MMT Case Against Sun Hung Kai

This week the talk of the town in the compliance field is the report issued by Market Misconduct Tribunal (MMT) on the case of QPL International Holdings Ltd.

SFC publicly reprimanded Sun Hung Kai Investment Services Ltd (SHKIS) and fined it $4,000,000 for internal control failures that contributed to market misconduct (false trading and price rigging). Following an inquiry into dealing in the shares of QPL in 2003, MMT found on 22 January 2009 that Mr Edmond Chau Chin Hung (a former responsible officer of SHKIS) and Ms Connie Cheung Sau Lin (a former account executive of SHKIS) engaged in false trading and price rigging, contrary to SFO, for the period from 6 May to 10 June 2003.

MMT further found that:

• the misconduct of Chau was attributable to SHKIS of whom he was an executive director and responsible officer, and to Cheeroll Ltd (now renamed Sun Hung Kai Strategic Capital Ltd) for whom Chau was authorised to trade; and
• SHKIS was vicariously liable for the misconduct of Cheung.

On 25 February 2009, MMT made certain orders including recommending that disciplinary action be taken by SFC against SHKIS, Chau and Cheung. SFC found that there were internal control failures at SHKIS that contributed to the market misconduct because:

• despite policies to segregate proprietary trading and client trading, SHKIS gave Chau the authority to conduct both types of trading which gave him the opportunity to misuse information gathered on the client trading side of the business to engage in unlawful activities in a proprietary account;
• at material times, SHKIS allowed Chau and Cheung to place orders in the same dealing room by open "outcry", which was inconsistent with SHKIS' formal policy to physically separate proprietary and client trading functions; and
• SHKIS did not detect Chau and Cheung's misconduct for five weeks until brought to its attention by SFC.

Further details disclosed in MMT's report:

• In October 2002 and February 2003, Chau arranged two placements of QPL's shares on behalf of Sun Hung Kai International Limited to two clients, namely Chinacal Limited and Honest Opportunity Limited, generating total commissions of around $8 million.
• Since 1997, Chau had been authorized to operate the house account of Cheeroll. Between 6 May and 10 June 2003, he made numerous "buy", "cancel" and "reduce" orders for Cheeroll in its account with SHKIS to trade QPL shares. Not a single share was acquired in the course of those orders.
• During the same period, Cheung (direct subordinate of Chau) sold through SHKIS substantial quantities of QPL shares on behalf of Chinacal and Honest Opportunity.
• Since Chau had suggested Chinacal and Honest Opportunity take substantial tranches of QPL shares, he was motivated to "scaffold" in the account of Cheeroll in order to enable them to sell those shares more easily and quickly.

Let's wait and see how SFC would discipline Chau and Cheung as well.