Newsletter – October 2016
- SFC bans William Wong Yick Lok for three years
- SFC bans Chen Chia Hui for life
- SFC seeks compensation and disqualification orders against former and current directors of Freeman FinTech Corporation Limited
- SFC suspends Lo Tsz On for one year
- SFC reprimands and fines FXCM Asia Limited HK$4 million
- SFC reprimands and fines two JP Morgan Entities HK$5.6 million for regulatory breaches
- Market Misconduct Tribunal bans Andrew Left of Citron Research from trading securities in Hong Kong
- Takeover Panel upholds ruling on offer for L&A International
1. SFC bans William Wong Yick Lok for three years
On 3 October 2016, the SFC has prohibited Mr. William Wong Yick Lok (“Wong”), a former employee of Hang Seng Bank Limited (“Hang Seng Bank”), from re-entering the industry for three years from 30 September 2016 to 29 September 2019 following his conviction for forgery.
Background
The Court found that Wong, who was responsible for promoting insurance policy to customers of Hang Seng Bank at the material time, forged a customer’s signatures on an insurance application and a policy cancellation form without the customer’s knowledge.
Wong was sentenced to perform community service of 140 hours at the Fanling Magistrates’ Court on 10 December 2015 after his conviction for two counts of forgery under the Crimes Ordinance.
The affected customer had been compensated by Hang Seng Bank and received a refund of the paid premium of HK$2,054 for the insurance policy.
The case was referred to the SFC by the Hong Kong Monetary Authority.
Comment
The SFC considers that Wong is not a fit and proper person to be licensed or registered to carry on regulated activities as a result of his conviction and a 3-year ban on Wong is imposed.
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 further details, please refer to:
2. SFC bans Chen Chia Hui for life
On 5 October 2016, the SFC has banned Ms. Chen Chia Hui (“Chen”), a former employee of The Hongkong and Shanghai Banking Corporation Limited (“HSBC”), from re-entering the industry for life following her conviction for bribery.
Background
In May 2016, the District Court found that Chen, a relationship manager of HSBC at the material time, accepted a secret commission in the sum of HK$500,000 on 9 February 2013 as compensation for recommending and selling to a HSBC customer an insurance policy issued by a competitor. Chen also did not make it clear to the customer that the insurance policy was not a product of HSBC which was to the detriment of the bank’s interests.
Comments
Bribery is a serious criminal office and it can draw a maximum penalty of 7 years of imprisonment and a fine of HK$500,000 and Chen was sentenced by the District Court on 6 May 2016 to 18 months of imprisonment for contravening sections 9(1)(a) and 12(1) of the Prevention of Bribery Ordinance.
The SFC considers Chen is not a fit and proper person to be licensed or registered to carry on regulated activities as a result of her conviction.
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 Reason of Sentence (Only Traditional Chinese version is available), please refer to:
For further details, please refer to:
3. SFC seeks compensation and disqualification orders against former and current directors of Freeman FinTech Corporation Limited
On 7 October 2016, the SFC has commenced legal proceedings in the Court of First Instance to seek disqualification orders against 10 former and current directors of Freeman FinTech Corporation Limited (“Freeman”), including managing director, Mr. Quincy Hui Kwong Hei (“Hui”), and former non-executive director, Mr. Andrew Liu (“Liu”), for breaching their director duties in Freeman’s acquisition and disposal of a stake in Liu’s Holdings Limited (“Liu’s Holdings”).
The SFC alleges that, as a consequence, Hui and Liu caused Freeman to suffer loss and damage. The SFC is seeking a court order that Hui and Liu pay HK$76,812,543.58 as compensation to Freeman.
Background
The other eight former and current Freeman directors involved in the legal proceedings are: Mr. Lo Kan Sun, Ms. Sue Au Shuk Yee, Mr. Philip Suen Yick Lun, Mr. Scott Allen Phillips, Mr. Agustin V Que, Mr. Roger Thomas Best, Mr. Gary Drew Douglas, and Mr. Peter Temple Whitelam.
The SFC’s action follows its investigation into the acquisition in January 2011 (“Acquisition”) and subsequent disposal in July 2011 (“Disposal”) of a 24.43% interest in Liu’s Holdings by Ambition Union Limited (“Ambition”), a subsidiary of Freeman, which caused a loss of HK$76,812,543.58 to Freeman/Ambition.
The SFC alleges that Liu and Hui caused Freeman to indirectly buy a stake in Liu’s Holdings in disregard of the ability of other Liu family members to object to the purchase. The other Liu family members did object and Freeman could not complete the acquisition and sold the interest back at a loss.
Specifically, the SFC alleges that the 10 directors have:-
- failed to act in good faith and in the best interests of Freeman including a duty to disclose relevant material information to Freeman and its shareholders;
- allowed or caused false or misleading statements in Freeman’s announcements and circulars relating to the Acquisition and Disposal;
- failed to exercise reasonable care, skill and diligence in procuring or allowing Ambition to enter into the Acquisition and/or the Disposal; and
- failed to take steps to pursue Liu and/or others for the loss suffered by Ambition/Freeman.
Furthermore, Liu failed to disclose to Freeman and its shareholders that the Acquisition was opposed by some shareholders of Liu’s Holdings and the Disposal was motivated by self-interest and/or the interest of his parents, rather than the interest of Freeman.
Hui was responsible for discussing and liaising with Liu for the Acquisition and Disposal. He failed to make full and proper inquiries with Liu as to the stance of the other shareholders of Liu’s Holdings before procuring Freeman’s shareholders to approve the Acquisition.
Comments
The legal proceedings were commenced under section 214 of the SFO. Pursuant to 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.
- Order a company to bring proceedings in its own name against any person specified in the order and may make any other order it considers appropriate.
The first hearing of the petition filed by the SFC under section 214 of the SFO will be heard in the Court of First Instance on 24 February 2017.
More evidence and detail will be revealed in the upcoming proceeding of the case. Our newsletter will continue to follow up on any further updates.
For further details, please refer to:
4. SFC suspends Lo Tsz On for one year
On 12 October 2016, the SFC has suspended Mr. Lo Tsz On (“Lo”) for one year from 12 October 2016 to 11 October 2017 following his conviction for fraud.
Background
The Magistrates’ Court found that Lo fraudulently presented three false entertainment claim forms to his then employer, Core Pacific-Yamaichi International (H.K.) Limited (“CPY”), in which he overstated the amount of money he had spent on team meals in 2012 and 2013. This caused CPY to reimburse HK$3,430 more to Lo than he had actually spent.
The case was referred to the SFC by the Independent Commission Against Corruption.
Comments
The SFC considers Lo’s conviction has called into question his fitness and properness as a licensed person.
According to section 7.1.1 in the Fit and Proper Guideline 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.
Readers are reminded that fraud is a form of criminal offense contrary to section 16A of the Theft Ordinance. Individuals who are convicted are subjected to a maximum of 14 years’ imprisonment.
For further details, please refer to:
5. SFC reprimands and fines FXCM Asia Limited HK$4 million
The SFC has reprimanded and fined FXCM Asia Limited (“HK FXCM”) (now known as Rakuten Securities Hong Kong Limited) HK$4 million for regulatory breaches in relation to its order execution practice for foreign exchange (Forex) trading.
Background
An SFC investigation found that from December 2006 to December 2010, HK FXCM and its affiliate kept profits totalling US$1,452,926.69 from favourable price movements in Forex trading that occurred between receipt of client orders and execution of orders, while unfavourable price movements were passed on to clients.
HK FXCM admitted the existence of Asymmetric Treatment of Slippage in the order execution practice of the FXCM Group including HK FXCM during the Relevant Period. HK FXCM acknowledged that when there was a Negative Slippage, the client would receive the worse price, whereas when there was a Positive Slippage, the client would receive the originally requested price. A total of 3,739 accounts of HK FXCM were affected.
The SFC considers that HK FXCM did not treat its clients fairly, and failed to execute their orders on the best available terms and to act in their best interests as required by the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”).
HK FXCM also inaccurately represented to its clients that their orders would be executed at the best available prices when in practice. HK FXCM made representations in its website and email notification to its clients that it maintained a model whereby it sourced Forex pricing from external liquidity providers and that the orders would be executed at the next best market price. HK FXCM’s clients were deprived of receiving benefits of price improvements in relation to their trades.
The SFC further found that HK FXCM did not have proper internal policies and controls in place to ensure its order execution practice effectively complied with all regulatory requirements applicable to a licensed corporation.
The Compliance Manuals of HK FXCM which were effective between the Relevant Period did not have specific provisions governing best execution, client order handling or dealing practice.
In deciding the sanctions, the SFC took into account that HK FXCM:
- co-operated with the SFC in resolving the SFC’s concerns;
- has voluntarily agreed to make full restitution to the affected clients in the amount of US$1,452,926.69;
- is now under new ownership of which 100% shares are held by Rakuten Securities, Inc. in Japan from September 2015 and the failures were attributable to the former management of HK FXCM which has been replaced; and
- has no previous disciplinary record with the SFC.
Comment
HK FXCM has breached multiple paragraphs and General Principles stated in the Code of Conduct:
- General Principle 1 (Honesty and fairness)
- General Principle 2 (Diligence)
- General Principle 3 (Capabilities)
- Paragraph 2.1 (Accurate representations)
- Paragraph 3.2 (Best execution)
- Paragraph 3.10 (Best interests of clients)
- Paragraph 4.3 (Internal control, financial and operational resources)
- Paragraph 12.1 (Compliance: in general)
Readers are reminded that “best execution” and “best interests of clients” are two very important principle as a license corporation or representative. Adequate internal control policies have to be implemented to ensure “best execution” and “best interests” of clients are followed during operation. Readers should also pay attention that statements made on website and in emails must be accurate and executed in accordance to the statements.
For a copy of the Statement of Disciplinary Action, please refer to:
For further details, please refer to:
6. SFC reprimands and fines two JP Morgan Entities HK$5.6 million for regulatory breaches
On 20 October 2016, SFC has reprimanded J.P. Morgan Securities (Asia Pacific) Limited (“JPMSAP”) and JPMorgan Chase Bank, National Association (“JPMCB”), and fined them HK$3 million and HK$2.6 million respectively for regulatory breaches including disclosure failures in research reports and offering offshore listed index options without the required licences.
Background
Failure to disclose JP Morgan’s financial interest in research reports
An SFC investigation revealed that JPMSAP failed to disclose JP Morgan’s financial interests in respect of certain listed issuers covered in its research reports. The failure was caused by deficiencies in JP Morgan’s global securities position reporting system which failed to include stock borrow and options positions in the calculation of positions in relevant securities. The deficiencies were first identified by JP Morgan in the US in October 2013 and brought to JPMSAP’s attention in January 2014.
Despite the SFC’s enquiries, it is unclear precisely when JP Morgan’s system failed to capture stock borrow and options in its calculation of the firm’s financial interests. Given that the macro that failed to include options in the relevant position calculations had been in use since at least 2010, it appears that there might have been deficiencies in JP Morgan’s system since at least 2010.
Also, the standard disclosure clause that should be included at the end of all its equity research reports, irrespective of whether JP Morgan made a market in the relevant securities or whether the research reports involved securities traded or to be traded in Hong Kong did not disclose whether the firm made or would make a market in the securities covered in the research report at all. It merely informed investors the possibility that JP Morgan might be a liquidity provider or market maker in respect of such securities, and that investors could ascertain this fact from the HKEX website.
Offering of offshore index options without Type 2 and/or Type 5 registration
In a separated investigation, the SFC found that during the Relevant Period, JPMCB offered certain Index Options (which the SFC considers to be futures contracts for the purpose of the SFO) to its clients without a Type 2 (dealing in futures contracts) and/or Type 5 (advising on futures contracts) registration. During an internal compliance review in June 2015, JPMCB obtained preliminary advice from external counsel to the effect that the offering of the Index Options to the clients would require a Type 2 and/or Type 5 registration. JPMCB has ceased to offer the Index Options to its clients since
23 July 2015.
JPMCB executed 708 transactions concerning these Index Options for 37 clients involving premium of about US$90 million during the Relevant Period (169 of these transactions were executed for 24 Hong Kong contracting clients).
Delay in reporting breaches to the SFC
JPMSAP and JPMCB did not report the breaches or suspected breaches to the SFC in a timely manner as required under the Code of Conduct. In both instances, JP Morgan self-reported the breaches to the SFC around five months after discovery of the breaches.
In determining this disciplinary action, the SFC took into account that:
- JPMSAP and JPMCB co-operated with the SFC in resolving the SFC’s concerns;
- JP Morgan has taken remedial measures to rectify the deficiencies in its securities position reporting system; and
- JPMCB has stopped offering offshore listed index options to clients.
Comment
JPMSAP has breached multiple sections of the Code of Conduct, including:
- General Principle 7 (Compliance)
- Paragraph 12.1 (Compliance: in general)
- Paragraph 16.5(a) (Disclosure by firms of relevant financial interest)
- Paragraph 16.5(b) (Disclosure by firms of relevant market making activities)
JPMCB has breached the SFO Section 114 (1) for carrying out business in regulated activities without relevant license.
JPMSAP and JPMCB both delayed their notification of the incident to the SFC, therefore both of the entities are in breach of Paragraph 12.5 (Notification to the Commission) of the Code of Conduct.
Readers are reminded that it is required to notify the commission immediately once a material breach is spotted. 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 Statement of Disciplinary Action, please refer to:
For further details, please refer to:
7. Market Misconduct Tribunal bans Andrew Left of Citron Research from trading securities in Hong Kong
On 20 October 2016, The Market Misconduct Tribunal (“MMT”) has ordered that Mr Andrew Left of Citron Research be banned from trading securities in Hong Kong for the maximum period of five years without the leave of the court after finding him culpable of disclosing false or misleading information inducing transactions under the SFO in the publication of a research report on Evergrande Real Estate Group Limited (“Evergrande”) in June 2012.
Background
On 21 June 2012, Left published a report on Citron Research’s website (www.citronresearch.com) that contained false or misleading information about Evergrande. The report stated that Evergrande was insolvent and had consistently presented fraudulent information to the investing public.
The SFC commenced proceeding in the MMT in 2014 against Left.
On 26 August 2016, the MMT has found that Mr Andrew Left of Citron Research disclosed false or misleading information inducing transactions and so engaged in market misconduct under Section 277 of the SFO following proceedings brought by the SFC.
Comment
The MMT has issued a cease and desist order against Left. Left shall not again perpetrate the market misconduct specified in the order.
Left is also ordered to disgorge his profit of HK$1,596,240 from shorting shares of Evergrande and to pay the SFC investigation and legal costs.
Readers are reminded that under section 257(1)(b) of the SFO, a cold shoulder order is an order that the person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, in any way acquire, dispose of or otherwise deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any securities, futures contract, leveraged foreign exchange contract or collective investment scheme for the period (not exceeding five years) specified in the order.
For further details, please refer to:
8. Takeover Panel upholds ruling on offer for L&A International
On 12 October 2016, The Takeovers and Mergers Panel (“Takeovers Panel”) has upheld the ruling of the Takeovers Executive in relation to an offer for the shares of L&A International Holdings Limited.
Background
On 22 July 2016 Favourite Number Limited (“the Offeror”) informed L&A’s board of directors that it intended to make an offer for the shares of L&A with a combination of cash and securities as consideration. It subsequently came to light that in early July a concert party of the offeror had dealt in L&A shares prior to the approach. As a result the Takeovers Executive required the Offeror to match the terms of its offer so that the consideration offered for each L&A share would have a value of at least equal to the highest purchase price paid by the concert party. The offer was publicly announced on 18 August 2016 on this basis.
Subsequently, L&A made an application requesting the Takeovers Executive to rule that the offer did not comply with the Code on Takeovers and Mergers (“Takeovers Code”) and should be altered so that the consideration offered to shareholders reflected the same ratio of cash to securities as contained in the offeror’s earlier private letter to L&A’s board. The Takeovers Executive ruled that the consideration offered already complied with the Takeovers Code as the purchases were made before the terms of the offer had been publicly announced. L&A applied to the panel to review the ruling.
On 22 September 2016 the panel met to consider the matter and upheld the Takeovers Executive’s decision and concluded that there is no basis to alter the offer in the way as requested by L&A. The panel agreed with the Takeovers Executive’s ruling that the requirement to maintain the same ratio of cash to securities as requested by L&A only arises under the Takeovers Code if a concert party has purchased shares after the formal announcement of an offer.
Comment
Readers are reminded that under Rule 24.2 of the Takeovers Code, if an offer involves a combination of cash and securities and further purchases of the offeree company’s shares oblige the Offeror to increase the value of the offer, the Offeror must endeavour, as far as practicable, to effect such increase while maintaining the same ratio of cash to securities as is represented by the offer.
For a copy of the Takeovers Panel’s decision, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR101
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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