Market Manipulation Convictions for 2 warrant traders.

On 7 May the SFC reported that the District Court had found Mr Patrick Fu Kor Kuen and Mr Francis Lee Shu Yuen guilty of manipulating the market in various listed derivative warrants issued by Macquarie Bank Ltd (Macquarie Bank) between January 2004 and January 2005.

Fu and Lee were convicted in relation to 40 counts of market manipulation under section 295 of the Securities and Futures Ordinance.

The SFC alleged that Fu and Lee, through accounts at two brokerages, traded between themselves in a pre-determined manner in approximately the same quantities and prices in a repetitive fashion.

The trading was in effect not genuine trading, but a “ping pong” game with the result that the turnover for the Macquarie-issued warrants in question was falsely inflated by 80% or over $450 million in value. As a result, potential investors were misled into thinking these warrants were heavily traded by genuine buyers and sellers when in fact the reverse was the position.

The SFC also alleged Fu and Lee received commission rebates for their trading which was offered by Macquarie Equities (Asia) Ltd (Macquarie Equities). The commission rebate had the effect of reducing transaction costs for investors. The high volume of trading by Fu and Lee meant commission rebates they earned from Macquarie Equities exceeded the transaction costs they incurred in trading, enabling them to earn a net profit of approximately $1 million.

The District Court found that Fu and Lee traded to receive the commission rebates but they also did so to create the appearance of an active market as this would be to their advantage when they came to exit the market.