The Securities and Futures Commission of Hong Kong has reprimanded and fined Nine Masts Capital Ltd, a privately owned hedge fund sponsor which has just under HK$150 million in AuM and operates two private funds, for failures relating to the short-selling of shares in May 2015.

The shares in question were those of the Yuzhou Properties Company Ltd. When it announced its proposal for placing new shares, subject to the fulfilment of certain conditions in 2015, Nine Masts was one of the 'placees,' according to the regulator.

The SFC found that Nine Masts received a verbal confirmation on 13 May 2015 from a placing agent that it would be allotted 32 million placing shares of Yuzhou Properties. Shortly after that, it sold 10,633,000 Yuzhou Properties shares. At the time of placing the sell order, Nine Masts had no existing Yuzhou Properties shares and the placing had not been completed. As a result, Nine Masts short-sold 10,633,000 shares in Yuzhou Properties.  

The SFC considers that Nine Masts failed to act with due skill, care and diligence in dealing in the placing shares. Section 170(1) Securities and Futures Ordinance prohibits 'naked' short-selling. It is a criminal offence for a person to sell securities at or through a recognised stock market unless, at the time of the sale, he has a presently exercisable and unconditional right to vest the securities in the purchaser of them, or believes and has reasonable grounds to believe so.

This incident is the second such occurrence  – Nine Masts’ systems and controls for preventing naked short-selling were no better than when the SFC wrote to it in August 2013 about a similar incident.

In setting the penalty, the SFC took into account:

• the firm's failure to revise its preventative systems and controls;
• the fact that the dealing in Yuzhou Properties shares involved a single, unintentional short sale;
• the fact that Nine Masts itself reported the regulatory faux pas to the SFC;
• its insistence on paying the costs relating to the failure;
• the remedial measures that Nine Masts took to strengthen its internal controls and systems after the second incident;
• Nine Masts’ subsequent co-operation with the SFC; and
• its otherwise clean disciplinary record.