The Hong Kong Court of First Instance has sentenced two people to six years and eight months in prison and a third to four years and four months in the city’s harshest crackdown yet on those perpetrating a so-called “pump and dump” scheme. Sit Yi Kit and Tam Cheuk Hang received the greater sentence whilst Lam Wing Ki received the lesser sentence.

A nine-member jury found Sit and Tam guilty of the charge of conspiracy to commit false trading in May, the first time an SFC case had been heard before a High Court jury. The jury returned a guilty verdict against Lam by majority.

An investigation by the SFC working with international regulators uncovered that, for a period of more than five months between March 2016 and September 2016, Sit, Lam and Tam conspired together with two others who are still at large to carry out a complex scheme of market manipulation through 156 different securities accounts under their control in the shares of Ching Lee Holdings Limited, an investment holding company.

The scheme inflated the share price by as much as 2,000 per cent from the IPO price in March 2016 before the share price dropped 90 per cent on 7 September 2016, resulting in illegal profits of more than HK$124 million (US$15.8 million). Deputy High Court Judge Douglas Yau said that the scheme  - which he said had been intricately and meticulously planned - had caused losses to genuine market participants and damage to Hong Kong’s reputation as a global financial centre, commenting that “a fair and efficient stock market is the prerequisite for maintaining our competitiveness in the region”.

He noted that, “Having considered various sentencing authorities, and taking into account the scale, sophistication and international element of the conspiracy and the false trading, as well as the importance of maintaining the integrity of Hong Kong as an international financial centre, the Court considered that deterrence and punishment are most important in this case.”

The SFC’s Executive Director of Enforcement, Christopher Wilson, said: “the jail sentences reflect that the Court is taking a very dim view of misconduct pernicious to the reputation and integrity of Hong Kong’s securities and futures markets. Putting the market manipulators behind bars sends a very strong and clear message to would-be wrongdoers that misconduct of any form has no place in Hong Kong’s financial markets, and that they would be brought to justice and face the full force of the law.”

“The outcome of this highly sophisticated and complex case also underscored the SFC’s determination to bring its resources and powers to bear in tackling market abuses and maintaining investor confidence in Hong Kong’s capital markets.”

The SFC said it was also seeking orders under section 213 of the SFO against various local and overseas corporations and individuals, including the three imprisoned, to disgorge their profits in the scheme and/or restore the affected counterparties to their pre-transaction positions. The SFC said it had already obtained interim injunctions freezing assets of up to the value of the combined profits generated from the illegal trading activities.

Takeaways

The sentences come as the SFC steps up enforcement activities against market misconduct. In its Strategic Priorities for 2024-2026 published in January 2024, the SFC said it was committed to maintaining market resilience and mitigating serious harm to Hong Kong’s markets. It also promised to continue the close collaboration with regulatory counterparts in Hong Kong, mainland China and overseas to combat cross-border market misconduct and deliver timely investor protection outcomes.

This case appears to be a successful demonstration of such cross-border enforcement collaboration. The SFC said it wished to thank the China Securities Regulatory Commission, the Monetary Authority of Singapore, the Ontario Securities Commission, the Singapore Police Force, the United Kingdom Financial Conduct Authority and the United States Securities and Exchange Commission for their assistance in the case, along with Hong Kong’s Independent Commission Against Corruption. 

Next up, a trial of one of Asia’s largest hedge funds for alleged insider trading with the next hearing due in October. The enforcement battle against market abuse continues apace in Hong Kong.

Authored by Nigel Sharman.