Dow Jones insider trading probe puts Hong Kong in spotlight

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(AFP)

HONG KONG (AFP) - US allegations of insider trading against a Hong Kong couple highlight what many here believe is an entrenched culture of sharp practice in a city claiming to be a world financial centre.

A light regulatory regime, lightning fast flows of information and gossip, plus a get-rich-quick-at-all-costs ethos make markets such as Hong Kong open to abuse, they say.

Hong Kongers Kan-king Wong and his wife Charlotte Ka On Wong Leung have been charged by the US Securities and Exchange Commission with dealing in Dow Jones shares before a five billion dollar bid for the company by News Corp became public knowledge.

The pair allegedly borrowed 15 million dollars from various sources to buy 415,000 Dow Jones shares, acting on inside information just before it was announced that News Corp had made a bid for the financial news giant.

The offer sent the stock soaring almost 60 percent, producing an instant profit of some eight million dollars.

Observers noted how quickly and forcefully the US regulator had acted -- freezing the pair's trading account and calling them to book -- in sharp contrast to Hong Kong's less than strict record.

"The SEC moved immediately to freeze the funds of this couple in the US -- that has never been done here," said David Webb, a shareholder activist and a non-executive director of the Hong Kong Stock Exchange.

Observers say the problem is not regarded too seriously here, with the market driven by a volatile mixture of gossip and tips to invite comparisons with Hong Kong's horse racing scene -- itself often the subject of rigging charges.

Insider trading was only prohibited in law in 2003 with the creation of the Markets Misconduct Tribunal (MMT), which replaced the Insider Dealing Tribunal.

The IDT was the only route for bringing action against securities fraud from the 1970s and continues in operation as many of the cases it was dealing with at the time of its dissolution are still active.

Hong Kong's own Securities and Futures Commission (SFC) insists that it has "taken decisive action many times over the years on insider dealing.

"The SFC continues to pursue cases of suspected insider dealing and other types of market misconduct vigorously," the regulator said when asked to comment on the issue.

Part of the problem in insider trading cases is the difficulty in obtaining evidence.

"They are hard to prove, especially when they cut across several different jurisdictions," said a senior director at a leading Asian private security consultants that has investigated several insider dealing cases.

"How do you prove that the person accused didn't just buy and sell the stocks because they simply liked the look of them?" the director asked.

Webb says, however, that the slow pace of prosecutions is down to a lack of resources and that in turn reflects the government's policy priorities.

"It's a fair comment to make that resource allocation is indicative of the importance the government attaches to stopping it," he said.

Critics of Hong Kong's relatively light regulatory touch also blame vested interests, while others believe there are structural problems in the local bourse that make it more vulnerable to abuse.

The relatively small size and highly concentrated nature of the Hong Kong market -- in which a few players control much of the business -- makes it easier for abuse to take place.

A 2002 study by the University of Hong Kong's business faculty concluded just that, adding that most deals were from people within the traded company.

"Returns earned by insiders who purchase their own firms' shares in Hong Kong are statistically and economically significant," it said.

"Though the legal environment in Hong Kong purportedly provides strong protection for outside investors, it does not prevent insiders in consolidated industries from earning at the expense of the outsiders with whom they trade."

At the end of the day, says one broker, who preferred not to be named, it all depends on investors and in the absence of a robust regulatory environment, they will take advantage.

"There is a greater sense of greed in Asia -- that's not so say there isn't (greed) in London or New York -- but public policy in Europe and America is to rein in abuse," said the broker.

"There is not the will here to do that and so the worst tendencies of investors are allowed to come to the fore."