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UNAUTHORISED TRADING

Andrew OngPartner, Rajah & Tann8 July 2004

What is UnauthorisedTrading?

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• Definition in the SGX Rules (2003)

– The SGX Rules (2003) expressly prohibits unauthorised trading which is described as follows:-

“13.6 UNAUTHORISED TRADING

13.6.1 A Trading Representative must not:-

(1) execute his personal trades in the account of a customer; and

(2) use a customer’s account for third party trading without the customer’s prior written authorisation.”

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• Different Types

– Unauthorised trading by trading representative

– Third party trading

– Nominee arrangements

– Discretionary trading

– Profit arrangement with Client

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• Who benefits and how?

– TR’s Unauthorised Trading

* Churning trades to earn commission* Profit sharing arrangements with Client* Client issues blank cheque* Joint account with Clients

– Third party’s trading/Nominee arrangements

* Profit sharing arrangements* Nominee arrangement* Joint account

Steps to take in dealing with Unauthorised Trading

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• Investigation

– Important in order to decide on

* Steps to take vis a vis TR

* To prevent further unauthorised trading and for regulatory compliance

* To decide how to recover losses against the Client

– Investigation should be conducted in consultation with legal advisors

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• Dealing with Client

– Holding reply to Client

– Preferably a reply from legal advisors once investigation is complete

– Should you meet with the Client?

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• Seeking legal advice – Civil Recovery

– Involve legal advisors at an early stage in order not to prejudice your civil case

– Decide whether legal proceedings should be issued against client

– Decide whether Summary Judgment is possible

– Consult legal advisor on issues such as suspension or termination of TR

– Decide whether legal proceedings should be issued against TR

– Dealing with solicitors engaged by client alleging unauthorised trading, dealing with negotiation and settlement offers

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• Steps to take in relation to the trading representative

– Suspension necessary?

– Termination of TR?

– Dealing with retained commissions, claim against TR for indemnity?

– Timing of such action?

– Payments made by TR to knock off Clients’ losses?

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• Reporting Obligations

– Duty to report to SGX* Rule 4.6.9 provides that:-

“A Trading Member must inform SGX-ST in writing immediately if it or any of its Directors, Officers, Trading Representatives, employees, or agents:-(2) breaches the Rules or Directives;

(Note: Rule 13.6 expressly prohibits unauthorised trading)(5) breaches any provision involving fraud or dishonesty, whether in or out of

Singapore;(7) is the subject of a written complaint involving an allegation of fraud or

dishonesty, whether in or out of Singapore;(8) is the subject of an investigation involving an allegation of fraud or

dishonesty, whether in or out of Singapore;(11) engages in conduct which is inconsistent with the principles of good business

practice;”

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* Note that the SGX has taken action against stockbrokingcompanies in the past for failing to report to the SGX when their remisier had carried out trades without written authorisation from the Client and had carried out unauthorised trading

* Kindly also note that Sections 328 to 330, and 332 of the SFAprovide sanctions against the furnishing of any false statement or any false report to the SGX.

– Duty to report to CAD* Any such duty?

– Duty to report outcome of investigations to the Client* Any such duty?* Will your reply compromise your civil claim?

Investigating Unauthorised Trading

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• Internal Records

– Check account opening form

– What is the relationship between the TR and the client (if stated)?

– Where is the mailing address?

– Is it a PO Box address?

– Is the mailing address different from the Client’s Residential address or the address in the IC?

– Is the mailing address in fact the address of the TR?

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– Has there been a change in address since the account opening?

– Who requested the change in address?

– Was the change of address effected pursuant to a change of address with the CDP?

– Check whether your TR has changed his address and does this address coincide with the Client’s change of address?

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• Client Account Movements and Trading Pattern

– Check profile of Client

– Is the Client a consistent active trader or dormant account which has suddenly become active?

– Are the unauthorised trades complained of consistent with the previous trading pattern of the Client in relation to the type of counters traded and the volume of the trades?

– Is the pattern of trading consistent with the previous trades, ie contra trading, in speculative counters or blue chip, does the Client pick up the shares?

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– Did the Client specify a particular transaction or transactions to be unauthorised or is the complaint that all trades over a certain period were unauthorised?

– Pin the Client down to what exactly is the allegation on unauthorised trading

– If the complaint is on specific trades, are these trades connected with other transactions which the Client did not raise a complaint ofunauthorised trading?

– Were the trades complained of similar in nature to the other trades of the Client which the Client have not alleged to be unauthorised?

– Are the trades complained of connected with the Client’s own trade in the sense of previous profits use to set-off the unauthorised trades, etc

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• Payments Received and Profit Cheques

Payments– Examine the Client’s profile on payment and receipt of profits.

– Is the Client a contra trader and does he commonly use house cheques to off-set losses?

– Does the Client usually pay in cash at the cashier counter or is he likely to issue a cheque?

– Did the Client sign any authorisation to authorise his TR to offset his profit cheques to pay for losses. If so, when was this authorisation obtained? Was it obtained shortly before the unauthorised trading started?

– Is there a prolonged period whereby there is repeated contra trading and losses consistently paid by either cash or house cheques?

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– Check with the TR whether the Client made the cash payment or he did, ie did the TR make the cash payment because the Client has passed him cash or is he unaware of the cash payment?

– If payment is made by a house cheque, did the TR obtain the client’s instructions to offset the losses on each occasion and is the Client kept informed verbally?

– If the losses have been set-off against house cheques or cash, check to see whether contra statements and offset statements have beensent to the Client or Receipts have been sent for cash or chequepayment

– Were these documents handed to the TR?

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Profits– On profit cheques, check to see whether Client has given standing

instructions to effect EPS payment or have left any instructions to bank the cheque into his/her account.

– If not, would the profit cheques have been sent by mail to the Client? –Require presentation by the Client

– Did the Client receive and clear house cheques for profit trades during the period of the unauthorised trading, and particularly, did the Client retain or bank in any profit cheque for the unauthorised trades in question?

– Is this a case where the Client had received a cheque via EPS or deposited into his account without his knowledge?

– Did the Client issue any of his own cheques to the TR concerned with theTR’s explanation that it was an EIT? How many times was this done?

Are the clients liable in a case of unauthorised trading

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• What is the Courts’ view?

– As a general rule, if an unauthorised trading is established, the Courts will not find the client liable or, at least, will not grant Summary Judgment

– However, the Courts have entered Judgment against Client in numerous cases in the following circumstances:-

* Where the Client has consciously allowed unauthorised trading to be carried out in their account by a third party

* Where the Client is aware or should have been aware of the unauthorised trading (receipt of contact notes etc) but has turned a blind eye, or have not raised timely objections to the unauthorised trading - estoppel principle

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* Where the Client has benefited from the contra profit cheques and have not returned the profit even if the trades may have been unauthorised

* Where the Client has opened his account for the use and benefit of a third party and acts as a nominee for the third party who allegedly promises to assume responsibility for the losses

– Raising Objections

* The Clients would usually allege that they have raised objections to their own remisier or dealer. This has been rejected by the Court as ineffective to constitute timely objections. The objections must be raised to someone other than the dealer or remisier concerned, ie the management, credit officers, etc

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– The Court is, however, usually troubled by the following and may not grant Summary Judgment if these issues are raised:-

* Where the company has lax internal procedures which affords little control eg where the company allows contractual statements to be sent to a PO Box or the remisier’s address, where the account opening is not properly verified, where change of address is not supported by the Client’s written instructions

* Where the trades carried out are so highly disproportionate to the earnings declared by the Client or substantially exceeds theinternal limits (or revised limits) set for the Client

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* Where the TR files an Affidavit confirming that he has in fact carried out unauthorised trading

* Where the TR does not file any Affidavit categorically denying the allegation of authorised trading

* Where the company does not make a demand to the Client for the losses for a long period of time (eg a few years)

* Where the company receives payment from the remisier to clear the losses of the Client over a long period of time (this issue is not determinative)

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Tape Recordings– Do the tape recordings (if they exist) evidence the Client giving

instructions for the trades in question (or is there an absence of such instructions)?

– Did the Client promise payment or accept responsibility for the unauthorised trading?

Instalment Plan– Did the Client sign any instalment plan which covered the losses said

to be unauthorised?

– If the Client signs an instalment plan, it is difficult for them to allege unauthorised trading in the future

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• Who can you proceed against?

– The Account Holder

– The TR under his letter of appointment or agency agreement – not for unauthorised trading

– The person for whom the account holder is allegedly the nominee?

* Not likely to succeed

Criminal Sanctions

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• Criminal Sanctions

– The CAD may bring criminal charges against the TR for unauthorised trading. Typically, the SGX may refer the case to the CAD after their investigations or the CAD may act contemporaneously if a complaint to the CAD is lodged.

– Looking at past cases, the following charges may be brought:-

* Charge under Section 88(3) of the SFA (formerly, Section 33(3) of the Securities Industry Act (“SIA”)) read with Section 335 (formerly, Section 116 of the SIA)§ Maximum fine of S$50,000.00, no imprisonment

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* Charge under Section 201 of the SFA (formerly, Section 102 of the SIA) read with Section 204 of the SFA (formerly, Section 104 of the SIA)§ Higher fine not exceeding S$250,000.00 or imprisonment for

a term not exceeding 7 days or both

* The trend appears to be that the CAD will proceed under the latter and not the former which does not attract imprisonment.

* The tariff appears to be 4 to 6 months for each charge of unauthorised trading and imprisonment appears to be the norm and not merely a fine.

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6 months’ imprisonment on each of the 3 charges with 2 of the charges to run consecutively.

Total imprisonment of 12 months.

-3 charges under Section 102(b) of the SIA, Cap 289.

Other charges taken into consideration.

8 July 1999(3) Public Prosecutorvs HewKeongChan

6 months’ imprisonment for 1st and 2nd charges (102(b) charges); 24 months’ imprisonment for 3rd and 4th charges (468 charges); 3 months’ imprisonment for 5th and 6th charges (468 charges); 12 months’ imprisonment for 7th and 8th charges (420 charges); and 6 of the charges to run consecutively.

Total imprisonment of 4½ years.

-10 charges under Section 102(b) of the SIA, Cap 289. 20 charges under Section 468 of the Penal Code, Cap 224 (forgery for purposes of cheating). 4 charges under Section 420 of the Penal Code, Cap 224 (cheating and dishonesty inducing delivery of property).

Proceeded on 8 selected charges.

25 September 2000

(4) Public Prosecutorvs Mah Sui Meng

ResultCommentsChargeDateCase

4 months’ imprisonment.

Appeal dismissed.

Total losses exceed 2 millionRingit.

Proceeded with 1 charge under Section 102(b) of the SIA, Cap 289.

2 other charges taken into consideration.

6 October 1998

&17 November

1998

(2) David SynYong Singvs Public Prosecutor

S$50,000 on each of the 3 charges.

Total S$150,000 fine.

UnauthorisedTrading.

Proceeded on 3 charges under Section 102(b) of the SIA. 3 similar charges under Section 102(b) charges and a cheating charge under Section 417 of the Penal Code taken into consideration.

(6 charges were withdrawn).

1998(1) Public Prosecutorvs ShapyKhan s/oSher Khan

CRIMINAL

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8 months’ jail.Unauthorisedtrading.

Proceeded on 4 charges under SIA. Other charges taken into consideration.

27 December 2001

(7) Public Prosecutorvs Ang Beng Keong

6 months’ imprisonment on each of the 2 charges and both charges are to run consecutively.

Total imprisonment of 12 months.

Restitution of S$41,222.87. Other amounts paid by victims.

2 charges both under Section 102(b) of the SIA.

5 charges stood down.

15 November 2002

(8) Public Prosecutorvs Ho Thong Chuan

ResultCommentsChargeDateCase

6 months’ imprisonment on each charge, 2 to run consecutively and remaining to run concurrently.

Total imprisonment of 12 months.

Claimed trial to 8 charges under 102 (b). Appeal dismissed by CJ.

8 charges under Section 102(b) of the SIA.

7 December 2001

(6) Teo Kian Leong vsPublic Prosecutor

3 months’ imprisonment on each of the 3 charges with 1st and 2nd

charges to run consecutively and 3rd charge to be concurrent with the 1st charge.

Total imprisonment of 6 months.

800unauthorisedtransactions amounting to losses of to S$250,000.

No Restitution.

Proceeded with 3 charges Section 102(b) of the SIA, Cap 289. 3 similar charges under Section 102(b) and 1 charge under Section 33(3) of the SIA, Cap 289 and taken into consideration.

4 October 2001

(5) Public Prosecutorvs Tan Tong Mok

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Case Pending.Not a Remisierthird party trading in relation to Leong Hin Shares.

1 charge under Section 97(1) of the SIA (cheating false market); 1 charge under Section 197(i) (o) of the SFA (creating false market); 80 charges of unauthorised trading under Section 102 (b) of the SIA or Section 201 (o) of the SFA.

2004(11)Public Prosecutorvs Ang Tian Kiat

ResultCommentsChargeDateCase

Total imprisonment of 4 years.Unauthorsiedtrading and forging clients’ signatures to Repayment Schemes and on Guarantees.

8 charges of forgery and fraud. 29 other charges taken into consideration.

October 2003(10)Public Prosecutorvs Lou PuiFun

4 months’ imprisonment for Section 102 (b) charge; 18 months’imprisonment for CBT charge. Sentences to run concurrently.

Total imprisonment of 18 months.

Unauthorisedtrading and Banking in one client’s cheque into another client’s account to pay forUnauthorisedtrading. Appeal on condition dismissed.

1 charge under Section 102(b) of the SIA. 1 charge under Section 409 of the Penal Code (CBT by agent).

28 February 2003

(9) ShapyKhan s/oSher Khanvs Public Prosecutor

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• SGX Disciplinary Proceedings

– For unauthorised trading, the SGX may bring disciplinary proceedings against the DR for breach of:-

* Rule 13.6 (Unauthorised Trading)

* Rule 13.5 (Arrangement with Customers)

* Rule 13.2.1 (Obligation to act in good faith and act in the bestinterests of Customers)

* Rule 7.5.3 (Good Business Practice)

* SGX struck off Victor Lim in July 1996 and Joyce Tan in 2003 from the register of unauthorised trading.

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