Publication | Share Pledge Fraud – Remedial Action

  1. The impending economic downturn induced by persistent inflation and excessive borrowing is bringing on a cash flow crunch on companies and investors. A number of shareholders of listed companies with financial needs had been resorting to raising capital from unconventional sources. Some of these unconventional sources turned out to be suspected fraudsters posing as “financial institutions” and “custodians”, offering suspiciously attractive terms to shareholders for them to pledge their listed shares in exchange for a mouth-watering sum of cash, only for the suspected fraudsters to take custody of the shares, sell it in the open market and flee for good. For details of the modus operandi of the suspected fraudsters, readers may refer to our previous article.
  1. Faced with this daunting prospect of falling victim to a suspected fraud, victims’ hands are not necessarily tied. In this second article (full text in Chinese), we explore the potential remedial measures and provide some tips victims may consider, drawing from our relevant case experience.
  1. To give a few examples, we have assisted the victims in inter alia:
  1. conducting investigations through us or third-party agents across three continents to dig up dirt about the suspected fraudsters. Our efforts yielded the results of identifying inter alia the human controller of the suspected fraudster in the process;
  2. prompting multinational enforcement authorities to investigate the victims’ cases. In Hong Kong, we have successfully got the Commercial Crime Bureau of the Hong Kong police (which primarily investigates serious and complex commercial fraud) to investigate the victims’ cases;
  3. issuing preservative stop notices to alert the stock exchange, the listed company in question as well as local brokers possibly dealing with the defrauded shares and/or proceeds;
  4. timely obtaining worldwide injunction (which comes with a higher burden of proof than domestic injunction) with ancillary disclosure order against the “financial institutions”, the “custodian” and recipients of the shares whose identities remained unknown at the time. With the injunction in place, a portion of the defrauded shares and proceeds were effectively preserved;
  5. obtaining a third-party discovery order against multi-tiered brokerage and financial institutions. The information disclosed by the third parties enabled the victims to trace the defrauded shares and proceeds;
  6. clearing prerequisites to commence committal proceedings for contempt of court against the suspected fraudsters for their apparent breach of disclosure obligations under the injunction order and, in the process, pinning down the hideout of a key person of the suspected fraud syndicate. Strained with the pressure arising from possible criminal liabilities for contempt of court, the suspected fraudsters may be forced to (re)emerge from the shadows; and
  7. commencing civil recovery action against the “financial institutions” and the “custodian”.
  1. Please do not hesitate to contact LT Lawyers if you would like to obtain further information.