Hong Kong’s SFC imposes $1.5m fine on SFM HK Management Limited over naked short selling

Maria Nikolova

The failures relate to the short selling of Great Wall Motor Company Limited shares in 2015 on behalf of a fund SFM managed.

The Hong Kong Securities and Futures Commission (SFC) announces that it 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 shares in 2015 on behalf of a fund it managed.

On August 28, 2015, Great Wall announced its proposed bonus issue of shares, which was equivalent to 200% of its existing issued shares and was subject to the fulfillment of certain conditions. The settlement date of the bonus shares was expected to be on October 13, 2015.

The SFC investigation found that on September 30, 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 September 30, 2015 without segregating them into a restricted account as required by SFM’s internal policy. As a result, 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 October 2, 2015, causing the fund to become short by 1,616,000 shares in Great Wall.

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.

Also, 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.

The SFC finds that SFM 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 making its decision about the sanctions against SFM, the regulator took into account a range of 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.
  • Read this next

    Inside View

    Scalping or day trading?

    Among the many popular trading styles with both beginners and experienced traders are scalping, which allows you to extract small portions of profit from each price movement, and day trading, which aims to trade over a single day. In this article, you will learn what scalping and day trading are and their differences and peculiarities. Ultimately, you will learn what to look for to understand which trading style is right for you.

    Crypto Insider

    Unveiling Plasma Next: INTMAX’s Solution to Scale Ethereum with Stateless Layer

     INTMAX has launched Plasma Next on the mainnet α, a groundbreaking Layer 2 zkRollup, revealed by co-founder Leona Hioki at ETH Denver. This innovation offers scalability with constant costs per block, merging Plasma’s scalability goals with zkRollups’ security.

    Fintech

    Nuam selects Vermiculus for clearing system in Chile, Colombia, and Peru

    “We are proud to deliver a system that plays an integral role in the core of this historical merger, empowering one of Latin America’s most crucial markets with VeriClear’s state-of-the-art technology, together with our deep market expertise.”

    Retail FX, Uncategorized

    Moomoo launches super app in Malaysia

    “As an investment platform connecting 21 million retail investors globally, we envision collaborating with exchanges, regulatory bodies, and partners in the visible future to become the gateway, connecting Malaysia’s investment products to global capital and investors.”

    Executive Moves

    FXPA elects Joe Hoffman as new Chair in its 10th anniversary

    “The opportunity to serve as Chair of the FXPA is truly an honor, and I am committed to upholding the exceptional work of a FXPA. Given the recent market fluctuations due to global tensions, inflationary pressures, shifts in monetary policy, as well as the outcome of the US election and the risk of recession, brings the potential for more FX volatility in 2024. I am dedicated to expanding the FXPA’s membership and I’m excited about collaborating with all members to echo the unified voice of the FX market.”

    Market News

    Eurozone Fights Stagnation Whilst Stock Indices Rally

    European stock markets are defying economic gloom as they continue to soar to all-time highs, showcasing resilience amidst broader economic challenges.

    Web3

    Lisk Partners with Indonesia’s Communications Ministry to Boost Web3 Startup Ecosystem

    Discover the strategic partnership between Lisk and the Indonesian Ministry of Communications and Informatics, aimed at propelling local Web3 startups to new heights through comprehensive support and education.

    Executive Moves

    Admirals appoints founder Alexander Tsikhilov as CEO

    “Striking the right balance between sourcing new talent and developing and harnessing the strength and capabilities of our current workforce, is key to achieving our vision.”

    Executive Moves

    GCEX appoints Ignacio Corral and Helen Man to UK operation

    GCEX has announced the appointment of Ignacio Corral and Helen Man to its UK FCA-regulated operation based in London as the firm further expands its global business on account of increasing demand for its digital prime brokerage services.

    <