SFC Severely Reprimands EAA Securities Ltd for Internal Control Failures and Reprimands {X} for Inadequate Supervision

The SFC has severely reprimanded EAA Securities Ltd and reprimanded its managing director, {X}, under the Securities Ordinance.

The reprimands stem from an investigation in which the SFC found that {X} had failed to ensure adequate internal controls at EAA, in particular segregation of duties and credit controls between 2000 and 2001, which facilitated misdeeds by a former dealing director, Ms Anita So Tai Fai. The misdeeds included the conduct of unauthorised trades in clients' accounts and the dispatch of forged statements to clients. (Note 1)

Independent auditors appointed to investigate EAA found that EAA had made bad debt provisions for long outstanding receivables from clients' accounts for about $27.3 million at the year-end of 2001. Similar bad debt provisions for 32 clients' accounts handled by So amounting to $15.6 million were made at the year-end of 2002. The lack of adequate control at EAA over the credit limits in clients' accounts resulted in the bad debts.

{X} failed to keep himself informed of EAA's affairs, in particular the internal control system and its associated problems. He left EAA's operation almost entirely to the dealing directors and the staff, without exercising sufficient reasonable supervision over them. When he became aware of large receivables in the clients' accounts in the third quarter of 2000, he accepted advice from So and another dealing director to stall collection pending a market recovery. He submitted to So's refusal for EAA to directly collect debts from her clients. In the process, {X} failed to exercise objective judgment and failed to adequately inquire into the situation or take appropriate action. He failed to discharge his duties with due care and diligence and put EAA and its clients at financial risk. In the end, EAA had to write off bad debts of about $27.3 million.

The SFC found that EAA and {X} had failed to carry out their functions to the standard expected of them. As a result, the SFC concludes that the fitness and properness of EAA and {X} has been called into question.

Mr Alan Linning, SFC's Executive Director of Enforcement, said: "Brokers must ensure that internal controls are in place to safeguard clients' assets and to protect shareholders' interests. Though directors are entitled to discharge their functions through a proper degree of delegation and division of responsibility, the duty to supervise the functions delegated cannot be abrogated. The statutory and fiduciary obligations of directors are inescapable personal responsibilities and directors who fail in their duties may be held personally liable for losses and damages."

"The law allows the SFC to discipline and reprimand directors, secretaries or persons concerned in the management of a licensed corporation if they are not fit and proper or are guilty of misconduct, just as any licensed persons. If {X} had been a licensed person, we would have suspended his licence for a reasonable period for his failures," Mr Linning said.

Ends

Note:

1. So left the industry and her licence was revoked on 1 April 2003.