Last week The Eastern Magistracy today sentenced Mr Pablo Chan Pak Hoe, who was earlier convicted of insider dealing in a proposed takeover, to serve 240 hours of community service. Chan was also ordered to pay the SFC investigation costs totalling $44,478.
Magistrate Anthony Yuen Wai Ming (who recently put Amina Mariam Bokhary on one year's probation with respect to her third conviction for assaulting a police officer) had earlier found Chan guilty of one count of insider dealing in the shares of Universe International Holdings Ltd between 2 May 2008 and 19 June 2008 when he acted as a representative of the controlling shareholder in a proposed acquisition.
SFC had informed the Magistrate that Chan made a profit in the order of $120,000 when he sold the shares following the announcement of the acquisition. Under the community service order, Chan does not have to repay or disgorge any profit from his insider dealing and is able to retain it.
SFC is seeking a review of this sentencing decision.
Jack's comment: Compared with previous cases of insider dealing, the sentence in this case was really "exceptional"...no imprisonment, and even no disgorgement of profit. I am not informed that the defendant in this case has also suffered from bipolar disorder!
Wednesday, August 25, 2010
Wednesday, August 18, 2010
Morgan Stanley Breached the Research Rules Again
Recently FINRA censured and fined Morgan Stanley & Co., Inc. $800,000 for failing to make public disclosures required by FINRA's rules governing research analyst conflicts of interest. The firm also failed to comply with a key provision of the 2003 Research Analyst Settlement by failing to disclose the availability of independent research in customer account statements.
In addition to the censure and fine, Morgan Stanley must review a sample of its research reports and certify to FINRA that they comply with FINRA's research analyst conflict-of-interest rules. These reviews and certifications must take place every six months for two years.
FINRA found that from April 2006 to June 2010, Morgan Stanley issued equity research reports that failed to disclose accurate information about the relationships Morgan Stanley, or its analysts, had with companies covered in its research reports. Overall, these inaccuracies resulted in approximately 6,836 deficient disclosures in about 6,632 equity research reports and 84 public appearances by research analysts. Among the deficient disclosures were:
In determining the appropriate sanctions in this matter, FINRA considered Morgan Stanley's self-review and self-reporting of some of its disclosure violations and remedial steps taken by the firm, as well as a prior FINRA settlement in 2005 that found the firm violated FINRA's research analyst disclosure rules.In settling this matter, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Jack's comment: The credibility problem of research analysts has not fundamentally changed since the burst of the IT bubble. The financial penality is just a piece of cake to a giant investment bank.
In addition to the censure and fine, Morgan Stanley must review a sample of its research reports and certify to FINRA that they comply with FINRA's research analyst conflict-of-interest rules. These reviews and certifications must take place every six months for two years.
FINRA found that from April 2006 to June 2010, Morgan Stanley issued equity research reports that failed to disclose accurate information about the relationships Morgan Stanley, or its analysts, had with companies covered in its research reports. Overall, these inaccuracies resulted in approximately 6,836 deficient disclosures in about 6,632 equity research reports and 84 public appearances by research analysts. Among the deficient disclosures were:
- Securities holdings of an analyst, or a member of the analyst's household, in a subject company;
- Morgan Stanley's receipt of investment banking and non-investment banking revenue from subject companies;
- Morgan Stanley's role as a manager, or co-manager, of a public offering of securities for subject companies;
- Morgan Stanley's role as a market maker for certain subject companies' securities; and
- Price charts for securities covered in equity research reports and the valuation method used to support published price targets.
In determining the appropriate sanctions in this matter, FINRA considered Morgan Stanley's self-review and self-reporting of some of its disclosure violations and remedial steps taken by the firm, as well as a prior FINRA settlement in 2005 that found the firm violated FINRA's research analyst disclosure rules.In settling this matter, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Jack's comment: The credibility problem of research analysts has not fundamentally changed since the burst of the IT bubble. The financial penality is just a piece of cake to a giant investment bank.
Wednesday, August 11, 2010
Introducing Non-SFC Authorised Fund to Clients
SFC has just suspended the licence of Ms Kou Sao Peng for three months from 4 August 2010 to 3 November 2010. SFC's investigation found that Kou, while acting as a consultant of TTG (HK) Ltd, an investment adviser, introduced a non-SFC authorised fund to several clients in 2008.
The introduction of the fund preceded the completion of due diligence process by TTG. As such, the fund was not yet approved by TTG for recommendation to clients. In order to sell the fund to her clients, Kou asked her clients to sign a form acknowledging themselves as "execution only" clients who specifically requested to purchase the fund. Kou should not have done so given the fund was actually introduced by her to the clients.
An "execution only" transaction usually means a transaction executed by a firm upon the specific instructions of a client without solicitation or recommendation by the firm, where the firm does not, and is not expected to give investment advice relating to the merits and suitability of the transaction.
Moreover, Kou did not consider TTG’s due diligence on the fund before introducing it to the clients and ignored an instruction from her supervisor to monitor the fund for a longer period before introducing it to any clients.
In suspending Kou, SFC did not consider that Kou had acted dishonestly. Had there been a finding of dishonesty, the SFC would have imposed a more severe sanction.
Jack's comment: In the past, there were many investment consultants who attempted to deny solicitation of clients for purchasing non-authorized products by asking the clients to sign the "execution only" acknowledgement. This case reveals that such arrangement may not work.
The introduction of the fund preceded the completion of due diligence process by TTG. As such, the fund was not yet approved by TTG for recommendation to clients. In order to sell the fund to her clients, Kou asked her clients to sign a form acknowledging themselves as "execution only" clients who specifically requested to purchase the fund. Kou should not have done so given the fund was actually introduced by her to the clients.
An "execution only" transaction usually means a transaction executed by a firm upon the specific instructions of a client without solicitation or recommendation by the firm, where the firm does not, and is not expected to give investment advice relating to the merits and suitability of the transaction.
Moreover, Kou did not consider TTG’s due diligence on the fund before introducing it to the clients and ignored an instruction from her supervisor to monitor the fund for a longer period before introducing it to any clients.
In suspending Kou, SFC did not consider that Kou had acted dishonestly. Had there been a finding of dishonesty, the SFC would have imposed a more severe sanction.
Jack's comment: In the past, there were many investment consultants who attempted to deny solicitation of clients for purchasing non-authorized products by asking the clients to sign the "execution only" acknowledgement. This case reveals that such arrangement may not work.
Wednesday, August 04, 2010
Breach of Money Laundering Checks
This week FSA fined members of the Royal Bank of Scotland Group (RBSG) £5.6m for failing to have adequate systems and controls in place to prevent breaches of UK financial sanctions. FSA's Decision Notice
UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 (the Regulations) require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list.
During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution. However, between 15 December 2007 and 31 December 2008, RBS Plc, NatWest, Ulster Bank and Coutts and Co, which are all members of RBSG, failed to adequately screen both their customers, and the payments they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.
FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. This is the biggest fine imposed by the FSA to date in pursuit of its financial crime objective. It is also the first fine imposed by the FSA under the Regulations.
As RBSG agreed to settle at an early stage of the FSA investigation, it qualified for a 30% reduction in penalty. The FSA would have otherwise imposed a financial penalty of £8m.
Jack's comment: It appears that many financial institutions in the world (especially private banks) have not yet changed their lax attitude towards the compliance with money laundering rules.
UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 (the Regulations) require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list.
During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution. However, between 15 December 2007 and 31 December 2008, RBS Plc, NatWest, Ulster Bank and Coutts and Co, which are all members of RBSG, failed to adequately screen both their customers, and the payments they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.
FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. This is the biggest fine imposed by the FSA to date in pursuit of its financial crime objective. It is also the first fine imposed by the FSA under the Regulations.
As RBSG agreed to settle at an early stage of the FSA investigation, it qualified for a 30% reduction in penalty. The FSA would have otherwise imposed a financial penalty of £8m.
Jack's comment: It appears that many financial institutions in the world (especially private banks) have not yet changed their lax attitude towards the compliance with money laundering rules.
Wednesday, July 28, 2010
Regulation of Life Settlements
Last week US SEC released a staff report recommending that life settlements be clearly defined as securities so that the investors in these transactions are protected under the federal securities laws.
A life settlement is a transaction in which an individual with a life insurance policy sells that policy to another person, who then assumes responsibility for paying the premiums. Typically, the seller no longer wants the policy or can no longer afford to pay the premiums. In exchange, the insured party typically receives a lump sum payment that exceeds the policy's cash surrender value, but is less than the expected payout in the event of death.
The staff report by SEC's Life Settlements Task Force, which SEC Chairman Mary Schapiro established in August 2009, notes that the market for life settlements has grown over the past decade, raising questions about its regulation and oversight.
In particular, the report notes that there is inconsistent regulation of participants in the life settlements market, including those who arrange for the buying and selling of policies and those who provide estimates of an insured's life expectancy. In addition, the report notes that investors in individual life settlement transactions, or pools of life settlements, would benefit from the application of baseline standards of conduct to market participants.
In the report, the staff outlines the Task Force's findings about the life settlements market and recommends ways to improve market practices and regulatory oversight. It recommends that the Commission should:
Amending the federal securities laws to define life settlements as securities could have several benefits:
A life settlement is a transaction in which an individual with a life insurance policy sells that policy to another person, who then assumes responsibility for paying the premiums. Typically, the seller no longer wants the policy or can no longer afford to pay the premiums. In exchange, the insured party typically receives a lump sum payment that exceeds the policy's cash surrender value, but is less than the expected payout in the event of death.
The staff report by SEC's Life Settlements Task Force, which SEC Chairman Mary Schapiro established in August 2009, notes that the market for life settlements has grown over the past decade, raising questions about its regulation and oversight.
In particular, the report notes that there is inconsistent regulation of participants in the life settlements market, including those who arrange for the buying and selling of policies and those who provide estimates of an insured's life expectancy. In addition, the report notes that investors in individual life settlement transactions, or pools of life settlements, would benefit from the application of baseline standards of conduct to market participants.
In the report, the staff outlines the Task Force's findings about the life settlements market and recommends ways to improve market practices and regulatory oversight. It recommends that the Commission should:
- Consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlements as securities.
- Instruct the staff to continue to monitor that legal standards of conduct are being met by brokers and providers.
- Instruct the staff to monitor for the development of a life settlement securitization market.
- Encourage Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters.
Amending the federal securities laws to define life settlements as securities could have several benefits:
- The amendment would clarify the status of life settlements under the federal securities laws and provide for a more consistent treatment of life settlements under both federal and state securities laws.
- The amendment would bring intermediaries in the life settlement market within the regulatory framework of SEC and FINRA. This would subject them to regulatory requirements designed to protect investors from abusive practices and to promote business conduct that facilitates fair, orderly and efficient markets.
- The amendment would give SEC and FINRA clear authority to police the life settlements market, which could lead to early detection of abuses and help deter fraud.
Wednesday, July 21, 2010
Responsible Lending
Last week UK FSA has today outlined proposals to ensure all mortgages are carefully assessed to make sure borrowers can afford them.
Reflecting FSA's enhanced consumer protection strategy and intensive day-to-day supervision, the proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control.
Some of the key proposals include:
FSA found that:
Jack's comment: While FSA is enforceing responsible lending, it may have failed to ensure responsible borrowing.
Reflecting FSA's enhanced consumer protection strategy and intensive day-to-day supervision, the proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control.
Some of the key proposals include:
- Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
- Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
- Extra protection for vulnerable customers with a credit-impaired history.
FSA found that:
- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;
- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;
- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;
- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;
- Borrowers with a credit-impaired history are particularly vulnerable.
Jack's comment: While FSA is enforceing responsible lending, it may have failed to ensure responsible borrowing.
Wednesday, July 14, 2010
Manipulating Stock Price Downward to Benefit Hedge Fund Client
A FINRA hearing panel has permanently barred a former Deutsche Bank broker from the securities industry for manipulating the price of Monogram Biosciences (MGRM) stock in an effort to enrich a hedge fund client, himself and his family.
The panel found that Edward S. Brokaw, who worked in the Greenwich, CT branch office of Deutsche Bank Securities, engaged in a pattern of trading designed deliberately to drive the value of MGRM stock down and, in turn, drive up the value of contingent value rights (CVRs) on that stock. Included in the evidence against Brokaw were tape recordings of his phone calls to his firm's trading desk to place sell orders.
The MGRM CVRs were created and issued in December 2004, in connection with the merger of two firms to form MGRM. The CVRs were to be valued during a 15-day pricing period scheduled for 18 months after the merger – beginning on May 19, 2006, and ending on June 9, 2006.
The value of the CVRs was to be determined by the volume weighted average price (VWAP) of MGRM shares trading during that 15-day period. At the end of the pricing period, CVR holders were to receive a payment from MGRM, most or all of which would be in cash. If the final VWAP was at or above $2.90, the CVRs would be worthless. But if the final VWAP was below $2.90, CVR holders would receive a penny-for-penny payment for the amount below $2.90, down to $2.02. The maximum of $.88 per CVR would be paid if the final MGRM VWAP was at or below $2.02.
Brokaw's hedge fund client held approximately 18.5 million CVRs – nearly 30% of the 64.8 million MGRM CVRs outstanding. For every penny the final VWAP dropped below $2.90, the value of the hedge fund's CVRs increased by $185,000. If the maximum payout of $.88 per CVR were achieved, the hedge fund would receive approximately $16 million. Brokaw and his family owned 217,000 of the CVRs, with a potential maximum payout of $188,000.
The hedge fund owned 3 million shares of MGRM and told Brokaw that it wanted to sell off all of those shares during the pricing period. Prior to market open on the first day of the pricing period, the hedge fund placed an order with Brokaw to sell 50,000 MGRM shares close to the open and another 50,000 shares close to the close. In a tape-recorded phone call that morning, Brokaw told a Deutsche Bank sales trader, "Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000." According to the panel decision, the sales lasted little more than a minute – and MGRM shares dropped from $2.06 to $1.94.
The panel decision quotes another phone call from Brokaw to the sales trader that afternoon, in which he explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close, saying, "Just so you know what the target price is … So yeah, understand the game that's being played for the next 15 days."
The hedge fund's orders and Brokaw's aggressive placement of those sell orders continued for three trading days. But when Deutsche Bank's compliance personnel reviewed those orders, the firm decided it would no longer execute MGRM sales for the hedge fund's account. Deutsche Bank first suspended, then terminated Brokaw based on his MGRM sales orders for the hedge fund.
The hearing panel concluded that "the objective of the selling strategy was to drive down the price of MGRM shares rather than to obtain the best price … (Brokaw) placed the orders to artificially depress the price of MGRM to impact the pricing of the CVRs." The panel noted that for every penny MGRM stock dropped, the hedge fund lost $29,000 in value on its shares but gained more than $180,000 in value on its CVRs.
The panel also found that Brokaw violated Deutsche Bank's policy requiring the individual accepting a client order to create an order ticket "immediately upon receipt of an order." Instead, Brokaw's sales assistant completed one "booking ticket" each day, each showing a single 100,000-share order to sell, each with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw – thus circumventing automatic branch office compliance review of the orders.
Unless the hearing panel's decision is appealed, its ruling will resolve charges filed in a FINRA complaint against Brokaw filed in December 2008.
Jack's comment: Actually the design of CVR motivated this kind of "arbitrage" activities, but were incidentally regarded as "market manipulation".
The panel found that Edward S. Brokaw, who worked in the Greenwich, CT branch office of Deutsche Bank Securities, engaged in a pattern of trading designed deliberately to drive the value of MGRM stock down and, in turn, drive up the value of contingent value rights (CVRs) on that stock. Included in the evidence against Brokaw were tape recordings of his phone calls to his firm's trading desk to place sell orders.
The MGRM CVRs were created and issued in December 2004, in connection with the merger of two firms to form MGRM. The CVRs were to be valued during a 15-day pricing period scheduled for 18 months after the merger – beginning on May 19, 2006, and ending on June 9, 2006.
The value of the CVRs was to be determined by the volume weighted average price (VWAP) of MGRM shares trading during that 15-day period. At the end of the pricing period, CVR holders were to receive a payment from MGRM, most or all of which would be in cash. If the final VWAP was at or above $2.90, the CVRs would be worthless. But if the final VWAP was below $2.90, CVR holders would receive a penny-for-penny payment for the amount below $2.90, down to $2.02. The maximum of $.88 per CVR would be paid if the final MGRM VWAP was at or below $2.02.
Brokaw's hedge fund client held approximately 18.5 million CVRs – nearly 30% of the 64.8 million MGRM CVRs outstanding. For every penny the final VWAP dropped below $2.90, the value of the hedge fund's CVRs increased by $185,000. If the maximum payout of $.88 per CVR were achieved, the hedge fund would receive approximately $16 million. Brokaw and his family owned 217,000 of the CVRs, with a potential maximum payout of $188,000.
The hedge fund owned 3 million shares of MGRM and told Brokaw that it wanted to sell off all of those shares during the pricing period. Prior to market open on the first day of the pricing period, the hedge fund placed an order with Brokaw to sell 50,000 MGRM shares close to the open and another 50,000 shares close to the close. In a tape-recorded phone call that morning, Brokaw told a Deutsche Bank sales trader, "Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000." According to the panel decision, the sales lasted little more than a minute – and MGRM shares dropped from $2.06 to $1.94.
The panel decision quotes another phone call from Brokaw to the sales trader that afternoon, in which he explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close, saying, "Just so you know what the target price is … So yeah, understand the game that's being played for the next 15 days."
The hedge fund's orders and Brokaw's aggressive placement of those sell orders continued for three trading days. But when Deutsche Bank's compliance personnel reviewed those orders, the firm decided it would no longer execute MGRM sales for the hedge fund's account. Deutsche Bank first suspended, then terminated Brokaw based on his MGRM sales orders for the hedge fund.
The hearing panel concluded that "the objective of the selling strategy was to drive down the price of MGRM shares rather than to obtain the best price … (Brokaw) placed the orders to artificially depress the price of MGRM to impact the pricing of the CVRs." The panel noted that for every penny MGRM stock dropped, the hedge fund lost $29,000 in value on its shares but gained more than $180,000 in value on its CVRs.
The panel also found that Brokaw violated Deutsche Bank's policy requiring the individual accepting a client order to create an order ticket "immediately upon receipt of an order." Instead, Brokaw's sales assistant completed one "booking ticket" each day, each showing a single 100,000-share order to sell, each with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw – thus circumventing automatic branch office compliance review of the orders.
Unless the hearing panel's decision is appealed, its ruling will resolve charges filed in a FINRA complaint against Brokaw filed in December 2008.
Jack's comment: Actually the design of CVR motivated this kind of "arbitrage" activities, but were incidentally regarded as "market manipulation".
Subscribe to:
Posts (Atom)