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Name: Thu, Hpone Myint

UID: 2013579311
Assessment 2 - Case Synthesis: Morgan Stanley Asia
Basic Empirical Facts
In financial markets, whether related to banking, insurance, wealth management, securities or
futures, all the trading corporations are supervised and regulated rigorously by independent
bodies like Securities and Futures Commission (SFC) of Hong Kong. Despite many rules laid
down by SFC, the insider trading, a strictly forbidden malpractice of financial world, still occurs
in Hong Kong. In 2012, a former managing director in Morgan Stanley named Du Jun was
convicted of insider trading, and sentenced to six years imprisonment with the penalty of 1.7
million Hong Kong dollars. Dus case was the biggest rogue trading conviction in the history of
Hong Kong. Prior to his conviction, he was working in the fixed income division of Morgan
Stanley from 2001 to 2007. While advising Citic Resources Holdings Ltd for oil-field assets
purchase in Kazakhstan and in China, he bought US$ 11 million worth of the company shares
through bank in early 2007. In the mid-2007, he sold half of these shares and gained the profit of
US$ 4.3 million before Morgan Stanley reported the issue to the regulators. Immediately after
the revelation, Dus assets were frozen by SFC and the latter criticized Morgan Stanley for
compliance oversight. Du also fled to China where Hong Kong administrative region does not
have any legal authority and SFC was unable to detain him. He came back to Hong Kong from
Beijing in 2008 and was arrested by immigration authorities and the police. According to SFC,
over 290 investors were affected by Dus scandal and this has caused many to have cast doubt on
the efficiency of the compliance.
Causes and Antecedents
Having received a masters degree in International Banking and Finance, and worked at multiple
investment banks, Du Jun obviously had a thorough knowledge about his work at Morgan
Stanley as a managing director. During his tenure at Morgan Stanley, Dus purchase of shares at
Citi Resources was left unchecked and approved by his superiors as well as the compliance
officers. They misunderstood his purchases and thought that Du was referring to Citi Pacific, a
separately listed branch of Citic Group. The compliance failed to adhere to the normal
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procedures in an organized way leaving loopholes for Du to mislead the officers, dodge the
internal identification mechanism, and take advantage of the shortcomings.
Warranted Actions
To avoid the repetition of such financial fraud, the following strategies can be implemented
through the collaboration between the government and the financial institutions.
Firstly, financial institutions should be advised to adopt stricter measures in trading related
activities. Every single staff in the company who has the knowledge of or who is directly
correlated to the acquisition of shares should be sued by the independent regulatory bodies for
faulty programs in which clients of the company had undergone extensive financial losses even if
no insider activity took place (PwCs Financial Services Institute, 2011). By effectively
prosecuting the firms and supervisors who fail to diversify the risk exposure at the expense of
their investors, the level of obligation borne by the individuals can be increased.
Secondly, a whistleblower program should be introduced with rewards in return for the
whistleblowers information. In financial companies where the profit is excessively incentivized
over the ethic, it is natural even for a compliance officer to overlook any misconduct of the
companys financial affairs. A simple channel of whistleblower program, therefore, will not
work in practice. Hence, a program with the bounty of up to 30% of any amount recouped based
on the information should be incorporated into the compliance sector (PwCs Financial Services
Institute, 2011). It will encourage the bystanders to report the corporate wrongdoing to police
more frequently (Lynch, 2013). This, in turn, will create a catalyst that promotes the efficiency
of the compliance and helps the company maintains its integrity.
Originally, SFCs purpose was to regulate the market as a regulatory body. It would not have
detected Dus fraud unless Morgan Stanley also reported it. Therefore, a separate and dedicated
unit organized with experienced market analysts and attorneys should be formed inside SFC to
assist in future investigations (PwCs Financial Services Institute, 2011). This unit should be able
to identify the relationships between each traders and the associations between individual firms
in a large scale through more sophisticated technologies and mechanisms.
In the long run, it may be inferred that the insider trading cannot be completely wiped out from
the financial world despite stricter rules alongside heavier prison sentences and fine payments.
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However, people should not lose heart in the judicial system and consider it futile since the
current sentences will serve as the deterrence for any future violation in the market. In summary,
the scandal can be attributed to the shortcomings of the system and the deficiency of the
compliance.

Word Count (784)

Reference
Bobelian, M. (2012, 10 December). Can the Government Stop Insider Trading? Forbes.
Retrieved from http://www.forbes.com/sites/michaelbobelian/2012/12/10/can-thegovernment-stop-insider-trading/
Lynch, S.N. (2013, 1 October). Bigger Payouts Seen for U.S Financial Market Whistleblowers.
Reuters. Retrieved from http://www.reuters.com/article/2013/10/01/us-financialregulation-whistleblowers-idUSBRE9901EY20131001
PwCs Financial Services Institute (FSI). (2011). Avoiding the Headlines: How Financial
Services Firms Can Implement Programs to Prevent Insider Trading. PwCs Financial
Services Institute (FSI). Retrieved from http://www.pwc.com/en_US/us/financialservices/publications/viewpoints/assets/viewpoint-insider-trading-prevention.pdf