Not ruling out the involvement of more investment banks, as details of the Hong Kong ICAC Fuset operation come to light

China Securities Journal, March 12 — (Reporter Zhao Xinrui, Lin Jian) The investigation wave into Chinese investment banks in Hong Kong is intensifying, with the Hong Kong Independent Commission Against Corruption (ICAC) releasing additional details.

The ICAC stated that on March 10 and 11, they conducted a joint operation codenamed “Fuse” with the Hong Kong Securities and Futures Commission (SFC) to combat suspected insider trading and corruption. The operation involved brokerages, hedge funds, and intermediaries, uncovering details of leaking allocation information and profiting from short selling.

The image shows the ICAC’s announcement detailing the operation.

The information revealed includes at least three major points:

1. Investigation targets. Two brokerages, one 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 involved institutions are suspected of accepting bribes exceeding HKD 4 million from hedge fund managers, leaking confidential information about the allotment of shares of multiple Hong Kong-listed companies in advance. Based on this, the hedge fund established short positions, profiting from short selling and short stock swap contracts. After the allotment information was made public, the stock prices fell, and the hedge fund gained approximately HKD 315 million in profits.

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

After the announcement, some investment bank insiders 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 involving investment banks or financial institutions.

On the morning of March 12, regarding the case involving Chinese investment banks, sources told China Securities Journal that the investigation points to individual insider trading and misconduct by employees, unrelated to the institutions’ overall investment banking operations.

Why was it investigated? Major violation hotspots

Currently, market focus centers on two points: whether regulatory actions will slow down Hong Kong IPOs and refinancing; and whether the unwritten rules in ECM and allotment processes will be fully cleaned up.

This case directly targets the core of Hong Kong’s stock capital market (ECM), a high-risk area for利益输送 (benefit transfer). Industry insiders report that in Hong Kong’s capital markets, benefit transfer behaviors occur frequently, especially in key areas such as international placements and Pre-IPO offerings. Other areas include clawbacks, cornerstone investments, anchor investors, green shoe mechanisms, sub-allocations, nominee holdings, and price manipulation—these irregular operations often serve as hotbeds for利益输送.

The most common hotspot—international placements—mainly involves skewed allocations and covert rebates. Specifically, under the guise of allocating quotas for popular new stocks, investment banks or book managers prioritize related parties, market makers, and VIP clients over fair “highest bid” principles to gain private benefits. They also provide rebates via cash, shares, or other hidden perks, or agree on profit-sharing arrangements, forming covert benefit transfer chains.

Pre-IPO stages are also high-risk zones for利益输送, mainly exploiting pre-listing cost advantages to lock in early gains. Parties may transfer shares at 30-50% discounts to founders’ circles, VIP clients, and market makers, allowing them to trade immediately after listing at lower costs than retail investors, thus realizing profits right away. Additionally, “drawer agreements” are signed to arrange nominee holdings, profit sharing, and coordinated stock price support after listing, further expanding利益输送 space.

Investment bankers point out that ECM pricing, allotment, and distribution have long-standing潜规则 (unwritten rules) involving利益倾斜 (favoritism), opaque operations, and collusion. The recent large profits may be 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 further increases compliance risks. This mode relies on annual general authorization from shareholders, allowing up to 20% of share capital without prior regulatory approval. The board can make quick decisions, with issuance announced within 24 hours after market close, and no mandatory lock-up periods; in contrast, A-shares require prior approval from exchanges and the CSRC, with longer procedures and lock-up requirements, making regulation more stringent.

Is overheated Hong Kong market a factor?

Regarding the announcement, market attention focuses on five unresolved issues: how many listed companies are involved; whether information leaks are single or long-term, and if core info like price, scale, or underwriters is involved; whether the crackdown correlates with Hong Kong market heat; whether future penalties include license revocation or business restrictions; and whether small investors will be compensated and how to seek relief.

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

However, some Chinese 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 allotment, pricing, and information segregation will be subject to stricter compliance standards. Chinese banks in Hong Kong are tightening internal controls and employee conduct, with high-frequency activities like lightning and international placements facing more detailed scrutiny.

Not the first joint crackdown on broker-related financial crimes

It’s worth noting that Hong Kong’s SFC and ICAC have previously collaborated on cracking down on broker-related financial crimes, with two notable cases demonstrating close cooperation.

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, involving listed companies and licensed securities firms. The ICAC arrested the former chairman and a former executive director under the Prevention of Bribery Ordinance.

Investigations revealed that suspects conspired using false documents to claim that listed companies had entered into share subscription and joint venture agreements with mainland firms, 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 officers from the SFC and 70 from ICAC participated, executing 50 searches, including more than 20 joint operations, focusing on social media-driven pump-and-dump schemes.