SFC Reprimands And Fines Huatai Financial Holdings (Hong Kong) Limited $800,000 Over Naked Short Selling
The Securities and Futures Commission (SFC) has reprimanded and fined Huatai Financial Holdings (Hong Kong) Limited (Huatai Financial) $800,000 for failures relating to the short selling of Great Wall Motor Company Limited (Great Wall) shares in 2015 (Note 1).
On 28 August 2015, Great Wall announced its proposed bonus issue of shares, which was equivalent to 200 per cent of its existing issued shares and was subject to the fulfilment of certain conditions. The settlement date of the bonus shares was expected to be on 13 October 2015.
The SFC investigation found that:
- On 30 September 2015, when the shares started trading on an ex-rights basis, Huatai Financial’s proprietary desk manually booked an entry in its trading system to reflect Huatai Financial’s entitlement to 360,000 bonus shares as a result of its pre-existing holding of 180,000 Great Wall shares. The entry caused Huatai Financial’s trading system to show a total of 540,000 Great Wall shares as a single position without differentiating between its pre-existing holding of 180,000 shares and the 360,000 bonus shares which had not yet been settled.
- On 6 October 2015, without performing any checks or verifications, a proprietary trader of Huatai Financial assumed that the bonus shares had become unconditional and placed an order to sell 500,000 shares of Great Wall, causing Huatai Financial to become short by 320,000 shares in Great Wall (Notes 2 & 3).
The SFC considers that Huatai Financial failed to act with due skill, care and diligence in dealing in the bonus shares and to diligently supervise its staff members and implement adequate and effective systems and controls to ensure compliance with the short selling requirements.
In deciding the sanctions against Huatai Financial, the SFC took into account that:
- the dealing in the bonus shares involved a single, unintentional short sale;
- Huatai Financial self-reported the regulatory breach to the SFC;
- there is no evidence to suggest that Huatai Financial had acted in bad faith in short selling the bonus shares;
- Huatai Financial has taken remedial measures to strengthen its internal controls and systems;
- Huatai Financial has cooperated with the SFC in resolving the SFC’s concerns; and
- Huatai Financial has an otherwise clean disciplinary record.
- Huatai Financial is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
- Section 170(1) of the SFO prohibits “naked” or “uncovered” short selling. It is a criminal offence for a person to sell securities at or through a recognised stock market unless at the time of the sale, he has a presently exercisable and unconditional right to vest the securities in the purchaser of them, or believes and has reasonable grounds to believe that he has such a right.
- Prior to the settlement date, Great Wall did not make any public announcement regarding the fulfillment of the conditions. The public did not have reasonable grounds to believe that they had presently exercisable and unconditional rights to vest the bonus shares in the purchaser of them before the settlement date.