ComplianceOne Newsletter – April 2023
The topics discussed in this monthly newsletter are as follows:
SFC welcomes Stock Exchange consultation on climate-related reporting requirements for listed companies
The RAMP-AND-DUMP Scam Storyline
SFC reprimands and fines Ninety One Hong Kong Limited $1.4 million for unlicensed futures trading
SFC seeks court orders to disqualify former directors and ex-chief financial controller of China Candy Holdings Limited (8182.HK)
SFC bans Peter Law Chi Kin for 10 years and fines him $535,500 for taking part in stock manipulation scheme
MARKET NEWS
The SFC announced on 14 April 2023 on its support for the public consultation issued today by the The Stock Exchange of Hong Kong Limited (SEHK) on proposed climate-related reporting requirements for listed companies in Hong Kong. The consultation was a major step towards aligning Hong Kong with the global baseline for climate-related reporting standards to be published by the International Sustainability Standards Board (ISSB)
As Ms Julia Leung, Chief Executive Officer of the SFC, had said: “Hong Kong’s early adoption of climate-related corporate reporting requirements will consolidate its position as a leading green and sustainable finance hub within the region and globally” and further stated that the SFC had been working closely with SEHK to adopt a balanced approach aiming to provide appropriate flexibility for listed companies while promoting relevant, consistent and comparable disclosures to investors.
SEHK’s proposals had made reference to the ISSB’s exposure drafts for sustainability-related disclosures and was aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). This was consistent with the objective set out by the Green and Sustainable Finance Cross-Agency Steering Group.
SIGNIFICANCE:
The HKEX had pioneered in launching the Core Climate back on 28 October 2022 last year, with an aim to advocate the low-carbon, climate-resilient global economy. It was a further leap ahead for the HKEX to enhance climate-related disclosures under the environmental, social and governance (ESG) framework.
On the other hand, the SFC has also implemented the regulatory requirement for the licensed corporations engaging in managing funds to observe the Climate-Related Risk Disclosure since Nov November 2022 last year where all the licensed corporations have to examine themselves with regard to relevance and materiality in order to comply with the four core categories of governance, investment management, risk management and disclosure. The concerted efforts from both of the regulatory institutions of HKEX and SFC are instrumental in mutually reinforcing determination of the HKSAR government to develop Hong Kong as financial hub for low-carbon economy.
ENFORCEMENT NEWS
It was published on 4 April 2023 that six additional suspects – including key members and an alleged ringleader – were charged with various criminal offences following an earlier joint operation of the SFC and the Police against a large-scale and sophisticated syndicate suspected of operating “ramp-and-dump” market manipulation.
Four of them were charged with the offences of conspiracy to defraud and conspiracy to employ a scheme with intent to defraud or deceive in transactions involving securities under common law, section 300 of the Securities and Futures Ordinance and section 159A and 159C of the Crimes Ordinance and the rest were charged with money laundering related offences.
The SFC’s Executive Director of Enforcement, Mr Christopher Wilson, said: “We will see to it that suspects of market misconduct are brought to justice and the integrity of Hong Kong’s financial market and the investing public are protected. To this end, we will not hesitate to deploy legal and regulatory tools at our disposal and continue our collaboration with the Police and other law enforcement agencies in combating financial crimes.”
The series of extensive investigation and prosecutions by the SFC and the Police continued through the month with number of suspected core members brought to the Court amounted to 24 by the end of April; mostly of the charges were connected with the “ramp-and-dump” stock investment schemes and suspected money laundering activities.
The syndicate was alleged to have induced investors to purchase shares in these stocks through social media platforms to facilitate their disposal of shares at a profit. The prices of these stocks collapsed in November 2018 and April 2019 once the demand was exhausted.
On the other side of the story, on 25 April 2023, the SFC had issued restriction notices to “10 brokers” (refer to original circular for details), prohibiting them from dealing with or processing certain assets held in 31 trading accounts which were related to the "ramp-and-dump" scam involving the shares of a company listed on the Stock Exchange of Hong Kong Limited between November 2021 and June 2022.
The restriction notices prohibited the 10 brokers, without the SFC’s prior written consent, from dealing with, or disposing of, any assets in any way in the trading accounts, including a number of conditions as specified by the SFC. The brokers were also required to notify the SFC if they had received any of these instructions from the account holders.
SIGNIFICANCE:
It was such a high profile, proactive joint operation of the SFC and the HK Police rarely seen in recent years to mobilize concerted efforts to engage in combating a large-scale and sophisticated syndicate suspected of operating “ramp-and-dump” market manipulation, and the number of suspects involved was up to 24 by the end of April 2023. It was found that the SFC had frozen the assets held in the securities trading accounts by members of these alleged syndicates to an unconceivably total large amount of $650 million!
Such unscrupulous misfeasance to defraud the investors at large through social media and manipulate the stock prices was undeniably detrimental to the sound image of Hong Kong as an international financial centre where market integrity and investor protections are of paramount importance.
The concerted efforts of SFC and the Police are much more than welcome to uphold the image and prestige of Hong Kong; and the joint operation definitely delivers a signal to any syndicates or potential ring-leaders that their unlawful intrigues will never be tolerated or connived to any extent under the prevailing regulatory regime.
3. SFC reprimands and fines Ninety One Hong Kong Limited $1.4 million for unlicensed futures trading
The SFC had reprimanded and fined Ninety One Hong Kong Limited (NOHK) $1.4 million for dealing in futures contracts without the required licence.
It was found that between April 2014 and January 2020, NOHK executed 4,864 trades in futures contracts for portfolios managed by its three overseas affiliates without the required licence, in breach of the SFO and the Code of Conduct.
SIGNIFICANCE:
With reference to Section 1.3. Exemptions paragraph 1.3.6 with "incidental exemption" of the Licensing Handbook, it is stated that for corporations licensed for Type 9 regulated activities (asset management) to carry out Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and/or Type 5 (advising on futures contracts) regulated activity, they do not need to be licensed for these regulated activities provided that they are carried out solely for the purposes of your asset management business in the course of managing their "own client's portfolios” of securities and/or futures contracts.
In the Statement of Disciplinary Action attached in the circular, the investigation had found that:
(1) the futures trades were not executed under discretion of NOHK for purpose of managing its portfolios;
(2) NOHK had received remunerations from providing trading services to its overseas affiliates;
(3) the trading services were carried out on a recurring monthly basis over a period of five years.
It has come to the attention of the licensed corporations while they are exercising the incidental exemptions on a rationale consistent with the guidelines as stipulated by the SFC.
4. SFC seeks court orders to disqualify former directors and ex-chief financial controller of China Candy Holdings Limited (8182.HK)
On 20 April 2023, the SFC published that it had commenced legal proceedings in the Court of First Instance (CFI) to seek disqualification orders against seven former members of the board of directors of China Candy Holdings Limited (China Candy) and the company’s former chief financial controller
The SFC’s legal action follows an investigation which found that China Candy’s 2016 interim report and 2016 annual report had falsely and misleadingly portrayed the company’s financial strength by overstating the cash and bank balances in June 2016 and December 2016 respectively. To this end, falsified bank and accounting records were created to cover up the overstatement of the company’s cash and bank balances (Fraudulent Scheme)
The SFC alleges that Xu, Hong and Wang were the instigators and perpetrators of, or at least knowingly permitted, acquiesced or turned a blind eye to the Fraudulent Scheme. As for the remaining directors, the SFC alleged that they were negligent and/or in breach of their duties owed to China Candy including, inter alia, duties of care, skill and diligence and duties to act in the best interest of the company.
5. SFC bans Peter Law Chi Kin for 10 years and fines him $535,500 for taking part in a stock manipulation scheme
On 26 April 2023, the SFC had banned Mr Peter Law Chi Kin, a former licensed representative of Convoy Asset Management Limited (CAML), from re-entering the industry for 10 years from 26 April 2023 to 25 April 2033 for taking part in a stock manipulation scheme. The SFC also fined Law $535,500, equivalent to the profit that he gained from participating in the scheme.
From June to July 2016, Law was persuaded by his colleague Mr Wong Kwun Shing to join the stock manipulation scheme, and 10 of Law’s clients and friends were persuaded to buy, hold and prop up the shares of a company from the manipulators involved in the scheme.
The SFC also found that Law coordinated with Wong to arrange the transactions through which his clients were instructed to ensure the bid and ask orders were matched as previously agreed. In return, Law was remunerated with cash rebates from the manipulators. As the clients were dissuaded to offload their shares while the prices were plummeting, they ended up with forced liquidation by the brokers and suffered huge losses; in contrast, lucrative rewards were accrued to Law and Wong.
Law’s conduct fell far short of the standards set out in the Code of Conduct for Persons Licensed by or Registered with the SFC, and casts serious doubts on his character, reliability and ability to carry on regulated activities competently, honestly and fairly. The SFC considered that he was not fit and proper to be a licensed person, a consequent 10-year ban on the license was the price Law had to pay!
For more details, please click on the title of the topic above.
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