The Securities and Futures Commission (SFC) has reprimanded and fined SFM HK Management Limited (SFM) $1.5 million for failures relating to the short selling of Great Wall Motor Company Limited (Great Wall) shares in 2015 on behalf of a fund it managed (Note 1).
On 28 August 2015, Great Wall announced its proposed bonus issue of shares, which was equivalent to 200 per cent of its existing issued shares and was subject to the fulfilment of certain conditions. The settlement date of the bonus shares was expected to be on 13 October 2015.
The SFC investigation found that:
- On 30 September 2015, the fund’s custodian notified SFM’s trade support department of SFM’s entitlement to 1,616,000 bonus shares as a result of the fund’s pre-existing holding of 808,000 Great Wall shares.
- SFM’s trade support team booked the 1,616,000 bonus shares into SFM’s trading system on 30 September 2015 without segregating them into a restricted account as required by SFM’s internal policy. Consequently, the system indicated that a total of 2,424,000 shares of Great Wall were available for trading when in fact only 808,000 shares were available for trading at that point in time.
- Based on the erroneous information shown in the system, one of the fund’s portfolio managers placed an order to sell 2,424,000 shares of Great Wall on 2 October 2015, causing the fund to become short by 1,616,000 shares in Great Wall (Notes 2 & 3).
The SFC considers that SFM not only failed to act with due skill, care and diligence in dealing in the bonus shares, but also failed to diligently supervise its staff members and implement adequate and effective systems and controls to ensure compliance with the short selling requirements.
In deciding the sanctions against SFM, the SFC took into account all the circumstances including that:
- there is no evidence to suggest that SFM had acted in bad faith in short selling the bonus shares;
- this incident is the second occurrence of a similar kind over a period of five years;
- SFM has taken remedial measures to strengthen its internal controls and systems; and
- SFM has an otherwise clean disciplinary record.
Notes:
- SFM is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 9 (asset management) regulated activities.
- Section 170(1) of the SFO prohibits "naked" or "uncovered" short selling. It is a criminal offence for a person to sell securities at or through a recognized stock market unless at the time of the sale, he has a presently exercisable and unconditional right to vest the securities in the purchaser of them, or believes and has reasonable grounds to believe that he has such a right.
- Prior to the settlement date, Great Wall did not make any public announcement regarding the fulfillment of the conditions. The public did not have reasonable grounds to believe that they had presently exercisable and unconditional rights to vest the bonus share in the purchaser of them before the settlement date.
A copy of the Statement of Disciplinary Action is available on the SFC website
