The statutory functions of the SFC which are of an enforcement nature include:

• ensuring compliance with laws relating to the securities and futures industries, leveraged foreign exchange trading, and investment arrangements;
• reporting suspected insider dealing to the Financial Secretary;
• suppressing illegal, dishonorable or improper practices in dealing in securities, trading in futures and leveraged foreign exchange contracts, entering into investment arrangements, and providing investment advice or other financial services;
• inspecting the books and records of listed companies when directors and officers are suspected of impropriety in the management of a listed company's affairs; and
• cooperating with and assisting domestic or overseas regulatory bodies concerned with securities, futures, leveraged foreign exchange trading, banking, insurance or other financial services; or with the affairs of corporations.

In performing these functions, the SFC's Enforcement Division :

• collects evidence to:
  • support prosecutions for breaches of the various laws administered by the SFC;
  • institute disciplinary proceedings in respect of misconduct by licensed intermediaries;
  • refer to the Stock Exchange of Hong Kong (SEHK) and the Hong Kong Futures Exchange (HKFE) apparent breaches of their rules; and
  • detect impropriety by directors and officers in the management of a listed company's affairs;
• issues warnings, and advice on remedial action, for minor transgressions;
• prepares cases triable summarily for prosecution by the SFC's Legal Services Division;
• forwards to the Director of Public Prosecutions cases involving offences that appear to warrant prosecution on indictment;
• reports to the Financial Secretary circumstances which suggest that inspections under the Companies Ordinance or the Securities (Disclosure of Interests) Ordinance should be initiated;
• cooperates with and assists inspectors appointed by the Financial Secretary, the Insider Dealing Tribunal, and other regulatory and investigative authorities in Hong Kong such as the Hong Kong Monetary Authority (HKMA), the Independent Commission Against Corruption and the Royal Hong Kong Police - especially its Commercial Crime Bureau; and
• arranges, on behalf of the SFC, bilateral agreements with overseas regulatory authorities regarding mutual cooperation in the exchange of information and other assistance.

The Executive Director, Enforcement, coordinates and prioritises enforcement activity Commission-wide to ensure the range of cases investigated are well balanced, cover the full ambit of the SFC's statutory compliance responsibilities, reinforce regulatory policy objectives and demonstrate the SFC's vigilance in protecting investors.

The SFC's surveillance team monitors trading on the SEHK and the HKFE, using computer analysis to identify unusual price and volume movements and, when appropriate, conducts preliminary enquiries to determine whether the movements raise suspicions of market manipulation and/or insider dealing.

The first step is to analyse trading information from the SEHK or the HKFE. If this information raises suspicions of insider trading or market manipulation, then client details and records are obtained from brokers and, if further analysis of these records raise reasonable grounds to suspect insider dealing, market manipulation or other misconduct, an investigation is initiated.

During the year, trading records were obtained from brokers on 32 occasions. In 21 of these cases, full investigations were initiated.

Of the 1653 complaints and enquiries received during the year by the Investor Education Unit (see paragraph 2.56), the vast majority were resolved without full investigation being necessary. However, in 19 cases, formal investigations were initiated.

Although the SFC is limited in its capacity to comment on investigations by the secrecy provisions of the Securities and Futures Commission Ordinance (SFCO), there are some cases where information is already in the public domain and others where general information can be given.

A total of 188 cases were carried forward as ongoing inquiries from the previous year. During the year a further 188 cases (including the 21 cases referred to in paragraph 3.6 and the 19 cases referred to in paragraph 3.7) were referred to the Division by the public, foreign regulators, law enforcement agencies in Hong Kong, the Exchanges, and from within the SFC.

Of the total of 376 cases handled, 207 have been concluded. The remaining 169 are the subject of continuing enquiries, hearings or prosecutions.

During the year, action continued against registered persons involved in "rat trading", a generic term used in the local securities and futures markets to cover a wide range of malpractices by staff of brokers, in particular floor traders, trading to the disadvantage of clients. Rat trading is usually detected during routine inspections both by the SFC's Intermediaries Division and the Financial Regulation Unit of the SEHK, who then refer their findings to the Enforcement Division for investigation.

Investigations culminated in disciplinary action being taken against 58 registered persons who were involved in, or actively facilitated rat trading. These persons either had their registrations revoked or suspended for periods ranging from three months to three years. Sixteen dealers, whose lack of supervision or system inadequacies allowed rat trading to occur, were in most cases publicly reprimanded, except in the more serious of these cases when short periods of suspension were awarded.

Disciplinary cases of particular note resulting from investigations by the Enforcement Division and which were concluded during the year are detailed in the following paragraphs:

Jardine Fleming Investment Management Limited

On 29 August 1996 the SFC publicly reprimanded Jardine Fleming Investment Management Limited (JFIM) for failures of supervision and internal controls which allowed Colin Armstrong, a former director and senior fund manager of JFIM, to preferentially allocate trades to benefit his personal account and one particular client account to the disadvantage of funds and accounts managed by JFIM. The SFC revoked all registrations for both Colin Armstrong and Robert Thomas, the former Managing Director of JFIM, who accepted responsibility for JFIM's supervisory failures.

The public reprimand of JFIM took into account its cooperation in the investigation, its voluntary payment of compensation in the amount of HK$148.96 million to the disadvantaged funds and accounts, and the remedial action taken.

The SFC's action coincided with an announcement by the Investment Management Regulatory Organisation Limited (IMRO) that it had fined Jardine Fleming Asset Management Ltd (JFAM) (an associated company of JFIM) and three Robert Fleming group companies a total of ?00,000 for failing to properly supervise JFIM's management of funds delegated to it by them. IMRO also revoked JFAM and Robert Thomas' registration with IMRO (Robert Thomas was also managing director of JFAM).

Frankwell Commodities Limited

On 3 October 1996, the SFC publicly reprimanded Frankwell, a registered commodity dealer, its two dealing directors, Mr Johnny Sum Tai Chung, and Mr Andrew Strachan, and the major shareholders of Frankwell, Mr Wilson Lai Chan Kow, and Mr Frank Shum Tai Tung. This action related to:

failings by Frankwell to comply with the licensing requirements for dealers under section 3 of the LFETO in that its staff introduced clients to a Macau company to trade forex on a leveraged basis when the company was not licensed as a leveraged foreign exchange trader; in that it encouraged staff to hawk futures contracts by telephone as its main way of soliciting business, contrary to section 60A of the Commodity Trading Ordinance; and to satisfy the SFC it was and would continue to be able to meet the requirements imposed by the Financial Resources Rules; and

the fact that Strachan and Sum, although accredited to Frankwell as dealing directors with responsibility for the day-to-day operations of Frankwell, were directors in name only. All major decisions were made by the major shareholders, Lai and Shum, who acted as shadow directors and therefore bore ultimate responsibility for Frankwell's failings.

In deciding upon the action, which was taken in consultation with the HKFE, the SFC took into account that Frankwell had ceased business on 26 September 1996 and it, as well as Sum and Strachan, had requested the SFC to revoke their registrations. They all undertook not to re-submit any application for re-registration for a period of five years. In the case of Lai and Frank Shum, they also undertook not to submit applications for registration for themselves or for any entity in which they were directors, shareholders or partners for a period of five years and then only if an independent director with responsibility for corporate compliance acceptable to the SFC has been appointed.

On 19 November 1996, Lai and Frankwell pleaded guilty at Eastern Magistracy in relation to the unlicensed forex activity of Frankwell. They were fined a total of $50,000 and ordered to pay costs totaling $24,000 to the SFC.

Salomon Brothers Hong Kong Limited

On 28 February 1997, the SFC publicly reprimanded Salomon for failures within its Private Investment Department (PID) during the period April 1993 to March 1994. The failings resulted in certain account executives within the PID not being promptly registered with the SFC, and certain staff of the PID, when marketing Collaterised Mortgage Obligations, not fully explaining to their clients the risks involved in holding such products. When the bond market collapsed in February 1994, several of these clients incurred considerable losses as a result of holding high risk versions of this product. The public reprimand took into account prompt remedial action taken by Salomon at its own initiative, including the compensation of clients and the closure of the PID.

During the year, 3 dealing directors, 3 dealer's representatives and 1 leveraged foreign exchange trader were publicly reprimanded for minor transgressions in the conduct of their business. One dealer's and 2 dealer's representatives' registrations were suspended for periods ranging from one to three months for, among other things, concealing their trading, or facilitating trading of others, by the use of nominee accounts. In addition, 3 dealer's representatives, who misappropriated clients' shares, had their registrations revoked; the activities of these representatives were also the subject of enquiry by the Royal Hong Kong Police.

The SFC continued its enforcement action against registered dealers who employ people to act as their representatives, but who have not been registered with the SFC. In addition, the SFC continued to pay special attention to enforcing compliance with the LFETO, which mainly involved prosecutions against individuals for holding themselves out as carrying on a business of leveraged foreign exchange trading as agents for companies, based in Macau, whilst not licensed. This action not only resulted in 22 persons being prosecuted, but also disciplinary action being taken by the SFC against 9 registered/licensed persons; all of them were issued with public reprimands. Details of prosecutions and fines can be found in Table 1.

During the year, the SFC brought its first prosecution as a result of surveillance of the Internet. An individual in the United Kingdom, Mr Richard Woodhead, claiming to be an investment adviser, placed an open message on CompuServe's Hong Kong forum indicating that he could earn a 35% return for investors and inviting interested investors to contact him. A staff member from the Enforcement Division, posing as a prospective investor and replying via e-mail, learnt that the investment concept related to leveraged foreign exchange trading. When Woodhead arrived in Hong Kong, further contact was made and confirmation obtained in relation to his activities. He was convicted at Western Magistracy for holding himself out as carrying on a business of leveraged foreign exchange trading whilst not licensed. Woodhead was fined $10,000 or, in default, a 30 days term of imprisonment, and ordered to pay costs of $13,695 to the SFC.

During the year 10 persons were successfully prosecuted for providing false information in their application to be licensed or registered as representatives. Details of these prosecutions can be found at Table 2, below.

There was a significant decrease during the year in investigations into potential breaches of the Protection of Investors Ordinance (PIO), in particular the promotion of unauthorised investment arrangements to the public. There was only one prosecution, brought on 20 August 1996, when Skysen Development Limited pleaded guilty to 15 summonses in relation to the issue of unauthorised advertisements concerning the sale of property in China. The advertisements were issued under a scheme which constituted an investment arrangement under the PIO in that investors in the development were guaranteed that the price of property they purchased would appreciate between 20 to 25% annually. The company was fined $90,000 and ordered to pay costs of $17,234 to the SFC.

During the year, 57 persons were prosecuted for short selling, details of which can be found in Table 3. Short selling contravenes section 80(1) of the Securities Ordinance, which prohibits the sale of securities when the seller does not have a presently exercisable and unconditional right to sell.

Of the 57 persons prosecuted for short selling, 19 were registered persons. Six were publicly reprimanded for their short selling activities whilst the remainder were also disciplined for other activities, including rat trading. In addition, 2 registered dealers and 3 dealer's representatives were publicly reprimanded for failing to ascertain whether their clients had scrip to settle transactions and for failing to implement sufficient compliance procedures to prevent and detect short selling. These failings potentially jeopardise the settlement process.

The Enforcement Division cooperates with the Takeovers Executive in investigating potential breaches of the Takeovers Code and in verifying information provided to the Takeovers Executive. It also carries out investigations for the Takeovers Panel. In many cases, investigations are initiated whilst takeover transactions are underway, in which case the emphasis is on securing fair treatment for shareholders rather than on imposing sanctions after breaches have occurred. The types of outcome that are sought in these cases include having a general offer made to minority shareholders when none was previously forthcoming; having an offer price increased to that required by the Takeovers Code (the highest price paid by any member of a concert party in the preceding six months); or requiring shareholders who are not regarded as independent to abstain from voting at meetings of shareholders in relation to the takeover.

It is usually not possible to release information about cases of this nature where SFC intervention is successful except when the Takeovers Panel decides to publish its findings.

The SFC has continued during the year to monitor compliance with the SDIO. This resulted in two prosecutions:

• On 4 September 1996, Mr Chau Shek Cheong, a non-executive director of Kin Son Electronics (Holdings) Company Limited, was successfully prosecuted for failing, in May 1995, to notify the SEHK within five days of his ceasing to be interested in 82,345,191 shares of Kin Son. He was fined $5,000 and ordered to pay costs of $13,303 to the SFC.
  
• On 12 November 1996, Mr Li Chun, the Chairman of Best Wide Group Limited, was successfully prosecuted for failing, in October 1995, to notify the SEHK within five days of his ceasing to be interested in 6,036,000 shares of Best Wide. He was fined $21,000 and ordered to pay costs of $34,000 to the SFC

In addition to prosecutions, warning letters were sent to 66 persons for minor and inadvertent breaches of the Ordinance.

Yanion International Holdings Limited

An inquiry by the Insider Dealing Tribunal concluded that there was insider dealing in the shares of Yanion International Holdings Limited between 8 March 1993 and 12 May 1993 arising out of dealings in that company's shares by Danbridge Investments Limited, Golden Key Investments Limited and Langer Services Limited. The motive behind these dealings was to avoid the loss that was likely to occur after the announcement of Yanion's 1992 results, which showed a profit for the year ending 31 December 1992 of $2.43 million, compared to over $39 million for the year ending 31 December 1991 ("the relevant information").

The Tribunal identified five insider dealers:

• Leung Wah Chai, the Chairman of Yanion
• Butt Ching-han, Leung's sister-in-law, an employee of Yanion, and a director of Danbridge and Golden Key
• Danbridge, Golden Key and Langer

The Tribunal decided that Leung provided the relevant information, directly or indirectly, to Butt knowing she would make use of such information for the purpose of dealing, through the three companies, in the listed securities of Yanion, and that he counseled or procured Butt to deal in the listed securities of Yanion through the three companies knowing that she would deal in them.

The Tribunal made orders against the insider dealers to pay the following amounts:

The Tribunal took the view that Butt was at all times acting for and on behalf of Leung when she dealt on insider information and that the brunt of the financial penalty should be borne by Leung.

In addition to imposing financial penalties, the Tribunal issued an order prohibiting Leung and Butt, for a period of one year from 1 December 1996, from being directors of any listed company, or being involved in the management of any listed company.

CNPC (Hong Kong) Limited (formerly Paragon Holdings Limited)

On 13 November 1995, the Financial Secretary appointed the First Division of the Insider Dealing Tribunal to inquire into and determine whether insider dealing had taken place in relation to the listed securities of CNPC (Hong Kong) Limited during the period 3 March to 7 May 1993. The Tribunal held its substantive hearings between 25 March 1996 and 16 August 1996 and its report has yet to be published.

Hong Kong Parkview Group Limited (HKPV)

An inquiry by the Insider Dealing Tribunal concluded that Mr Hwang Chou Shiuan had dealt as an insider when purchasing 974,000 shares of HKPV on 13 August 1993. The Tribunal found that at the time of his dealings, Hwang had reason to believe that China International United Petroleum and Chemicals Company Limited (UNIPEC), a PRC company, would purchase by private placement 89 million HKPV shares. According to market sentiment at that time, such a substantial purchase by a PRC company, if it had been generally known, would have been interpreted as being very positive for the company. Indeed in the three days after the announcement of the placement on 17 August 1993, the price for HKPV rose from $3.20 to $4.325.

The Tribunal concluded that at the time of his dealings, Hwang was a "person connected with" HKPV because he had represented HKPV in making the offer to UNIPEC in respect of the placement of HKPV shares.

The Tribunal made orders against Hwang to pay the following amounts:

In addition to imposing financial penalties, the Tribunal issued an order prohibiting Hwang for a period of six months from being a director of HKPV or any of its subsidiaries, or from being involved in their management.

Chevalier (OA) International Limited

On 14 August 1996, the Financial Secretary appointed the Second Division of the Insider Dealing Tribunal to inquire into and determine whether insider dealing had taken place in relation to the listed securities of Chevalier (OA) International Limited arising out of the dealings in the listed securities of that company by Mr Chow Yei Ching (the Chairman of the company) during the period 26 April 1993 to 5 July 1993 (inclusive). The Tribunal commenced public hearings on 10 March 1997; the hearings are continuing.

Hong Kong Worsted Mills Limited

On 23 January 1997, the Financial Secretary appointed the Second Division of the Insider Dealing Tribunal to inquire into and determine whether insider dealing had taken place in relation to the listed securities of Hong Kong Worsted Mills Limited during the period from 6 May to 16 June 1993 (inclusive). The Tribunal held a preliminary hearing on 20 March 1997 and is expected to commence substantive hearings in June 1997.

Other Cases

Five cases were referred during the current year resulting in the Financial Secretary appointing the Insider Dealing Tribunal to inquire into three; Hong Kong Parkview Group Limited, Chevalier (OA) International Limited and Hong Kong Worsted Mills Limited. The Financial Secretary's decision as to whether or not to appoint the Tribunal to inquire into the remaining two cases is awaited.

The SFC continues to devote resources to the investigation of apparent cases of market manipulation. Most of these cases, which are highly resource intensive, are not public. There has, however, been one exception during the year, details of which are provided in the following paragraphs.

Real Grant Limited

As a result of suspicions that Real Grant Limited may have been involved during the period 1 April 1995 to 22 February 1996 in the manipulation of the share prices of a number of companies listed on the SEHK, including but not limited to Dah Hwa International (Holdings) Limited; Ngai Hing Hong Company Limited; Chaifa Holdings Limited; and Wing Fai International Limited, the SFC launched an investigation under Section 33 of the SFCO.

When Notices issued under Section 33(4) of the SFCO requiring production of banking and trading records were served on Real Grant in furtherance of that investigation, the company initially challenged the SFC's authority to conduct such an investigation and then sought to limit the information it was required to produce.

This resulted in an application to the High Court under Section 33(13) of the SFCO which was concluded on 27 February 1997. Mr Justice Rogers, after considering the evidence before him, including an affirmation by the principal shareholder and director of Real Grant Limited, Mr Victor Choi Hok Wan, indicated that he viewed as "very serious" Real Grant Limited's failure to produce the documents which it was legally obliged to produce to the SFC's investigators. However, as Real Grant Limited eventually complied, he took the view that it was not a case of obstinate refusal but a culpable failure to comply. Accordingly, in addition to ordering Real Grant to pay the full costs of the SFC on an indemnity basis, he imposed a fine of $650,000.

Section 29A of the SFCO empowers the SFC to inspect a listed company's books and records if its directors and officers are suspected of impropriety in the management of a company's affairs. During the year, the power was invoked on one occasion.

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