Fri. Sep 22nd, 2023

Regulation HK

Financial Regulator

SFC Fines Brokerage for Negligence During Share Placement

2 min read

China On Securities used incorrect prices in contract notes and transferred shares to placees without first requiring payment.

Hong Kong’s SFC (Securities and Futures Commission) has reprimanded and fined China On Securities HKD 6 million (USD 767,000) for failures as the placing agent in a share placement.

In November 2019, China On was appointed as the placing agent by the then majority shareholder of Hon Corporation Limited to procure placees to subscribe for shares representing up to 45 percent of Hon Corp’s total issued share capital.

An SFC investigation found that upon identifying six placees for the placement, China On failed to ensure that it acted within the scope of the majority shareholder’s authority and adequately safeguard its assets.

The SFC said China On entered into contract notes with the placees on the majority shareholder’s behalf, but using prices that were inconsistent with those agreed with the majority shareholder.

China On also transferred the shares to the placees without first requiring payment of the purchase price or confirmation that they would be able to make payment.

In addition, China On executed a purported instruction by a third party for part of the shares to be transferred to one of the placees for free, without verifying the instruction with the majority shareholder.

The SFC says China On’s disregard of the majority shareholder’s interests constituted “gross negligence, if not recklessness”, in breach of the Code of Conduct.

In deciding China On’s sanction, the SFC took into account that there was insufficient evidence to support any finding of dishonesty against China On, and that the firm otherwise had a clean disciplinary record.

Still, the SFC highlighted the importance of sending a “deterrent message” to the industry to make clear that it “will not tolerate any grossly negligent or reckless conduct”.

A copy of the Statement of Disciplinary Action is available here.

In January 2020, the SFC issued a restriction notice to China On, prohibiting it from dealing with assets held in six client accounts which were related to the suspected manipulation of Hon Corp shares.

As a result, China On was unable to collect the purchase price from the placees, and failed to pay the same to the majority shareholder.

Hon Corp was delisted from Hong Kong’s Growth Enterprise Market in June 2022.

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