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Favourable investment research report = not-so-favourable results

Favourable research report ends in prison and ban from the financial services industry for ex-research head.

On 25 February 2015 Mr Gong Yueyue, former head of research at Orient Securities (Hong Kong) Limited (“Orient”), was sentenced by the Eastern Magistrates’ Court to one year’s imprisonment for accepting a bribe contrary to section 9 of the Prevention of Bribery Ordinance (Cap. 201) (“PBO”). As a result of this conviction, the Securities and Futures Commission (“SFC”) has banned Gong from participating in Hong Kong’s financial industry until 2030.

The case demonstrates the breadth of potential consequences for individuals involved in private sector bribery in the financial sector.

The law

Section 9 of the PBO makes it an offence for an agent to solicit or accept an advantage as an inducement or reward, without permission from their principal, to perform or abstain from performance of any act in relation to their principal’s affairs or business.

The facts

Gong was licensed in Hong Kong as a representative to carry on Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance (Cap. 571). He was also licenced as a Responsible Officer of Orient.

In early 2014, Gong was asked by an unnamed third party (“Third Party”) to write a research report on a listed company (“Company”). Gong accepted the request. The first draft of the report stated a target price for the Company of HK$1.80 to HK$2.00. Gong sent the draft report to the Third Party, knowing that the Third Party would show the draft to the Company’s management.

The Company’s management reviewed the report, and suggested increasing the valuation to HK$2.06. Gong approved this revision, and the report was published with the increased target price. That same day, Gong met with the Third Party in a cafe. The Third Party gave an envelope containing HK$100,000 to Gong. Gong was arrested by officers of the Independent Commission Against Corruption (“ICAC”) immediately after receiving the money.

Orient and the Third Party cooperated fully with ICAC and the Department of Justice during the investigation and prosecution.

The results

In February 2015, Gong was sentenced to one year of imprisonment.  Following that conviction, in November 2015, the SFC banned Gong from re-entering the industry for 15 years.

Key takeaways

There are three key takeaways from Gong’s case.

  1. Prison sentences for corruptionCustodial sentences remain the norm for corruption offences in Hong Kong.  The magistrate in Gong’s case likely took into account the recent decision in HKSAR v Pau Chin Hung Andy [2014] 1 HKLRD 587. In that case, a securities broker was found guilty of accepting a bribe contrary to section 9 of the PBO, and received a community service order. On appeal, the Court of Appeal imposed a three year prison sentence, stating that a community service order for a corruption offence was both “manifestly inadequate” and “wrong in principle”. In light of this decision, it was reasonably inevitable that Gong would receive an immediate custodial sentence for his offence.
  2. Private sector corruption has significant consequencesThere is equal culpability for private and public sector corruption. The suggestion that private sector corruption may not attract the same degree of punishment as public sector corruption was dismissed in Secretary for Justice v Kwan Chi Cheong [2009] 4 HKLRD 273.  In this case the Court of Appeal held that the public interest requires that deterrence is the predominant consideration in corruption cases, rather than the defendant’s position or personal circumstances.   Accordingly, the fact that Gong did not abuse any public power or position did not mitigate his sentence.
  3. Flow-on regulatory action can be severe – Disciplinary action by financial regulators in Hong Kong is likely to be severe following a corruption conviction.  Indeed, there is a stark contrast between the punishment given in court and the SFC’s own disciplinary action. The 15-year ban is likely to have an enduring impact on Gong’s finance career, at the age of just 36. It also lies at the high end of typical SFC bans.  The fact that the report would mislead the investing public at large, and that the conduct was intentional, likely increased the length of the ban. While a lifetime ban is possible, it tends to be reserved for cases involving theft of client monies or tampering with trading records. We expect a similar approach to be taken by other regulators in Hong Kong.

Should firms self-report?

Firms who suspect bribery or corruption should consider the need to self-report to their regulators and other authorities.  Swift assessments, early engagement and remediation are key.

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