Do not rule out more investment banks being implicated, details of the Hong Kong Independent Commission Against Corruption's Operation Fuse are coming to light.

The crisis of Chinese investment banks being investigated in Hong Kong is escalating, and the Hong Kong Independent Commission Against Corruption (ICAC) has revealed more details in its latest statement. The ICAC of Hong Kong stated that it conducted a joint operation with the Hong Kong Securities and Futures Commission on March 10th and 11th, under the codename "Fuse", to crack down on suspected insider trading and corruption. The details of the case cover brokerage firms, hedge funds, and intermediaries, who profited through the disclosure of confidential information related to stock placements and short selling. The information revealed includes at least three key points: 1. The investigation targets. Two brokerage firms, a hedge fund management company, and their executives are all implicated in the case. Six men and two women, aged between 35 and 60, were arrested. 2. The reasons for the investigation. The executives of the companies involved in the case are suspected of receiving over HK$4 million in bribes from the head of a hedge fund management company, in exchange for disclosing confidential information on stock placements of multiple Hong Kong-listed companies. The hedge fund then established short positions in the relevant stocks, profiting through short selling and signing short-selling contracts. After the placement information was made public, the stock prices dropped, allowing the hedge fund to make a profit of approximately HK$315 million. 3. The progress of the investigation. The joint operation was initiated based on preliminary investigations by the Securities and Futures Commission into suspected insider trading activities, uncovering potential corrupt practices. The investigation is still ongoing. After the announcement, some investment bank professionals expressed concerns to reporters, fearing that more investment banks may be warned and that the special operation may affect more industry practitioners. However, some industry observers believe that there is no need to overreact, as this is an isolated case. Historically, this is not the first time that Hong Kong regulators have collaborated to crack down on misconduct by investment banks or financial institutions. On the morning of March 12th, sources familiar with the situation revealed to Caishishe that the investigation into Chinese investment banks focuses on individual insider trading and violations, unrelated to the institutions' overall investment banking business. Why the investigation? Violations in high-risk areas The current core concerns of the market are focused on two points: whether regulatory actions will slow down the pace of Hong Kong IPOs and secondary offerings, and whether the ECM and placement processes will undergo a comprehensive cleanup of hidden rules. This case directly targets the core areas of the stock market in Hong Kong (ECM), which is also a high-risk area for interest transfers in the Hong Kong market. According to industry insiders, in the Hong Kong capital market, there have been frequent incidents of interest transfers, mainly focusing on several key aspects of the entire chain of new stock offerings and trading, with international placements and Pre-IPO placements being typical. These areas also include buy-backs, cornerstone investments, pegged investments, greenshoe options, warehousing, nominee holdings, pump-and-dump operations, among others, where irregular operations often become breeding grounds for interest transfers. As the most common area for interest transfers, the violations in the international placement process are mainly reflected in two aspects: biased placements and private rebates. Specifically, investment banks or bookrunners in the allocation of quotas for popular new stocks do not follow the fair principle of "the highest bidder wins," but prioritize allocating scarce quotas to related parties, market makers, and VIP clients, in exchange for private benefits. At the same time, the parties involved may also offer rebates through cash, shares, or other implicit benefits, or agree on profit-sharing arrangements, forming a covert chain of interest transfers. The Pre-IPO phase is also a high-risk area for interest transfers, where the core is to use the cost advantage before listing to allow certain groups to lock in profits early. On one hand, the parties involved may transfer shares to founder circles, investment bank VIP clients, and market makers at a significantly discounted price of 30% to 50% below the secondary market prices, which can be directly traded after listing, with costs nearly half as low as ordinary retail investors, allowing for immediate profits. On the other hand, the parties involved may also sign "drawer agreements" to determine arrangements for nominee holdings, profit-sharing ratios, and price manipulation post-listing, further expanding the space for interest transfers. Professional insiders point out that irregularities, opaque practices, and hidden rules have long existed in the pricing, placement, and allocation processes in the ECM, and this significant profit may be related to large-scale placements in recent years in H-shares. Unlike the strict approval process for A-share refinancing, the lightning placement mechanism in the Hong Kong stock market further amplifies compliance risks. This model relies on the annual general authorization of shareholders, with no need for regulatory pre-approval within a 20% capital limit, allowing the board of directors to make quick decisions, with announcements to be made within 24 hours after the market closes, and no mandatory lock-up period for shares; in contrast, A-share offerings require pre-approval by the exchanges and the Securities and Futures Commission, a process that can take months and includes lock-up periods for shares, with stricter regulatory constraints. The result of overheating in the Hong Kong stock market? Regarding the contents of the announcement, the market is focusing on five unresolved issues: how many listed companies are involved in the case; whether the information leak was a one-time occurrence or a long-term practice, involving core information such as pricing, scale, underwriters, etc.; whether the actions are related to the heat in the Hong Kong stock market; whether the implicated institutions will face penalties such as license revocation or business restrictions; and whether small and medium-sized investors will have access to compensation and relief channels. Many opinions suggest that this action is directly related to the overheating of the Hong Kong stock market, with rapid growth in market trading and financing leading to inherent risks in the placement process, prompting regulators to intensify enforcement. 24 companies have already completed IPOs in Hong Kong this year, with 388 companies queued up on the Hong Kong Stock Exchange. Institutions generally predict that the Hong Kong IPO market will remain hot in 2026. However, some Chinese investment bank professionals have told reporters that this action is not strongly related to the overheating of the Hong Kong stock market, but rather a routine law enforcement action by Hong Kong regulators. The allocation, pricing, and information isolation in subsequent placement processes will be subject to stricter compliance standards, with Chinese investment banks in Hong Kong tightening internal controls and employee behavior management, and high-frequency businesses such as lightning placements and international placements facing more detailed regulatory scrutiny. Not the first time joint crackdown on financial misconduct related to brokerages It is worth mentioning that the collaboration between the Hong Kong Securities and Futures Commission and the ICAC to crack down on financial misconduct related to brokerages is not the first time. There have been two previous typical cases that demonstrate the close cooperation between the two sides in combating complex financial crimes. In July 2025, the two agencies initiated a joint operation under the codename "Leverage" to investigate a sophisticated criminal group suspected of market manipulation and price manipulation of listed companies through corrupt means. The operation involved searches at 14 locations, including offices of the implicated listed companies and multiple licensed securities firms. The ICAC arrested the former chairman of the company and a former executive director based on the Prevention of Bribery Ordinance, as they were suspected of colluding to use documents containing false information to falsely claim that the listed company had reached stock subscription and joint venture agreements with mainland enterprises, involving over HK$20 million; they also manipulated stock prices through multiple nominee accounts. Additionally, the former executive director of the listed company also held positions as a leading member of a brokerage firm, and was suspected of receiving benefits from the former chairman and misappropriating client stocks worth approximately HK$9 million. In an earlier case in 2022, the two agencies joined forces to crackdown on the "Pump-and-Dump Scam" syndicate, arresting a total of eight individuals, including the mastermind of the group, the chairman of a listed company, and three responsible persons from two securities business divisions. The syndicate used cross-holding networks of multiple listed companies to carry out market manipulation, resulting in illegal gains of HK$191 million. The operation involved over 120 SFC staff and 70 ICAC staff, with searches conducted at 50 locations, over 20 of which were joint searches, focusing on cracking down on activities such as pushing up stock prices through social media, selling at high levels, and deceiving investors to buy. This article is reprinted from "Caishishe", GMTEight editor: Jiang Yuanhua.