The Securities and Futures Commission (SFC) of Hong Kong has revoked the licence of Nerico Brothers Limited (NBL) for facilitating misappropriation of client assets and other misconduct.

The SFC has also banned NBL’s director, Jerff Lee Cheuk Fung, from engaging in all regulated activities for life.

The regulator found that, between June 2020 and January 2021, NBL misused a client’s funds totalling over US$68 million on six occasions to subscribe for shares in two segregated portfolios of a Cayman-incorporated fund (Fund) for the firm’s own account. NBL retained the profits arising from the subscriptions for itself and only returned the subscription principals to the client’s account at NBL by June 2021.

Notably, NBL’s acts were done without the client’s knowledge, instruction, authorization or consent, and in breach of the express terms of the client agreement.

The SFC also found that NBL knowingly facilitated a scheme orchestrated by Neo Ng Yu and his connected persons and entities, resulting in the misappropriation of approximately US$154 million of the same client’s funds since January 2021.

Specifically, between January and August 2021, NBL transferred nearly all the client’s funds to one of the segregated portfolios of the Fund (Sub-fund) for the purported acquisition of “liquidity provider units” from the Sub-fund for the client.

However, the Sub-fund neither issued nor held any “liquidity provider units”, contrary to NBL’s claim. A significant portion of the client’s funds were subsequently used by or dissipated to Neo Ng and his corporate vehicles.

To disguise and conceal the misappropriation, NBL either fabricated or employed fabricated transaction documents and account statements as part of the scheme.

During the SFC’s inquiry and investigation, NBL presented two contradictory narratives and relied on two sets of conflicting documents to explain the usage and whereabouts of the misappropriated client funds. While NBL initially claimed that the client’s funds were transferred to the Sub-fund to acquire “liquidity provider units” issued by the Sub-fund, it later changed its explanation and asserted that the funds were used to acquire from the Sub-fund “liquidity provider units” issued by a different Cayman-incorporated fund.

The SFC’s investigation further revealed that both narratives were false. The client’s funds were not used to acquire any “liquidity provider units” and they were in fact misappropriated. In addition, both sets of documents relied on by NBL to support these false narratives and conceal the misappropriation were fabricated.

The regulator concluded that the misconduct of NBL was directly attributable to the actions of Lee, who was the directing mind behind NBL’s misuse of the client’s funds and facilitation of their misappropriation by Neo Ng, with whom he had close ties.

Lee also personally breached the SFO by knowingly giving false or misleading answers and explanations in his interviews with the SFC.

In deciding the disciplinary sanctions against NBL and Lee, the SFC has taken into account that their conduct was egregious and serious, their conduct caused significant losses to the client, and

they each had an otherwise clean disciplinary record.