Why Du Jun thought he could flout the law
Why did Du Jun leave the safety of Beijing and head for Hong Kong to collect a picture and an air purifier, knowing the local regulator was after him?
That's the question many have asked since the conviction of the former Morgan Stanley Asia banker for insider trading.
Some say it was foolishness or recklessness. I saw a calculating mind that has been twisted by a privileged upbringing, an ineffective compliance system and the perceived impotence of regulators against international players in town.
In short, Du saw no big deal in trading on privileged information. He expected no grave consequences.
Born to a well-placed mainland family where guanxi matters, Du knows about the trading of privileges.
Naturally, he made his career as a 'relationship facilitator' at Morgan Stanley in its China business. His job was not about following written rules, but rubbing shoulders and exchanging favours with the powerful to get what he wanted.
This was a circle where insider information was used as 'gift'.
Du did his job well. He landed Morgan Stanley juicy fixed-income and foreign exchange deals with the State Administration of Foreign Exchange and various state-owned enterprises.
His efforts were well rewarded. Within a few years, he was No 2 of the firm's fixed-income team in Asia. His annual pay plus bonuses was more than HK$19 million, not bad for a 40-year-old.
But here is a man who has risen to the top not by upholding integrity. He is in an industry where corporate insiders get financing to trade on their own stocks; where brokers win fund managers with 'tips'; where hedge funds short shares after being given the nod by investment bankers of share placement plans, subscribe for the placement at a discount and then help the bank in building a decent order book.
The written rule at Morgan Stanley says: 'Thou shall not trade on insider information.' Billions of dollars were showered on internal control. A dozen workshops were organised every year to warn staff against insider trading. Informer hotlines were set up for staff.
But the reality is another story. The system was 'haphazard and inefficient', as described by the prosecutor.
The system required Du to get his boss' approval to trade through his employee account. But his 'busy' boss designated the power to the operating officer who had no clue who was working on what. The operating officer relied primarily on the employee's 'integrity' and the consensus of a compliance officer.
Yet, the compliance officer could not even get the names right. She took Citic Pacific for Citic Resources Holdings when Du asked for the consensus to trade on the latter. With all the approvals granted, Du began his trading on February 15, 2007.
Not until 10 days later did his boss - the head of the fixed-income division, Liu Jialin - pick up the fishy trades. By then, Du had already bet HK$31 million on Citic Resources through five trades.
Liu blew no whistle. He merely asked Du, who he knew was working on the Citic Resources oilfield acquisition, to stay away from the stock.
If Du had had any doubt about whether he could have his way, it would have all gone by then. Mind you, Liu is no ordinary division head. He is among the handful of people sitting on the powerful management committee of the firm's Asia arm.
A week later, Du increased his bet on Citic Resources. Liu took him to lunch and warned him again. Du ignored him and bought more. Liu summoned him to the office and warned him again. Still no action was taken.
The ceiling did not fall in until Du's trades swelled to a tally of HK$87 million and got noticed by the compliance office. By then, he had already done nine trades over two months with official approvals each time.
Morgan Stanley began an internal investigation. Du subsequently got the boot in June 2007. His pay and bonus were left untouched.
All this could only have reinforced Du's impression that the zero tolerance of insider dealing was no more than rhetoric in the industry.
Why should he see himself as doing any grave wrong? Why would he consider himself to be in deep trouble?
Yes, the firm had referred his case to the Securities and Futures Commission. He had been questioned, his computer and BlackBerry searched, but Du could not have been too worried.
In July last year, the commission had yet to secure any criminal conviction on insider dealing. It had just started its first two prosecutions - one against a junior employee of a small listing firm and one against the banker of a second-tier brokerage firm ... and this was the fifth year after insider trading was made criminal.
Until then, insiders were penalised with nothing more serious than a fine and very often the punishment was only meted out many years later. Big fish were seldom caught, let alone major investment bankers. Hong Kong was never seen to be too serious about combatting insider dealings.
Against this backdrop, it's not too surprising that Du thought he could get away with his crime or at most a settlement with the regulator.
So, after seeing his wife, who also traded Citic Resources on his insider information, free to move in and out of Hong Kong, he decided to return.
But our regulator has proven him wrong, very wrong. Let's hope the message has finally sunk in.