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Friday, 11 September 2009
Du Jun walked into SFC trap
A trip back to Hong Kong to collect a framed picture and a small air purifier from his old office proved to be the downfall of Du Jun, the city’s biggest insider trader.
Charges ready to be laid as insider trader returned to collect personal items
Enoch Yiu and Cliff Buddle 11 September 2009
A trip back to Hong Kong to collect a framed picture and a small air purifier from his old office proved to be the downfall of Du Jun, the city’s biggest insider trader.
Du had fled to Beijing, his birthplace, after losing his job as the managing director of Morgan Stanley Asia in May 2007. The Securities and Futures Commission started an investigation into his activities the next month.
For more than a year, he stayed in the capital out of the financial regulator’s reach and might still be a free man had he not returned to Hong Kong where, for more than 10 years, he had been a rising star in the investment banking world.
When he returned on July 10 last year, the SFC was waiting. The regulator had already taken unprecedented court action to seize his assets. Before then, it had been a case of waiting and watching to see if he came back. The flat he rented in Hong Kong was kept under close watch and contact was maintained with his friends and associates.
Suddenly, investigators learned that Du had made a request to his former employers to collect the picture - a modern art print - and the air purifier from his office. It is unclear why he decided to risk the trip for such apparently trivial personal items.
He may have taken comfort from the fact that his wife, Li Xin, had returned to the city twice without any problem and that no one had ever before been arrested under the Securities and Futures Ordinance.
Du did not know that insider dealing charges had been prepared and police and immigration alerted. So when he turned up at the airport on July 10 last year using his identity card to pass through the immigration barrier, the trap was sprung.
He was arrested and charged. The biggest insider dealing trial in Hong Kong’s history was about to begin.
Yesterday, it ended with his conviction for trading in HK$87 million worth of shares in oil firm Citic Resources Holdings between February and April 2007 while in possession of inside information about deals the company was about to make.
It was the largest sum involved in an insider dealing case. Du was also charged with asking his wife to trade the shares. She was not charged.
Du now faces a prison sentence of up to seven years, the maximum that can be imposed at the District Court.
Under the law, a person commits insider dealing if he or she secures company information not yet made public and uses it to trade shares or asks others to do so to earn a profit or avoid losses.
The dramatic story presented by prosecutor Charlotte Draycott during the 38-day trial provides a classic example.
In late 2006 and early 2007, Du was involved in two projects in which Morgan Stanley was serving a client, Citic Resources. The first was Project Jumbo, in which Morgan Stanley was assisting the mainland firm to issue bonds to finance the acquisition of a Kazakhstan oilfield that boasted 100 million barrels of oil. The second was Project Colorado, concerning oil hedging related to the oilfield.
Du, the managing director of the fixed-income department at Morgan Stanley, was among a handful of bankers in a team assisting with the Citic Resources bond issue and receiving sensitive e-mails about the progress of the deal.
These bankers had access to important confidential information. In a bid to prevent insider dealing, they were logged with the company’s control room as “over the wall” - in other words, classified as “insiders”. This meant they were prohibited from trading in shares related to the deal.
Du was among the bankers who, from February 2007, received e-mails from a superior warning them not to trade the shares. This was because at that time, Morgan Stanley had received verbal approval of the bond offering mandate - valuable information for anyone tempted to trade in Citic Resources shares.
The temptation was too strong for Du. He ignored the warnings. Between February 15 and April 30, 2007, he traded in Citic Resources shares on nine occasions, buying a total of 26.7 million shares. Altogether, it cost him HK$87.1 million.
This is 4.5 times his HK$19 million salary and bonus for 2006. He borrowed HK$50 million, or 57 per cent of the total, in margin financing from Morgan Stanley to pay for the deals.
Draycott said these figures showed Du was not acting normally by “his own or any individual’s standards in this trading”.
When the deals were announced in May 2007, Citic Resources’ share price rose sharply. It was after the deal was made public that Morgan Stanley noticed its employee’s huge investment in the oil company. It notified the SFC and suspended Du.
Two months later, Du made a profit of HK$33 million by selling half of his holding, but he also paid a price - he was sacked by Morgan Stanley.
Within weeks of Du starting to sell the shares in Citic Resources, the SFC had for the first time taken action to freeze the profits from insider dealing. In this case, the amount frozen was HK$46.5 million.
Du’s lawyers fought the SFC all the way. They brought three judicial reviews challenging aspects of the investigation. Ultimately, Du did not succeed but was allowed to remove funds to meet legal fees, reducing the sum frozen to HK$31 million.
Du denied he had read the e-mails containing confidential information. But the prosecution provided technical reports on Du’s BlackBerry, which recorded that he had opened and scrolled down manually to read the five e-mail chains from early February 2007 concerning the two Citic Resources projects. This was before his first purchase of the shares on February 15 that year.
Judge Andrew Chan Hing-wai said during the hearing: “It is common sense that one would read all e-mails while doing a deal.”
Senior counsel Alexander King, for Du, argued the banker had applied and received permission from Morgan Stanley’s compliance unit before making his first trade in Citic Resources, suggesting these trades were “honest and legitimate”.
Draycott said Du received approval only because the bank’s compliance system was run in a “haphazard and ineffective manner”. She said a compliance officer had misheard Du as saying he wanted to trade Citic Pacific instead of Citic Resources.
“He (Du) refused to exercise his own judgment,” Draycott said. “His attitude seems to have been ‘if I can get clearance, I will do it even if I know it is wrong’, and in seeking that permission, he was very far from frank.”
2 comments:
Du Jun walked into SFC trap
Charges ready to be laid as insider trader returned to collect personal items
Enoch Yiu and Cliff Buddle
11 September 2009
A trip back to Hong Kong to collect a framed picture and a small air purifier from his old office proved to be the downfall of Du Jun, the city’s biggest insider trader.
Du had fled to Beijing, his birthplace, after losing his job as the managing director of Morgan Stanley Asia in May 2007. The Securities and Futures Commission started an investigation into his activities the next month.
For more than a year, he stayed in the capital out of the financial regulator’s reach and might still be a free man had he not returned to Hong Kong where, for more than 10 years, he had been a rising star in the investment banking world.
When he returned on July 10 last year, the SFC was waiting. The regulator had already taken unprecedented court action to seize his assets. Before then, it had been a case of waiting and watching to see if he came back. The flat he rented in Hong Kong was kept under close watch and contact was maintained with his friends and associates.
Suddenly, investigators learned that Du had made a request to his former employers to collect the picture - a modern art print - and the air purifier from his office. It is unclear why he decided to risk the trip for such apparently trivial personal items.
He may have taken comfort from the fact that his wife, Li Xin, had returned to the city twice without any problem and that no one had ever before been arrested under the Securities and Futures Ordinance.
Du did not know that insider dealing charges had been prepared and police and immigration alerted. So when he turned up at the airport on July 10 last year using his identity card to pass through the immigration barrier, the trap was sprung.
He was arrested and charged. The biggest insider dealing trial in Hong Kong’s history was about to begin.
Yesterday, it ended with his conviction for trading in HK$87 million worth of shares in oil firm Citic Resources Holdings between February and April 2007 while in possession of inside information about deals the company was about to make.
It was the largest sum involved in an insider dealing case. Du was also charged with asking his wife to trade the shares. She was not charged.
Du now faces a prison sentence of up to seven years, the maximum that can be imposed at the District Court.
Under the law, a person commits insider dealing if he or she secures company information not yet made public and uses it to trade shares or asks others to do so to earn a profit or avoid losses.
The dramatic story presented by prosecutor Charlotte Draycott during the 38-day trial provides a classic example.
In late 2006 and early 2007, Du was involved in two projects in which Morgan Stanley was serving a client, Citic Resources. The first was Project Jumbo, in which Morgan Stanley was assisting the mainland firm to issue bonds to finance the acquisition of a Kazakhstan oilfield that boasted 100 million barrels of oil. The second was Project Colorado, concerning oil hedging related to the oilfield.
Du, the managing director of the fixed-income department at Morgan Stanley, was among a handful of bankers in a team assisting with the Citic Resources bond issue and receiving sensitive e-mails about the progress of the deal.
These bankers had access to important confidential information. In a bid to prevent insider dealing, they were logged with the company’s control room as “over the wall” - in other words, classified as “insiders”. This meant they were prohibited from trading in shares related to the deal.
Du was among the bankers who, from February 2007, received e-mails from a superior warning them not to trade the shares. This was because at that time, Morgan Stanley had received verbal approval of the bond offering mandate - valuable information for anyone tempted to trade in Citic Resources shares.
The temptation was too strong for Du. He ignored the warnings. Between February 15 and April 30, 2007, he traded in Citic Resources shares on nine occasions, buying a total of 26.7 million shares. Altogether, it cost him HK$87.1 million.
This is 4.5 times his HK$19 million salary and bonus for 2006. He borrowed HK$50 million, or 57 per cent of the total, in margin financing from Morgan Stanley to pay for the deals.
Draycott said these figures showed Du was not acting normally by “his own or any individual’s standards in this trading”.
When the deals were announced in May 2007, Citic Resources’ share price rose sharply. It was after the deal was made public that Morgan Stanley noticed its employee’s huge investment in the oil company. It notified the SFC and suspended Du.
Two months later, Du made a profit of HK$33 million by selling half of his holding, but he also paid a price - he was sacked by Morgan Stanley.
Within weeks of Du starting to sell the shares in Citic Resources, the SFC had for the first time taken action to freeze the profits from insider dealing. In this case, the amount frozen was HK$46.5 million.
Du’s lawyers fought the SFC all the way. They brought three judicial reviews challenging aspects of the investigation. Ultimately, Du did not succeed but was allowed to remove funds to meet legal fees, reducing the sum frozen to HK$31 million.
Du denied he had read the e-mails containing confidential information. But the prosecution provided technical reports on Du’s BlackBerry, which recorded that he had opened and scrolled down manually to read the five e-mail chains from early February 2007 concerning the two Citic Resources projects. This was before his first purchase of the shares on February 15 that year.
Judge Andrew Chan Hing-wai said during the hearing: “It is common sense that one would read all e-mails while doing a deal.”
Senior counsel Alexander King, for Du, argued the banker had applied and received permission from Morgan Stanley’s compliance unit before making his first trade in Citic Resources, suggesting these trades were “honest and legitimate”.
Draycott said Du received approval only because the bank’s compliance system was run in a “haphazard and ineffective manner”. She said a compliance officer had misheard Du as saying he wanted to trade Citic Pacific instead of Citic Resources.
“He (Du) refused to exercise his own judgment,” Draycott said. “His attitude seems to have been ‘if I can get clearance, I will do it even if I know it is wrong’, and in seeking that permission, he was very far from frank.”
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