Reference no: EM131756456

Question 1

Your colleagues have the following conversation.

Rainy: HSBC Private Bank (Suisse) SA was recently fined HK$400 million!

Jo: Yeah, the Securities and Futures Appeals Tribunal gave them the biggest fine ever. Rainy: The fine seems too much to me. I mean, nothing's been proven in a court of law.

Bill: Its too small if you ask me. They earned over HK$2 billion in gross revenues selling those products over a 5 year period! They should have been fined a lot more. If I were at HSBC, I'd say that the fine was just a cost of doing the business because we still made money out of it.

Rainy: Sure they earned a lot but it seems to me that the fine is being applied with the standards of 2017 not the standards that applied when the selling activity was happening. Anyway, aren't this company's clients professional investors that should be able to make their own decisions?

Jo: I think you're both wrong. The real blame here is really on the SFC and the HKMA. Aren't they supposed to be regulating to prevent this sort of thing? They knew about the misselling while it was happening but didn't do much to really stop it, they just talked about it. They published a report on it in February 2005, in 2006 they said that where there is evidence of breaches of the rules and regulations they will "take the necessary enforcement action", and then in May 2007 they issued a circular about it. So why didn't they do anything back then? If they did, a lot of people might not have lost so much money!

Rainy: Yeah, Jo's got a point. The Tribunal has kind of proved that SFC didn't do their job properly. Shouldn't the SFC be fined too?

Please provide your own views, with appropriate support and reasoning.

charge of corporate business, about a business Appco proposes to acquire following being admitted to listing - Kenny has already arranged that Bankco will provide some of the financing using Kristal's shares in Appco as collateral. Although negotiations are currently underway, it is expected that it will take around two to three months before the deal could be finalized and signed. They have the following conversation:

Kristal: We should have enough money after the listing, I don't think we'll need to ask for any more.

Kenny: Still, you'll probably need to announce it after you've signed the agreement.

Question 2

After considering the following facts, please explain any issues that arise under applicable Hong Kong laws and regulations, including the possible consequences thereof Are any of the issues you identify of particular relevance to the Hong Kong market as a whole and, if so, why?

Appco, a company duly incorporated in Mainland China, is seeking a listing on the Main Board of The Stock Exchange of Hong Kong Limited (SEHK). Some time ago it appointed Sponco, a Type 6 licensed corporation, to act as sole sponsor to undertake the requisite sponsor work. The listing work has progressed well and Appco is hoping to be listed in around one month. Yesterday, Appco signed a confidential engagement letter with Bankco, an authorized institution under the Banking Ordinance, appointing it to act as a second sponsor together with Sponco, though all parties understand that the appointment is only to deal with relationship issues and that Bankco will generally stay in the background.

Appco's controlling shareholder, Chairperson and CEO, Kristal, has recently had a confidential discussion with Kenny, Bankco's board director and principal officer in

Kristal: I'm sure you can help us find a way to avoid that, we'll need some time to settle things down after its ours.

Kenny: Have you discussed this with Sponco?

Kristal: No, it's a very confidential and sensitive transaction that's still being negotiated.

Kenny: Hmmm, its probably best to keep it that way.

As a result of the conversation, Kenny becomes concerned that Appco's share price could fall in the period following the listing if news leaked out about the negotiations. He mentions the concern to Sam, who has been seconded to Bankco from Beeco (one of the Bankco Group companies) to help with the listing work since he holds Types 4 and 6 representative status with Beeco. Sam suggested that Bankco stabilize the share price after trading commences by buying and selling shares until after the news of the new acquisition has been released, and noted that many investment banks typically engage in this type of activity. Kenny thinks it a prudent suggestion. He is very satisfied with Sam, particularly as Kenny now spends most of his time in Mainland China and Korea seeking out new business opportunities for Bankco. Appco and Bankco subsequently agree that any profits from the stabilizing activities would be for the account of Appco, although both parties understand that Appco will use any profits to pay down part of the loan it will still owe to Bankco after being admitted to listing. Although not widely known, Bankco has always been instrumental in developing Appco's business by extending debt finance to Appco at attractive rates. Kenny has been instrumental in fostering the relationship between the two companies as a shareholder and former director of Appco.

The proposed acquisition will enable Appco to cancel several of its long-term supply contracts with certain suppliers that have caused trouble in the past. Accordingly, Kristal has told Sam to try to keep Sponco away from those suppliers as they are unlikely to be cooperative and will soon be irrelevant. In any case, the employees at Appco have been very helpful in providing the relevant information to Sponco about Appco's suppliers as well as their sales records although some of the information had to be adjusted by Sam before Appco could provide it to Sponco in order to make sense of the valuation that Appco was seeking for its shares.

The appointment of Bankco turns out to be very fortuitous, as Sponco has just resigned as a result of what Kristal describes as continued misunderstandings, a lack of professionalism, and Sponco's work ethic failing to meet her satisfaction. The plan is that Bankco can now complete the sponsor work as the sole sponsor. Kristal expects to receive the approval of the Listing Committee in accordance with the expected schedule.

Question 3

This question comprises two parts of approximately equal weight. Both parts must be answered.

3.1 With reference to the extracts of the IHT (International Herald Tribune) article dated 6 March 2008 (see below), please identify what laws and regulations, if any, would be at issue in Hong Kong if Fidelity and its staff engaged in the same actions here, including any consequences of the same. For these purposes you should assume the following: Fidelity holds a Type 9 license issued by the Securities and Futures Commission (SFC); Fidelity's primary business in Hong Kong is to manage authonzed collective investment schemes; Peter Lynch is the appointed responsible officer for Fidelity's Type 9 activities; the matters stated as facts in the article are true.
Notes: This is a hypothetical question and you should ignore the actual status and circumstances of Fidelity in Hong Kong.

3.2 Where a licensed corporation has engaged in serious breaches of regulatory codes issued by the SFC that have resulted in losses to their client, please comment on the efficacy of powers given to the SFC as regards addressing any prejudice investors may have suffered, including obtaining remedies for affected investors, and protecting investors from future abuses of this sort. Is this is another area where regulations should be given statutory backing, or what other issues may need to be considered in this regard?

Extracts quoted from the International Herald Tribune newspaper, 6 March 2008.

Fidelity is lined $8 million over improper gifts By Jenny Anderson

Days at Wimbledon. Nights at U2 concerts. Flights aboard the Concorde. And a dwarf to toss.

Wall Street brokers were willing to give all that and more to win lucrative business from Fidelity Investments, the world's largest mutual fund company.

But on Wednesday those lavish gifts caught up with Fidelity, which agreed to pay $8 million to settle regulatory claims that current and former employees - among them Peter Lynch, the investor behind its Magellan Fund - had accepted improper gifts in exchange for business.

Lynch, a vice chairman of Fidelity, was among 13 employees accused by the U.S. Securities and Exchange Commission of accepting gifts from brokers. Over the years, he had asked Fidelity traders to secure tickets from brokers to 12 concerts and sports events, including shows by the rock bands U2 and Santana and a pass to the 1999 Ryder Cup golf tournament, the SEC said. Fidelity's self-imposed limit on gifts to its employees is $100.

Lynch, who ran the Magellan fund until 1990, agreed to pay a fine equal to the value of the tickets brokers had given him over the years almost $16,000 - plus interest.

-In asking the Fidelity equity trading desk for occasional help locating tickets, I never intended to do anything inappropriate, and I regret having made those requeSts,- Lynch said in a statement.

Money managers like Fidelity direct billions of dollars in securities trades to brokerage houses that reap commissions by executing the transactions. To get fund managers' business, brokerage firms shower money managers with expensive gifts. There is a lot of money at stake: From January 2002 to October 2004, Fidelity alone generated $2.3 billion in commissions for brokerages.

The SEC's complaint paints unflattering portrait of Fidelity's trading desk in recent years. Under Scott DeSano, the former head of global equity trading, Fidelity traders routinely accepted gifts in return for directing lucrative trades to brokers, according to the SEC.

"Word is out that order flow is for sale," an unnamed Wall Street broker wrote in an undated e-mail message to another broker in reference to Fidelity, according to the SEC complaint.

Between January 2002 and October 2004, the SEC complaint says, Thomas Bruderman, then a trader at Fidelity, received $450,000 worth of travel and entertainment from brokers who, among other things, helped pay for Bruderman's bachelor party in Miami. The festivities reportedly included chartered yachts, lodging at the Delano, a luxurious hotel, and a dwarf-tossing competition.

Bruderman also received 'thousands of dollars" worth of wine, a cigar-tilled humidor worth $1,300 and 30 tickets to at least seven events, including the U.S. Open and front-row seats at a Dave Matthews concert.

E-mail communications among the traders at Fidelity and their brokers, disclosed by SEC, suggest the employees knew they were breaking the rules.

In one, DeSano says, "What happens when I get fired for this" A broker responds, in e¬mail shorthand, ". . . no one is allowed 2 say anything . . . Last yr never got out . If someone talks, we kill." The SEC said the gifts influenced the way Fidelity's traders directed their trades. In December 2003, for example, Karen Pascucci, a former equity trader at Fidelity, asked a broker for courtside tickets to that night's NBA Celtics game. When the broker offered four tickets, Pascucci explained where to deliver the tickets and responded, "Thks. Buy 50K," meaning 50,000 shares, according to the SEC. Pascucci's lawyer could not be reached.

Fidelity said Wednesday that the SEC's findings make no finding of financial harm to our shareholders or our funds," but added, we do recognize the seriousness of the misconduct found by the SEC."