Market Supervision Update Issue 55

Unauthorised access of client accounts - update

In the August 2014 edition of the Market Supervision Update (MSU), we warned market participants about the risk of identity fraud on client accounts (MSU Issue 49). ASIC’s Market Surveillance Team has recently detected additional instances of unauthorised access of online broking accounts. To provide participants with a better understanding of this activity, we have set out some of the common characteristics associated with recent suspected account hacking activities below.

The shares involved in this activity are usually penny stocks and are thinly traded under normal market conditions. The price and trading volume of these shares has often surged significantly on the days when account hacking activities occurred.

The trading has typically involved several steps, including:

  • an account with an overseas based holder purchasing the shares on the ASX or Chi-X (or both) through a market participant
  • suspected related parties gaining unauthorised access into online broking accounts with one or more market participants
  • suspected related parties selling the holding in the online broking accounts to generate a cash balance or trade in online broking accounts that allow small cash purchases of shares without a cash balance
  • suspected related parties then using the online broking accounts to increase the price in the relevant stock, and
  • the account with overseas connection selling the shares on market and into the ensuing rally at a higher price than they were purchased for, in the process generating a profit.

If participants suspect that their clients may have been involved in and yielded profits from these trading activities they should satisfy themselves, before dealing with any funds or property with the clients, that they are not dealing in property or funds in their possession:

  • that they reasonably suspect of being direct or indirect proceeds of crime in contravention of Part 10.2, Division 400 of the Criminal Code (Cth), or
  • in breach of their obligations under the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth).

Participants should consider withholding funds from their clients in relation to any suspected trading, particularly if ASIC has raised concerns about the trading and has confirmed that the other side of the transactions appeared to be from hacked accounts.

ASIC also encourages market participants to put in place filters and monitoring arrangements that are sufficient to detect unusual share trading indicative of either:

  • unauthorised access of their clients’ online accounts, with unusual volumes resulting in unprofitable trading over a short period
  • accounts participating in thinly traded securities over short periods of time with unusually large volumes resulting in profitable trading at prices that reflect a large relative percentage change (an example would be a security trading at 0.02 then shortly thereafter trading 0.08 or 300% price increase), and
  • the use of IP addresses that are not reflective of the original client documentation.

ASIC is currently attempting to establish a connection between the overseas account holders who bought the shares and the parties who perpetrated the account hacking. We believe that they are likely to be connected. We are working with other regulatory and law enforcement agencies (domestic and international) on this matter.

Sino Australia Oil and Gas Limited - update

On 26 November 2014, the Federal Court of Australia extended its orders freezing the Australian bank accounts of Sino Australia Oil and Gas Limited (ASX:SAO) held with HSBC Bank (Australia) Limited until 6 March 2015. The restrained funds were raised from investors during the company’s initial public offer (IPO) in 2013. These freezing orders were first granted on 13 March 2014, on ASIC’s application.

In November 2014, ASIC filed civil proceedings against SAO and its former Chairman, Mr Tianpeng Shao. ASIC is seeking the following relief:

  • orders that shares purchased during the IPO are voidable at the election of the purchaser by written notice to the company’s registered office pursuant to s1101B
  • declarations that SAO contravened:
    • the prospectus disclosure requirements in s728(1) and s710 of the Corporations Act 2001 (Cth) by offering securities under a disclosure document containing a misleading &/or deceptive statement, or an omission required by s710 during the period from 26 April 2014 and 12 December 2014 (or both); and
    • the continuous disclosure obligations in s674(2) during the period from 12 December 2014 to 1 April 2015
  • orders that SAO:
    • pay a pecuniary penalty to the Commonwealth pursuant to s1317G
    • send a shareholder letter to all investors advising of an entitlement to the refund of subscription funds pursuant to s1324B
    • publish corrective advertising in a major newspaper in each Australian capital pursuant to s1324B
    • publish notification of the court ordered corrective advertising on the ASX and SAO websites
  • declarations against Mr Shao, that he:
    • contravened the continuous disclosure requirements in s674(2A)
    • failed to discharge his director duties with reasonable care and diligence in contravention of s180(1), and
  • an order disqualifying Mr Shao from managing companies pursuant to s206C, or alternatively s206E.

SAO has been ordered to file a defence by 13 February 2014 after which ASIC has 14 days to file a reply. The next directions hearing is listed on 6 March 2015. ASIC’s investigation continues.

ASIC consults on ‘sunsetting’ class orders

ASIC has released two consultation papers proposing to re-make a number of class orders that are due to expire in 2015 and 2016. ASIC proposes to remake these class orders without significant changes before they sunset so that their ongoing effect will be preserved without any disruption to the entities that rely on them.

Class orders on secondary services and general advice

Consultation Paper 226 Remaking ASIC class orders on secondary services and general advice (CP 226) outlines changes we are proposing to make to make to these class orders, including:

  • updating the name, format, legislative references and definitions
  • simplifying the drafting to give greater clarity and correct minor drafting errors
  • removing obsolete paragraphs, and
  • updating the class order on general advice in advertising to encompass contemporary forms of advertising.

Class orders facilitating offers by foreign companies

ASIC proposes to remake class orders that facilitate Australian investors participating in scrip offers on the same basis as foreign investors where adequate safeguards are in place. The relief applies to certain rights issues, schemes of arrangement, scrip bids and small scale personal offers.

CP 225 Remaking ASIC class orders on offers of foreign securities (CP 225) outlines proposals to update these class orders with minimum amendments so that they better reflect the current law, and also make changes aimed at reducing regulatory requirements.

Submissions to CP 225 and CP 226 are due on Monday 9 February 2015.

ASIC Annual Forum – 23-24 March 2015

This year, the ASIC Annual Forum will explore the balance between growth and stability, challenge the assumption that regulation inhibits innovation and ask how we can boost trust and confidence, and therefore participation, in our financial system.

International guest speakers include:

Vikram S. Pandit

Vikram S. Pandit
TGG Group

Vikram S. Pandit is Chairman of TGG Group and a private investor focusing on opportunities
that transform and re-imagine businesses and industries. Mr Pandit was CEO of Citigroup
from December 2007 to October 2012. He is a member of the board of directors of
Bombardier Inc. and serves on the boards of Columbia University and Columbia Business
School.

Paul Tucker

Sir Paul Tucker
Harvard University

Paul Tucker is a senior fellow at the Mossavar-Rahmani Center for Business and
Government at Harvard. He was Deputy Governor at the Bank of England from 2009 to
October 2013, having joined the Bank in 1980. Internationally, he was a member of the
steering committee of the G20 Financial Stability Board, and chaired its Committee on
the Resolution of Cross-Border Banks.

Paul Schulte

Paul Schulte
Schulte Research

Paul Schulte has had a career in equity research which spans 22 years on both the buy and
sell sides covering the Asian and emerging markets. He also has five years of government
policy experience in emerging markets. He has been frequently ranked in top-five positions
in Euromoney, Asiamoney and Institutional Investor.

Last updated: 23/03/2016 03:10