(Bloomberg) -- Seven years after a fateful stock trade in Hong Kong, Segantii Capital Management Ltd. and its founder Simon Sadler will appear in court on Wednesday to face insider dealing charges. 

The criminal case centers around Segantii’s actions ahead of an unidentified block trade in June 2017. That block trade was the sale of a 10% stake in apparel retailer Esprit Holdings Ltd. by another hedge fund firm, Lone Pine Capital LLC, according to a person with knowledge of the matter who spoke on condition of anonymity.

Esprit’s shares tumbled before and after the $117 million block trade, falling a total of 29% over six consecutive trading days, according to data compiled by Bloomberg.

Hong Kong’s Securities and Futures Commission has accused Segantii, Sadler and Daniel La Rocca, who used to be a trader at the firm, of acting on insider information prior to the deal. The case is one of the city’s highest-profile actions against a major hedge fund firm, and is being closely watched by market participants in the Asian financial hub. Authorities so far haven’t publicly detailed what Segantii did and how much money the fund made in the process.

On Wednesday, prosecutors are expected to ask for the Segantii case to be transferred from a Magistrates’ Court to a higher Hong Kong court — known as the District Court — that can mete out heavier sentences. The District Court can hand out a maximum penalty of seven years’ imprisonment in insider-dealing cases that are decided by a judge, in addition to financial penalties.

Sadler and La Rocca last appeared in court on May 2, the same day the criminal proceedings were unveiled by the SFC. They didn’t enter a plea that day, and were released after posting bail. A Segantii spokesperson said last month that the firm intends to defend itself vigorously against the Hong Kong charge. 

About three weeks after the insider-trading charges became public, Segantii told investors that it will return all outside capital, bringing an abrupt end to the 16-year-old hedge fund. The multi-strategy fund had $4.77 billion in assets under management at the end of April, and received close to $1 billion in redemption requests, Bloomberg News reported last month. 

Esprit Trade 

The case against Segantii is likely to hinge on prosecutors’ ability to prove that Sadler and La Rocca knowingly traded on material non-public information in 2017, allegedly ahead of the Lone Pine block trade.

Greenwich, Connecticut-based Lone Pine sold 195.64 million Esprit shares at an average price of HK$4.68 apiece on June 15 of that year, according to a filing to the Hong Kong stock exchange that was posted about a week after the transaction. The hedge fund had been the largest shareholder of the retail chain more than a decade ago. 

Esprit’s share price fell more than 3% in each of the two days before the block trade. It plummeted 13% on the day of the transaction, and dropped further afterward. 

A former trader at Bank of America Corp.’s Merrill Lynch division was named in the Segantii case. The trader, Tony Psarianos, worked at the firm in Hong Kong from 2007 to 2021, according to regulatory records. The Financial Times earlier reported that Psarianos gave inside information about Esprit to Sadler and La Rocca. He hasn’t been charged.

Bank of America traded some Esprit shares on two days in June 2017 after the Lone Pine sale, according to stock-exchange filings. 

The legal arguments in the case could focus on what information was shared prior to the 2017 block trade, whether Segantii knew the size of the transaction, and whether Segantii traded improperly with material non-public information. 

Segantii’s chief executive officer Kurt Ersoy did not respond to a request for comment. A SFC spokesman, Lone Pine representatives, and a Bank of America spokesman declined to comment. Psarianos could not be reached for comment.

Court Matters

A court trial for insider dealing charges could last at least three weeks, according to Jimmy Chan, a former SFC enforcement director who is now a partner at law firm Jingtian & Gongcheng LLP. 

Cases involving 1,162 defendants were resolved by Hong Kong’s District Court in 2022, according to the most recent statistics available from the local Legislative Council. Two-thirds of those defendants pleaded guilty after court mentions. For those that went through trials, 79% were convicted and the rest were acquitted, the data showed. 

Back in 2008, Du Jun, a former Morgan Stanley managing director, was charged with insider dealing in the shares of Hong Kong-listed Citic Resources Holdings Ltd. the previous year. The investment banker had purchased shares of the Chinese state-owned company after learning about its plan to acquire an oilfield. Morgan Stanley fired him and reported his trading to the SFC in 2007.

Du’s case was transferred to Hong Kong’s District Court about two months after he was charged, and he was found guilty about a year later following a trial that lasted 38 days. He was sentenced to seven years in prison in 2009, before his jail term was reduced slightly to six years. In 2013, Du was ordered by a High Court judge to pay HK$24 million ($3 million) to compensate nearly 300 investors. He also received a lifetime ban from the industry.

Hong Kong’s SFC also previously went after Tiger Asia Management LLC — the predecessor firm to Archegos Capital Management LP — for insider trading in a 2009 civil case. The securities regulator accused the New York-based asset manager of using confidential price-sensitive information to trade the shares of two Chinese state-owned banks after being tipped off about their stock placements. 

A long legal and regulatory tussle eventually resulted in a HK$45.3 million penalty in 2013, and a 2014 ban on Tiger Asia and its founder Bill Hwang from trading securities in Hong Kong for four years. The SFC opted for civil proceedings against Tiger Asia because the asset manager did not have an office in the city. Hwang is currently undergoing a criminal trial in New York after his family office imploded in 2021. 

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