Hong Kong Securities And Futures Commission Reprimands And Fines CES Capital International (Hong Kong) Co., Limited $3.2 Million For Failures In Managing Private Funds

The Securities and Futures Commission (SFC) has reprimanded and fined CES Capital International (Hong Kong) Co., Limited (CESHK) $3.2 million over its failure to discharge its duties as an investment manager of two funds between February 2015 and July 2017 (Note 1).

The two CESHK-managed funds invested substantially all their assets in two Cayman-incorporated underlying companies (UCs) (Notes 2 to 5).

The SFC found that CESHK failed to perform sufficient due diligence and monitoring on the funds’ underlying investments and undertake satisfactory risk management measures to identify, quantify and manage the risks exposed to the funds.   CESHK also failed to keep proper audit trail of the due diligence and monitoring allegedly performed on the funds and their underlying investments.

In particular, the SFC found that during the relevant period:

• While CESHK was responsible for managing and investing the funds’ assets and investments on a discretionary basis, it failed to do so in practice.  Instead, the decisions on when to invest for the funds were made by the funds’ directors.  CESHK considered that its main role was to ensure that the funds’ assets were invested substantially in the UCs in accordance with the investment objective stated in the funds’ private placement memorandum;
• CESHK had carried out minimal due diligence on the UCs with the result that it had limited or no information on the UCs’ holdings of assets, investments and liabilities, and the basis on which the UCs were valued;
• CESHK failed to produce any records of the regular meetings it claimed to have held with its asset management department to review the performance of the funds, and the monthly reports it prepared from May 2016 to March 2017 only set out some data and/or general market views without any accompanying analysis or explanation on their impact on the UCs and/or the funds; and
• CESHK did not maintain any record of its alleged discussions with the funds’ directors regarding the significant price drop in one of the funds in around mid-December 2016, nor the basis of its decision to take no further action (Note 6).

In deciding the sanction against CESHK, the SFC took into account all the circumstances, including:

• CESHK’s remedial actions taken after July 2017, following a limited review conducted by the SFC on its business activities, including the termination of its investment management services to the funds with effect from 1 February 2018 in light of the funds’ directors’ failure to provide the information necessary for CESHK to discharge its duties; and
• CESHK cooperated with the SFC in resolving the SFC’s concerns.

Notes:

1. CESHK is licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 3 (leveraged foreign exchange trading), Type 4 (advising on securities), Type 5 (advising on futures contracts) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance.  CESHK has ceased business of regulated activities.
2. The two funds are Hong Kong Investment Fund SP (HKIFSP) and Evergreen Growth Saver SP (EGSSP, formerly known as Real Estate and Finance Fund SP).  They were segregated portfolios of Worldwide Opportunities Funds SPC (WOF), which was an open-ended investment fund established as an exempted company limited by shares under the laws of the Cayman Islands.  WOF was wound up by an order of the Grand Court of the Cayman Islands on 16 May 2019 and the two funds have been in liquidation since then.
3. CESHK was appointed by WOF to be the investment manager of HKIFSP from 1 March 2016 to 31 January 2018 and EGSSP from 16 February 2015 to 31 January 2018.
4. Pursuant to the funds’ respective private placement memorandum, their investment objective was to provide shareholders with a structured investment return by investing substantially all its assets in acquiring shares in the UCs.
5. “Real Estate and Finance Fund”, incorporated in the Cayman Islands, was the UC for both HKIFSP and EGSSP initially.  WOF’s directors passed a resolution on 11 March 2016 to change the UC for EGSSP to “Evergreen Growth Saver”, which was also incorporated in the Cayman Islands.
6. The net asset value per share of EGSSP dropped by 75.7% from $2,251.987 on 30 September 2016 to $546.872 on 30 November 2016.