Newsletter

July 16 2018

Global market abuse news - Summer 2018

On 17 May 2018, the Hong Kong Securities and Futures Commission (SFC) announced that it had reprimanded and fined the sole sponsor of Real Gold Mining Limited (Real Gold) HK$57million to settle the SFC’s concerns about the sponsor failing to conduct adequate and reasonable due diligence on Real Gold’s customers and properly supervise its staff¹

The case marks the first concluded SFC disciplinary action against a “bulge-bracket” international bank for deficiencies in HK IPO sponsor work. 

The SFC found that:

• Real Gold’s prospectus disclosed that its sales increased over twenty-fold within two years, and it appeared that, save for one customer, its customers had changed significantly during that period;
• All customer interviews were conducted by telephone;
• There was no direct confirmation from the customers of the transaction amounts;
• The sponsor did not interview one of the three customers with whom Real Gold had seemingly entered into a memorandum of long-term cooperation and did not ask another customer about the document, when it was interviewed, to authenticate it;
• A sponsor principal was appointed over four months after the sponsor was mandated, by which time preparations for the listing application were well under way;
• One of the sponsor principals thought she was the “signing responsible officer” for the listing application and believed that another team member was the sponsor principal. She was not involved in conducting due diligence or in correspondence with the Stock Exchange; and
• The due diligence work conducted on customers was handled by junior staff with little supervision.

In reaching this resolution, the SFC took into account that:

• This was the first and only listing application that the SFC had concerns about with respect to the sponsor’s work;
• The breaches concerned a limited portion of the sponsor’s due diligence;
  
• There was no evidence that the breaches were deliberate, intentional or reckless;
  
• The sponsor applied a reasoned weighting towards production-related due diligence and away from customer-related due diligence, which the SFC did not think met regulatory requirements;
  
• Senior management and external counsel were engaged early to address the SFC’s concerns; and
  
• The sponsor took steps to strengthen its internal controls and systems with respect to sponsor work after this listing.
  

• Carried out 1,503 routine analyses and reviews;
• initiated 84 investigations (30 involving misuse of inside information; 54 of market manipulation);
• completed or withdrew 72 investigations (21 involving inside information; 51 of the market manipulation cases); and
• forwarded 6 reports to the Central Public Prosecutor for Economic Crime and Corruption.

An insider who intentionally uses inside information is subject to imprisonment for a maximum of five years, if the transaction volume exceeds EUR 1 million. Recommendations involving inside information are also subject to imprisonment for up to five years. The unlawful disclosure of inside information is punishable by a maximum imprisonment of two years.

FMA cooperates closely with its European and international partners in the supervision of the stock exchange and securities trading. During 2017, 31 requests for mutual assistance were sent to authorities in other countries; seven were addressed to the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin“) and 24 to partner authorities in other countries. The number of inquiries received from overseas authorities has increased from 26 in 2016 to 32 in 2017; 21 of the requests were made by BaFin.

Notably, to ensure that Austria complies with MAR, FMA has repealed the Issuer Compliance Ordinance (Emittenten Compliance Verordnung), so that the previous concept of “compliance relevant information” (ie non-public information that is confidential and price relevant) from Austrian statutory law no longer applies.

• fair presentation of investment recommendations;
• communication of conflicts of interests; and  
• channels of distribution of investment recommendations.

• Consob received 352 reports of alleged suspicious transactions, of which 262 came from intermediaries, companies managing stock exchanges or multilateral trading systems, and 80 came from overseas securities market regulators;
• approximately 57 per cent of the alleged suspicious transactions concerned insider trading, 31 per cent market manipulation and the remaining 12 per cent related to multiple market abuse violations;
• most of the suspicious transactions reports related to the equities markets (78 per cent);
• Consob imposed 6 administrative sanctions in connection with market abuse violations (compared with 20 administrative sanctions in 2015), and five of these involved insider trading violations; and
• Five cases were reported by Consob to the Public Prosecutor as potentially entailing criminal offences.

• For an effective approach to enforcement, the FCA will not just focus on imposing larger and larger penalties. Sanctions are only one element as “Good enforcement [also] requires robust, accurate and faithful processes for detecting misconduct in all its guises and acting quickly and effectively.”
  
• The FCA will increasingly use a combination of powers in enforcement situations as “Outcomes to [FCA] investigations may involve the use of enforcement, supervision, or competition powers, or a combination of some or all”.