Hong Kong Regulator Secures Landmark Criminal Sentence Against Market Manipulators

On 22 July 2024, the Hong Kong Courts imposed the heaviest jail sentence, ranging from 52 to 80 months of imprisonment, on market manipulation since the Securities and Futures Ordinance came into effect in 2003 after three perpetrators of a complex cross-border ramp-and-dump syndicate were found guilty of conspiracy to carry out false trading in the shares of a Hong Kong listed company following a 22-day market manipulation trial by jury. This landmark case marks the first time that criminal prosecution of an offense under the Securities and Futures Ordinance (SFO) has been tried at the Court of First Instance (CFI).

Background

Upon extensive investigations and the joint collaborative assistance rendered by local and overseas regulators, the Securities and Futures Commission (SFC) unraveled a highly sophisticated ramp-and-dump syndicate comprising local and overseas individuals and companies. The syndicate had acted in concert in a scheme primarily involving the placees of the placement shares and using 156 securities accounts to create a false or misleading appearance of active trading and an artificial increase in trading volume for the shares of Ching Lee Holdings Limited (Ching Lee) by maintaining an artificial turnover of the shares. The manipulative activities which involved an unprecedented scale of false trading conducted under the conspiracy lasted for more than five months in 2016 and commenced prior to Ching Lee’s listing in March 2016, significantly and artificially driving up the share price and trading volume of Ching Lee’s shares and generating wrongful profits of around HKD 124.9 million. The perpetrators disposed of the shares in September 2016, which led to the collapse of Ching Lee’s share price by 90%.

The SFC commenced investigation in 2017 and initiated criminal proceedings against the perpetrators in July 2020. Three defendants were eventually prosecuted at the CFI, while two other perpetrators who had absconded were subject to arrest warrants. On 29 May 2024, the CFI convicted the three defendants of conspiracy to carry out false trading in the shares of Ching Lee following a 22-day trial by jury. Considering the seriousness of the manipulative scheme and the need for deterrence, on 22 July 2024, the CFI sentenced the two primary perpetrators to six years and eight months’ imprisonment and another to four years and four months’ imprisonment.

In the CFI’s Reasons for Sentence, Deputy High Court Judge Douglas Yau made an express remark that the conspiracy involved was “sophisticated, intricate, meticulously planned”, and the losses suffered by “those who had thought they were taking part in the genuine trading” of the shares are “practicably unable to be ascertained and unquantifiable”. In citing other case authorities, Deputy High Court Judge Douglas Yau also emphasized that the primary objective of the false trading provisions should be directed at the fact of market manipulation itself, rather than to focus on the proof of loss to other investors resulting from the offenses. The judge further noted that market manipulation is a serious offense that strikes at the fair and honest operation of the securities market. It is not a victimless crime and most importantly, it is an offense that necessarily involves deceptive and dishonest conduct. Given “the serious nature of the conspiracy, and the scale of the false trading”, and that the proper maintenance of Hong Kong’s reputation as a global finance centre as an “asset of ours is of paramount importance for the people of Hong Kong, and part of the duty of the judicial system”, it was held that general deterrence and punishment are the most important sentencing considerations in this case.

In parallel with the criminal prosecution, the SFC separately commenced civil proceedings under section 213 of the SFO in 2019 for disgorgement and compensation orders against these perpetrators and the related parties, which have yet to be resolved by the court. The SFC also previously secured an interim injunction freezing the HKD 124.9 million of wrongful profits earned as a result of the manipulative acts for assets preservation. This case had led to a landmark judgment handed down by the Hong Kong Court of Final Appeal, which confirmed that leave to serve the proceedings on foreign defendants out of the jurisdiction is not required, as covered in our article “Hong Kong Court of Final Appeal Affirms Securities and Futures Commission’s Powers Against Foreign Defendants for Market Misconduct Offenses” dated 1 November 2023.

This case demonstrates the collaborative efforts between the SFC and the local and overseas regulators, including the Hong Kong Independent Commission Against Corruption, 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 U.S. Securities and Exchange Commission, in cracking down the cross-border syndicate.

Ramp-and-Dump scams

In recent years, financial scams and the resulting losses suffered by unsuspecting victims have noticeably escalated in numbers and amount, sometimes up to billions of Hong Kong dollars.  Ramp-and-dump scams have all the classic hallmarks of stock manipulation leading to artificial share price fluctuation involving vulnerable listed companies but with a modern twist of being perpetrated through popular social media platforms.

Listed companies with a small market capitalization, low market liquidity, and high shareholding concentration are particularly susceptible targets for stock manipulation as the costs of kick-starting ramp-and-dump scams under such conditions are comparatively low. As the fraudsters continue their cornering and ramping activities, the target listed company may experience unusual upward share price movements that can hardly be explained or supported by its underlying financials or business developments. We have seen instances of a listed company’s share price increasing tenfold or more without any actual improvement in its business performance, financial position, or future prospects.

SFC’s enforcement priority 

Since 2020, ramp-and-dump scams have remained one of the top enforcement priorities for the SFC, which has since then taken massive actions as well as joint operations with other local regulators, enforcement agencies and authorities against sophisticated syndicates. The SFC is committed to expend its all-out efforts in combating market misconduct and protecting the integrity of Hong Kong’s securities market.

As repeatedly emphasized by the SFC, the SFC has “zero tolerance of market manipulation in any share or form” and is ready to “relentlessly pursue enforcement actions” against wrongdoers in any jurisdictions making full use of its statutory powers. Apart from joining hands and cooperating with other local and overseas regulators in the investigative and enforcement efforts, the SFC has also bolstered its investigative capabilities in coping with complicated crimes by forming a cross-divisional task force involving its Intermediaries Division, Corporate Finance Division, and Enforcement Division.

Commentary

With the heaviest sentence imposed in this landmark market manipulation case, it is clear that the court is taking a very dim view of such market misconduct in view of its devastating impact on the reputation and integrity of Hong Kong’s securities and futures markets.

While the SFC continues to tackle the pervasive problem of rampant scams and targeted efforts to manipulate the share price of vulnerable Hong Kong listed companies, it is worth noting that market players and intermediaries also often play a key role in facilitating the relevant transactions. For example, market manipulators may operate their scheme through client accounts with certain brokerage firms, which may then become the subject of restriction notices from the SFC to prohibit the dealing and processing of assets in those specified client accounts. Effective monitoring and reporting of suspicious trading activity by intermediaries may help to facilitate the SFC’s ongoing work to combat market manipulation and identify the potential bad actors.

Likewise, Hong Kong listed companies experiencing unusual volatility or movements in their share price and/or trading volume may be an indicator that they are the target of a ramp-and-dump scheme. Even if the listed companies have no involvement in the ramp-and-dump scams, there may still be potential reputational risks by being associated with the scams, as well as the prospect that the aggrieved investors may take action to seek compensation against the listed companies for investment losses following the disappearance of the fraudsters. The listed companies may need to expend substantial resources to defend against such litigation, collateral regulatory complaints, and potential regulatory investigations commenced by the SFC or other regulators. Therefore, it is highly recommended for listed companies to maintain effective internal control measures, and take precautionary steps to identify any red flags at an early stage. In case of any regulatory investigations, listed companies shall ensure full cooperation and timely response. In the interest of protecting investors from becoming unwitting victims of ramp-and-dump scams, the onus is on all related parties to be vigilant, to act on red flags, and to cooperate with the regulators so that timely enforcement action can be taken.