It is reported that the 15 people who were arrested allegedly manipulated Next Digital’s stock, artificially inflating it in order to collect a combined profit of HK$38.7 million.
On September 3, Hong Kong authorities arrested 15 people on charges of money laundering and suspicion of conspiracy to defraud in connection with last month’s surge in shares of Next Digital Ltd., a media company owned by Jimmy Lai, the founder of a pro-democratic publication.
This is just the latest news following Lai’s arrest last month under Hong Kong’s contentious National Security Law. The arrest of the media mogul was due to alleged “collusion with a foreign country, uttering seditious words, and conspiracy to defraud.”
As news erupted of Lai’s arrest, Next Digital’s stock – which had been anticipated to fall drastically as a result of wariness about the company’s future – instead increased by nearly 344% over the course of the day.
The stock’s surge is thought to be linked to a push by some Hong Kongers on social media who called for advocates to buy shares of Next Digital stock as a way to show support for Lai.
On August 11, the price had climbed more than 1,100% over what it was the day prior to Lai’s arrest.
In the days immediately following the increase, Next Digital stock plummeted over 40%, prompting uneasiness in the Securities and Futures Commission (SFC), an independent body tasked with regulating Hong Kong’s markets, which urged investors to exercise “extreme caution.”
This month the media company’s shares have risen again, this time by as much as 97%, mirroring August’s yields and leaving some traders incredibly confused.
It is reported that the 15 people who were arrested allegedly manipulated Next Digital’s stock, artificially inflating it in order to collect a combined profit of HK$38.7 million. The supposed money launderers traded hundreds of thousands to even a few million shares per transaction.
It was reported that the group arrested coordinated the transactions mainly through WhatsApp through nine securities firms in three days. In total, they had more than 13,000 transactions combined. Through the inflated trading volume as well as social media, the group also “drew individual households into the game.”
Lai urged his supporters not to invest, telling Bloomberg Television in an interview last month, “People with very little money just want to express their anger and express their support for our company … Everybody bought a little bit. That became a lot of it and jacked up the price. I was telling people ‘don’t do it, don’t do it, because you’re going to lose money.’”
Nevertheless, the Chinese government claims that the surge is not due to support of Lai, but instead a small group of investors who attempted to game the market.
Intentionally manipulating the stock market – sometimes referred to as a “Pump-and-dump” scheme – is when investors create the appearance of trading interest and activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or depressing stock prices, according to The United States Securities and Exchange Commission.
While these schemes are certainly illegal, they can be immensely difficult to prove in court.
Officers from the Narcotics Bureau’s financial investigations division offered some insight into the 15 arrested. One suspect, a 27-year-old jobless man, allegedly acquired HK$25 million and another four obtained more than HK$1 million in the span of three days.
Altogether, 14 men and one woman made 13,200 transactions involving 1.69 billion shares, accounting for 23.8% of the stock’s total movement between August 10 and August 12, according to bureau head Chung Wing-man.
Chung said that after the suspects had created the illusion that the stock was gaining in popularity, they would post on social media platforms to attract other investors, later selling their shares at an inflated price.
Police said the investigation revealed that some suspects knew each other and closely mimicked one another’s trading patterns.
“The group bought and sold the shares at the same price frequently in a very short period of time,” said Bureau Superintendent Chow Cheung-yau. “When the selling command had not even been executed, the suspects [were already buying more] shares at the same or similar price.”
The SFC has declined to confirm its participation in the police-led investigation, provoking some speculation as to the Chinese government’s motives behind the arrests.
“It’s quite bizarre that local police rather than the markets regulator is investigating a stock market incident,” said Alvin Cheung, Associate Director with Prudential Brokerage Ltd. in Hong Kong. “People might wonder if there’s something else going on.”
Under the Crimes Ordinance, anyone sentenced on conspiracy to defraud or money laundering faces a jail term of up to 14 years.
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