Hong Kong's Securities and Futures Commission has reprimanded and fined three UBS employees over mishandling of a client's trade order. The action follows a related temporary suspension of the licence of a Morgan Stanley employee handed down last year.
Two executive directors at UBS, Frank Hu and Peony Ng, were fined HK$800,000 and HK$600,000 respectively. An associate director, Jenny Chang Pui-Chun, was also fined HK$400,000. They remain employees of the Swiss bank.
They were negligent in relation to a series of trades they carried out on behalf of a UBS client that constituted wash sales and may have misled the market, says the SFC, which has stepped up vigilance in this area.
The misdeeds occurred when, in February 2008, a client faced margin calls from UBS. The investor decided to transfer part of his portfolio at the Swiss bank to his account at Morgan Stanley Asia, in order to ease his margin position with UBS.
This should have been a routine, delivery-versus-payment arrangement, says the SFC. For example, the transition could have been done through the Central Clearing and Settlement System of the Hong Kong stock exchange.
Instead, for the next several weeks, the UBS officials carried out a series of on-exchange matched sales and purchases in collaboration with the client's account executive at Morgan Stanley, Lillian Liu Yaying.
Ultimately, these people engaged in 82 'wash' sales (transactions that do not involve any change in beneficial ownership) covering four securities, distorting their real demand and supply. On six trading days, their activities accounted for more than half the daily turnover of one of the securities involved.
In August last year, Liu's licence was suspended by the SFC for six months for her role in the affair. Her licences for dealing in securities and in futures were reactivated on February 15 (she had resigned from Morgan Stanley in February 2009).
An SFC investigation found she failed to notice -- or turned a blind eye -- to the possibility that her participation in wash sales and falsely inflated turnover was detrimental to the client's interest.
Upon receiving the client's instructions, the team at UBS would input sell orders on the Hong Kong stock exchange. They would then inform Liu or her assistants by phone immediately of the volume and price of the orders. Liu and her assistants would then arrange for Morgan Stanley, on behalf of the client, to buy from the market a similar quantity of the same stock at the same prices or at prices lower than that of UBS's sell orders.
The SFC notes the penalty accounted for the UBS individuals' not having meant to manipulate the market, and that they sought compliance advice at UBS, but misunderstood it. This is probably why the trio remain UBS employees.
A UBS spokesman says the SFC has not reprimanded the firm. The SFC would not comment on whether the investigation is ongoing.