Unfair Treatment to Fund Clients

It is reasonably expected that retail banks in Hong Kong would experience a tough year when facing regulatory investigations of their investment product selling activities. Being the first case against a bank in 2009, yesterday SFC issued a reprimand to Standard Chartered Bank (Hong Kong) Ltd (SCB) for failing to act in the best interests of its clients and to exercise due skill, care and diligence to reasonably ensure that its clients who invested in the mutual funds from two fund houses were treated fairly.

The decision follows HKMA's investigation into SCB's mutual funds distribution and dealing operation between May 2001 and Sep 2003 (so long ago?). HKMA referred its findings to the SFC on 10 Jan 2008 for further action. The investigation centred on concerns that SCB gave preferential treatment to one client, Stone Castle Ltd (Stone Castle), over SCB's other clients investing in the mutual funds from two fund houses.

Stone Castle Ltd was a Cayman Island vehicle of Millennium International Ltd, which was owned by a US based hedge fund group, Millennium Partners. In Oct 2003, Steven B. Markovitz, a director and authorized signatory of Stone Castle, pleaded guilty to a charge of late trading of mutual funds in New York. In Dec 2005, Millennium settled with US SEC for abusive trading strategies. SCB was not an implicated party in the prosecution of Markovitz.

SCB allowed Stone Castle to get same day pricing for switching in and out of the relevant mutual funds. The same day pricing arrangement was not made known nor available to other clients of SCB who received next day pricing. The timing advantage given to Stone Castle was open to abuse and was potentially prejudicial to SCB's other clients because it might enable Stone Castle to trade ahead of those clients at better prices.

SCB has agreed with SFC to make payments to the eligible SCB clients who invested in the relevant funds and did not receive the same treatment SCB gave to Stone Castle. In entering into this agreement, SCB does not accept that it has done anything wrong and is making the payments voluntarily. Under the payment scheme, about 1,260 SCB clients who invested in the relevant funds will each be eligible to receive a total payment ranging between US$0.1 and US$12,739 plus interest, making a total amount available under the scheme of about US$320,000 plus interest.

In deciding on the appropriate action to take against and the resolution with SCB, SFC took into account the mitigating factors that SCB self reported the matter to HKMA and co-operated fully with both HKMA and SFC in agreeing to make these payments to clients.

Relative to the Lehman Brothers incident, this case was not very significiant in terms of the amount of client losses. But it is hardly acceptable that SCB had not done anything wrong (who facilitated Stone Castle's late trading?).