Many people suddenly realized one thing only this time: Hong Kong’s financial market really does arrest people.
From March 10th to 11th, the Hong Kong Independent Commission Against Corruption (ICAC) and the Securities and Futures Commission (SFC) jointly launched an operation codenamed “Flashpoint.” Within two days, 14 locations were searched, and 8 people were arrested, including senior executives from two Chinese-funded brokerage firms and the head of a hedge fund.
Subsequently, the truth gradually surfaced: those involved in the storm were CITIC Securities Hong Kong subsidiary and Guotai Junan International. Pan Jupeng, the ECM director of Guotai Junan Hong Kong, was directly taken away from his home; employees of CITIC Securities Hong Kong subsidiary were also questioned by the ICAC.
This matter is huge.
Because this is a financial crime case – insider trading plus the transfer of benefits.
Another shocking thing is that the amount involved was only a mere HK$4 million in bribes, but through insider information operations, the hedge fund made HK$315 million from this information.
Having insider information is just that awesome.
Many people may not be clear what ECM is when they see the news.
ECM, short for Equity Capital Market, is the equity capital market department. This is one of the most core and dangerous positions in the brokerage’s investment banking system. What they do is actually very simple: help companies raise funds and help funds find investment targets.
This seemingly simple job means that they are in contact with the most sensitive information in the market every day: which company is going to issue shares, when to issue shares, how much, what the pricing is, and which institutions will participate.
Once this information is leaked in advance, the market will fluctuate violently.
Just like the operation mode in this case, it is actually very typical.
The first step, the hedge fund obtains the share issuance information through internal personnel of the brokerage; the second step, short the stock before the news is announced; the third step, the listed company announces the share issuance, and the stock price falls; the fourth step, the hedge fund closes its position, and the profit is pocketed.
The truly valuable thing in the whole process is the time difference. Because in the capital market, whoever knows the information first means that whoever can make a fortune out of thin air.
According to the details disclosed by the ICAC, this time, the boss of a hedge fund provided more than HK$4 million in bribes to the brokerage’s ECM department personnel in exchange for confidential information on the listed company’s share issuance. Before this information was made public, the hedge fund had already set up short positions in the market.
When the share issuance announcement is released, the stock price falls, and the profit will be automatically realized.
In the end, this hedge fund made HK$315 million through these transactions. This is actually a very classic arbitrage model in the financial market. The problem is that it can only be established in the case of insider trading, because normal investors cannot get this information.
This is also why all mature capital markets around the world severely punish insider trading.
Because insider trading destroys the most core rule of the market: information fairness. Once market participants generally believe that “someone knows the news in advance,” the market will lose its basis of trust. What the capital market fears most is not losing money, but the rules being broken.
Actually, what I want to say is that the most interesting thing about this matter is not the insider trading itself, but that Hong Kong really started arresting people.
Some brokerage firms are still copying the practices that used to indulge them in the A-share market to Hong Kong, thinking that they are just “routine operations,” but they didn’t expect that Hong Kong would actually enforce the law.
There, no one will indulge you.
Many people have a misunderstanding about Hong Kong’s financial market, thinking that it is a highly free place and the supervision may be relatively loose. The fact is quite the opposite. Hong Kong’s capital market has a very distinct tradition – extremely strict supervision.
According to the Hong Kong Securities and Futures Ordinance, insider trading is a criminal offense. The maximum penalty for a public prosecution conviction is a fine of HK$10 million and imprisonment for 10 years; even if convicted through a summary procedure, it may face a fine of HK$1 million and imprisonment for 3 years.
Hong Kong also has a system that is very different from the mainland: senior executives of institutions also have to bear responsibility. If market misconduct occurs within the company and senior executives have not established sufficient compliance mechanisms, they may also be held accountable.
This is also why the internal compliance system of Hong Kong financial institutions is very complex: from transaction monitoring, information isolation to telephone recording, and email auditing, almost every link is preventing insider trading.
But even so, the temptation of human nature still exists.
Another reason why this incident has attracted huge attention is that the two institutions involved are both leading Chinese brokerage firms. CITIC Securities and Guotai Junan are both important forces in China’s investment banking business and are also representative institutions that have been vigorously promoting international expansion in recent years.
Especially the Hong Kong market, which has always been the bridgehead for Chinese-funded brokerage firms to “go global.” In the past few years, the share of Chinese-funded brokerage firms in Hong Kong stock underwriting has been continuously increasing. CITIC Securities Hong Kong subsidiary has participated in the underwriting of dozens of companies, and Guotai Junan Hong Kong has also underwritten multiple IPO projects.
But this scandal has undoubtedly cast a shadow over this expansion. Because what the capital market values most is not scale, but credibility. Once labeled as insider trading, it is difficult for the institution’s image to recover. In the financial industry, a scandal often takes many years to repair.
This kind of story is actually quite common – for example, Chinese aunties make a scene in front of European and American police, thinking that they can also be allocated according to the noise, but the result is that they are arrested.
In a rule-of-law society, still doing the same old tricks as before, you are too young, too simple.
Many people who come to Hong Kong’s financial industry from the mainland often experience a cognitive shock. In some places, the rules can sometimes be “negotiated,” but in Hong Kong, many rules are red lines that cannot be touched. Insider trading, the transfer of benefits, and market manipulation – once caught, there is almost no room for maneuver.
The law is the law, if it can be maneuvered, then it is not called the law.
The ICAC will not make an exception because you are an employee of a large institution, nor will it show mercy because you are an investment banking elite.
In the face of the law, there are no so-called financial elites, only suspects. This is also why many Hong Kong financial practitioners often say: in Hong Kong, you can make a lot of money, but you must abide by the rules.
In some environments, many things can be handled vaguely, “three cups of wine as a penalty.”
But in Hong Kong’s financial market, the rules are the rules. Whether you are a senior executive of a Chinese-funded brokerage firm or an investment banking star, as long as you touch the red line of insider trading, the outcome is often only one – being arrested.
This is also an important reason why Hong Kong’s financial system has been able to maintain its international reputation for decades. The trust of the capital market is never built on slogans, but on strict law enforcement, relentless investigations, and making those who violate the rules pay the price time and again, gradually building it up.
In Hong Kong, no one will indulge you. The financial market can give you great wealth, and it will also give you extremely severe punishment.
The rules have always been there, but some people, only until the moment they are taken away, truly realize its existence.
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