The cost of being a figurehead
Warehousing of shares or stock parking is a common tactic of market manipulators. If nobody is willing to lend their account for stock parking, market manipulation will become difficult.
Case study: Confession of a figurehead
My name is Ah Wai, and I am a China-Hong Kong cross-border truck driver. I do not know about stock investment and I do not have the time to learn about it. Around six months ago, a fellow driver introduced me to a broker who persuaded me to open a discretionary account. Initially, I had no intention of doing so. The broker said that I was merely lending an account to someone, and I would not be responsible for any trading losses. I was also guaranteed regular payments so it seemed like a favourable deal for me. I could earn some money without doing anything.
Later I found out that there were many trades conducted using the account, and some of the trades involved tens of millions of dollars. I guessed that someone was using the account for illegal purposes. This made me increasingly suspicious and anxious. I was worried that I would be the subject to investigation and suffered many sleepless nights.
In order to conceal their holdings, market manipulators often find various people to serve as figureheads, including ordinary retail investors. Apart from individuals, stock parking schemes may also involve private funds or discretionary accounts. There were instances where private fund investors were majority shareholders or affiliates of the listed companies who sold their shares to a private fund and then bought the fund units through their discretionary accounts. This was to conceal their holdings in the listed companies.
The stakes are high for figureheads
Regulators are always on the lookout for indications that an account may be a figurehead account. Obvious tell-tale signs include unusual transactions with values as high as a hundred million dollars in an ordinary account, or the existence of suspicious funds in the account. The stock parking schemes often involve illegal acts, such as market manipulation or vote planting at shareholder meetings. In such cases, it is not just the market manipulator who has committed an offence; the holder of the figurehead account can also be subject to criminal or civil liability for participating or assisting a crime. The maximum penalties for participating in market manipulation or vote planting at a shareholder meeting, respectively, are 10 years' imprisonment and a fine of $10 million.
The holder of the figurehead account may also be subject to civil proceedings brought by the SFC. The SFC may also apply to the court for an injunction order to freeze the assets in the figurehead account, or issue a restraining order to prohibit the broker or any person to deal with the money and stocks in the account.
There may be individuals who inadvertently become figureheads by allowing a market manipulator to use their accounts as a 'favour' to a friend. To avoid falling prey to becoming a figurehead, the following advice may help.
- Be wary if a friend or relative asks to 'borrow' your account.
- Investors can open a discretionary account with a broker, and authorise the broker to trade for you. However, it is unusual if a broker offers you money to open a discretionary account, and assures that you will not be responsible for the profits and losses in the account. Don't be duped.
- If you have an online investment account, do not let any other person know or use your login name and password, as this will allow them to control any trading activities in the account.
30 November 2017
