In mid-2016, Wong Kwun Shing, Law’s colleague at Convoy Asset Management Limited (CAML), introduced to Law a scheme operated by certain unknown manipulators to offload the shares of a GEM listed company to retail investors who were willing to hold onto the same for one to three months in return for a cash rebate of 12% to 15% of the transaction value.
Between June and July 2016, Law solicited and arranged for the clients to buy the shares from the manipulators. Law represented that he had met the manipulators to discuss the plan to push up the share price, but in fact he neither knew nor had direct contact with the manipulators. The clients agreed to buy and hold the shares until Law gave them permission to sell.
Wong would agree the date, time, quantity and price of each transaction with the manipulators in advance and inform Law of the same. At the agreed date and time, the manipulators would place an ask order within one to two spreads of the prevailing nominal price. Upon receiving Wong’s confirmation, Law would instruct the client to place a corresponding bid order. After the transaction was completed, Wong would pay the cash rebate collected from the manipulators to Law for onward distribution to the client.
Before the clients were allowed to dispose of the shares, the share price of the company collapsed and they suffered substantial losses.
Law admitted that he received a "referral fee" from Wong / the manipulators for soliciting the clients to participate in the scheme, which was calculated on the basis of the value of the shares the clients purchased. He did not disclose to the clients his financial interest in the transactions.
Law repeatedly gave reckless advice to some of the clients in connection with their investment in the shares, e.g.
- He represented that the scheme was "100% safe" and riskless, or had a guaranteed return of 12%, without explaining that the clients might suffer losses if the share price were to drop.
- He suggested one of the clients sell all her existing holdings and use the proceeds to invest in the company, without analysing and warning her of the concentration risk.
- He suggested two of the clients make use of the overdraft facilities offered by a brokerage firm to acquire a larger quantity of the shares, without explaining to them the risk of "margin call". Instead, he assured one of them that the brokerage firm would not force sell the shares in his account, and advised the other to ignore the brokerage firm's demand for deposit of additional funds. In the end, both their shares were force sold by the brokerage firm when the share price plummeted.
- When the share price started to fall, he dissuaded the clients from offloading their shares and reassured them that they would recoup their losses or even make a profit by holding onto the shares. As a result, the clients missed the opportunities to mitigate their losses.
