Hong Kong SFC suspends Credit Suisse prop trader

The SFC said that a representative of Daiwa Securities SMBC (Europe) in Geneva contacted the trader, Stephane Hug, about a potential convertible bond issue by Tokyo-listed Sumitomo Light Metal Industries (SLM) in November 2003. Daiwa, the underwriter, had disclosed terms for the convertible bond to gauge Hug’s interest on the deal.

The statement also said that the practice of disclosing terms, known as sounding out, means underwriters disclose non-public information such as transaction terms before it is publicly announced, to assess interest from prospective buyers. However, anyone who trades upon that information is likely in breach of insider trading provisions, if the shares are listed in Hong Kong.

Hug eventually sold 204,000 SLM shares valued at approximately $230,000 on December 2, 2003. The SFC statement said Hug had prior information that the convertible bonds would be announced after the market closed on the same day, and that the issue price would be fixed on December 3, 2003.

In response to questions from Risk News about whether Hug was dismissed, a Credit Suisse spokesman said only that he will “cease to be employed”. This followed an investigation that led the bank to suspend him for one month without pay, fine him and deny him $400,000 worth of discretionary bonus. The regulator suspended Hug from trading for four months from 13 December 2006 to 12 April 2007.

The irregularity was first raised by the Japanese Securities and Exchange Surveillance Commission in 2004, said the Credit Suisse spokesman. The bank conducted an internal investigation and voluntarily turned over its findings to the SFC, he added.

Although Hug did not contravene Hong Kong’s securities law because trading happened on the Tokyo Stock Exchange, the SFC found him in breach of its code of conduct, which “requires licensed persons in Hong Kong to act with due skill, care and diligence in the best interests of clients and market integrity, a breach of which raises issues of fitness and properness”.

This is the first time the SFC has taken disciplinary action against misconduct related to sounding out. Mark Steward, SFC’s executive director of enforcement, said in a statement: “This case is a warning to all firms to review internal practices and guidelines on handling confidential information to ensure the obvious risks of sounding out – including insider dealing and prejudicial conflicts of interest – are adequately addressed. Regulated persons, both firms and individuals, who fail to heed this warning will face serious consequences.”

Credit Suisse donated $7,200, the profit from the transaction, to charity.

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