The US$1.14 million trade that sparked Hong Kong’s Segantii insider trading trial

[HONG KONG] In the closely knit financial community of Hong Kong, major criminal cases are both rare and closely watched.

That’s put a spotlight on the trial of Segantii Capital Management – once one of Asia’s top hedge funds – as well as its founder, Simon Sadler, and a former employee. They are accused of using confidential inside information about a planned block trade in 2017 to sell shares in fashion chain Esprit Holdings. All three have pleaded not guilty.

The court case, which began on Monday (May 4) and is expected to run for about a month, will put the company under a microscope and show how it was undone by a US$1.14 million share trade.

Who is on trial?

Hong Kong’s securities regulator, the Securities and Futures Commission (SFC), has brought criminal insider-trading charges against three parties: Segantii Capital Management; Sadler, once dubbed Asia’s “block trade king;” and former Segantii trader Daniel La Rocca.

Prosecutors allege that Sadler, La Rocca and the firm knowingly traded securities using non-public, price-sensitive information obtained from a person they knew was connected with Esprit. Beyond that, it remains unclear how they intend to defend themselves or whether they will mount a joint or separate defence.

Under Hong Kong law, insider trading carries a maximum penalty of 10 years in prison and a fine as high as HK$10 million (S$1.6 million). However, in the District Court – where the court case is being heard before a judge rather than a jury – the maximum sentence is seven years.

What allegedly happened?

In June 2017, Lone Pine Capital – a US hedge fund and major shareholder in Hong Kong-listed fashion chain Esprit – was preparing to sell a 10 per cent stake in the company in the form of an off-exchange transaction known as a block trade. By this point, Esprit’s valuation – amid declining sales – had dropped over a 10-year period from about HK$125 billion in 2007 to roughly HK$10 billion.

Prosecutors allege that on Jun 14, Sadler and La Rocca received confidential information from Tony Psarianos – at the time a director of equity sales trading at Bank of America’s Merrill Lynch unit – about a potential share sale. Psarianos has not been charged and is expected to testify as a witness in the case.

A large block sale is typically priced at a discount to the market – meaning the share price is likely to fall once the deal is executed. According to court documents, Segantii allegedly sold shares ahead of the deal, offloading 1.57 million Esprit shares at an average about HK$5.25 and short-selling a further 132,000 shares at around HK$5.23.

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Short selling involves borrowing shares to sell them, with the aim of buying them back later at a lower price and making a profit. The following day, Lone Pine sold roughly 195.6 million shares at about HK$4.68 – roughly 11 per cent lower than the price at which Segantii had sold theirs.

How did the alleged trade unravel?

The transaction first drew scrutiny internally at Bank of America Merrill Lynch. According to a pre-trial ruling in a Hong Kong court, a review of internal correspondence sparked concern among the bank’s compliance team about some staff’s mishandling of “material non-public information.” Within about a week, the bank had engaged external law firm Freshfields to conduct an internal investigation and notified the SFC of a potential breach. The regulator then requested further information from Segantii as part of its probe.

The case, however, has been complicated by a dispute over documents from Bank of America Merrill Lynch. Some documents were mistakenly disclosed by the regulator to Segantii’s defence team. The bank argued that the documents were protected by legal privilege, but a Hong Kong judge ruled in mid-April that the Merrill Lynch papers – a cache of around 40 documents that included internal interviews and self reports – were disclosable and could be used by both sides during the trial.

What are the sensitivities around block trading?

Selling small amounts of publicly listed shares is straightforward: They typically trade at the prevailing market price. Offloading large stakes is more difficult, because the very act of selling can drive the price lower.

If investors become aware that a major shareholder is preparing to sell, the share price often falls in anticipation of the deal. To avoid that, banks arrange private “block trades”, allowing large shareholders to sell big chunks of shares in a single transaction, usually at a discount. These deals are typically negotiated confidentially and executed quickly – often within hours.

Block trading itself is legal and widely used. But the process relies on strict confidentiality. Trading on non-public, price-sensitive information about an upcoming block deal can amount to insider trading because that information is likely to move the market once it’s disclosed.

Hong Kong’s SFC has since 2024 tightened oversight of block trades and the handling of sensitive information around them.

What makes this trial such a big deal?

While the trade was relatively small, it brought down one of the largest hedge funds in Asia within weeks of the allegations becoming public.

Such court cases can also carry serious repercussions. A notable example involved Bill Hwang, the founder of Archegos Capital Management, who was sentenced to a prison term in the US in 2024 for market manipulation and fraud.

Hwang had earlier admitted to insider trading and market manipulation involving shares of Bank of China and China Construction Bank in 2008 and 2009, when he was associated with Tiger Asia Management. He was banned from the Hong Kong market for four years, and he, Tiger Asia and the firm’s head of trading were and ordered to pay more than HK$45 million to affected investors.

The Segantii case adds to global scrutiny of block trades, a practice that has also ensnared Wall Street giants. In 2024, Morgan Stanley agreed to pay US$249 million to settle US allegations that employees leaked information to funds that shorted shares ahead of block trades. BLOOMBERG