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SFAT affirms SFC decision to fine CCL and imposes a heavier suspension on its RO for his failures

The Securities and Futures Commission (SFC) has reprimanded and fined Cardinalasia Consulting Limited (CCL) $1.5 million over its failures in acting as a principal investment adviser to five private funds between August 2014 and October 2017 after the Securities and Futures Appeals Tribunal (SFAT) upheld the SFC’s disciplinary action against it (Notes 1 to 5).

The licence of CCL’s responsible officer, Mr Edward Lee Shiu Lun, has also been suspended for nine months from 27 January 2023 to 26 October 2023 – two months more than the SFC had proposed. Lee was primarily responsible for providing investment management and advisory services to the five CCL-advised private funds during the material time (Note 6).

In imposing a heavier suspension on Lee, the SFAT’s chairman the Hon Justice Hartmann said “it is important that others acting in the same capacity should appreciate that the role of an investment adviser is a role of real substance”.

Mr Justice Hartmann also said that: “The clear importance of an investment adviser in protecting the interests of investors lies in the simple, single fact that the person so appointed acts in an independent way, even if acting under delegated powers, employing his or her knowledge and understanding of financial matters in order to ensure the best interests of investors even if, in giving advice, that advice is contrary to the intended wishes, or decisions actually made, of those higher in the delegated chain of management.”

Mr Christopher Wilson, the SFC’s Executive Director of Enforcement, said: “This case serves as a timely reminder to fund managers and advisers of the high standards of conduct the SFC expects of them. Substandard practices of fund managers would not only expose fund investors to potentially significant financial losses, but also threaten the integrity of the market and Hong Kong’s role as an international asset management centre.”

“The SFC is determined to crack down on asset management misconduct and will impose harsher penalties going forward to deter such misconduct,” he added.

During its investigation, the SFC found that seven loan agreements totalling $203.9 million were entered into amongst the five CCL-advised private funds for the sole purpose of addressing the borrowing funds’ liquidity needs (such as meeting margin calls), with little regard to the lending funds’ interests (Note 7). Specifically:

  • the loans were not backed by any collateral or guarantee, and offered limited protection to the lending funds in the event of default or late repayment;

  • one of the loans was granted free of interest, and the interest rates for the other loans were far below the rates offered by other execution brokers for margin loans; and

  • it is apparent that one of the lending funds did not have sufficient liquidity when granting the loans. In one case, the lending fund had to borrow from another fund due to liquidity issues just one day after it had granted two loans to a third fund.

The SFC is of the view that CCL and Lee had failed to ensure that five of the seven loans that they advised and/or recommended the funds to enter into were fair and in their best interests. As for the other two loans which CCL and Lee allegedly had no knowledge of until after they had been entered into, CCL and Lee did not raise any concerns with the funds’ investment managers after becoming aware of them even though they were not in the best interest of the lending funds.

The SFC’s investigation also found that the investment managers of the five CCL-advised funds effected a total of 14 pairs of cross trades amongst the funds by way of bought and sold notes at a significant discount (ranging from 14% to 31%) to the stocks’ previous close on three trading days in November 2015. In this connection, CCL and Lee had failed to properly assess the basis for each of the trades and ensure that they were executed on the best available terms for, and in the best interests of, both the buying and selling funds before signing the relevant settlement instruction forms for the trades.

End

Notes:

  1. CCL is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities.

  2. Between August 2014 and October 2017, CCL was appointed by the funds’ investment managers as the principal investment adviser responsible for providing investment management and advisory services in respect of the funds.

  3. The funds, which were incorporated under the laws of the Cayman Islands as exempted companies with limited liability, are: (i) Taiping Quantum China Opportunities Fund; (ii) Taiping Quantum Strategic Fund; (iii) Taiping Quantum Prosperity Fund (Prosperity Fund); (iv) Quantum Advantage Fund; and (v) Quantum Enhanced Fund (Enhanced Fund).

  4. Prior to August 2015, Quantum China Asset Management Limited (QCAML) acted as the investment managers of all five funds. On 3 August 2015, Nova Asia Asset Management Limited (formerly known as Quantum Asia Asset Management Limited, NAAM), replaced QCAML as the investment manager of Prosperity Fund and Enhanced Fund. Both QCAML and NAAM were incorporated in the Cayman Islands and were not licensed by the SFC to carry on a business in any regulated activities as defined in the SFO during the relevant period.

  5. Please see the SFAT’s determination for SFAT Application No. 2 of 2021 on its website.

  6. Lee has been a responsible officer of CCL since 27 June 2003 and is licensed to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO.

  7. Two of the loans were partially repaid (for the total sum of $38.3 million) and the other five loans have been defaulted.

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