Hong Kong – Enforcement Update: Historical Market Manipulation Criminal Trial.
In a 22-day market manipulation trial by jury, three individuals were convicted by the Court of First Instance (“CFI”) in May 2024 for engaging in false trading in the shares of Ching Lee Holdings Limited (previous GEM stock code: 8318 / current main board stock code: 3728) (“Ching Lee”). On 22 July 2024, two of the defendants were sentenced to imprisonment of six years and eight months and one of the defendants was sentenced to imprisonment of four years and four months. This case marks the first time that an offence under the Securities and Futures Ordinance (“SFO”) was tried at the CFI and represents the heaviest jail sentence imposed on market manipulation cases since the SFO came into effect.
Ching Lee commenced trading on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited on 29 March 2016. The prosecution stemmed from the Securities and Futures Commissions (“SFC”)’s investigations which revealed that even before Ching Lee was listed in March 2016 the three defendants conspired with the masterminds of the scheme (who are believed to have absconded from Hong Kong) and other syndicate members (“Syndicate”) to carry out a complex scheme of market manipulation in respect of the Ching Lee shares, contrary to sections 295 (offence of false trading) and 303 of the SFO and section 159A (offence of conspiracy) of the Crimes Ordinance.
Based on the SFC’s investigations, the Syndicate or their nominees:-
- Acquired placement shares in Ching Lee;
- Between March and September 2016, matched “buy” and “sell” trades of the shares so as to create a false an misleading appearance of wide investor interest and to maintain artificially inflated prices. Specifically, the three defendants conspired to maintain an artificial turnover of the shares in Ching Lee by conducting manipulative transactions among 156 securities accounts under their control.
- Between July and September 2016, obtained loans from lenders using, as security, shares in Ching Lee which had been trading at inflated prices;
- In September 2016, disposed of some of the shares they controlled at a profit, causing a drop in the share price of 90% in a single trading day after around five months.
- Transferred some of the proceeds of sale out of Hong Kong; and
- Defaulted in repayment of the loans.
Above: Historical trend of Ching Lee’s share price
The manipulative trading activities took place over a period lasting for more than five months in 2016 and netted illicit profits of over HK$124 million.
The outcome of this case reinforces Hong Kong’s reputation as a leading international financial centre with a robust regulatory frameworks, a vigilant regulator (the SFC), and a judiciary willing to impose substantial penalties on those who seek to undermine the fairness and transparency of the markets. By taking decisive action in this case, the SFC has shown that it is serious about protecting investors and maintaining the confidence of market participants in Hong Kong’s financial system.
