The Securities and Futures Commission of Hong Kong (SFC) has continued to enhance its enforcement actions against individuals for market misconduct in the first few months of 2024. This is in line with the SFC’s Strategic Priorities for 2024 to 2026, one of which is to further strengthen market resilience in Hong Kong as an international finance centre. Particularly, the SFC will leverage its surveillance capabilities to crack down market misconduct. This article summarises the SFC’s recent enforcement trends, highlights their implications and the key takeaways for licensed persons and individual investors.

Ramp-and-dump

Ramp-and-dump is a type of market manipulation where individuals use numerous accounts to corner and “ramp” up the price of a listed stock, and “dump” the shares to other investors (commonly induced through circulating favourable information about a stock on social media) at an artificially high price. As there is no longer demand for the shares, the share price would then collapse.  

According to the SFC, ramp-and-dump cases have formed a significant percentage of the market manipulation cases investigated by the SFC since 2020. Until recently, the SFC has continued to conduct joint operations with the Hong Kong Police Force (Police) and the Independent Commission Against Corruption (ICAC) to arrest suspects and to freeze the relevant securities accounts and proceeds. Regulators will take timely action against ramp-and-dump. Arrested individual suspects are charged with conspiracy to employ a scheme with intent to defraud or deceive in transactions involving securities under common law, the Securities and Futures Ordinance (SFO) and the Crimes Ordinance, and money laundering. There are currently active criminal proceedings in the Hong Kong court against individuals for ramp-and-dump, following SFC investigations.

Licensed persons and individual investors should stay vigilant if other sophisticated investors approach you to participate in a coordinated syndicate to manipulate share price, and should refrain from manipulating share price. Separately, licensed or registered persons (as a firm) are obliged under paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) to report material breach or non-compliance with law or regulations, including suspected market misconduct by clients, to the SFC immediately. If in doubt, you should err on the side of caution and seek legal advice.

Other recent SFC enforcement actions or legal proceedings against individuals

• Insider dealing – In May 2024, the SFC commenced criminal proceedings against a hedge fund management firm, its chief investment officer and director, and a former trader for insider dealing in the shares of a Hong Kong-listed company, prior to a block trade.
• False trading – In May 2024, the Hong Kong court convicted and sentenced to imprisonment two former SFC licensees for false trading in the shares of a Hong Kong-listed company. The two individuals conducted manipulative and frequent transactions among various securities accounts, boosting the trading volume of the shares and creating a false or misleading appearance of active trading.
• Illegal short selling – In March 2024, the Hong Kong court sentenced a retail trader to 18 months imprisonment for securities fraud by way of illegal short selling, following SFC investigations.

Interim freezing injunction pending compensation order

The SFC recently has obtained an interim injunction from the Hong Kong court against an individual to preserve her assets pending any compensation order that the court may impose on her at the end of the SFC’s on-going legal proceedings. It is the first time that the SFC obtains this type of interim injunction in connection with legal proceedings under section 214 of the SFO. The SFC’s legal proceedings relate to a suspected fraudulent scheme disguised as various sale and purchase agreements with a consideration of hundreds of million Hong Kong dollars. This serves as a reminder that individuals facing SFC enforcement actions and related legal proceedings are subject to a risk of his personal assets being frozen for months or years, until the conclusion of the legal proceedings, if the SFC considers there is a risk of dissipation.

Conclusion

The SFC’s surveillance team monitors trading on the Hong Kong stock market on a daily basis into possible market misconduct. If you receive a SFC notice requesting to produce documents or records or to attend an interview, or if you are subject to a SFC dawn raid, it is important to promptly seek legal advice to protect your position. Even if the regulators are not knocking at your door, it is important for licensed persons, individuals and companies to always adhere to relevant law and regulations and not make yourself vulnerable, including by participating in coordinated syndicates of market manipulation. For licensed or registered persons as a firm, it is important to review your internal policies and procedures regularly, to ensure there is sufficient internal training in place, and to report suspected market misconduct to the regulators immediately.

Contact us today for further information on best practices, and to learn more about how our team can help you navigate the complex legal and regulatory landscape. 

  Alfred Leung, Partner

(E: alfredleung@hkytl.com T: +852 3468 7202)

Tiffany Lee, Of Counsel

(E: tiffanylee@hkytl.com T: +852  3468 7038)

This article is introductory in nature. Its content is current at the date of publication.  It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this article. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.