Mishandling of Clients' Dividend Entitlements

As announced on 14 Mar 2016, SFC reprimanded Unicorn Securities Company Limited and fined it and its former responsible officer, Mr Chan Hoi Shu, $3 million and $200,000, respectively, relating to failures in handling clients’ money and securities. Chan, who was primarily responsible for the failures of Unicorn Securities in this connection, was also suspended for a period of 15 months.

Between Mar 2011 and Dec 2013, Unicorn Securities mishandled its clients' dividend entitlements of shares of HSBC Holdings PLC by going against clients’ instructions in their choices between cash or scrip dividends (i.e. HSBC shares) when submitting their instructions to HKSCC, and giving the clients' dividends to others.

On 7 occasions, Unicorn Securities chose and received scrip dividends for all clients regardless of the clients’ instructions. After allocating the dividends to clients who elected to receive scrip dividends, Unicorn Securities deposited the remaining scrip dividends into the account of Chan or the account of a client. Chan would then sell these HSBC shares in the market and pay Unicorn Securities an amount equivalent to the clients' cash dividend entitlements for making payments to the clients who chose cash dividends. Chan kept the profit arising from the difference between the amount he received from selling the HSBC shares and the amount he had to pay to the firm.

Separately, Unicorn Securities chose and received cash dividends for all the clients on two occasions. For clients who opted for scrip dividends, Unicorn Securities would give the clients' cash dividends to Chan who would then buy HSBC shares in the market to meet clients' requests for scrip dividend, and he made a profit in the process.

Unicorn Securities had connived in Chan's transfer of client money into his personal account and withdrew securities from a client's account without the necessary written direction from the client.

The conduct of Unicorn Securities demonstrated its failure to put in place adequate and effective internal controls to ensure compliance with relevant regulatory requirements in relation to segregation and proper handling of client assets.

Chan masterminded and involved the firm in the malpractice in handling its clients' dividend entitlements, initiated and directed his staff to act contrary to clients' instructions and to transfer clients' money and securities to his personal accounts and instructed the share withdrawal from the client account without the required written direction.

Chan had acted like an unauthorized portfolio manager to handle clients' dividend entitlements but then stole their profits. What a thief!

Illicit Mark-Up/Down of Execution Prices

As announced on 29 Feb 2016, SFC reprimanded and fined Yuanta Securities (Hong Kong) Company Limited  $4 million for failing to disclose the actual execution price and properly and adequately disclose the financial gains it made whilst handling bond transactions for its clients.

From 1 Jul to 31 Dec 2012, Yuanta Securities, acting as its clients' agent, made approximately $3.1 million in commission by marking-up or marking-down the execution prices in some of the 256 bond transactions for 96 clients without making proper and accurate disclosure to the clients.

After receiving a client’s buy order, Yuanta Securities' financial product team would buy the product through a counterparty and mark-up the trading price before passing it to the sales team which would further mark-up the price before selling it to a client. The same approach was used in executing sell orders by marking down the trading prices.

Whilst some of the clients appeared to be aware of the amount of the commission the sales team earned from the trades, such commission was not always properly disclosed in the trading instruction form and was not mentioned in the daily statements sent to the clients. Furthermore, the clients were charged additional fees by Yuanta Securities without their knowledge and consent since they were not informed of the financial product team’s mark-up/mark-down.

Under para 8.3 of the Code of Conduct, where a securities firm enters into a back-to-back transaction concerning an investment product, it should disclose to the client the trading profit to be made. The trading profit should be disclosed as a percentage ceiling of the investment amount or the dollar equivalent. Secret mark-up/mark-down is definitely an illicit practice.