The man Hong Kong day traders know as "Dr. Cho" has supervised an entirely different kind of operation, according to a charge filed against him in Hong Kong. Roy Cho Kwai-chee is the alleged mastermind behind a million-dollar scheme to defraud one of the city's financial-advisory firms.

Overseas investors would do well to follow the case. It is likely the first of many such prosecutions. It's also instructive of how Hong Kong's stock market, despite leading the world's exchanges in terms of the value of new stock offerings last year, is all too often the site of suspicious transactions between related parties.

This may be the first penny stock of many to drop. The Securities and Futures Commission's enforcement chief Thomas Atkinson said in an October speech that regulators are taking a tougher stance on fraud. This year, they plan criminal and civil action against some 60 companies and individuals, which were at the heart of what the regulators call a series of "nefarious networks."

Subsidiaries in Hong Kong are sold well over the odds, or bought at sweetheart prices, at times stripping out the original business altogether. On the receiving end are unsuspecting shareholders unaware of all the secret connections between subsidiaries, directors and controlling investors.

Hong Kong's anticorruption watchdog filed the charge against Cho this week, claiming he defrauded the brokerage Convoy Global Holdings. The chief crime alleged by the Independent Commission Against Corruption (ICAC) is that Cho, a medical doctor who founded a chain of clinics, caused a Convoy subsidiary to spend more than HK$89 million (US$11 million) to buy an investment company that he in fact owned. He's been slapped with one charge of "conspiracy to defraud."

In related investigations, companies with a combined market capitalization of at least US$22 billion are now suspended from trading in Hong Kong, Bloomberg reports, while 13 people have been arrested. Tens of millions of dollars of loans are unpaid. Convoy, now under new management, is also suing Cho, claiming he used a secret email account to get confidants at Convoy to make margin loans to businesses he owned or controlled, even though he wasn't part of Convoy's management team.

The charge against Cho, who appeared in court this week for "mention" of it, stems from an investigation that started back in December 2017. The ICAC, which was first set up to tackle police corruption but combats all its forms in Hong Kong, partnered with the stock watchdog, the Securities and Futures Commission (SFC), to bring the case.

The ICAC claims that Cho acted as a "shadow director" of Convoy, "exerting significant influence over its operation directly or indirectly." He came to own 50% of Convoy.

In April 2016, Cho allegedly presented a potential deal to Convoy to buy True Surplus International Investment, another asset management company. In fact, its main business was just holding interests in two other investment funds, which the ICAC says "required continuous capital commitment." Cho also happened to own 55% of True Surplus.

Five months later, a Convoy subsidiary went ahead with the purchase of True Surplus. The charge claims Cho pushed through the deal without convening the necessary meetings to approve it at Convoy. He also hadn't made it clear that he was the de facto director of Convoy, and hadn't revealed the connections between his subsidiary and Convoy, the ICAC says.

Cho got paid more than HK$57 million (US$7.3 million), personally, out of the deal, according to the ICAC. The corruption cops say the acquisition also spared Cho having to pay HK$16.2 million (US$2.1 million) into the investment funds held by True Surplus.

Convoy provides asset management, securities brokerage and insurance. Its shares have been on a long-term slide, but spiked massively and strangely twice in 2015. Those that bought at its brief peak would have lost 88% of their money, leaving it with a market capitalization of HK$2.5 billion (US$318 million). The shares have been suspended since this investigation began in December 2017, and four people were arrested.

Cho has his own company, Town Health International Medical Group HK:3886, which manages a chain of doctor's clinics. That went public with backing from Hong Kong's richest man, Li Ka-shing, but saw its shares suspended in November 2017. More recently, the ICAC has searched its premises.

I wrote about the dodgy dealings among Hong Kong's penny stocks back in mid-2017. That was when Hong Kong's secondary exchange, the Growth Enterprise Market or GEM, hit an all-time low.

It was also shortly after Hong Kong's best-known shareholder activist, David Webb, published his May 15 report "The Enigma Network: 50 stocks not to own." Webb has been Hong Kong's listed-markets personal detective, through his www.webb-site.com site, for two decades now.

Webb, a former investment banker, had been filing complaints with the Hong Kong Stock Exchange and its for-profit operator, Hong Kong Exchanges and Clearing HKXCY HK:0388. Despite making money off their listings, HKEX describes itself as the "front-line regulator" of listed issuers, monitoring market operations and rules.

Webb was angry that the stock exchange was not enforcing its own rule that companies disclose in their filings the "significant investments" that they hold. What makes something "significant" isn't defined, but another rule requires the itemization of any real-estate holdings that exceed 5% of the company's total assets. Webb figures anything else worth 5% of assets should be disclosed too.

Webb's efforts met with success. By scouring subsequent filings, he outlined a veritable spider's web of cross-holdings among the 50 stocks he believes are the ones "not to own." In many cases, multiple shareholders own stakes in each other's companies so that none passes the 30% barrier beyond which they would have to make an offer for the other company. By breaking down their holdings across multiple companies, they could exert voting and practical control over a company without having to own it outright, or be in its management.

"If the corporate shareholders are not acting in concert, then it is an extraordinary coincidence that they have picked many of the same stocks in which to invest," Webb noted in his typical deadpan manner.

Incidentally, he said as far back as 2000 that Cho's Town Health International was a company he wouldn't touch "through three pairs of latex gloves." Li Ka-shing bought his shares at an 80% discount on his shares when Town Health listed. Due to questionable dealings between directors and subsidiaries they own, Webb already felt Town Health's financial health was dubious.

Webb questions why so many Hong Kong companies have investments in other companies at all. "Serious or professional investors," he asserts, "regard any stock market investment by listed companies as highly inappropriate," taking the company out of its own area of expertise. If you've got money to invest, do so in your business, "and return surplus capital to investors, so that they can invest it."

Cho has now been charged with overseeing one part of the "Enigma Network" that Webb first described. With 60 more prosecutions to come, he will surely not be the last.