SFC Fines CES Capital International $3.2 Million for Failures in Managing Private Funds

The Securities and Futures Commission (SFC) has reprimanded and fined CES Capital International (Hong Kong) Co., Limited (CESHK) $3.2 million over its failure to discharge its duties as an investment manager of two funds between February 2015 and July 2017.

The two CESHK-managed funds invested substantially all their assets in two Cayman-incorporated underlying companies (UCs).

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The SFC found that CESHK failed to perform sufficient due diligence and monitoring on the funds' underlying investments and undertake satisfactory risk management measures to identify, quantify and manage the risks exposed to the funds. CESHK also failed to keep proper audit trail of the due diligence and monitoring allegedly performed on the funds and their underlying investments.

In particular, the SFC found that during the relevant period:

• ​While CESHK was responsible for managing and investing the funds' assets and investments on a discretionary basis, it failed to do so in practice. Instead, the decisions on when to invest for the funds were made by the funds' directors. CESHK considered that its main role was to ensure that the funds' assets were invested substantially in the UCs in accordance with the investment objective stated in the funds' private placement memorandum;

• ​CESHK had carried out minimal due diligence on the UCs with the result that it had limited or no information on the UCs' holdings of assets, investments and liabilities, and the basis on which the UCs were valued;

• CESHK failed to produce any records of the regular meetings it claimed to have held with its asset management department to review the performance of the funds, and the monthly reports it prepared from May 2016 to March 2017 only set out some data and/or general market views without any accompanying analysis or explanation on their impact on the UCs and/or the funds; and

• ​CESHK did not maintain any record of its alleged discussions with the funds' directors regarding the significant price drop in one of the funds in around mid-December 2016, nor the basis of its decision to take no further action.