The Securities and Futures Commission (SFC) in Hong Kong has decided to revoke the license of Nerico Brothers Limited (NBL) due to serious misconduct, specifically the misappropriation of client assets. This decision follows the regulator’s findings, which revealed that between June 2020 and January 2021, NBL misused over $68 million of a client’s funds on six separate occasions. These funds were improperly used to purchase shares in two segregated portfolios of a Cayman Islands-based fund. The profits from these transactions were kept by NBL, with only the original amounts being returned to the client’s account by June 2021.
The regulator emphasized that these actions occurred without the client’s knowledge or consent, constituting a direct violation of the client’s agreement with NBL. Moreover, the SFC uncovered that NBL was also involved in a more extensive scheme, orchestrated by individuals connected to another party, which resulted in the misappropriation of approximately $154 million from the same client’s assets starting in January 2021.
During this period, NBL transferred almost all of the client’s funds to one of the fund’s segregated portfolios, claiming these were for acquiring “liquidity provider units” for the client. In reality, the portfolio in question did not issue or possess any such units, contrary to what NBL claimed. Instead, significant amounts of the client’s funds ended up being utilized or dissipated by the orchestrating party and their associated companies.
To mask these fraudulent activities, NBL resorted to creating or using forged transaction documents and account statements. The SFC’s investigation revealed that NBL presented conflicting narratives concerning the use of the misappropriated funds during their inquiry. Initially, NBL stated that the funds were utilized for liquidity provider units from the fund; however, it later shifted its explanation, indicating these were from another Cayman entity. The SFC later established that both accounts were fabricated, confirming that the funds had been misappropriated rather than properly invested in any liquidity provider units.
The wrongdoing was attributed mainly to the actions of the director of NBL, who played a central role in misusing the client’s funds and facilitating the scheme. Additionally, this individual was found to have violated the Securities and Futures Ordinance by providing false or misleading information during SFC interviews.
In determining the penalties against NBL, the SFC considered the gravity of the misconduct, the substantial losses incurred by the client, and the previous lack of disciplinary issues for both the company and its director. The license revocation and lifetime ban from regulated activities for the director mark a significant step taken by the regulatory authority in response to this egregious situation.