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SFC secures first criminal conviction of securities fraud via illegal short selling

Issue date: 2024-02-27 16:44:52

The Eastern Magistrates’ Court today convicted Ms Christine Yeung Tak Sum, an unemployed retail trader, after she pleaded guilty to securities fraud involving illegal short selling in proceedings brought by the Securities and Futures Commission (SFC).

The conviction of Yeung of a charge of employing a fraudulent scheme with intent to defraud in transaction involving securities under section 300 of the Securities and Futures Ordinance (SFO) in the context of illegal short selling is first-of-its-kind.  This case stemmed from a ramp-and-dump investigation during which the SFC discovered that Yeung had engaged in a fraudulent scheme to commit the offence (Notes 1 & 2).

Yeung was remanded in custody pending sentencing on 20 March 2024.

The Court heard that, on 28 May 2020, Yeung submitted a settlement instruction form to her broker Aristo Securities Limited purporting to show that she had 15 million shares in Hong Kong-listed Aurum Pacific (China) Group Limited (Aurum) in another brokerage firm, when in fact she did not.  The broker, being misled, allowed Yeung to sell the shares in Aurum before the purported transfer of shares was settled.

Yeung did not hold any of Aurum shares at the time she submitted the settlement instruction form and when she sold the shares.  After illegal short-selling Aurum shares, she proceeded to buy back the same quantity of shares at a lower price to cover her short-sold positions within the same day.  As a result, she obtained an illicit profit of about $602,600.

The SFC reminds intermediaries of their obligation to implement and maintain appropriate measures to comply with the short selling requirements and to be mindful of red flags indicating illegal short selling by its clients (Notes 3 & 4).

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Notes:

1. Under section 300 of the SFO, it is an offence to engage in any act, practice or course of business which is fraudulent or deceptive in a transaction involving securities.  A person committing an offence under section 300 of the SFO is liable on summary conviction to a fine of $1 million and to imprisonment for three years.
2. Please see the SFC’s press release dated 7 November 2023.
3. These include sections 170 to 172 of the SFO, the Securities and Futures (Short Selling and Securities Borrowing and Lending (Miscellaneous)) Rules and the Guidance Note on Short Selling Reporting and Stock Lending Record Keeping Requirements.
4. Red flags for illegal short selling include:

• Newly onboarded clients or clients with poor settlement records who request to sell large amounts of shares without first depositing the shares to the broker; and
• Retail clients who indicate that he/she will settle the sell transaction by transferring stocks from another broker via settlement instructions, but cannot provide a credible reason for not executing the sell transaction directly through the other broker.

Once the aforesaid red flags are detected, brokers should take reasonable steps to ensure its clients are in possession of the stocks before executing clients’ trade orders.

Source: SFC