The champagne flowed. Fat red packets were handed out. The Year of Monkey has been good business for owners of listed shell companies, and so too, by all accounts, will be the Year of Rooster. Dark shadows hanging over the trade have cleared since the eve on the Lunar New Year. The acceleration of listing approvals up north had been threatening the value of listed shells in Hong Kong. A downturn in mainland stock markets and well orchestrated finger-pointing in the past two weeks have made Beijing question the wisdom of ramping up the pace of new listing approvals. In Hong Kong, senior regulators have repeatedly expressed their anger at the price roller coaster of many new listings on the GEM board. However, guidelines issued by the Securities and Futures Commission before the Lunar New Year holiday turned out to have more bark than bite. SFC and HKEX urge GEM market sponsors to ensure ‘fair and orderly manner’ of IPO listings If the ultimate sale of a listed shell is a long term reward, then the price roller coaster is a quick meal for the “shell owners”. A trading pattern widely shared by issuers with eye-popping performance helps illustrate the allure of the operation. Among them is a service provider which Money Matters won’t name for obvious reason. Like all the GEM board issuers, it has sold shares by placement only. The first trade was price at HK$9.6, which was almost 30 times its IPO price. The price stayed at that level for two days drawing attention from investors This jaw-dropping performance didn’t take much to achieve though. Assuming the trades are genuine, turnover was only HK$4.4 million given the thin volume of less than 0.5 million shares. The price made a U-turn on the third day as the share opened at HK$4.5. Retail investors flocked in to “bargain hunt” and trading volume ballooned. In the following three days, more than 200 million shares changed hands above the offer price. The 180 million shares held by the placees can be the only sellers. That translated into a 165 per cent gain, or at least HK$80 million, within a week. As the share price continued to fall, retail investors started to panic. More than 180 million shares were sold and many below the initial offering public. The placees could have comfortably recouped their shares at a discount, waiting for the sale of the listed shell. Such a pattern has been seen in six other issuers listed in the past six months. They rose more than 10 fold on the first day of trading and then dived below its offering price within a month of listing. These price movements require well coordinated efforts and therefore a high concentration of shares. Joining the dots provided by the commission in the guideline, one will see a syndicated operation among a handful of ringleaders. A small number of placing agents is involved. They allocate the lion share of the stock to a number of placees. Top 25 placees took up 96 per cent of the shares offered in 2015 and the first half of 2016. This is a privileged club. A handful of investors repeatedly appeared as the top placees in otherwise unconnected GEM IPOs, according to the SFC. To satisfy the regulatory requirement of having more than 100 shareholders, the agent places one or two board lots each to 100 or more investors. They would get a waiver or rebate of brokerage fee; an agreement to repurchase the shares after the listing; as well as a promise of securities in another IPO, according to the commission. They will buy or sell as told. The regulator’s solution is to “know your clients”. The commission requires the issuers, the sponsors, the underwriters and the placing agents to make sure the placees are not nominee. It threatens to delay a listing if in doubt. The shell owners’ answer to this so-called tightening is a USB drive. The fact is this “know your clients” requirement has been there for brokers for years and veterans have been there long enough to know what sort of questions would be asked by the regulators. Upon his or her share trading, a nominee will be asked a set of standard questions such the funding source, independence of the trading decision as well as reasons for trading. The conversations as well as the documents will be recorded on a USB drive. When the investigators come, everything is ready. No sweat.