We look at the collapse of Tiffit Securities and what lessons the SFC can learn from it. In our view, they should have shut this firm down and banned its operator 3 years ago, after a second regulatory offence and a criminal prosecution. The owner and his firms were also in trouble in Australia in 2001 and 2002

Tiffit's collapse
21 July 2006

The SFC has issued a restriction notice on Tiffit Securities (Hong Kong) Ltd (Tiffit), a smallish broker with 700 active cash clients and no margin clients. The notice said:

"the SFC uncovered a material shortfall in the securities held by Tiffit on behalf of its clients and breach of the Securities and Futures (Financial Resources) Rules...

It appears to the SFC that Tiffit has dissipated, transferred or otherwise dealt with clients' property in a manner prejudicial to the interest of its clients and that there might be further such dissipation, transfer or dealing."

Should we be surprised by this turn of events? Not really, and nor should the SFC. As we shall show, they could have shut down Tiffit three years ago.

Two of the Responsible (or some would say, irresponsible) Officers of Tiffit are Mr Kwok Wood Yan (Mr Kwok), who reportedly owns the brokerage, and Ms Fong Shik Yee (Ms Fong).

Regulatory note: The SFC has to approves all owners of 10% or more of any brokerage or other intermediary, so they know who owns them. That information is currently secret. It should be made public in an online register, so that investors can check who they are ultimately dealing with.

Mr Kwok formerly traded under the unincorporated name of Tai Fat Securities Company, and on 19-Jul-01, he was reprimanded and Ms Fong, who worked for him, was suspended for 1 week. The SFC found that for 5 years, the brokerage had repeatedly pledged client shares to finance its business without any written authorisation from the clients, or with expired authorisations. Mr Kwok promised to clean up his act but, as you will see, he didn't.

Tiffit was incorporated on 25-Aug-00. On Christmas Eve 2004, the SFC reprimanded Tiffit and suspended Mr Kwok and Ms Fong. Ms Fong's suspension began immediately and ran for 3 months and 15 days to 7-Apr-05, while Mr Kwok's suspension was helpfully deferred to start the day Ms Fong was allowed back, running for 7 months from 8-Apr-05 to 7-Nov-05. The penalties related to earlier failures to maintain the required level of liquid capital and to tell the SFC about it, between Aug-01 and 26-Jul-02, when the auditors discovered that the financial statements omitted a $4m bank overdraft, "thereby causing the SFC to believe Tiffit was financially sound when it was not". These were criminal offences for which the pair and Tiffit pleaded guilty and were convicted on 18-Aug-03, when Tiffit and Mr Kwok were each fined just $22k and Ms Fong was fined only $7k, plus costs.

Tiffit now has 4 Responsible Officers, including Mr Kwok and Ms Fong. The latest to join, Ms Teresa Wong Shue Yung (Ms Wong), became a Responsible Officer of Tiffit on 6-Jul-06, just 12 days before Tiffit was shuttered. Ms Wong has a history too. On 12-Dec-05, she was reprimanded by the SFC and fined $30k for internal control failings at Luen Fat Securities Co Ltd, where she was a Responsible Officer. The SFC found, amongst other things, that the brokerage had re-pledged securities of certain margin clients to banks without valid authority, and had "transferred" interest accrued on client money to its own account without client consent. So 3 out of the 4 Responsible Officers of Tiffit have a regulatory record.

Mr Kwok has also been in trouble with the Australian securities regulator, ASIC. On 18-Jan-02, Tiffstock.com Pty Ltd (Tiffstock) and its directors, Mr Kwok and Mr Rocky Cheung Kan Ming (Mr Cheung) gave an enforceable undertaking to ASIC not to deal in securities without a licence. They had been promoting HK stocks and Tiffit's services to Australians without a licence. According to the National Names Index, Tiffstock was deregistered as a company on 14-Mar-04.

Before that undertaking, in 2001, another company, Tiffit Securities (Australia) Ltd (Tiffit Australia) was fined AU$100k (about HK$400k) by the National Adjudicatory Tribunal of Australia, for breaches of Australian Stock Exchange Business Rules in 2000, in part for lodging false Capital Liquidity Ratio Returns - in other words, the same kind of offence for which Mr Kwok and Tiffit was prosecuted in HK in 2003. Tiffit Australia was wholly-owned by Tai Fat Securities (Australia) Pty Ltd, of which Mr Kwok was the major shareholder and another shareholder was Mr Cheung. The details of an event which led to the capital adequacy breach are described in a New South Wales Supreme Court case in 2004. Interestingly, the fine levied in Australia was some 9 times the total fine against Tiffit and Mr Kwok in Hong Kong, which says something about our regulatory standards. Administrators were appointed to Tiffit Australia on 19-Dec-01, although it is unclear whether that was voluntary. It was deregistered on 6-Nov-05 and its parent was deregistered on 22-Jan-06.

It seems to Webb-site.com that the SFC has been far too lenient with Tiffit, Mr Kwok and Ms Fong. This week's collapse would have been avoided if they had been banned from the industry in 2003 after the second offence in HK, rather than given enforced holidays which were staggered to allow the firm to remain in operation.

© Webb-site.com, 2006


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