The Independent Commission Against Corruption (ICAC) arrested 29 people yesterday in connection with a two-year corruption scam related to trading of warrants, sending a shock wave through the securities industry.

Among the 29 people arrested was a director of an investment firm who was believed to be the mastermind behind the scam. The rest of the arrestees include four traders from four warrants issuers, six stock trading agents, and 18 associates of the director.

ICAC acting principal investigator Choi Shu-keung said the mastermind had gained HK$100 million from the scam that began in early 2007. ICAC officers have recovered suspected bribe money of over HK$2 million in the operation.

Choi said the scam involved an average daily trading volume of over HK$10 million with the turnover exceeding HK$100 million on some trading days.

The investigation also revealed that dozens of warrants were involved in their daily trading.

It is alleged that the mastermind had offered bribe to the traders, who were liquidity providers, in return for favorable bid and asked prices.

Choi added the four traders had no connection to each others.

The mastermind allegedly opened investment accounts in Hong Kong and asked associates in a company that he set up in Shenzhen to purchase warrants using the accounts.

After deducting commissions for the traders and brokers, profits from these transactions were transferred to overseas accounts set up by the mastermind, Choi said.

Choi refused to disclose the names of the warrant issuers, citing the ongoing investigation.

The ICAC launched the investigation a year ago.

This was the first time the anti-graft body had investigated trading related to warrant transactions, Choi said.

Warrants are issued by financial institutions which allow holders to buy or sell a security at a predetermined price. Warrants are attractive to retail investors as they allow investors to buy a single stock and share index at a lower cost, while the chance for a better returns is higher if the market moves in their favor.

Hong Kong Exchanges and Clearing Limited said it had contacted all derivative warrant issuers before the market opened yesterday morning. All issuers confirmed that they are operationally ready and their liquidity providers will continue to provide market-making services.

It also said the derivative market was proceeding as usual yesterday.

The Securities and Futures Commission said they are aware of the ICAC operation, but declined to make any comment while the investigation is ongoing.

Financial experts said there were loopholes in the warrant market, but added that yesterday's arrests were an isolated incident.

(HK Edition 05/30/2008 page1)