Corrupted Analyst

As announced on 16 Nov 2015, SFC banned Mr Gong Yueyue, a former licensed representative, from re-entering the industry for 15 years following his conviction by the Eastern Magistrates' Court on 25 February 2015 for an offence of bribery.

The Court found that, in Mar 2014, Gong accepted $100,000 for the publication of a research report on a listed company. The target share price proposed by the research report was not an independent and fair assessment of the listed company.

In late 2013, a third party asked Gong to prepare a research report on the listed company. Draft reports were prepared by Gong and after they were shown to the management of the listed company, the third party indicated to Gong that the target share price should be revised upwards. On the day the research report with the revised target share price was published, Gong received $100,000 from the third party.

This analyst was so severely penalised by SFC because he was convicted for bribery.

Mis-selling of Overseas Fund

As announced on 16 Jun 2015, SFC reprimanded and fined Phillip Securities (Hong Kong) Limited $1 million for failings over its sale of a fund to 4 clients. Phillip Securities also agreed to repurchase the fund from the clients at the principal amount less dividends plus interest if the amount had been invested in a 12-month fixed term deposit over the same period of time.

Phillip Securities sold the American Pegasus Fixed Income Fund – Series II Segregated Portfolio to the four clients around Aug 2004, involving transaction amount of approximately $819,000.

The American Pegasus Fixed Income Fund – Series II Segregated Portfolio is a viatical settlement which invested in senior life settlement insurance policies issued by investment grade insurance companies in the United States. It is not a product authorized by SFC. In June 2010, investors were notified that the fund would be wound up as it did not have sufficient value to continue to pay life insurance policy premiums until the expected maturity of the life settlement policies held by it. The fund was liquidated in Jul 2011 and the clients have not been able to recover their investment.

Phillip Securities failed to:

• conduct adequate due diligence on the fund before selling it to clients;
• provide adequate training and/or sufficient product information to its sales staff to ensure they fully understand the nature of the fund, the risks involved, and for which types of investors the fund would have been suitable; and
• implement sufficient measures to ensure that its sales staff had assessed the suitability of the fund to clients, and to monitor and review the selling process.

This case illustrates that for mis-selling of only one fund to just a few clients, involving a non-material total amount, more than 10 years ago, SFC would still take disciplinary action against the firm. I guess in this case the affected clients of Phillip Securities had lodged their complaints to SFC.

Dark Pool No Longer for Individual Investors

On 15 May 2015, SFC released consultation conclusions on proposals to enhance and unify the regulatory regime for alternative liquidity pools (ALPs). ALPs are commonly known as "dark pools". Unlike “lit” trading venues, they do not provide for pre-trade price and volume transparency.

Highlights of the enhanced regime include:

• no individual investors (including individual professional investors and their wholly owned investment holding corporations) will be allowed to use ALPs;
• client facilitation orders will be treated as proprietary orders, which will have a lower execution priority in ALPs than agency orders; and
• there will be no mandatory "opt-in" requirement before client orders can be routed to ALPs, but ALP operators should permit their clients to opt out of having their orders transacted in ALPs. [This requirement is obviously originated from the previous disciplinary action against HSBC Securities.]

The new regime, which involves amendments to the Code of Conduct, will come into effect on 1 Dec 2015. This is a new game plan.

Unlicensed Advising by Holding Courses

As announced by SFC on 11 May 2015, the Eastern Magistrates Court convicted Hong Kong Game Theory Association Limited and Mr Sze Ching Lok, its sole director and shareholder, of advising on futures contracts without a license following a 10 day trial. Sze was sentenced to one month’s imprisonment suspended for two years, while Hong Kong Game Theory was fined $7,000.

Between July and August 2010, Sze ran courses via Hong Kong Game Theory on trading in Hang Seng Index futures contracts in which real time investment advice was provided to attendees as to when and at what price to trade the futures contracts. This constituted advising on futures contracts, a regulated activity under the SFO, but both Hong Kong Game Theory and Sze were not licensed to do so.

Hong Kong Game Theory and Sze were acquitted of another two counts of unlicensed dealing in securities as the Magistrate gave the defendants the benefit of the doubt that Sze and the investor involved might have worked as partners in trading the stock options concerned.

Holding of investment courses in general is not prohibited by the SFO, but this is another story if the course is giving advice on how to invest in particular products.

Subsequent update on 29 Jun 2017:

• The Court of First Instance dismissed the appeal of Hong Kong Game Theory and Sze against their convictions for carrying on a business in advising on futures contracts without a licence.
• In dismissing the appeal, Deputy High Court Judge C P Pang ruled that there are no merits in any of the grounds advanced on behalf of Hong Kong Game Theory and Sze and their convictions are not unsafe nor unsatisfactory.
• While the Court also dismissed Hong Kong Game Theory’s appeal on sentence, holding that a fine of $7,000 is not manifestly excessive, it allowed Sze’s appeal against his suspended imprisonment sentence and replaced it with a fine of $5,000.

Improper Trading Arrangement

As announced on 25 Feb 2015, SFC banned Ms Katherina Lo Ka Shun from re-entering the industry for 2 years.

Lo sold 30 million shares in Grand Peace Group Holdings Limited held by her and her daughter on a pre-arranged basis. The transaction was executed on market at prices which Lo knew that they were not the price she privately agreed with the purchaser. The actual terms Lo agreed to dispose the shares included a cash discount payable to the purchaser.

There was no reasonable explanation for the payment of the cash discount and for such a transaction being executed on-market. On-market transactions should reflect what has actually been agreed between the parties.

Transactions with artificially inflated prices and secret discounts are prevailing in many markets (esp. property market). Unfortunately, they are not so regulated like securities market.

Improper Activities in Principal Trading Books

As announced on 12 Jan 2015, SFC banned Mr Jagjit Singh Dhillon, a former trader at Credit Suisse Securities (Hong Kong) Limited and Credit Suisse (Hong Kong) Limited (collectively Credit Suisse), from re-entering the industry for life over improper activities in two principal trading books for which he had responsibility.

SFC referred the matter to the police in June 2012. Dhillon was arrested by the police and holding charges were laid against him. The holding charges were withdrawn in May 2013 due to lack of co-operation from key witnesses and Dhillon left Hong Kong immediately!

Dhillon, who was responsible for trading equity derivatives, took various steps to cover up the losses and the real level of risk exposure in his trading books between 8 and 17 May 2012, including booking fictitious trades and entering incorrect market data in the trading books.

The SDA of this case disclosed the following details:

Failure to update market prices or entering incorrect market prices

• In several instances, Dhillon did not enter or update market prices, or entered incorrect market prices, in the System for his trading books. As a result, outdated or incorrect market prices were used to calculate the P&L position of his trading books, causing a misstatement in the P&L position of such trading books.

Booking of fictitious trades and subsequent cancellations

• Dhillon entered a number of fictitious trades for listed futures and options in his trading books which he subsequently cancelled before the settlement day in order to disguise the level of equity market risk exposure and mask daily losses for his trading books.

Transferring profits from other traders' books into Dhillon's trading books

• Dhillon booked a number of transactions in his trading books and in trading books managed by other traders in an attempt to transfer profits from those trading books to his own.

Dhillon's conduct led to an overstatement in the level of profits and an understatement in the level of risk exposure in his trading books, resulting in Credit Suisse having to make negative adjustments of USD5.4 million to the cumulative monthly profit and loss figures for its trading books on 18 May 2012, and recalculate the level of risk exposure recorded in its risk management systems.

Dhillon also provided his supervisors with false information when they first became suspicious of the activities in his trading books.

Whenever a rogue trader has incurred a big boss for his employer, the regulator would no doubt question how robust the firm's risk control mechanism is.