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SFC prosecutes short sellers during rights issue

The SFC has taken action against a group of persons for illegal short selling in respect of a rights issue when they were applying for additional rights and sold into that process without confirmation of those additional rights.  The case highlights the strict view that the SFC has in relation to short sales and ensuring that they are covered.  The SFC website stated:

SFC secures short selling convictions

The Eastern Magistrates Court today fined seven investors a total of $71,000, ranging from $2,000 to $30,000 each, after they had pleaded guilty to 11 charges of illegal short selling shares of Imagi International Holdings Limited (Imagi) in May 2010.

Acting Principal Magistrate Mr. David Dufton also ordered the defendants - Kung Ping Cheung, Chan Ki, Siu Kam Fung, Siu Kam Mei, Siu Hung Keung, Ma Siu Fan and Yau Ka Yiu - to pay the Securities and Futures Commission’s (SFC) investigation costs of $21,820.

The SFC told the court that, on 7 May 2010 and/or 11 May 2010, the defendants placed various orders to sell 31,000 to 16,855,600 shares of Imagi when they did not and could not have reasonable grounds to believe that they had a presently exercisable and unconditional right to sell the shares, thus constituting illegal short selling.

In May 2010, Imagi conducted a rights issue in which all shareholders received four rights for each old share. Each of the rights entitled shareholders to subscribe for one new share. However, not all shareholders exercised their rights to subscribe for the new shares. These non-subscribed new shares became excess rights which other shareholders could apply to subscribe for on top of their own entitlements.

The seven investors subscribed for Imagi excess rights shares and placed orders to sell the amount of shares that they thought they would be allocated or would be able to receive in time for settlement. At the time of short selling Imagi shares, they did not receive the excess rights shares or receive any confirmation as to the time and the quantity of excess rights shares they would receive.

“Taking advantage of a rights issue to sell shares in expectation of an allotment constitutes illegal short selling if the investor has no presently exercisable and unconditional right to sell the shares. It is also an abuse of the rights issue and the excess rights process,” Mr Mark Steward, the SFC’s Executive Director of Enforcement said.

“This kind of arbitrage carries all the risks of naked short selling. This case should send a clear message that this practice is illegal,” he added.

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