09/16/96 IS HONG KONG 'THE WILD, WILD EAST'? (int'l edition)

IS HONG KONG 'THE WILD, WILD EAST'? (int'l edition)
The Jardine case may bring stricter securities regulation
When word leaked out last spring that the white-shoe house of Jardine Fleming Investment Management was under investigation by British and Hong Kong regulators for suspected irregularities in handling institutional funds, employee-benefits consultant Mark Baxter got a flood of calls from worried Jardine customers asking whether they should steer clear of the company. Baxter's advice: Don't start any new business with Jardine until the probe was completed.
It turned out that Baxter and his clients had reason for concern. On Aug. 29, British securities regulators fined Jardine $1.1 million for supervisory errors, inadequate controls, and other offenses. They also barred a Jardine Fleming Investment Management affiliate from selling funds in Britain. Hong Kong regulators, meanwhile, cut a deal obliging Jardine and former Chief Investment Officer Colin Armstrong to make $20 million in restitution payments to investors.
HIGH ANXIETY. The investors suffered the losses when Armstrong, authorities say, delayed posting trades and shifted trading profits into several accounts including his personal one. Armstrong, a 14-year Jardine veteran, had his registration with Hong Kong's Securities & Futures Commission (SFC) revoked permanently. He resigned and moved to Britain, says Jardine, and could not be reached for comment.
Rather than calming investors, the disciplinary action is only raising their level of anxiety. Jardine is now trying to assure skeptical investors that it has cleaned house and instituted internal controls. In addition to Armstrong's resignation, Jardine also has transferred his boss, CEO Robert Thomas, to other duties. Jardine says Thomas has no comment about the case. But some observers are speculating now that Alan Smith, chairman of the entire Jardine Fleming Group, may eventually have to step down. And while the storm over Jardine rages, many investors are asking whether they should get their funds out of the colony altogether. Hong Kong, says Baxter, now looks too much like ``the wild, wild East.''
CHIPPING AWAY. There is no question that the Jardine Fleming scandal is taking a big toll on Hong Kong's reputation. That London's Investment Management Regulatory Organization Ltd. (IMRO), and not the Hong Kong SFC, raised questions about Jardine first and levied harsher sanctions had made people ask whether the territory's fledgling regulatory body is doing its job. Meanwhile, rival investment firms in Singapore have been chipping away at Hong Kong's $100 billion money management business just as the territory prepares to launch a mandatory retirement savings program that would put billions more in individuals' savings up for grabs.
What worries many analysts now is that Jardine's high-flying ways could be typical of the activities of other Hong Kong houses as well. Jardine Fleming, which has some $22 billion under management, concedes that during the boom years of 1993 through 1995, the company focused too strongly on growth and too little on controls. ``Plainly, we have a lot of explaining to do,'' admits spokesman Rodney Williams. But a number of fund managers say that the same lack of controls may plague other Hong Kong houses. ``If this kind of thing could go on, how can we as an industry be trusted with other people's money?'' asks one dismayed fund manager with a major Western firm.
The case also raises questions about the quality of oversight and regulation in Hong Kong. Although the IMRO shut down Jardine Fleming Asset Management in Britain for an indefinite period, Hong Kong's regulators have permitted an affiliate to operate in their territory. Many in the industry also don't buy Jardine's and SFC's conclusion that Armstrong was a lone rogue trader. ``It was common knowledge that people would book deals after the fact to favored accounts,'' says a former Jardine employee. ``Everyone looked up to Armstrong for guidance. If he was front-running and shifting profits among accounts, everyone was doing it.''
``TOO COMPLEX.'' The SFC claims it audited the accounts of dozens of Jardine fund managers and found only Armstrong's to have deficiencies. The regulatory body decided, however, to audit only two boom years, reasoning that the most profits were made between 1993 and 1995. And a source close to the SFC claims no more serious charges were leveled against Armstrong because that would involve extradition proceedings on the eve of China's takeover of the territory next year. ``With 1997 approaching, that gets too complex,'' the source says. The SFC denies such charges. ``If there was any criminal offense, we'd pursue it,'' insists General Director of Enforcement Gerald McMahon. ``We are determined to take action against misconduct, even by a market leader,'' adds Deborah Glass, senior director of the SFC's investment products division.
The Jardine case may, in fact, build pressure for stricter regulation in Hong Kong. Several global firms operating there, including Fidelity Investments, have long argued for tighter governance. And the territory's Legislative Council has begun hearings on the Jardine case that could force the SFC to bring its rules more in line with the tougher standards of the U.S. and Australia. Then there's the discipline of the market: If Hong Kong money managers don't clean up their act, other investment houses in other financial centers are more than willing to take their place.
By Dave Lindorff in Hong Kong