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Monday, 21 September 2009
Hong Kong’s huge insider dealing case highlights problems
The conclusion of Hong Kong’s largest insider dealing case has shone a rare light on the challenges facing the city’s financial regulator as it tries to crack down on market offenders.
Hong Kong’s huge insider dealing case highlights problems
AFP 20 September 2009
The conclusion of Hong Kong’s largest insider dealing case has shone a rare light on the challenges facing the city’s financial regulator as it tries to crack down on market offenders.
On Friday, the District Court jailed ex-Morgan Stanley banker Du Jun for seven years for buying shares in CITIC Resources, an arm of China’s largest investment conglomerate CITIC Group, while advising it on acquiring an oil-field in Kazakhstan.
The court also fined the 41-year-old HK$23.32 million (US$2.99 million) after taking into account the notional profit he could have reaped by selling the shares after the acquisition was publicly announced.
The Securities and Futures Commission (SFC) hailed the sentence, the longest the court was able to impose, as the strongest possible deterrent to insider trading, which was criminalised in 2003.
Mark Steward, the SFC’s head of enforcement, has vowed to take on “cases like this again and again and again.”
Du’s conviction for insider dealing was the 10th obtained by the SFC in just over a year. But despite the success, the case also shows that much more needs to be done to tackle the problem, according observers.
One issue raised during the trial was the failure of Morgan Stanley’s internal compliance system to stop Du from trading in the CITIC Resources stock over nine occasions in 2007.
“That was a surprise in Morgan Stanley. I think the case in part has highlighted the need for the company to tighten up internal compliance,” said Andrew Powner, the managing partner of solicitors’ firm Haldanes, who has handled many cases in Hong Kong involving commercial crime.
“I would expect companies to begin tightening their compliance as soon as insider dealing was made a criminal offence. I am sure that’s what they are doing now,” Powner said.
During the trial, the court heard recordings of phone conversations between Du and a junior Morgan Stanley compliance officer who approved his trading after confusing CITIC Resources with CITIC Pacific, a sister company.
David Webb, a shareholder activist and a former non-executive director of the Hong Kong Stock Exchange, said the chance of the mix-up would have been “almost zero” had the officer taken the simple step of checking the company code, rather than just its name.
“I think Morgan Stanley needs to explain to investors what they have done to address the issue,” he said.
In response to criticism, the investment bank has repeatedly said Du’s conduct was a violation of its own values and policies, and stressed that the bank itself reported the case to the SFC.
Apart from targeting individual investors, Webb said, the regulator should also take a tougher stance against brokers.
“I don’t think the SFC has provided a large enough deterrent against brokers turning a blind eye to their clients trading on insider information,” he said.
Webb said drastic steps were needed to combat the problem, and suggested the regulator suspend the licences of both the individual broker and the brokerage firm should there be evidence of a cover-up.
Billy Mak, an associate finance professor at Hong Kong Baptist University, said the SFC could consider imposing a requirement for brokers to keep a report of their clients’ trading if it involves an abnormally large amount.
But he said the reporting guidelines had to be supported by an industry-wide consensus.
He said it could be “challenging” to decide the value of a transaction beyond which a broker had to ask a client for the reasons for making the trade.
“And if the client is trading on insider information, he would not tell his broker the truth anyway. There is also the issue of privacy,” Mak said.
Powner said the battle against sophisticated commercial criminals could be tough.
“If somebody is bent on breaking the rules, and they are intelligent enough, no doubt they are going to find a way around them,” he said.
1 comment:
Hong Kong’s huge insider dealing case highlights problems
AFP
20 September 2009
The conclusion of Hong Kong’s largest insider dealing case has shone a rare light on the challenges facing the city’s financial regulator as it tries to crack down on market offenders.
On Friday, the District Court jailed ex-Morgan Stanley banker Du Jun for seven years for buying shares in CITIC Resources, an arm of China’s largest investment conglomerate CITIC Group, while advising it on acquiring an oil-field in Kazakhstan.
The court also fined the 41-year-old HK$23.32 million (US$2.99 million) after taking into account the notional profit he could have reaped by selling the shares after the acquisition was publicly announced.
The Securities and Futures Commission (SFC) hailed the sentence, the longest the court was able to impose, as the strongest possible deterrent to insider trading, which was criminalised in 2003.
Mark Steward, the SFC’s head of enforcement, has vowed to take on “cases like this again and again and again.”
Du’s conviction for insider dealing was the 10th obtained by the SFC in just over a year. But despite the success, the case also shows that much more needs to be done to tackle the problem, according observers.
One issue raised during the trial was the failure of Morgan Stanley’s internal compliance system to stop Du from trading in the CITIC Resources stock over nine occasions in 2007.
“That was a surprise in Morgan Stanley. I think the case in part has highlighted the need for the company to tighten up internal compliance,” said Andrew Powner, the managing partner of solicitors’ firm Haldanes, who has handled many cases in Hong Kong involving commercial crime.
“I would expect companies to begin tightening their compliance as soon as insider dealing was made a criminal offence. I am sure that’s what they are doing now,” Powner said.
During the trial, the court heard recordings of phone conversations between Du and a junior Morgan Stanley compliance officer who approved his trading after confusing CITIC Resources with CITIC Pacific, a sister company.
David Webb, a shareholder activist and a former non-executive director of the Hong Kong Stock Exchange, said the chance of the mix-up would have been “almost zero” had the officer taken the simple step of checking the company code, rather than just its name.
“I think Morgan Stanley needs to explain to investors what they have done to address the issue,” he said.
In response to criticism, the investment bank has repeatedly said Du’s conduct was a violation of its own values and policies, and stressed that the bank itself reported the case to the SFC.
Apart from targeting individual investors, Webb said, the regulator should also take a tougher stance against brokers.
“I don’t think the SFC has provided a large enough deterrent against brokers turning a blind eye to their clients trading on insider information,” he said.
Webb said drastic steps were needed to combat the problem, and suggested the regulator suspend the licences of both the individual broker and the brokerage firm should there be evidence of a cover-up.
Billy Mak, an associate finance professor at Hong Kong Baptist University, said the SFC could consider imposing a requirement for brokers to keep a report of their clients’ trading if it involves an abnormally large amount.
But he said the reporting guidelines had to be supported by an industry-wide consensus.
He said it could be “challenging” to decide the value of a transaction beyond which a broker had to ask a client for the reasons for making the trade.
“And if the client is trading on insider information, he would not tell his broker the truth anyway. There is also the issue of privacy,” Mak said.
Powner said the battle against sophisticated commercial criminals could be tough.
“If somebody is bent on breaking the rules, and they are intelligent enough, no doubt they are going to find a way around them,” he said.
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