Hong Kong Keeps it Among Friends

Hong Kong has just achieved its second conviction for insider trading and the first in which a culprit was actually given a custodial remand. But do not assume that a general clean-up of insider activity is underway. The majority view of the business elite is that it should not be stopped, let alone subject to criminal prosecution. Most likely prosecutions will be infrequent and aimed at minor players.

Insider dealing has been a criminal offense under the Securities and Futures Ordinance since 2003. But when Hong Kong's best known insider-dealer is none other than banking sector legislator and head of the Bank of East Asia, David Li Kuok-po, it is no surprise that it took five years to mid-2008 to bring a case to conviction.

In this second case, Ma Hon-yeung, a middle ranking executive at BNP Paribas and four accomplices – his girlfriend and three relatives – were found guilty of using inside information to profit from of a plan to privatize a small listed company, Egana Jewellery & Pearls. Ma was a member of a team working on the privatization proposal.

They bought a large number of shares prior to the privatization announcement when the price rose by 25 percent from the average in the preceding month. Ma is awaiting sentence but a jail term is probable given that he has been remanded in custody while his accomplices have been released on bail.

He may well feel very hard done by compared with the local banking community's leader. Li narrowly escaped criminal prosecution in the US for doing pretty much the same thing -- tipping off a close friend about the Murdoch bid for Dow Jones, of which Li was a director. The friend then informed his daughter and son-in-law and financed their large purchases of Dow Jones shares. This netted a US$8 million profit. Li got off with a civil penalty of $8.1 million and his friends had to pay US$16.3 million in penalties and disgorge the profits. The profits gained from Ma's insider dealing have not so far been revealed. However they are almost certain to have been very much smaller than those of Li's pals.

Li probably escaped criminal prosecution because he personally had not profited and it was possible that he passed on the takeover information by loose talk rather than deliberate design. However, the lack of ethical standards at the top in Hong Kong was reflected in the fact that Li resigned from the Executive Council, the government's top policy-making body, only after much public pressure and with the regret of his friend chief executive Donald Tsang. He was allowed to remain in key official advisory positions at the Monetary Authority and elsewhere and no questions were asked whether he was a “fit and proper person” to head a bank.

Despite this disgrace, Li remains brazen in his opposition to efforts to stem insider dealing. He was in the forefront of a recent campaign by Hong Kong tycoons against a stock exchange plan to impose tighter rules on dealings by directors and senior managers prior to profit announcements and significant corporate developments. They implausibly argued that the insider dealing law was sufficient. In practice the tycoons have long been heavy traders in their own shares with privileged knowledge. They want to be able continue to profit at the expense of outside shareholders or would-be shareholders.

Although the tighter dealing rules had been a year in the making, the government quickly caved into the tycoons and leaned on the stock exchange, which the government controls, and the Securities Commission not to proceed with them. The surrender by senior officials to such blatant self-interest by insiders ought to attract the attention of the Independent Commission Against Corruption (ICAC). But the ICAC itself has become a creature of the top officials and mostly contents itself with prosecuting low and middle level officials and policemen.

And so it is now with the insider dealing law. There will be a few prosecutions against middle level bankers and other professionals, a few against executives of small listed companies. But the likes of David Li and his fellow tycoons will continue to play the markets according to their own rules and interests.