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The SFC has been pushing enforcement efforts to uphold market integrity, with an increase in criminal prosecution for investigations at the District Court and the Court of First Instance. With the Hong Kong regulator turning its enforcement eye towards ramp-and-dump schemes and insider trading, firms will need to demonstrate a proactive commitment to compliance and ethical business conduct.
Ramp-and-dump schemes
A typical ramp and dump scheme is a form of market manipulation where fraudsters may open and use multiple nominee accounts to corner the shares of the target stocks and drive up the price of those shares. The fraudsters will then try to induce investors to purchase the shares through different social media platforms. They will then dispose of the shares aggressively at a profit which causes the price of the target stocks to collapse once the demand is exhausted. This ends up leaving the innocent investors with substantial losses.
In 2024, we have seen some ramp-and-dump cases investigated by the SFC and the Hong Kong police being transferred to the District Court for the first time for criminal prosecution. A total of 18 defendants were charged in the three cases, with offences under the Securities and Futures Ordinance (SFO) and the offences of conspiracy to defraud and money laundering. It was alleged that the defendants had organised and executed ramp-and-dump schemes in the shares of the three Hong Kong-listed companies by manipulating the trading of a large volume of those shares through numerous nominee accounts and inducing investors to buy the shares via different social media platforms.
In June 2021, the SFC issued a circular on suspected ramp and dump scams involving market manipulation in the shares of listed companies. The circular mentioned some of the red flags identified, such as:
- large trading volumes being conducted disproportionately to their reported financial profiles (e.g. unemployed individuals with limited assets making large trades)
- clients regularly acquiring shares through unusual means like bought / sold notes or third-party deposits
- shares being bought on a delayed settlement basis, then quickly selling them for a profit before the payment is due
- clients buying shares in a thinly traded, small-cap stock in a way that substantially raises the closing price, without clear explanation
- large volume of shares being sold shortly before a significant price drop, attempting to quickly receive the sale proceeds
- a group of clients exhibiting coordinated trading behaviour, such as:
- having the same third-party account operator
- transferring funds between each other
- opening accounts around the same time, with the same broker, or referred by the same person
- sharing personal details like phone numbers or email addresses.
To avoid falling into these traps, we advise strengthening compliance processes, identifying and addressing potential risks and misconduct, and maintaining a responsive and transparent relationship with regulators.
This includes:
- providing training to all employees to ensure they are aware of the red flags and the processes for identifying, escalating, and blocking potential red flags
- reviewing client onboarding and ongoing monitoring processes to identify high-risk clients and unusual transaction patterns in a timely manner, ensuring prompt follow-up actions are taken
- identifying potential market misconduct at an early stage and to timely escalate and / or report to regulators.
Insider trading cases
The SFC has recently initiated criminal proceedings in an insider dealing case against hedge fund Segantii Capital Management, its founder and director Mr. Sadler, and a former trader. The charges relate to dealing in the shares of a listed company in Hong Kong. Mr. Sadler was alleged to have received inside information from an investment banker on suspicion of insider dealing in the shares before a block trade in June 2017. The case has been transferred from Eastern Magistrates’ Court to the District Court for criminal prosecution.
The SFC has also strengthened its enforcement powers on insider trading. After its consultation, the SFC will proceed with expanding the jurisdiction of the SFO to include insider dealing activities that are related to overseas-listed securities perpetrated in Hong Kong and those involving Hong Kong-listed securities perpetrated overseas.
To mitigate risks of insider trading, it’s important to establish clear policies and procedures, provide on-going training and education to employees, implement trading controls and monitor trading activity, and set up internal confidentiality measures such as a Chinese Wall.
How can Bovill Newgate help you avoid SFC enforcement?
By leveraging our expertise, you can navigate the complex landscape of ramp-and-dump schemes and insider trading cases more effectively, mitigate potential legal and reputational risks, and strengthen your overall compliance posture.
Get in touch with our experts to find out more.
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