Charles Schmitt & Associates has been banned from trading by the Securities and Futures Commission after the fund management company's managing director failed to adequately explain the transfer of clients' assets to an unauthorised account. The commission found the firm's owner and managing director, Charles Schmitt, transferred clients' funds to a bank account connected to him. 'There is a suspicion that client assets might have been misappropriated from a fund on which he advised on behalf of Charles Schmitt & Associates, namely, CSA Absolute Return Fund,' it said last night. 'The SFC, therefore, believes that clients' property has been dealt with in a manner prejudicial to the interests of clients and considers that it is desirable in the interest of the investing public to issue a restriction notice.' According to the commission, the commercial crime bureau of the police is also investigating the case. The restriction notice means the company cannot trade or dispose of any assets without the consent of the commission. The SFC said it had questioned Mr Schmitt over the transfers, which were in breach of regulations requiring fund managers to appoint an independent trustee or custodian to provide safe custody of assets of unit trusts and mutual funds for investor protection. The CSA Absolute Return Fund is not authorised by the commission, which means it cannot be sold to retail investors. However, it can be sold to professional investors such as insurers, brokers and high-net-worth individuals. Mr Schmitt manages the hedge fund, which uses high gearing and derivatives products to enhance investment returns. Although the fund is not regulated by the SFC, the company and Mr Schmitt are both licensed to offer securities advice, corporate finance and asset management. The Charles Schmitt case marks another scandal in relation to unauthorised funds sold in Hong Kong. The commission, however, said the case 'appears to be an isolated case of deliberate fraud. The SFC will continue its vigilance programme to detect incidences of suspected fraud'. Towry Law Hong Kong has been plagued by scandal since March, when two hedge funds widely sold by the company, Global Diversified Trading and Global Opportunities Trading, collapsed. Since then, further scandals have emerged involving the sale of geared-with-profits funds provided by companies such as Circus Capital and Scottish Mutual International. In many cases, investors have faced substantial or total losses on what were supposed to be low-risk investments.
