MARKET MISCONDUCT
UNDER THE SECURITIES AND FUTURES ORDINANCE

MARKET MISCONDUCT

Previously, the criminal offences contained in the Securities Ordinance ('SO') and the Commodities Trading Ordinance ('CTO') governing certain forms of market manipulation and disclosure of false or misleading information were limited in scope. Further, the beyond reasonable doubt standard of proof and restrictive criminal evidence laws often made it difficult to secure criminal prosecutions. Hence, the new provisions create virtually identical civil and criminal provisions covering a far wider range of conduct.

FALSE TRADING (Sections 274 and 295)

False trading occurs when:

1. a person, in Hong Kong or elsewhere, does anything or causes anything to be done, with the intention that, or being reckless as to whether, it creates, or is likely to create, a false or misleading appearance -
   
   
1. of active trading in securities or futures contracts traded on an exchange or through an ATS in Hong Kong; or
   
   
2. with respect to the market for, or the price of, securities or futures contracts traded on an exchange or through an ATS in Hong Kong.
   
   
Such conduct by a person in Hong Kong which has a similar effect on securities or futures traded on an overseas market may also amount to false trading.


2. a person, in Hong Kong or elsewhere, is involved, directly or indirectly, in one or more transactions (whether or not any of them is a dealing in securities or futures) with the intention that, or being reckless as to whether, they create or maintain, or are likely to create or maintain, an artificial price for securities or futures contracts traded on an exchange or through an ATS in Hong Kong.
   
   Again, the same conduct but by a person in Hong Kong which has a similar effect on securities or futures traded on an overseas market may also constitute false trading.
   
   It is not necessary for the transaction or transactions concerned to be in securities or futures. These provisions therefore prohibit a range of conduct that occurs off a market that affects prices on a securities or futures market, most importantly cross-market manipulation (ie. conduct in one market which has a manipulative effect in another market) and cornering (ie. monopolising or restricting supply of an asset so as to manipulate its price).
   
   

A person who engages in an on-market 'wash sale' or 'matched order' is presumed to have intended, or been reckless as to whether, his conduct creates or is likely to create a false or misleading appearance of active trading, the market for, or price of, the securities (S274(5) and S295(5)). He will have a defence if he can establish that the purposes for which he engaged in the transaction did not include the purpose of creating such a false or misleading appearance (S274(6) and S295(7)). The presumption applies only to 'on-market' wash sales and matched orders – that is they are recorded on the relevant exchange or ATS or have to be reported to the exchange or ATS operator under the rules governing the exchange or ATS. For off-market wash sales and matched orders, the prosecution will need to prove the mental element.

'Wash sales' are trades in which a person buys or sells securities without there being a change of beneficial ownership (Sections 274(5)(a) and 295(5)(a)).

A 'matched order' is where a person offers to sell or buy securities at a price that is substantially the same as the price at which he has made or proposes to make, or he knows an associate of his has made or proposes to make, an offer to buy or sell the same or substantially the same number of securities (Sections 274(5)(b) and (c) and 295(5)(b) and (c)).

Where the offence in question involves conduct in Hong Kong which affects securities or futures traded on an overseas market, the prosecution must prove that such conduct is also unlawful in the country in which the market is situated (Sections 282(3) and 306(3)). The same applies to price rigging and stock market manipulation where the conduct in question takes place in Hong Kong but affects securities or futures traded on an overseas market.

An 'associate' is defined to include a person's spouse or reputed spouse, brother, sister, parent, step-parent, natural or adopted child or step-child, any corporation of which a person is a director, any partner or employee of a person and in the case of a corporation, each of its directors and its related corporations and each director or employee of any of its related corporations.

PRICE RIGGING (Sections 275 and 296)

Price rigging occurs when a person in Hong Kong or elsewhere:

1. engages, directly or indirectly, in a wash sale of securities which has the effect of maintaining, increasing, reducing, stabilising, or causing fluctuations in, the price of securities traded on an exchange or through an ATS in Hong Kong; or
   
   
2. engages, directly or indirectly, in any fictitious or artificial transaction or device with the intention that, or being reckless as to whether, it has the effect of maintaining, increasing, reducing, stabilising, or causing fluctuations in, the price of securities, or the price for dealings in futures contracts, that are traded on an exchange or through an ATS in Hong Kong.
   
   

The same conduct by a person in Hong Kong which affects securities (or, in the case of paragraph 2, securities or futures contracts) traded on an overseas market will also constitute price rigging if such conduct is unlawful in the country in which the relevant market is situated.

A person will have a defence in relation to 1 above (and also where the conduct is in Hong Kong and affects securities traded on an overseas market) if he can establish that the purposes for which the securities were sold or purchased did not include the purpose of creating a false or misleading appearance with respect to the price of securities (Sections 275(4) and 296(5)).

STOCK MARKET MANIPULATION (Sections 278 and 299)

These provisions relate only to transactions in securities.

Stock market manipulation occurs when, in Hong Kong or elsewhere, a person enters into or carries out, directly or indirectly, 2 or more transactions in securities of a corporation that by themselves or in conjunction with any other transaction:

1. increase, or are likely to increase, the price of any securities traded on an exchange or through an ATS in Hong Kong, with the intention of inducing another to purchase or subscribe for, or to refrain from selling, securities of the corporation or those of a related corporation;
   
   
2. reduce, or are likely to reduce, the price of any securities traded on an exchange or through an ATS in Hong Kong, with the intention of inducing another to sell, or to refrain from purchasing, securities of the corporation or those of a related corporation;
   
   
3. maintain or stabilise, or are likely to maintain or stabilise, the price of any securities traded on an exchange or through an ATS in Hong Kong, with the intention of inducing another to sell, purchase or subscribe for, securities of the corporation or those of a related corporation, or to refrain from so doing.

The same conduct in Hong Kong which affects securities traded on an overseas market will also amount to stock market manipulation if the same conduct is unlawful in the country in which the relevant market is situated.

Previous / Next