SFC enforcement spree against bad apples

The enforcement arm of the Securities and Futures Commission (SFC) has been increasingly active in recent years in taking action against “bad apples”. Last year saw the introduction of a requirement to disclose to the SFC any internal investigations conducted within six months of a licensed representative’s departure, which was designed to give the SFC the opportunity to detect “rolling bad apples”. There have been four suspensions and three bans of individuals since the beginning of this year.

Cases involving no dishonesty

• A broker’s representative had his licence suspended for five months for trading client securities without a written discretionary authority and failing to follow his employer’s internal policies and procedures.

• A responsible officer (an RO) at a broker who was responsible for overall management as well as being the anti-money laundering (AML) officer had her licence suspended for five and a half months for failing to discharge her duties as AML officer and as a member of senior management, so that the brokerage company’s serious AML failures were attributable to her.

• An RO who was responsible for approving personal account trades and short sales, routinely approved transactions by his fellow RO who was also the chief executive officer of the company without making any inquiries nor checking whether there were any irregularities. His licence was also suspended for seven months, on the basis that, although he had acted honestly, he had failed to act with due diligence.

• A research analyst had his licence suspended for 12 months for breaching his employer’s internal policies and controls, trading contrary to his own recommendations in research reports, and trading securities on his employer’s restricted list. These were serious breaches, but the SFC stopped short of making a finding of dishonesty.

Cases involving dishonesty

• A broker’s representative was banned from the industry for 14 months for overcharging clients and dishonestly providing false pricing information to clients.

• An RO was banned from the industry for 28 months as a result of his conviction for uncovered (and therefore illegal) short-selling of Hong Kong listed securities. He traded the securities through his personal account and the discretionary account of a client without informing his employer or the client that the sales were uncovered. He concealed his uncovered positions by buying the relevant stock at the end of the trading day. Sometimes he would cover his position through a cross trade with his discretionary client at a price favourable to himself, which was dishonest.

Life-time ban

Cases involving dishonesty tend to result in a lengthier ban or suspension. However, as mentioned in the SFC’s Enforcement Reporter of December 2006, where a case involves the misappropriation of client assets, a life-time ban will almost invariably be imposed, as occurred recently. On 23 March 2020, the SFC announced a life-time ban on Ms Mo Shau Wah (Mo), a former account executive of China Pacific Securities Limited (China Pacific). Mo was banned from the industry for life as a result of her criminal convictions for conspiracy to steal (Charge 1) and conspiracy to defraud (Charge 2). Mo’s criminal acts required the participation of her co-conspirator, Ms Hui Fong Ting (Hui), who was a settlement clerk at China Pacific but who was not licensed.

Summary of facts

Mo stole HK$110.2 million worth of securities from clients from 2005 to 2012. She sold the clients’ securities without their knowledge through accounts opened in the names of her relatives with China Pacific. Hui covered up the theft by making fraudulent entries in China Pacific’s systems and falsifying statements. Hui falsely recorded that Mo and her relatives had deposited physical shares with China Pacific. When sell orders were given, what China Pacific actually sold were shares belonging to its other clients, but the proceeds of sale were paid to Mo and her relatives. 

On 16 November 2012, Mr Ng Yick-yee (Ng), one of the directors of China Pacific, informed Mo that the SFC would shortly be conducting an inspection. He told Mo to be prepared. Mo did not turn up for work the next day and left Hong Kong on 19 November 2012. On 23 November 2012, Hui attempted suicide.

Ng felt suspicious and started to investigate the internal records of China Pacific and the offences were revealed.

In the criminal proceedings Mo was sentenced to 8 years imprisonment for Charge 1 and 11 years 3 months imprisonment for Charge 2 to run concurrently. Hui was sentenced to 5 years 3 months imprisonment for Charge 1 and 7 years 6 months imprisonment for Charge 2.

As a result of the fraud, China Pacific’s shareholders and directors were required to give an undertaking to the SFC that China Pacific, its shareholders and directors would fully compensate any clients affected by the misappropriation of client securities, and that undertaking was satisfied by the shareholders/directors making loans to China Pacific and/or China Pacific buying shares in the market to compensate the clients, resulting in a loss to China Pacific of HK$156 million.

This case again demonstrates the need for vigilance in supervision and in times of economic hardship the need for vigilance is even greater as employees such as Mo, who was paid no salary but only earned commission, may feel under increased pressure to supplement their incomes.