Hong Kong regulators have punished Soros Fund Management, a family office created by the tycoon, for naked short selling.

Soros Fund Management, the family office of billionaire George Soros estimated to oversee about $25 billion, has been fined by Hong Kong’s securities regulator for naked short selling.

The company’s Hong Kong unit was reprimanded and fined HK$1.5 million ($192,000) for a 2015 trade involving a bonus share issue of Great Wall Motor Co, Hong Kong’s Securities and Futures Commission said in a statement today.

According to one definition, naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist - hence the word "naked". Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short.

The family office was created about seven years ago after Soros decided to stop managing third-party money so that his business would not fall under the regulatory umbrella of the Securities and Exchange Commission. A number of hedge fund firms have morphed into family offices for this reason in the wake of regulatory changes post-2008.

“The SFC considers that SFM not only failed to act with due skill, care and diligence in dealing in the bonus shares, but also failed to diligently supervise its staff members and implement adequate and effective systems and controls to ensure compliance with the short selling requirements,” the Asian regulator said.

The Chinese automaker announced the bonus share issue in August 2015. Soros Fund Management’s local unit, known as SFM HK Management Ltd, was notified by its custodian that it was entitled to 1.6 million bonus shares as a result of already owning 808,000 Great Wall Motor shares, it continued. 

Soros is no longer involved in daily management activities of the family office, focusing on political activism and philanthropic endeavors instead. The financier become famous in the early 1990s for his shorting of sterling, helping to force the British currency out of the European Exchange Rate Mechanism, or ERM, triggering a political crisis.

Explaining events, the SFC said that on 30 September 30, 2015, the fund’s custodian notified SFM’s trade support department of SFM’s entitlement to 1,616,000 bonus shares as a result of the fund’s pre-existing holding of 808,000 Great Wall shares. SFM’s trade support team booked the 1,616,000 bonus shares into SFM’s trading system on 30 September 2015 without segregating them into a restricted account as required by SFM’s internal policy.  Consequently, the system indicated that a total of 2,424,000 shares of Great Wall were available for trading when in fact only 808,000 shares were available for trading at that point in time.

Based on the erroneous information shown in the system, one of the fund’s portfolio managers placed an order to sell 2,424,000 shares of Great Wall on 2 October 2015, causing the fund to become short by 1,616,000 shares in Great Wall, the SFC statement said.

In deciding the sanctions against the Soros business, the SFC said there “is no evidence to suggest that SFM had acted in bad faith in short selling the bonus shares”; the incident was “the second occurrence of a similar kind over a period of five years”, and that SFM has taken remedial measures to strengthen its internal controls and systems; and SFM has an otherwise clean disciplinary record.