Analyst Fined for Disclosing Misleading Information

Last week UK FSA fined Christopher Gower £50,000 for making misleading and inaccurate disclosures to the market about Enterprise Inns plc (ETI) to clients via Bloomberg instant messenger, substantially impacting ETI share price.

Gower, a former senior research analyst employed by MF Global Securities Limited and MF Global UK Limited, attended a meeting with the CEO of Punch Taverns plc on 7 May 2008. In the course of the meeting they discussed an application made by ETI to Her Majesty’s Revenue and Customs (HMRC) for approval to convert to a REIT. This discussion concerned solely information which was in the public domain.

Following the meeting, Gower sent a Bloomberg instant message to 14 clients of MF Global, a Bloomberg reporter and MF Global equity salesmen in the following terms:

"*** HOT OFF PRESS*** Just had meeting with CEO of PUNCH TAVERNS. They have heard from HM Revenue & Customs that it is highly likely Enterprise Inns has been granted REIT status and ETI are due to announce this on 13th May at interims. Expect ETI to bounce (was up 10% on previous HMRC news) BUT then fall back as mkt realises it will take time to implement.... MORE on my meeting to follow.... Chris"

This instant message did not accurately reflect the conversation Gower had had. It gave the impression of containing inside information although, in fact, Gower had no such information. The message was misleading and inaccurate. It was rapidly circulated widely in the market and contributed to a substantial increase in the volume of ETI shares traded.

Gower gave no apparent consideration to the consequences to the market of his message. His conduct was careless and fell below proper standards of conduct in the circumstances.

Jack's comment: Pretending to be an insider would not commit an offence of insider dealing, but market abuse.

Promotion of Unauthorized Investment Fund

Investment fund promoter, Ms Kwok Sau Ping, was convicted last week at the Eastern Magistrates Court of issuing documents in relation to a collective investment scheme without the authorization of SFC and not disclosing interests in listed securities on time. Kwok was fined a total of $12,000 and ordered her to pay SFC investigation costs of $ 80,000.

The Court found that on 13 and 20 October 2007, Kwok held a series of public presentations to promote a collective investment scheme called Reliance China Hong Kong Opportunity Fund. Kwok conducted the presentations using Powerpoint slides, which were not authorized by SFC. A total of 120 investors subscribed to the Fund.

Kwok, who controlled the Fund, was deemed to be interested in the Fund's investments which included an indirect interest in 60 million shares of Hong Kong-listed Bel Global Resources Holdings Limited, and she failed to disclose it within three business days.


Jack's comment: Some people may think that only displaying but not distributing Powerpoint slides about an unauthorized investment product would not constitute a breach of SFO. I don't think so, because the document is still "issued" (the term "issue" is broadly defined under S.102 of SFO) as an invitation to the public for inducing investment.

Expert Immunity

Today I read this interesting article published by a law firm about "expert immunity":



Keeping up with the Jones case – will expert immunity survive?

If you have ever acted, currently act, or contemplate acting as an expert for litigants, then you ought to be aware of an interesting case before the English Supreme Court. The pending decision could abolish the long-standing doctrine that provides experts with immunity from suit for almost all work done in relation to litigation proceedings (expert immunity). This extends to oral evidence given at trial and preliminary steps undertaken in connection with giving evidence, such as the creation of expert reports.

The subject case on appeal from the English High Court is Jones v Kaney [2010] EWHC 61 (QB). Justice Blake of the English High Court summarily struck out a negligence claim against an expert witness on the basis that he was bound by the leading English case on point, Stanton v Callaghan (Stanton). Stanton upheld the absolute immunity from suit conferred on witnesses (including experts) with respect to testimony in court or work otherwise intimately related to court proceedings.

Since the Court of Appeal would also be bound by Stanton, Blake J granted the claimant, Mr Jones, a 'leapfrog' certificate for the Supreme Court to decide whether or not to allow an appeal, under s.12(1) of the Administration of Justice Act. The Supreme Court has granted permission, and the appeal will be heard on 11 and 12 January 2011.

Although it seems likely that the ordinary 'witness immunity' will be left unaltered, it is not inconceivable that expert immunity could be removed, particularly in view of:

• attacks on the public policy underpinning the doctrine of expert immunity;
• the fact that these days many experts derive income or indeed make a full-time career acting as an expert witness; and
• the judgment of Lord Hoffman in Arthur JS Hall & Co v Simons (Hall v Simons) which overruled the long standing principle that advocates, whether solicitors or barristers, were immune from suit for things done or omitted in the course of conducting a case in court.

It remains to be seen whether the Supreme Court will take the opportunity on this appeal to revisit the case law and the public policy considerations behind the immunity. If, however, expert immunity is abolished, experts who derive fees advising litigants should pay careful attention. The decision could well reverberate across all common law jurisdictions.

HKMA Securities Enforcement Senior Manager

金融管理局高級經理錢曾珙〔Brian Chin Tsang-kung〕，因被航空公司拒絕登機，一怒之下，打傷國泰航空一名地勤人員，早上在荃灣裁判法院，判簽保守行為三年，以及罰款五千元。


裁判官指被告的教育程度，應該清楚什麼是規矩，應為自己行為感到羞恥。國泰本地職員工會主席劉玉光，滿意裁決，認為被告的行為應受譴責。


金管局說，錢曾珙已就事件通知局方，局方會按既定的人事處理機制跟進事件，但發言人現階段不願評論會否對事主進行處分。

案情指被告今年八月，與三名家人乘搭國泰航機往吉隆坡，但因家人遲到，他們在航機起飛前幾分鐘才抵達閘口，地勤人員拒絕四人登機，被告情緒激動，拍打一名地勤人員，對方後來報警將他拘捕。


Hong Kong still has law and order!


I wonder if this "poor guy" can still work in HKMA.

Good News: Chief Executive Officer to leave SFC

SFC just announced that its Chief Executive Officer, Mr Martin Wheatley will be leaving next summer.

The following are standard BS in the press release...

• Chairman of the SFC, Dr Eddy Fong said: "It has been a great pleasure working with Martin, whose leadership has helped the Commission ride out many challenges and strengthen its position as a globally respected regulator. I am thankful to him and I wish him all the best in his future endeavours."
• "My six years with the SFC – hectic and demanding at times – have been very fruitful. The Commission has taken in its stride the many challenges that confronted the financial markets and regulators and we have been able to adopt a pragmatic and sensible approach in our regulation. I am also encouraged to see the work that we have done in tackling market misconduct," Mr Wheatley said.
• "I am very grateful for the support, dedication and professionalism of our staff who carried out their duties conscientiously under very trying circumstances at times. I would like to thank them for their commitment and hard work and I wish the SFC continuing success," he added.
• Mr Wheatley joined the SFC in June 2005 and was appointed as the Commission’s first Chief Executive Officer in 2006.
• Mr Wheatley is a member of the Standing Committee for Standards Implementation of the Financial Stability Board as well as the International Organisation of Securities Commissions (IOSCO) Technical Committee. He currently chairs the IOSCO Technical Committee Task Force on Short Selling.
• Prior to joining the SFC, Mr Wheatley was Deputy Chief Executive of the London Stock Exchange. He was also Chairman of the FTSE International and sat on the Listing Authority Advisory Committee of the Financial Services Authority of England.

Jack's comment: My Xmas wish is that the key personnel change will lead to a much more robust and fair regulatory culture. There are too many power-abusing and irresponsible officials in the world!

Criminal Procedures Not Applicable to SFC Disciplinary Process

This week SFC announced that the Court of Appeal has allowed SFC's appeal against a decision of the Securities and Futures Appeals Tribunal (SFAT) and decided that criminal procedures are not applicable to SFC disciplinary proceedings.


On 19 March 2010, the SFAT altered SFC's decision to revoke the licence of Asser Li Kwok Keung and ban him for 10 years to a suspension for 18 months for lying to SFC and breaching his undertaking to co-operate. In addition, in its determination, the SFAT equated the obligations of the SFC in disciplinary proceedings with that of a prosecutor in criminal proceedings.


SFC appealed to the Court of Appeal against both the penalty imposed by the SFAT and its analogy drawn between SFC's disciplinary process and criminal procedures.


The Court of Appeal, comprising Madam Justice Kwan JA, Mr Justice Stone and Mr Justice Bharwaney, unanimously allowed the SFC’s appeal and increased the penalty for Li from a suspension of licence for 18 months to a prohibition order for three years.


Jack's comment: Many market practitioners believe that SFC's disciplinary process is a kind of "private punishment" and should be subject to the rigidity of criminal procedures. Unfortunately, the Hong Kong court usually supports SFC, especially when SFC can use taxpayers' monies to extend its power.

Synthetic ETFs

Last week SFC and HKEx a new effort to raise investors' awareness of Exchange Traded Funds (ETFs) that primarily adopt synthetic replication strategy (synthetic ETFs). A traditional ETF (also known as physical ETF) invests in securities that replicate or represent the composition of the index it tracks, and a synthetic ETF uses financial derivative instruments to track index performance.


A manager of an ETF may adopt one or more of the following strategies to achieve the fund's index tracking objective:

1. full replication by investing in a portfolio of securities that replicates the composition of the underlying index;
2. representative sampling by investing in a portfolio of securities featuring a high correlation with the underlying index, but not exactly the same as those in the index; or
3. synthetic replication through the use of financial derivative instruments (such as swaps and performance-linked structured products issued by counterparties) to replicate the index performance. 

Synthetic ETFs' managers have agreed to adopt new measures aimed at helping investors to better differentiate between index tracking strategies of ETFs. The new measures, supported by the SFC, HKEx and the industry following extensive discussions, are in line with ongoing efforts to strengthen protection for investors.


Addition of marker to stock short names of synthetic ETFs


Effective from 22 November, 2010, a marker X will be placed at the beginning of the English and Chinese stock short names of all synthetic ETFs listed on SEHK.


The marker will make synthetic ETFs more visible on the stock pages of HKEx's securities trading system and on the HKEx website and the HKExnews website. The stock short names of traditional ETFs will remain the same.


Annotation of names of synthetic ETFs


Building on the preceding measure, by 16 January 2011, managers of synthetic ETFs will be required to put an asterisk (*) and an annotation in English "(*This is a synthetic ETF)" and in Chinese "(*此基金為一隻合成交易所買賣基金)", as the case may be, right after the name of a synthetic ETF whenever it appears in offering documents and marketing materials for a synthetic ETF issued by the manager or on the manager’s behalf to investors in Hong Kong.


This requirement will also be applicable to all notices and other communications with Hong Kong investors in respect of synthetic ETFs whenever the name of the synthetic ETF is mentioned, including information on the corporate websites for Hong Kong investors run by or on behalf of synthetic ETFs' managers.


Investor education initiatives


SFC will continue its investor education efforts to help investors better understand synthetic ETFs.


HKEx is updating its product education material to explain the purpose of the stock short name marker and the risks of ETFs using synthetic replication.


HKEx will also enhance the HKEx website to highlight disclosure of ETF product features. For example, it will indicate which ones use synthetic replication and which ones do not. This will help investors find ETFs by their product features more easily.


HKEx has enhanced the hyperlinks to ETF websites from the HKEx website to provide easier navigation to ETF websites.


Other measure to enhance transparency of ETFs


To assist managers of ETFs in complying with the ongoing disclosure obligations under the Code on Unit Trusts and Mutual Funds and/or Listing Agreement, SFC and HKEx today jointly issued a circular containing a list of potential events that may trigger such disclosure obligation.


Jack's comment: Retail investors should thank Next Magazine's article published several months ago for reporting the danger of synthetic ETFs. SFC is often working on hindsight when handling products.