HK SFC fines broker for failing to tape calls

The following announcement appeared on the SFC website and shows an more aggressive approach than previously to the issue of brokers properly recording orders from clients.  Broker firms in HK are required to have in place telephone recording systems but some brokers have gotten into a habit of taking orders over their cell phones. 

The SFC announcement was as follows:

Broker disciplined for breaching telephone recording requirement

The Securities and Futures Commission (SFC) has issued a reprimand against Mr Karl Wu Kin Chung, an account executive of Celestial Securities Limited (CSL) , and fined him $40,000 for non-compliance with order recording requirements under the Code of Conduct (Note 1 and 2).

The disciplinary action follows an investigation which found that Wu had been receiving order instructions from a client via his mobile phone and had failed to keep any taped record of the relevant telephone conversations between September and November 2009. The dealing sheets that Wu maintained in relation to the concerned trades did not record the time of receipt of order instructions.

In deciding on the penalty, the SFC took into account that Wu has no previous disciplinary record and his co-operation with the SFC by resolving the disciplinary proceedings.

Order recording is a basic and fundamental requirement expected of licensees and any failure will lead to disciplinary action (Note 3).

End

Notes:
1. Wu is licensed to carry out Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities.
2. Code of Conduct for Persons Licensed by or Registered with the SFC.
3. Please see “Circular to the SFC’s Licensed Intermediaries’’ dated 25 November 2004 for details.

HK SFC takes action against RO for control failures

Showing once again the vicarious nature of liability for Responsible Officers in Hong Kong when supervising their businesses, the SFC has reported on two fines levied against a local broker and one of the Responsible Officers.  The SFC report from their website is as follows:

SFC reprimands and fines Taifair Securities Limited and Kwok Fai

The Securities and Futures Commission (SFC) has issued a reprimand to Taifair Securities Limited (Taifair) and its responsible officer, Mr Kwok Fai. The SFC has also fined them $400,000 and $100,000 respectively (Note 1).

The decision follows an SFC investigation which found that Taifair’s settlement supervisor, who was not licensed with the SFC, had misappropriated clients’ assets (Note 2).

The SFC investigation revealed that Taifair had a number of internal control deficiencies, including:

• insufficient management supervision over daily operations – the settlement supervisor who misappropriated clients’ assets was largely unsupervised, and management did not review a number of important reports concerning Taifair’s daily operations;
• there was no compliance function set up at Taifair;
• there was no comprehensive manual that governed Taifair’s daily operational policies and procedures; and
• weak data protection measures – access control to Taifair’s computer brokerage system (the POP system) was weak, trading data in the POP system was susceptible to manipulation and the audit logs in the POP system could be turned off such that manual modifications of data could be made without any audit trail.

Kwok was a responsible officer of Taifair and oversaw the compliance function at Taifair. In such capacity, Kwok was responsible, but failed to ensure that effective compliance procedures were in place and properly implemented. As such, Kwok should bear responsibility for Taifair’s failure in that regard.

In deciding the sanction, the SFC took into account all the circumstances including:

• Taifair’s failures in primary internal controls are serious;
• Kwok has seriously undervalued the importance of Taifair’s compliance function and internal controls;
• The affected clients did not suffer any loss because Taifair has reimbursed all affected clients and reported the matter to the SFC shortly after the discovery of the misappropriation;
• Taifair and Kwok are remorseful, and Taifair has remediated its internal control failures by adopting the recommendations of an independent accounting firm which conducted a review of its internal controls;
• Taifair and Kwok have co-operated with the SFC; and
• Taifair and Kwok have no previous disciplinary record.

The whereabouts of the settlement supervisor remains unknown. The matter has also been reported to the Police by Taifair.

End

Notes:

1. Taifair is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) regulated activity. Kwok is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and is accredited to Taifair and Taifair Futures Limited. Kwok remains a responsible officer of Taifair.
2. As a result of the same investigation, the SFC has already taken disciplinary action against Mr Peter Tam Man Chuen, an account executive of Taifair. Please see SFC’s press release dated 2 July 2010 for details of the disciplinary action taken by the SFC against Tam, suspending his licence for 18 months.

Former Haeco director to face Insider dealing charges

On 28 June 2011, the SFC reported that it had commenced criminal proceedings against Mr Lam Kwong Yu, a former independent non-executive director of Hong Kong Aircraft Engineering Company Limited (HAECO), for alleged insider dealing in the company’s shares on 4 June 2010.

The SFC alleges that Lam purchased 4,000 shares in the company on 4 June 2010 through an online securities trading account after being told about a proposed deal in which Cathay Pacific Airways Limited, a substantial shareholder of HAECO, would sell its entire stake in the company to Swire Pacific Limited. Lam then sold the shares in the company after the announcement, making a profit of $80,000.

Further details are available here.

Mr Lam Lok Yin sentenced to community service and fined for manipulating Callable Bull Bear Contracts

On 28 June 2011, the SFC reported that Mr Lam Lok Yin to had been sentenced to 120 hours of community service after he pleaded guilty to manipulating four Callable Bull Bear Contracts (CBBCs) during the pre-opening session (POS) between 18 May and 16 July 2009.

Lam was also ordered to pay a total fine of $89,100 and $60,007 investigation costs to the SFC. The fine amounts to the total net profit earned by him in carrying out the manipulation.

An SFC investigation found that, on four occasions between 18 May and 16 July 2009, Lam raised the indicative equilibrium price (IEP) of four CBBCs by artificially placing auction orders and limit orders at escalating prices during the POS.

Further details are available here.

SFC reprimands Sun Hung Kai Investment Services

On 21 June 2011, the SFC reported that it had issued a reprimand to Sun Hung Kai Investment Services Ltd (SHKIS) and fined it $4.5 million for failings relating to its sale of Lehman Brothers related equity-linked notes (ELNs) to its clients between May and August of 2008.

An investigation by the SFC found that SHKIS had failed to:

• perform adequate due diligence on the ELNs before selling them to clients;
• provide adequate training and guidance for its sales staff, which would enable them to fully understand the nature of ELNs, the risks involved in ELNs, and the suitability criteria; and
• disclose material information, including the product terms and conditions and the risks associated with ELNs, to its clients       

Further details are available here.

SFC appeal dismissed in Tsein Case

On 14 June 2011, the SFC reported that the Court of Appeal had dismissed an appeal by the SFC and reaffirmed the decision of the SFAT to ban Mr David Tsien Pak Cheong , a former equity salesman of JP Morgan Securities (Asia Pacific) Ltd (JP Morgan), from re-entering the industry for 10 years.

The SFC had appealed the SFAT’s decision to vary the period in which Tsien was banned from re-entering the securities industry from life to 10 years.

Further details are available here.

SFC issues latest edition of Enforcement Reporter

On 31 May 2011, the SFC announced that the latest edition of its Enforcement Reporter focuses on recent Lehman Brothers (LB)-related products agreements that the SFC has been involved in. To date, the SFC has reached agreements with 25 distributors and non-distributors of such products. It also details the fighting funds that have been set up to recover collateral.

Other areas that the publication examines are recent cases against market manipulators, insider dealing and alternate non-executive director disqualification.

A copy of the publication is available using the link above or on the SFC website.

SFC reprimands and fines Merrill Lynch

On 12 May 2011, the SFC reported that it had issued a reprimand to Merrill Lynch (Asia Pacific) Ltd (Merrill Lynch) and fined it HK$3 million for inadequate systems in relation to the sale of two index-linked notes to 72 clients in 2007.

This decision follows an SFC investigation in which the SFC raised concerns that Merrill Lynch had failed to properly assess the financial situation and investment objectives of over 40 of the 72 customers who invested in the index-linked notes during 2007. The SFC was also concerned that key product information was only provided to clients after they had agreed to invest in the index-linked notes and that Merrill Lynch kept inadequate documentation to explain the rationale behind the advice they had given to their customers.

In addition to the fine, Merrill Lynch has agreed to implement a resolution scheme in which it will make payment to repurchase from customers holding the outstanding index-linked notes and offer top up payments to customers who bought the index-linked notes through Merrill Lynch and redeemed them for less than their principal invested.

Merrill Lynch will also implement an Enhanced Complaint-Handling Procedures (ECHP) to review client complaints regarding its distribution, sale, and provision of investment advice.

Further details are available here

SFC fines HSBC Trinkaus Investment Management Limited

On May 4 2011, the SFC reported that it had resolved its disciplinary action with HSBC Trinkaus Investment Management Limited (HSBC Trinkaus)  in relation to its distribution of equity linked notes (ELNs) . Under the resolution, the SFC reprimands HSBC Trinkaus, fines it $3 million, and partially suspends its licence for two years from 30 April 2011 to 29 April 2013.

The SFC investigation revealed that HSBC Trinkaus did not have adequate procedures to:

• ensure that its recommendations or solicitations made to customers in relation to the ELNs were suitable for and reasonable in all circumstances of each of the customers;
• ensure adequate product due diligence had been conducted on ELNs before making recommendations or solicitations to the customers for them to invest into the ELNs; and
• adequately document the investment advice given, in particular in relation to ELNs, to its customers and the rationale underlying the advice and to provide customers with a copy of the written advice.

Further details are available here.

Mr Mok Kee Tong short selling fine

On 8 July the FSC reported that Mr Mok Kee Tong, a licensed representative of Lehin Securities Limited, had been fined $54,000 after pleading guilty to 18 charges of illegally short selling. Mok was also instructed to pay the SFC investigation costs.

The SFC’s reported that its investigation found that between 3 September 2009 and 11 December 2009, Mok conducted intraday short selling involving 14 stocks traded on The Stock Exchange of Hong Kong Limited when he did not have a presently exercisable and unconditional right to sell them and did not believe or have reasonable grounds to believe that he had such right (thus constituting illegal short selling). Mok made a profit on each of the short selling occasions.

For further information please see Short Selling Fine

SFC bans and fines Ricky Kwan Po Kit

On 5 July the Securities and Futures Commission (SFC) reported that it had banned Mr Ricky Kwan Po Kit, from re-entering the industry for five years from 2 July 2010 to 1 July 2015 and fined him $228,000.

The SFC found that Kwan operated a secret account in his brother-in-law’s name without proper disclosure to his employer, with some transactions generating a profit. In doing so, he placed himself in a position of serious conflict in breach of the General Principle 6 (conflicts of interest) of the Code of Conduct.

For further information please see Kwan Banned

SFC fine UBS employees

Continuing a very busy couple of weeks of fines and enforcement reporting the Hong Kong SFC today announced that it was fining three UBS employees in connection with an issue that was previously covered in this blog involving wash trades and a client of Morgan Stanley.

The SFC reported as follows:

The Securities and Futures Commission (SFC) has publicly reprimanded Mr Frank Hu, Ms Peony Ng and Ms Jenny Chang Pui Chun of UBS AG Hong Kong (UBS) and fined them $800,000, $600,000 and $400,000 respectively, for negligence in handling a client’s trade orders (Note 1).

An SFC investigation found that Hu, Ng, and Chang, were negligent in relation to a series of trades that they carried out on behalf of one of their clients at UBS which constituted wash sales and may have misled the market (Note 2).

Both Hu and Ng are executive directors at UBS and Chang is an associate director.

In February 2008, the client, who was facing margin calls from UBS decided to transfer part of his portfolio at UBS (Note 3) to his account at Morgan Stanley Asia Ltd (Morgan Stanley) in order to ease his margin position with UBS.

This could have been achieved through a simple delivery versus payment arrangement, such as by using the Central Clearing and Settlement System. Instead, a series of on-exchange matched sales and purchases (Note 4) was coordinated among Hu, Ng and Chang at UBS and the client’s account executive and her assistants at Morgan Stanley (Note 5) between 28 February and 26 March 2008.

In deciding the penalty for Hu, Ng and Chang, the SFC took into account that the three individuals had not carried out the matched trades with manipulative intent to interfere with the market, that they had sought internal compliance advice at UBS but failed to follow the advice due to misunderstanding, that they had co-operated with the SFC, and that each of them has a clean disciplinary record.

End

Notes:

1. Hu, Ng and Chang are relevant individuals registered with the Hong Kong Monetary Authority. Hu and Chang are authorized to carry out Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities whilst Ng is authorized to carry out Type 1 regulated activities.
2. Wash sales are transactions that do not involve any change in beneficial ownership. In this case, the sell orders of UBS and the buy orders of Morgan Stanley were matched on 82 occasions where there was no change in beneficial ownership of the shares involved.
3. The securities involved in the transfer were Fosun International Ltd (stock code 656), Tiangong International Company Ltd (stock code 826), Centron Telecom International Holding Ltd (stock code 1155), and Kingsoft Corporation Ltd (stock code 3888).
4. Upon receiving the client’s instructions, Chang would input sell orders on The Stock Exchange of Hong Kong. She would then inform the account executives handling the client’s account at Morgan Stanley by telephone immediately of the volume and price of the orders who would then arrange for Morgan Stanley, on behalf of the client, to purchase from the market similar quantity of the same stock at the same prices or at prices lower than UBS’ sell orders.
5. The SFC has also taken disciplinary action against the account executive at Morgan Stanley (See SFC press release dated 17 August 2009).

SFC fine Merrill Lynch

According to the SFC website, the Hong Kong SFC has fined two Merrill Lynch entities at total of HK$3.5m (about US450k) for internal control breaches.

Here is the report:

The Securities and Futures Commission (SFC) has fined Merrill Lynch (Asia Pacific) Limited and Merrill Lynch Futures (Hong Kong) Limited (collectively Merrill Lynch) (Note 1) $3,500,000 for systems and controls failings associated with the mis-marking activities in a trading book.

The SFC’s investigation found that during the period from December 2007 to October 2008, a managing director of Merrill Lynch had mis-marked a trading book in exotics options (Book) by manipulating the volatility marks in the valuation model, and accessed the computer system without authority to alter pricing parameters on various occasions. The mis-marking activities, which did not apply to any other books, resulted in the value of the Book being inflated by approximately US$25 million and caused the actual loss in the Book to be wrongly reported internally.

The SFC found that Merrill Lynch did not have adequate internal controls procedures in place to manage the risks associated with mis-marking, in that:

• there was uncertainty as to supervisory responsibilities over the trader and the Book;
• the price verification mechanism applied to other trading books was not applied to the Book;
• there were inadequate checks and balances over the Book to mitigate operation risks including risks associated with fraud and dishonest activities;
• there was insufficient safeguard over information security and integrity as regards the Book;
• trading and valuation policies were not sufficiently implemented over the Book; and
• senior management failed to adequately manage the risks associated with the Book.

“Licensed corporations must have effective procedures in place to manage risks of trading books. For books that deal in illiquid assets which have low price transparency, more robust measures must be in place. The proper implementation of an effective risk management framework could have enabled Merrill Lynch to detect the mis-marking earlier,” said Mr Mark Steward, the SFC’s Executive Director of Enforcement.

Merrill Lynch accepts that its systems and controls fell short of those expected in respect of the Book.

The SFC accepts that Merrill Lynch’s misconduct was not intentional and Merrill Lynch has taken remedial steps to address the compliance weaknesses. In deciding on the sanctions, the SFC took into account Merrill Lynch’s co-operation in resolving the case.

End

Notes:

1. Merrill Lynch (Asia Pacific) Limited is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 7 (providing automated trading services) regulated activities. Merrill Lynch Futures (Hong Kong) Limited is licensed to carry on Type 2 (dealing in futures contracts) regulated activity under the SFO.

SFC bans Steve Luk Ka Cheung for life

On April 1 the SFC reported that it had banned Mr Steve Luk Ka Cheung from re-entering the industry for life following a Market Misconduct Tribunal determination that Luk had engaged in market misconduct.

The MMT determined that Luk, a former vice-president and fund manager of JF Asset Management Ltd, and two other parties had engaged in insider dealing. The SFC’s Executive Director of Enforcement Mr Mark Steward said, “Insider dealing undermines the fairness and efficiency of the financial market. Following the MMT’s finding, the SFC is exercising its protective jurisdiction by prohibiting Luk from re-entering the market again as an intermediary and threatening market integrity”                                                                                                                  

For further information please use the following link Luk Banned for Life

SFC directs company to take civil action against former directors for losses.

The SFC is making it clear that directors duties mean something. After earlier in the week banning 2 directors for failing to ensure adequate and timely disclosure to shareholders, on 18 March 2010, the SFC announced that it had obtained a court order directing Rontex International Holdings Ltd (Rontex) to bring legal proceedings against three former executive directors for compensation.

This is the first time the SFC has obtained an order in the High Court directing a listed company to commence civil proceedings to seek recovery of compensation for the loss and damage suffered by the company as a result of directors’ misconduct.

Rontex was ordered to commence proceedings within 60 days against its former executive directors, Mr Cheung Keng Ching, Ms Chou Mei and Mr Kevin Lau Ka Man.

The court also granted orders disqualifying Cheung and Chou from being a company director or being involved in the management of any company, without leave of the court, for five years (except for a private company through which they continue to conduct a business). Lau, who consented to the orders, was disqualified for a period of four years.

The breaches centred on four investments entered into by the company or its subsidiaries between 2002 and 2005, resulting in Rontex suffering losses and damages of about $19 million

For further information please see SFC obtains court order to direct listed company to commence proceedings against former directors

Directors Banned for Failing in Disclosure Duty

On 17 March 2010, SFC reported that it had obtained orders in the High Court to disqualify two former executive directors of Warderly International Holdings Ltd (Warderly) for failing to ensure timely disclosure of material information to the company’s shareholders. This is the first time directors have been disqualified for this type of misconduct.

The orders disqualify Ms Ellen Yeung Ying Fong and Mr John Lai Wing Chuen from being directors or being involved in the management of any corporation for five years

Both Yeung and Lai accepted they had breached their duties to Warderly and specifically, they agreed they failed on a number of occasions to ensure Warderly complied with the disclosure requirements under the Listing Rules and to give shareholders all the information they might reasonably expect.

Mark Steward, the SFC’s Executive Director of Enforcement, said “Directors have an obligation to ensure the company reports material information to the investing public on a timely basis. Failure to do so destroys trust and confidence in the market.”

For further information please use the following link Directors Banned for failing in disclosure duty

HK SFC takes action against short seller

The Hong Kong Securities and Futures Commission announced that it had suspended the license of an individual following the placement of naked short sales on the Hong Kong market.  In Hong Kong this practice is illegal.  The annoucement was as follows:

SFC suspends Mak Chi Leung for short selling breaches

The Securities and Futures Commission (SFC) has suspended Mr Mak Chi Leung, a responsible officer of KAB Asia Securities Ltd (Note 1), for six weeks from 17 March 2010 to 27 April 2010 for short selling breaches (Note 2).

An SFC investigation found that Mak placed orders for a client resulting in 100 short selling transactions between June and August 2008. Mak also conducted 23 short selling transactions in his own account during the same period.

The SFC found Mak guilty of misconduct. Mak accepted responsibility for his conduct, which earned him a reduction in penalty from two months to six weeks.

End

Notes:

1. Mak is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
2. The selling of stocks through the Stock Exchange of Hong Kong Ltd is naked short selling unless at the time of the sale, the seller (or his client, if he is an agent) has a presently exercisable and unconditional right to sell the stocks, or believes and has reasonable grounds to believe that he (or his client, as the case may be) has such a right. Unless exempted, naked short selling is prohibited. All the short selling transactions in question were naked short sales.

SFAT Decision in relation to Mr Hung Chi Wah

On 9 March the SFC reported that the Securities and Futures Appeals Tribunal (SFAT) had affirmed its decision to ban Mr Hung Chi Wah from re-entering the industry for life.

In May 2009 the SFC decided to ban Hung from the industry for life for breaching General Principle 1 of the Code of Conduct after finding he had fraudulently persuaded a client to invest and defrauded other clients using fabricated IPO subscriptions. Hung appealed to the SFAT.

The SFAT appeal was heard before The Honourable Mr Justice Saunders on 5 March 2010.

The SFAT affirmed the SFC's decision and stated that Hung's appeal was "utterly devoid of any merit whatsoever" and that "the investing public deserves to be fully protected from people like Mr Hung and the only way that can be done is to ensure that he should never enter this industry again."

For more details please see Hung SFAT Decision

Another sanction in HK for market manipulation

The Hong Kong SFC website reported as follows:

SFC bans Edmond Chau Chin Hung for life

The Securities and Futures Commission (SFC) has publicly reprimanded Mr Edmond Chau Chin Hung, fined him $2 million and prohibited him for life from re-entering the industry for engaging in market misconduct (Note 1).

The disciplinary action follows the Market Misconduct Tribunal’s (MMT) determination that Chau, a former responsible officer of Sun Hung Kai Investment Services Ltd (SHKIS), and three other parties had engaged in market misconduct by false trading and price rigging in the shares of QPL International Holdings Ltd (QPL). The MMT made certain orders against Chau, including recommending that the SFC take disciplinary action against him (Note 2).

During the period from 6 May to 10 June 2003, Chau engaged in scaffolding activities by placing numerous buy orders for QPL shares and subsequently cancelling, reducing these orders or allowing them to lapse in order that two SHKIS clients could sell their holdings of QPL shares more actively and quickly.

Not only was Chau in breach of SHKIS’s internal policies, he also abused his senior position as responsible officer by procuring the assistance of or conniving with his subordinate to conduct these unlawful activities.

When he attended interviews with the SFC during the investigation, he denied having conducted any scaffolding activities or engaged in any market misconduct. However, during the MMT proceedings, he admitted that he had done so.

In deciding upon the sanctions against Chau, the SFC took into account that Chau:

• played a primary role in perpetrating the market misconduct for five weeks and his misconduct was only put to an end by the intervention of the SFC with its inquiry into the trading of QPL shares;
• abused his senior position at SHKIS by procuring the assistance of his subordinate to conduct unlawful activities;
• co-operated with the SFC by consenting to the disciplinary action; and
• has a clear disciplinary record with the SFC.

End

Notes:

1. Chau was licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 3 (leveraged foreign exchange trading) regulated activities. He was a responsible officer of Bali Securities Co Ltd, SHKIS, Sun Hung Kai Commodities Ltd, and Sun Hung Kai International Commodities Ltd. He ceased to be a licensed person and the approval for him to act as a responsible officer was revoked on 27 February 2009.
2. The MMT’s press release and report (http://www.info.gov.hk/gia/general/200903/18/P200903180162.htm) can be found on the MMT’s website (www.mmt.gov.hk).

Chau Sik Ki Banned for Life

On 14 January 2010, the SFC reported that it had revoked the registration of Mr Chau Sik Ki and banned him for life. This is the result of an investigation that revealed he had obtained funds from a client for the use of investment in futures contracts on their behalf. However, he instead deposited the funds into his own account to use in trading and then left the company he was working for, which the clients had the relationship with. He also issued statements to the client with misleading information about the state of their accounts.

The investigation is ongoing.