Civil lawsuits add to Everbright woes

Trading error could cost the brokerage a further 2.7 billion yuan in compensation

PUBLISHED : Tuesday, 03 September, 2013, 12:00am
UPDATED : Tuesday, 03 September, 2013, 3:57am

Mainland brokerage Everbright Securities, hit last week by a record fine for a trading error, saw its share price plunge yesterday and faces further losses of as much as 2.7 billion yuan (HK$3.4 billion) as investors seek compensation.

The error, which plunged trading into chaos on the mainland on August 16, is also likely to trigger a fresh clampdown on brokerage firms as the regulator steps up efforts to clean up the sector.

Shares in Everbright closed down 8.5 per cent at 9.21 yuan in Shanghai yesterday after plummeting by the 10 per cent daily limit in the morning, taking them to their lowest level since the stock started trading in 2009.

The downward spiral looked set to continue, analysts said, with the trading error, a result of chaotic management and a lack of oversight in internal risk control, likely to cost Everbright billions of yuan more due to the taint on its reputation.

The brokerage was fined 523 million yuan by the China Securities Regulatory Commission (CSRC) on Friday after being charged with "inside trading" practices following the error, which drove the stock market up nearly 6 per cent within minutes on the morning of August 16.

Everbright, without releasing information about the trading error to the public, immediately sold shares and index futures to reduce losses, improperly pocketing an illicit gain of 87.2 million yuan, the CSRC found.

A glitch in Everbright's arbitrage system mistakenly placed a buy order of more than 20 billion yuan in shares, leading 16 large-cap stocks to immediately hit the 10 per cent daily ceiling. Transactions worth 7.3 billion yuan ensued.

The CSRC also encouraged investors who lost money in chaotic trading as they chased the rally on that day to bring civil lawsuits seeking compensation from Everbright.

The stock market fell sharply on the afternoon of August 16, with other institutional and retail investors estimated to have suffered a combined loss of 2.7 billion yuan, Xinhua reported.

Everbright posted a net profit of one billion yuan last year.

"The further handling of Everbright will showcase the regulator's attitude towards the entire brokerage industry," a source close to the CSRC said. "To protect small investors, the regulator is expected to take a harsh stance on Everbright."

Zhang Yujun, an assistant to CSRC chairman Xiao Gang, told a closed-door work conference earlier that underachieving brokerages without effective internal risk-control systems would be forced to close down.

Following the error, four senior Everbright executives, including president Xu Haoming, have been barred from the stock market for life.

The brokerage's proprietary trading business was suspended by the CSRC and analysts predict its asset management unit will also be shuttered.