Hong Kong’s Securities And Futures Commission Reprimands And Fines A One Investment Company Limited $1.2 Million And Suspends Its Responsible Officer For Internal Control Failures

The Securities and Futures Commission (SFC) has reprimanded A One Investment Company Limited (A One) and fined it $1.2 million for internal control failures relating to the unauthorized sales of client securities and the unauthorized transfers of more than $7 million in client funds held by A One to third party accounts (Note 1).

The SFC has also suspended the approval granted to Ms Alysia Ann Lee to act as a responsible officer for A One and suspended her licence for eight months from 29 July 2013 to 28 March 2014 (Note 2).

The disciplinary action follows an SFC investigation into a self report by A One about suspected fraudulent activities in the account of one of its clients.

The SFC found that, between 4 July 2012 and 10 August 2012, 538,000 shares of Li & Fung Limited in the relevant client’s account were sold and a total of EUR676,000 and GBP160,000 were transferred out of the client’s account in 13 transfers to third party bank accounts in Italy, Norway, Singapore and the United Kingdom. The sales and transfers were carried out pursuant to instructions that were sent to Lee at A One’s email account (the Email Instructions) from an email account that the client had previously used in his communications with A One. The client denied that the instructions were given by him and claimed that his email account had been compromised.

The SFC also found that:

• A One did not have any manual, written policy or procedure for handling client requests to transfer funds to third party accounts.
• A One claimed that clients who requested to transfer funds to third party accounts were required to provide a signed authorization letter, so that the client’s signature could be verified by comparing it against the signature on his/her account opening documents. However, A One never received the original signed authorization letters for the above 13 transfers. It received a scanned copy of the signed authorization letter on the day it processed the client’s request for only one of the transfers. In all other cases, scanned copies of the signed authorization letters were received only after the transfers had been completed.
• A One did not take any other step to verify the identity of the person who gave instructions for the sales and the transfers, or to verify the authenticity of the instructions.
• Although two responsible officers were required to endorse the remittance application form (which gives the bank instructions to effect a remittance), it does not appear that they bore any responsibility for verifying the authenticity of the client’s instructions.
• The circumstances of the transfers did not accord with the historical pattern of transfers from the relevant client’s account to third party bank accounts, but A One made no enquiries to satisfy itself that the transfers were reasonable.

The SFC found that A One has failed to ensure that client assets are adequately safeguarded and has failed to establish effective internal control procedures for ensuring that client assets are protected from theft, fraud and other acts of misappropriation. The SFC also found that A One has failed to effectively monitor activities in its clients’ accounts to mitigate the risks of money laundering.    

The SFC found that in response to the Email Instructions, Lee set in train the chain of events that facilitated the unauthorized transfers from the relevant client’s account. In her capacity as a responsible officer of A One, Lee was primarily responsible for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by A One. She should have ensured that A One’s procedures in handling client requests to transfer funds to third party accounts adequately safeguarded client assets. However, the SFC found that she acted negligently in handling the relevant transfers and failed to properly discharge her managerial duties. Therefore, A One’s failures are attributable to her.

In deciding the disciplinary sanction, the SFC took into account all relevant circumstances, including that A One agreed to pay compensation to the client, and that A One and Lee co-operated with the SFC and have no previous disciplinary record.

The SFC’s investigation into suspected offences involving fraudulent or deceptive devices, etc in transactions in securities, futures contracts or leveraged foreign exchange trading under section 300 of the Securities and Futures Ordinance is continuing.

Notes:

1. A One is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
2. Lee is licensed under the SFO to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities. Lee is a responsible officer of A One.
3. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.
4. The SFC has advised intermediaries to be on alert of fraudulent email instructions. A copy of theCircular to All Intermediaries – Beware of “Email Scam” dated 7 September 2012 is available on the SFC website.