WHEN a company within the National Mutual group spent $23.7 million to buy 60 million shares of Hongkew Holdings from James Capel (Far East) in September 1990, it believed it was getting the best possible deal. It turned out, however, that the company had overpaid by $1.5 million due to serious misconduct by the James Capel account executive, Dickson Lai Kin-sang. Acting as a middleman through a firm he owned called Pure March, Mr Lai made a ''commission'' of $1.2 million by buying the Hongkew shares from Kongson Securities at 37 cents each and then delivering the shares to James Capel to settle the sale. Mr Lai breached securities rules again between February 26 and April 17, 1991, when James Capel sold various US dollar-denominated bonds to a company in the National Mutual group. The bonds were supplied to James Capel by Pure March. They had been bought by Pure March through Taiheiyo Securities (HK) on the same day as they were on-sold through James Capel. Pure March bought the bonds at a significant discount to the price at which they were sold through by James Capel. The bond transactions were arranged by Mr Lai. The most interesting part of the deal was that Pure March was able to chalk up profits of US$268,450 without having to make an outlay of capital. This was done making cash transfers through Euroclear from the accounts of Pure March with James Capel to Taiheiyo Securities. The SFC began to make inquiries into Mr Lai's activities in late 1992 and early 1993 under Section 56 of the Securities Ordinance. After the inquiry, the SFC concluded that Mr Lai was guilty of serious misconduct and was not a fit and proper person to be registered as a dealer or an investment adviser under the Securities Ordinance. The SFC decided, therefore, to revoke Mr Lai's licence as a dealer and investment adviser. Mr Lai was invited to make representations to defend himself and his solicitor appeared on his behalf. But after careful consideration, the SFC confirmed its original decision. Mr Lai then appealed to the Securities and Futures Appeals Panel, which upheld the SFC's findings but modified the penalty to a five-year suspension. Mr Lai's troubles began four years ago when he supplied the Hongkew Holdings shares to James Capel through Pure March. What followed was a number of puzzling and questionable moves. As part of the transaction, James Capel issued a bargain entry form and a contract note as evidence of the sale by James Capel of the Hongkew shares on behalf of Pure March. The bargain entry form was marked ''LDN Term'', or London terms, which meant settlement could be delayed to a date specified by the account executive, who happened to be Mr Lai. The settlement date was marked as October 15, 1990. After the bargain entry form and contract were issued to indicate the sale by Pure March through James Capel, the bargain entry form was amended to show the vendor as Ka Wing Securities. Ka Wing is owned by Mr Lai's sister and two of its four registered representatives are Mr Lai's wife and his brother. The bargain entry form was still marked ''LDN Term'' and the settlement date was still specified as October 15, 1990. The previous contract note was cancelled and a new contract note, which was dated October 1, was issued showing Ka Wing as the seller. Mr Lai's representatives claimed the initial reference to Pure March was a mistake but the SFC found the change to be deliberate. The Appeals Tribunal found that given the evidence, it was difficult to see how Mr Lai, who was responsible for the transaction record, could have mistakenly recorded Pure March as the seller of the Hongkew shares. There was also the issue of who made Pure March's investment decisions. The Appeals Tribunal agreed with the SFC's conclusion that when Mr Lai booked transactions to Pure March, he must have known he was booking transactions to his own benefit. As a result, he could and should not have treated Pure March as just another client. On October 15, 1990, Ka Wing bought the Hongkew shares from Kongson Securities for 37 cents each. The shares were delivered to James Capel to settle the sale to James Capel of October 1. The purchase by Ka Wing of the Hongkew shares from Kongson and the previous sale of those shares to James Capel were booked to a Ka Wing account called Francisco Yue. Mr Lai's wife handled the transactions at Ka Wing. On October 30, 1991, Ka Wing issued a cheque for $1,204,965 payable to Mr Lai. The payment, credited to Mr Lai's bank account, was for the same amount as the profit accruing to the Francisco Yue account with Ka Wing. Mr Lai's wife claimed the instruction to buy the Hongkew shares from Kongson to settle the sale with James Capel, and payment of the profit on that transaction to Mr Lai, was given by Jeremy So. However, the commission found Mr Lai had played a significant role in arranging the Ka Wing side of the Hongkew transactions. The Appeals Tribunal noted there was no explanation as to why Mr So used Ka Wing's account with James Capel for the sales. There was also no explanation offered about Francisco Yue's account with Ka Wing or why he used Ka Wing. Among the SFC's conclusions were that James Capel could have bought the shares direct from Kongson at 37 cents each rather than 39.5 cents; that the price paid by James Capel's clients went directly to Mr Lai's benefit; and that Mr Lai played a major role in arranging these transactions. The SFC also found that payment of the US dollar-denominated bond sales was made possible by the intermediation of Pure March between Taiheiyo Securities and James Capel. It found that had the sale been made direct between Taiheiyo and James Capel, James Capel could have bought the bonds at a considerably cheaper price. The SFC concluded that the intermediation of Pure March was arranged by Mr Lai and the extra price paid by James Capel benefited Mr Lai's company, Pure March. The Appeals Tribunal rejected a number of allegations made by Mr Lai's representatives against the SFC regarding its lack of principle, fairness and good faith, and of oppression and abuse of power. Mr Lai's representatives also contended that the commission was obliged to apply ''the highest criminal standard of proof beyond a reasonable doubt'' to its considerations of the allegations against Mr Lai. To support this point, the 1986 Report of the Insider Dealing Tribunal was cited. The Appeals Tribunal said the cited parts of the report had been subsequently described in the Court of Appeal as applying ''a more rigorous standard of proof than the applicants could, as a matter of law, have demanded of them''. It found the SFC had not applied the wrong standard of proof. Rather than remove Mr Lai from the securities industry forever by revoking his licence, the tribunal decided to make the penalty less severe by suspending him for five years. ''We are mindful of the importance to maintain the integrity of the securities industry,'' the tribunal said. ''The commission's resolve to protect the investing public must not be undermined. ''Mr Lai's misconduct was serious. To profit at a client's expense as he did is wholly unacceptable and a serious breach of commercial morality. We must register a strong condemnation of such misconduct,'' it said.
