The Securities & Futures Commission has suspended the licence of Morgan Stanley Asia's Lillian Liu Yaying for six months from August 15 to February 15, 2010.

The commission said today Liu had failed to notice or otherwise turned a blind eye to the possibility that matched trades she carried out for one of her clients might result in so-called "wash sales" and falsely inflated turnover would result.

A wash sale is trading activity in which shares of a security are sold at a loss and a substantially identical security is purchased within 30 days.

In February last year, her client faced margin calls from another investment bank, through which he had invested in a number of securities. He decided to transfer part of his portfolio to Morgan Stanley to ease his margin position with the other bank.

The commission said this could have been achieved through a simple delivery-versus-payment arrangement, such as by using the Central Clearing & Settlement System.

Between February 28 and March 26, 2008, instead of transferring the relevant shares off-market, a series of on-exchange matched sales and purchases was coordinated between Liu and her assistants with a team of traders at the other bank - including 82 wash sales.

Trades distorted share demand

The matched trades, conducted for the purpose of transferring part of the client's portfolio at the other bank to Morgan Stanley, distorted the real demand for and supply of four securities, namely Fosun International, Tiangong International, Centron Telecom International Holding and Kingsoft Corporation.

They took up more than half of the daily turnover of one of the four securities on six trading days.