Suspected boiler-room accounts frozen in Hong Kong

Hong Kong’s securities regulator on Friday outlined significant developments made in two cases, one concerning alleged ‘boiler room’ frauds and the other relating to two solicitors carrying out insider dealing.

The Securities and Futures Commission (SFC) has obtained interim injunctions in the Court of First Instance freezing around HK$600,000 ($76,962) in bank accounts suspected of receiving monies from investors in alleged frauds known as boiler rooms.

Boiler rooms usually claim to be licensed for regulated securities or futures business and issue related advertisements when they are not licensed or actually in that jurisdiction. These schemes work by deceiving investors into transferring money to certain accounts, with the money subsequently disappearing.

The Court has also granted the SFC’s application for interim orders to restrain three entities from holding themselves out as carrying on regulated activities while unlicensed and suspending their websites. The trio comprised Waldmann Asset Management, Doyle Hutton Associates and Cardell Limited and/or Cardell Company Limited.

The interim orders protect the monies in bank accounts held by Cardan Limited, Cedan Limited, Hamtron Limited and Mutual Hope Limited. These accounts allegedly hold the proceeds of unlicensed or boiler room activities being carried out by Waldmann, Doyle and Cardell.

The interim orders will remain in force until the hearing of the SFC’s application for final orders against all the parties, the date of which is yet to be fixed.

The regulator is seeking final orders against Waldmann, Doyle and Cardell, including permanent injunctions and other orders to provide relief to any victims. The SFC’s investigation is continuing.

In another case involving the Court of First Instance, the SFC said on Friday that two solicitors, Eric Lee Kwok Wa and Betty Young Bik Fung, and Lee’s sister, Patsy Lee Siu Ying, were found to have conducted insider dealing and to have engaged in fraud or deception in securities transactions.

The regulator started civil proceedings in the court against Eric Lee, Young and Patsy and Stella Lee, both sisters of Eric, in December 2010, alleging the defendants made a total profit of HK$2.9 million in these transactions.

The SFC alleged that, in relation to Taiwan-listed Hsinchu International Bank transactions in September 2006, Young obtained non-public, confidential and materially price-sensitive information about a tender offer for Hsinchu shares while working as a lawyer seconded to a client of her firm.

Young allegedly subsequently bought Hsinchu shares and tipped off Lee and his sisters to do the same before the announcement of the tender offer. The SFC also alleged that this amounted to fraud or deception because Young owed duties to her employer and their client, including the duty to refrain from using such information for personal gain.

The SFC further alleged that, in relation to Asia Satellite transactions in February 2007, Eric Lee obtained non-public, confidential and materially price-sensitive information about the proposed privatisation of Asia Satellite shares while his law firm was advising on this transaction.

The regulator also alleged that he tipped off Young and his sisters to buy Asia Satellite shares before the announcement of the proposed privatisation, and that this amounted to insider dealing.

The court found that these allegations were proven against Young, Eric Lee and Patsy Lee, but ruled that there was not enough evidence to prove the allegations against Stella Lee. Nevertheless, the court may exercise its power to remove the illicit profit from her and restore the victims.

The court’s decision is a landmark ruling on the interpretation of section 300 of the Securities and Futures Ordinance, which prohibits the use of fraudulent or deceptive schemes in securities transactions.

Hsinchu Bank was a listed company on the Taiwan Stock Exchange in September 2006 and Asia Satellite was a company listed on the Hong Kong Stock Exchange in February 2007.

On 29 September 2006, Standard Chartered Bank announced the tender offer for Hsinchu Bank shares at NT$24.50 per share, around a 40% premium over the last closing price for Hsinchu shares.

On 14 February 2007, the proposed privatisation of Asia Satellite shares was announced and the offer price was $18.30, around a 30% premium over the last closing price for Asia Satellite shares.

Young and Eric Lee were employed, at the relevant time, as solicitors by Slaughter & May and Linklaters respectively. They are no longer employed by these firms.