A sudden sell off that shredded USD6 billion in value from Hong Kong-listed small cap stocks on 27 June 2017 revealed neatly how organised syndicates can manipulate shares at the expense of investors. In doing so, however, they potentially expose professional services firms and legal and other advisors to serious liabilities.

Suspicious and Irregular Trading

The coordinated collapse of the so-called “Enigma Network”, an interlinked group of small cap stocks sharing many of the same legal and financial advisers, mauled investors. At least one stock plummeted 90% in value, while 13 others tumbled “only” 50%.

This debacle revealed how some incestuous syndicates of interlocking shareholders, directors and advisers can fleece investors on the Hong Kong Exchanges & Clearing’s Growth Enterprise Market (“GEM”). These networks seek to hollow out established listed companies, dump the key business, eject existing management and directors, and sell the listed company as a much more valuable “shell”. Alternatively, they manipulate share prices, perhaps by inflating a bubble that subsequently pops.

The Enigma fiasco further highlighted how these networks have to date operated with relative impunity, thanks to insufficiently robust supervision of the market (at least, up to now; a recent meeting between mainland and Hong Kong regulators hints at a clampdown to come).

Who is really at Risk?

At first glance, the losers were gullible investors from mainland China. However, professional services organizations, such as sponsors, underwriters, financiers, auditors, company secretary firms and lawyers, are as much at risk – if not more so.

After all, some of these firms may now face a raft of litigation claims from irate investors. Civil cases, and embarrassing media coverage, promise to damage these advisers’ good names.

Regulatory, or even criminal investigations are another threat. The creation of a “shell” could amount in some cases to a predicate offence for a money laundering charge, meaning that any professional found to be involved could lose licenses, face professional censure, or even go to jail.

How SVA can help to protect Professional Services Organisations

SVA has considerable experience in investigating cases of share price manipulation, the deliberate dilution of shares, and other financial engineering schemes designed to benefit a coterie of conspirators. We have a keen and current understanding of the main players, their support networks, and their methods.

SVA believes that firms must now take active steps to protect themselves.

Ahead of any listing, professional services firms must carry out rigorous and independent due diligence investigations, examining not only the company itself, but also principals, advisers, investors, and connected parties. Doing so can assist in spotting early signs of a takeover conspiracy.

SVA also has experience of uncovering and mapping out the networks involved, and in tamping down the threat by watching for further signs of trouble, such as suspicious changes in equity holders, fluctuations in the share prices or trading volumes, or the sudden appointment of proxy directors.

SVA stands ready to assist Professional firms in identifying and mitigating these risks to their reputation and the organisation. We have an established investigative due diligence platform that is well respected and effective and who specialise in this area.

Please do not hesitate to contact us at the numbers below or via email to [email protected] if we can be of assistance.