Analyst Conflicts of Interest

Since April 2005 SFC has implemented the new Paragraph 16 added to the Code of Conduct in order to address the analyst conflicts of interest problem. Before that, the compliance awareness of certain research analysts was perceived to be quite low.

This week SFC reprimanded and fined two guys from South China Research Ltd, namely Patrick Pong (research analyst) and Anthony Teoh (head of research). It is a rare case for a research head being disciplined.

Pong's Case

• In one case in 2003, Pong purchased securities days before he prepared a BUY report on the same securities, but failed to disclose his interest in the report. This research report was however not initiated by Pong (requested by his boss?).
• In another case in 2003, Pong purchased shares days before South China issued a SELL report on the same shares (i.e. his trading is contrary to the research recommendation).

Teoh's Case

• Teoh subscribed for IPO securities recommended by a South China research report, sponsored by South China Capital Ltd, and co-led by South China Securities Ltd in underwriting the allotment. He sold the securites on their debut trading day.
• Teoh allocated the preparation of a research report to his subordinate who had a pre-existing interest (I guess this subordinate was Patrick Pong).

In the above cases, obviously the analysts had no intention to produce objective research reports. It appeared that the research team had not put in place compliance measures to prohibit staff dealings in black-out period, in quiet period and to the contray of recommendations. I think the head of research should bear the most responsibility in putting his subordinate in conflicts of interest.