Not ruling out involvement of more investment banks: Hong Kong ICAC Fuset operation details emerge

Chinese-funded investment banks in Hong Kong under investigation intensify, with the Hong Kong ICAC releasing new details in a recent statement.

The Hong Kong ICAC stated that a joint operation codenamed “Fuse” was carried out with the Hong Kong Securities and Futures Commission on March 10 and 11 to combat suspected insider trading and corruption. The investigation covered brokerages, hedge funds, and intermediaries, involving the leaking of confidential information and short-selling to reap huge profits.

The image shows the Hong Kong ICAC’s report on this operation.

The information revealed includes at least three main points:

1. Investigated Parties. Two brokerages, a hedge fund management company, and senior executives are involved, with six men and two women arrested, aged between 35 and 60.

2. Reason for Investigation. Senior executives of the involved institutions are suspected of accepting bribes exceeding HKD 4 million from a hedge fund manager, leaking confidential information about Hong Kong-listed companies’ share placements in advance. The hedge fund used this information to establish short positions, profiting from short sales and short-term equity swap contracts. After the share placement details were announced, the stock prices fell, and the hedge fund made approximately HKD 315 million in profit.

3. Progress of the Investigation. The joint operation was initiated following a preliminary investigation by the SFC into suspected insider trading, which uncovered potential corruption. The investigation is ongoing.

After the announcement, some investment banking professionals expressed concern to reporters, suggesting that more banks might be warned and that the operation could extend to more practitioners. However, industry opinions also suggest not to overthink it; this is an isolated case. Historically, Hong Kong regulators have previously collaborated to crack down on violations by investment banks and financial institutions.

On the morning of March 12, regarding the involvement of Chinese-funded investment banks, sources told Caixin that the investigation points to individual insider trading and misconduct by employees, unrelated to the institutions’ overall investment banking operations.

Why are they being investigated? Major areas of violation

Currently, market focus centers on two points: whether regulatory actions will slow down Hong Kong IPOs and refinancing; and whether the potential rule-breaking in ECM and placement processes will be fully addressed.

This case directly targets the core of Hong Kong’s stock capital market (ECM), an area prone to benefit transfers. Industry insiders report that benefits transfer behaviors frequently occur in Hong Kong’s capital markets, especially in key areas such as international placements and Pre-IPO offerings. Other areas include clawbacks, cornerstone investments, anchor investors, green shoe mechanisms, tranche allocations, nominee holdings, and price manipulation—many of which are vulnerable to irregular practices that facilitate benefit transfers.

The most common area of benefit transfer is in international placements, where violations mainly involve preferential allocation and secret rebates. Specifically, under the guise of fairness, underwriters or book managers often prioritize allocations to related parties, market manipulators, and VIP clients instead of following the “highest bid wins” principle, in exchange for hidden benefits. They may also provide rebates via cash, shares, or other covert benefits, or agree on profit-sharing arrangements, creating a concealed benefit transfer chain.

Pre-IPO processes are also high-risk zones for benefit transfer, primarily exploiting pre-listing cost advantages to lock in profits early. Parties may transfer shares at a discount of 30-50% to founders’ circles, VIP clients, and market manipulators, allowing these shares to be traded immediately after listing at a lower cost than retail investors, thus realizing profits right away. Additionally, “drawer agreements” are used to formalize nominee arrangements, profit-sharing ratios, and coordinated stock price support after listing, further expanding benefit transfer opportunities.

Investment banking insiders point out that long-standing issues such as pricing, allocation, and distribution in ECM often involve favoritism, opaque operations, and collusion. The recent large profits may have been amplified through derivatives and leverage, closely linked to major H-share placements in recent years.

Unlike the strict approval process for A-share refinancing, the Hong Kong “lightning” placement mechanism significantly increases compliance risks. This mode relies on annual general authorization from shareholders, allowing up to 20% of share capital without prior regulatory approval. Boards can make quick decisions, with announcements within 24 hours after closing, and no mandatory lock-up periods for shares. In contrast, A-shares require approval from the stock exchange and CSRC, with longer procedures and lock-up requirements, making regulation more stringent.

Is overheated Hong Kong market a result?

Regarding the investigation, market attention focuses on five key questions: how many listed companies are involved; whether information leaks are single or ongoing, and if core details like price, scale, or underwriters are involved; whether the crackdown correlates with Hong Kong’s hot market; whether future penalties will include license revocations or business restrictions; and whether small investors will be compensated or have access to remedies.

Many believe that the crackdown is directly related to the overheated Hong Kong market, where rapid growth in trading and financing, combined with inherent risks in placement processes, has prompted regulators to step up enforcement. So far this year, 24 companies have completed Hong Kong IPOs, with 388 companies queued at HKEX. Industry forecasts suggest the Hong Kong IPO market will remain hot through 2026.

However, some Chinese-funded investment bankers told reporters that the investigation is not strongly linked to market overheating but is part of Hong Kong’s routine annual enforcement. Future placement, pricing, and information-sharing standards will be more strictly enforced, with tighter internal controls and employee conduct management. High-frequency activities like lightning and international placements will face more detailed regulatory scrutiny.

Not the first joint effort against financial crimes by brokerages

It is worth noting that Hong Kong’s SFC and ICAC have previously collaborated on cases involving brokerage-related financial crimes, demonstrating close cooperation in tackling complex financial misconduct.

In July 2025, they launched a joint operation codenamed “Leverage” targeting a sophisticated criminal group suspected of market manipulation and stock price rigging through corruption. Raids included 14 locations, such as involved listed companies and licensed securities firms, leading to the arrest of the former chairman and a former executive director under the Prevention of Bribery Ordinance.

Investigations revealed that the suspects conspired to use false documents claiming agreements with mainland companies for share subscriptions and joint ventures, involving over HKD 20 million; they also manipulated stock prices through multiple nominee accounts. The former executive director of the listed company also served as a broker responsible and director, suspected of accepting benefits from the former chairman and misappropriating client stocks worth about HKD 9 million.

In an earlier 2022 case, the authorities jointly targeted the “Pump and Dump” group, arresting eight individuals including the group’s mastermind, a listed company chairman, and three responsible personnel from two securities firms. The group used cross-holdings among multiple listed companies to manipulate prices, illicitly earning HKD 191 million. Over 120 SFC personnel and 70 ICAC officers participated, executing 50 searches, including more than 20 joint operations, focusing on social media-driven price hikes followed by high-volume sell-offs to trap investors.

(Source: Caixin)