Court orders boiler room fraudsters to compensate investors

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Introduction

On 21 December 2018, the Securities and Futures Commission (the “SFC”) succeeded in its actions against boiler room fraudsters, where the Court of First Instance (the “CFI”) ordered such fraudsters to compensate investors who fell victim to the scams, in accordance with section 213 of the Securities and Futures Ordinance (the “SFO”).

Background

Boiler room fraud

A boiler room fraud is a common securities fraud in which the fraudsters purport to operate as a licensed securities or futures broker and offer to people, via their websites, through emails and/or cold‑calls, to trade in securities or futures which are fake in the sense that the securities or futures contracts which the victims have paid for have not been executed on any recognised exchange.

 

Often a boiler room would transfer money received from the investors from an account in one place to an account in another place almost as soon as it is received. By the time the fraud is discovered, the money would have disappeared or been transferred out of reach.

 

In the current case, the three entities involved in the boiler room scams were:

  1. Cardell Limited and/or Cardell Company Limited using the website www.cardell-limited.com (“Cardell”);
  2. Waldmann Asset Management using the website(s) www.waldmann-asset-management.com and/or www.waldmann-asset-management.net (“Waldmann”); and
  3. Doyle Hutton Associates using the website www.doyle-hutton-associates.com and/or http://doyle-hutton-associates.net (“Doyle”). The three entities purported to be based in and operated from Hong Kong, solicited investors through emails and cold calls to open trading accounts and to invest in securities and futures products via their websites at various times principally in 2014. However, none of these entities had been licensed, registered or authorised to carry on any of the regulated activities under the SFO including, in particular Types 1, 2, 4, 5 and 9 regulated activities. None of the trades agreed with the investors were ever executed on any recognised exchange, nor had these investors been able to recover any of their monies.

CFI’s decision

Under section 114(1)(b) of the SFO, it is an offence for a person to hold himself out as carrying on a business in a regulated activity stipulated under the SFO without a licence. Under section 109 of the SFO, it is an offence to knowingly issue an advertisement in holding oneself out as prepared to carry on such regulated activity while without a licence.

 

The CFI found Cardell, Waldmann and Doyle in contravention of sections 109 and 114 of the SFO as they held themselves out as being prepared to carry on regulated activities of securities and futures contracts advisory services and asset management whilst unlicensed; and the inevitable inference was that they were the issuer of the advertisements in question.

Aiding, abetting or assisting

In this case, investors were also asked to deposit funds for their investments into various bank accounts in Hong Kong held by (1) Cedan Limited (“Cedan”); (2) Hamtron Limited (“Hamtron”); (3) Cardan Limited (“Cardan”); and (4) Mutual Hope Limited (“Mutual Hope”).

The CFI held that by opening the bank accounts in question and allowing them to receive funds from the victims in question, Cedan, Hamtron, Cardan and Mutual Hope had aided, abetted or assisted Cardell, Waldmann and Doyle, as well as had been knowingly involved, directly or indirectly, in their contraventions of the SFO.

CFI’s orders

The CFI granted the restitution order and the order for the appointment of an administrator with consequential directions, to facilitate the recovery, receipt and administration of the remaining proceeds (approximately HK$600,000) in Hong Kong.

 

The Defendants were further restrained from contravening or continuing to contravene the SFO or from disposing of the proceeds of the frauds in the bank accounts in question.

 

Regarding the restitution order, the CFI ordered distribution of the amounts frozen in the bank accounts of the Defendants to the complainants/victims on a pro rata basis. Although the proposed restitution order would not fully restore the complainants/victims to their pre-transaction positions, the CFI was satisfied that it was nevertheless desirable because it provided compensation to them to the extent that is reasonably practicable.

Conclusion

Before making investments in certain market(s), investors are reminded to check and ensure that the brokers they are dealing with are properly licensed in the relevant jurisdiction(s).

 

The SFC maintains an Alert List on its website which lists out firms which are not licensed to carry out regulated activities in Hong Kong and are suspected to be targeting Hong Kong investors or claim to have an association with Hong Kong. For details, you may refer to the Alert List at: http://www.sfc.hk/web/EN/alert-list/.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:
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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019