i) restricting an intermediary from representing itself as “independent” or using any term(s) with a similar inference if the intermediary receives commission or other monetary or non-monetary benefits or it has links or other legal or economic relationships with product issuers which are likely to impair its independence; and

(ii) requiring an intermediary to disclose the range and maximum dollar amount of any monetary benefits received or receivable that are not quantifiable prior to or at the point of sale.

CompliancePlus is currently looking into the consultation paper and would submit a detailed response to the SFC later.

For a copy of the consultation paper, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP5

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR124

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

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