Hong Kong’s securities regulator handed out decisions in two separate cases yesterday, one concerning Unicorn Securities and the other China Merchants Securities (HK).

The Securities and Futures Commission (SFC) reprimanded Unicorn and fined it and its former responsible officer, Chan Hoi-Shu, HK$3 million ($386,630) and HK$200,000, respectively, for failures in handling clients’ money and securities. Chan was also suspended for 15 months from March 12, 2016 to June 11, 2017.

The SFC found that between March 2011 and December 2013, Unicorn Securities mishandled its clients’ dividend entitlements of HSBC shares. The firm had gone against clients’ instructions in their choices between cash or scrip dividends (i.e. HSBC shares) when submitting their instructions to Hong Kong Securities Clearing Company, and giving the clients’ dividends to others.

On seven occasions, Unicorn chose and received scrip dividends for all clients regardless of the clients’ instructions. After allocating the dividends to clients who had chosen to receive them, Unicorn deposited the remaining scrip dividends into the account of Chan or the account of a client.

Chan would then sell these HSBC shares in the market and pay Unicorn an amount equivalent to the clients’ cash dividend entitlements for making payments to the clients who chose cash dividends. Chan kept the profit arising from the difference between the amount he received from selling the HSBC shares and the amount he paid Unicorn.

Separately, Unicorn chose and received cash dividends for all the clients on two occasions. For clients who chose scrip dividends, Unicorn would give the clients’ cash dividends to Chan who would then buy HSBC shares to meet clients’ requests, and he made a profit in the process.

The SFC also found that Unicorn had connived in Chan’s transfer of client money into his personal account.

The conduct of Unicorn demonstrated its failure to put in place adequate and effective internal controls in relation to proper handling of client assets.

In determining the penalties, the SFC took into account that:

  • Unicorn and Chan had abused the trust placed by their clients in the firm;
  • Unicorn co-operated in resolving the disciplinary proceedings while Chan admitted to his misconduct;
  • Unicorn engaged an external consultant to conduct a review of its systems and controls and has adopted an automated operation system to reduce the risk of fraud; and
  • there is no evidence that clients suffered any loss as a result of the malpractice.

Both Unicorn and Chan are licensed to carry on type 1 (dealing in securities) regulated activity. Chan acted as licensed representative and responsible officer of Unicorn between October 1994 and October 2015. Chan had also been a shareholder of the firm until November 2014 and a director until October 2015. He is currently not accredited to any licensed corporation.

In a separate case, the SFC has banned Ng Hongs, a former executive of China Merchants Securities (HK), from the industry for 10 months from March 12, 2016 to January 11, 2017 for breach of the SFC’s Code of Conduct.

Ng had obtained a written authorisation from his client that authorised him to conduct trades on a discretionary basis in the client’s account, but did not obtain CMSHK’s management approval before entering into the arrangement. He then effected transactions for the client on a discretionary basis between August 2010 and September 2011 without CMSHK’s knowledge.

As a result the client was deprived of the firm’s protection on the discretionary account. Hence the operation of client’s account could not be properly monitored and supervised by the firm.

Ng was licensed to carry on type 1 (dealing in securities) and type 2 (dealing in futures contracts) activities. He was accredited to CMSHK and China Merchants Futures (HK) from August 5, 2010 to February 25, 2013. Ng is currently not licensed by the SFC.