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Insider dealing under the Securities and Futures Ordinance

EFFECTS OF INSIDER DEALING AND OTHER FORMS OF HONG KONG MARKET MISCONDUCT

THE HONG KONG MARKET MISCONDUCT TRIBUNAL (“MMT”)

The MMT is chaired by a judge assisted by two members and a presenting officer appointed by the Secretary for Justice when conducting proceedings. It is inquisitorial and is entitled to direct that the SFC carry out further investigations and report its findings to the MMT.

Under the SFO the presenting officer is a lawyer whose role is to present evidence to the MMT. He should be more like a prosecuting counsel rather than a counsel assisting the tribunal and he should be independent.

There are detailed provisions in the SFO governing the composition of and procedures to be followed by the MMT.

Proceedings of the MMT

The Financial Secretary may under section 252 institute proceedings before the MMT in respect of any suspected market misconduct following a report by the SFC or a referral from the Secretary for Justice by giving notice in writing to the MMT setting out the terms of reference for the proceedings.

The main purpose of proceedings is to determine:

  1. whether any market misconduct has taken place;
  2. the identity of every person involved in the market misconduct; and
  3. the amount of any profit gained or loss avoided as a result of the market misconduct.

The MMT may identify a person as having engaged in market misconduct if:

  1. he has perpetrated any market misconduct;
  2. the market misconduct was perpetrated by a corporation of which he is an officer with his consent or connivance; or
  3. another person engaged in market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.

The MMT makes its findings on the civil standard of proof. It needs therefore to be satisfied that a person has engaged in market misconduct on the balance of probabilities (rather than beyond reasonable doubt which is the criminal standard of proof).

The MMT has powers to receive any evidence, whether or not such evidence would be admissible in civil or criminal proceedings. It also has wide powers to compel the giving of evidence and to prevent the publication of information about the evidence the MMT receives. Significantly, a person is not excused from complying with a requirement of the MMT to give evidence on the ground that to do so might incriminate him (section 253(4)) and such compelled self-incriminatory evidence may be considered by the MMT.

Orders of the MMT

At the end of any proceedings the MMT may under subsection 257(1) impose the following sanctions on any person found to have committed market misconduct:

  1. a disqualification order – that a person shall not, without the leave of the Court of First Instance, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed corporation or any other specified corporation or in any way, whether directly or indirectly, be concerned or take part in the management of a listed corporation or other specified corporation for up to 5 years;
  2. a cold shoulder order – that a person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any of them or a collective investment scheme for up to 5 years;
  3. a cease and desist order – that the person must not again engage in any specified form of market misconduct;
  4. a disgorgement order – that the person pay to the Government an amount up to the amount of any profit gained or loss avoided as a result of the market misconduct;
  5. Government costs order – that the person pay to the Government its costs and expenses in relation to the proceedings and any investigation;
  6. SFC costs order – that the person pay the SFC’s costs and expenses in relation to any investigation; and
  7. disciplinary referral order – that any body which may take disciplinary action against the person as one of its members be recommended to take such action against him.

A disgorgement order may, at the discretion of the MMT, be made subject to compound interest from the date of the occurrence of the market misconduct in question (section 259). The SFC also has the ability to fine regulated persons (see “Disciplinary Proceedings” below).

When making an order, the MMT may take account of any previous convictions in Hong Kong, any previous findings of market misconduct by the MMT and any previous findings of insider dealing under the S(ID)O (s257(2)).

Failure to comply with a disqualification, cold shoulder or cease and desist order is a criminal offence under sub-sections 257(10) and 258(10) punishable by a maximum fine of $1 million and/or up to 2 years’ imprisonment.

In addition, sections 253(2) and 254(6) prescribe a penalty of a maximum fine of $1 million and a maximum of 2 years’ imprisonment for failure to comply with various requirements of the MMT or disrupting its proceedings. The conduct referred to in those sections and in sections 257(10) and 258(10) is also liable to be punished as contempt under section 261.

Appeals

Any person who is dissatisfied with a finding or determination of the MMT may appeal to the Court of Appeal but only in respect of a point of law or, with the leave of the Court of Appeal, on a question of fact (section 266).

Under the SFO, a party who is not satisfied with certain decisions by the SFC (i.e. disciplinary action) may appeal to the Securities & Futures Appeal Tribunal (“SFAT”). Recent MMT and SFAT decisions have reiterated that:

  • SFC disciplinary proceedings are civil in nature for the purposes of the Hong Kong Bill of Rights; and
  • the civil standard of proof, allowing for flexibility in respect of the seriousness of the issue (a sliding standard of proof), should be used before the SFAT and in any SFC disciplinary proceedings. It is possible for the civil threshold to approach or even be identical to the criminal standard3.

CRIMINAL LIABILITY

All forms of Hong Kong market misconduct (including insider dealing) are liable to prosecution as a criminal offence under Part XIV of the SFO.

Penalties

The maximum criminal sanctions were increased by the SFO to a maximum of 10 years’ imprisonment and fines of up to $10 million. In addition, the court may make disqualification, cold shoulder and disciplinary referral orders. Failure to comply with a disqualification or cold shoulder order is an offence liable to a maximum fine of $1 million and up to 2 years’ imprisonment.

No double jeopardy

A person will not be subject to the “double jeopardy” of both civil proceedings under Part XIII of the Securities and Futures Ordinance and criminal proceedings under Part XIV of the Securities and Futures Ordinance for the same conduct. The SFO provides that a person who has been subject to criminal proceedings under Part XIV may not be subject to MMT proceedings if those proceedings are still pending or if no further criminal prosecution could be brought against that person again under Part XIV in respect of the same conduct and vice versa (sections 283 and 307).

The decision as to whether to take civil or criminal proceedings in relation to suspected market misconduct is made by the Secretary for Justice. The SFC may also institute summary criminal proceedings before a magistrate for less serious market misconduct offences, although the Secretary for Justice is able to intervene in the SFC’s conduct of any such proceedings. The decision whether to take criminal or civil proceedings is made in accordance with the Department of Justice’s Prosecution Policy which provides two criteria for the institution of criminal proceedings: that there is sufficient evidence for a criminal prosecution and that a criminal prosecution is in the public interest. If these tests are not met, suspected market misconduct will be dealt with through civil proceedings before the MMT.


3 In Application for Review by Mr. Lee On Ming, Paul (SFAT Application No 4/2007), it was claimed that the SFC’s disciplinary process should be characterised as a criminal one and so the higher criminal burden of proof should be applied instead. SFAT disagreed. Mr. Lee has filed an appeal against the SFAT’s decision and is pending to be heard.

Skills

Posted on

2014-07-15