HKSI Paper 6 Misconduct question: form of market misconduct

HKSI Paper 6Misconduct

On each quarter's last trading day, Ben Cheng, a fund manager, buys his fund's thinly traded holdings minutes before the close, to lift their closing prices and so the fund's NAV and his performance fee. Which form of market misconduct is this most likely to be?

A Insider dealing, as he knows the size of the fund's orders before the rest of the market
B Stock market manipulation, as the purchases are meant to induce other investors to buy the shares
C Price rigging, as quarter-end purchases for a fund involve no change in beneficial ownership
D False trading, as he intends a false or misleading appearance with respect to their prices

Show the answer and explanation

Answer: D. False trading, as he intends a false or misleading appearance with respect to their prices

False trading takes place when a person does anything intending, or reckless as to whether, it creates a false or misleading appearance with respect to the price of securities, or an artificial price (s.274(1)(b), (3)); the criminal twin is s.295. Buying at the close to lift prices for valuation day fits. Stock market manipulation (s.278) needs an intention to induce others to buy or sell, which is not Ben's aim. The fund buys from other investors, so beneficial ownership changes and the wash-sale limb of price rigging (s.275(1)(a)) does not apply. Knowing your own orders is not inside information about the company (s.245(2)). FMCC para 3.3 requires controls to prevent such conduct. Source: SFO (Cap. 571) s.245(2), s.274(1), (3), s.275(1), s.278, s.295; Fund Manager Code of Conduct (October 2024) para 3.3 (as at October 2026).

Common mistake

Calling quarter-end marking the close 'stock market manipulation'. Section 278 needs an intention to induce others to deal; lifting your own valuation is false trading.

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Study note: Misconduct: market misconduct, unsolicited calls and improper trading by fund managers HKSI Paper 6 practice questions & mock exams

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