Hong Kong SFC fines placing agent for disregarding fundamental duties

The Securities and Futures Commission (SFC) in Hong Kong has fined China On Securities Limited (China On) HK$6 million over its failures as the placing agent for the then majority shareholder (the “Vendor”) of Hon Corporation Limited (Hon Corp) at the end of 2019. In procuring placees to subscribe for 45% of Hon Corp’s total issued share capital, the SFC concluded that China On was grossly negligent, if not reckless, in its disregard of its fundamental duties to act within the scope of the Vendor’s authority and adequately safeguard the Vendor’s assets. Please see the SFC’s statement here. In more detail:

• Without the Vendor’s specific authority, China On entered into bought and sold notes on the Vendor’s behalf, in which the transaction prices were inconsistent with the placing price agreed with the Vendor.
• China On transferred the shares to the placees without first requiring payment of the placing price or certainty that they would be able to make payment. This was done “on the mere hope” that the placees would sell the shares on the market and that the proceeds would be sufficient to settle the placing price. The individual who carried out this arrangement was the then Responsible Officer who acted on purported instructions from two individuals (a China On consultant and an individual associated with the minority shareholder of China On) without verifying if this was in fact the Vendor’s intention.
• China On executed a purported instruction by a third party for part of the shares to be transferred to one of the placees for no payment of price, without taking any steps to ascertain whether this instruction represented the Vendor’s intention.

On 21 January 2020, the SFC issued a restriction notice to China On, prohibiting it from dealing with assets held in the placees’ accounts, on the basis that the placees were suspected to be involved in market manipulation.