SFC faces battle to identify victims of malpractice

A new system is needed to identify investors left out of pocket because of market misconduct

PUBLISHED : Tuesday, 25 September, 2012, 12:00am
UPDATED : Tuesday, 25 September, 2012, 3:49am

Nearly a decade after legislating to allow Hong Kong's securities watchdog to seek compensation on behalf of investors, there is likely to be a problem defining - and finding - victims to compensate.

Yesterday, suspended sports fabric maker Hontex International started offering to buy back HK$1 billion worth of stock it issued in a 2009 initial public offering. Investors have until October 29 to claim.

This is the first time the Securities and Futures Commission has used section 213 of the Securities and Futures Ordinance to seek compensation for investors left out of pocket because of market misconduct.

Previously, wrongdoers were only fined, and the money went to the government rather than to investors.

It has been a bumpy road to get this far. In March 2010, the SFC suspended trading in Hontex's shares after finding the company's prospectus overstated turnover and pre-tax profits in the three years leading up to the listing in late 2009.

A lengthy legal battle ensued before the High Court made its landmark compensation ruling.

In this case, the victims are easily defined. They are the 7,700 who are still holding the stock. But it may not always be so easy in other cases.

For instance, last week, vice-president of the Court of Appeal Justice Frank Stock and two other judges substantially reduced the fine imposed on inside dealer Du Jun to HK$1.688 million from the HK$23.3 million levied by the District Court in September 2009.

This was done to allow Du - Hong Kong's biggest inside dealer - to pay the victims of his dealings. When Du was managing director of Morgan Stanley, his client Citic Resources issued bonds to buy a Kazakhstan oilfield and he used the inside information to trade HK$87.1 million worth of stocks between February and April 2007, pocketing HK$23.3 million.

The SFC last Thursday said it would seek compensation for investors in those stocks. But finding the victims will be more complicated because the SFC will need to determine the counterparties to the trades. So, maybe the time is right for the SFC to devise a way to determine and locate such victims.

One way is for the SFC to introduce a system whereby victims of market misconduct can apply for compensation, providing they can prove they qualified.

That would be more efficient, and perhaps, save the regulator time and resources.