Four Hong Kong defendants convicted of fraud in first illegal short-selling case prosecuted as fraud

Four people have been found guilty of fraud in Hong Kong’s first case where illegal short-selling was successfully prosecuted under fraud charges, after they tricked a broker into selling shares they did not own to profit around HK$3.3 million.

A regional court judge convicted four defendants—two couples—of nine counts of fraud on Monday. The group, consisting of 49-year-old Lee, 48-year-old Chan, 48-year-old Lam, and 50-year-old Hui, denied the charges but was found guilty after trial.

Between June 23 and September 9, 2020, the defendants obtained stock tips from a WeChat contact. Without holding the shares, they phoned a client officer at Spark Securities, falsely claiming ownership and instructing him to sell specific stocks. 

When prices fell, they repurchased the shares through other brokers to cover the trades, pocketing about HK$3.3 million in profits while exposing the firm to potential losses.

The prosecution described the scheme as a sustained plan discussed over months, with the main perpetrators fully aware that false statements to the broker were essential to execute the naked short-selling operation.

The court rejected defense arguments that the broker already knew of the “sell first, buy later” tactic and thus was not deceived. 

The judge found the broker’s testimony straightforward, credible, and free of fabrication. Recorded interviews showed the defendants initially presented their actions as normal trading before shifting to claims that the broker was aware all along, which the judge viewed as after-the-fact excuses.

Although the four offered to plead guilty to alternate charges of illegal short-selling, prosecutors declined, pursuing the fraud counts instead, which carry a maximum penalty of 14 years’ imprisonment.

The judge noted a high likelihood of immediate imprisonment, viewing the two men as principal organizers and the two women as following their husbands’ instructions, suggesting some leniency for the women.

Sentencing was adjourned to February 9 for reports on probation and community service orders for the female defendants. 

The men reported mental health issues post-arrest, but no psychiatric reports were recommended.

The case marks a legal milestone in addressing naked short-selling through fraud prosecution in Hong Kong.