Suspected Ramp and Dump Scams

This year SFC has put substantial efforts to combat ramp and dump scams involving market manipulation of Hong Kong listed shares.  Today it issued a circular to remind intermediaries of their existing obligations under para. 12.5(f) of the Code of Conduct to report suspected market misconduct suspected of their clients to SFC timely manner.

Most importantly, this circular provides a non-exhaustive illustrative list of red flags may indicate a potential ramp and dump scam:

• Clients whose transaction amounts are generally incommensurate with their reported profiles. For example, a client, who is unemployed with no significant previous trading experience and has limited reported assets, conducts a large volume of trading in a stock in a short period of time;
• Clients who regularly acquire shares through bought and sold notes or on a free-of-payment basis or who receive large third-party deposits in their accounts;
• Clients who bought shares on a delayed settlement basis, following which the share price rose substantially during the delayed settlement period, and then gave instructions before the payment date to sell these shares;
• Clients who bought shares in a particular stock towards the end of the trading day in a way that had the effect of substantially raising the closing price on a number of days, particularly when the company is a thinly-traded, small-cap stock with a highly concentrated shareholding and it has experienced a sustained price increase which cannot be explained by any corporate or sector-specific news;
• Clients who sold a large volume of shares in a particular company shortly before a collapse of the share price which cannot be explained by any corporate or sector specific news.  It would be particularly suspicious if clients seek to receive the funds immediately following the selling instruction and before the completion of the normal T+2 settlement period;
• A group of clients, some of whom are identified from the trading behavior set out above, traded in the same stock in the same direction, at more or less the same price or at the same time, and exhibit any of the following characteristics:
• they have authorised the same third party to operate their accounts;
• they have effected fund transfers amongst themselves;
• they opened accounts on or around the same day, were served by the same account executive or referred to the intermediary by the same person at account opening; or
• they share the same personal particulars such as telephone numbers or email addresses.

In my compliance practice, I had witnessed most of the above red flags and taken necessary actions against those suspicious clients.  This circular is in fact a summary of good industry practices.