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Insider dealing under the Securities and Futures Ordinance

CIVIL LIABILITY – Private right of action

The SFO provides a private right of civil action against any person who has committed market misconduct or any offence under Part XIV in favour of anyone who has suffered a pecuniary loss as a result, unless it is fair, just and reasonable that the perpetrator should not be liable (sections 281 and 305).

A person will be taken to have committed market misconduct if:

  1. he has perpetrated any market misconduct;
  2. corporation of which he is an officer perpetrated the market misconduct with his consent or connivance; or
  3. any other person committed 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.

It is not necessary for there to have been a finding of market misconduct by the MMT or a criminal conviction under Part XIV before bringing civil proceedings. Findings of the MMT are however admissible in the civil proceedings as prima facie evidence that the market misconduct took place or that a person engaged in market misconduct. Further a criminal conviction constitutes conclusive evidence that the person committed the offence. The courts are able to impose injunctions in addition to or in substitution for damages.

Transactions not void or voidable

Sections 280 and 304 provide that a transaction is not void or voidable by reason only that it constitutes market misconduct.

LIABILITY OF OFFICERS OF A CORPORATION

Duty of Officers

Section 279 of the SFO imposes a duty on all officers of a corporation to take reasonable measures to ensure that proper safeguards exist to prevent the corporation from acting in a way which would result in the corporation perpetrating any market misconduct.

The definition of an “officer of a corporation” includes a director (including a shadow director and any person occupying the position of a director), manager or secretary of, or any other person involved in the management of, the corporation. The last category (i.e. any other person involved in management) could, in principle, catch supervisors and anyone else with management responsibilities.

Under Section 258, where a corporation has been identified as having been engaged in market misconduct and the market misconduct is directly or indirectly attributable to a breach by any person as an officer of the corporation of the duty imposed on him under section 279, the MMT may make one or more of the orders detailed above in respect of that person even if that person has not been identified as having engaged in market misconduct himself.

Civil Liability

As described above, the SFO clearly provides that anyone who suffers pecuniary loss as a result of market misconduct has a right of civil action to seek compensation. As noted above, an officer of a corporation which perpetrated market misconduct is taken to have committed market misconduct himself, if the corporation perpetrated the misconduct with his consent or connivance.

Criminal Liability

Under section 390 of the SFO, where it is proved that an offence committed under Part XIV was aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to the recklessness of, any officer of the corporation, or any person purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and liable to be punished accordingly.

Disciplinary Proceedings

Under Part IX of the SFO, any regulated person who is guilty of misconduct or who, in the opinion of the SFC, is not a fit and proper person to be or to remain the same type of regulated person, is subject to a widened range of disciplinary procedures. ‘Misconduct’ is defined to include any contravention of the SFO or of the terms of any licence issued or registration made under it. The SFC may revoke or suspend a person’s licence in respect of all or any part of the regulated activities for which he is licensed. In addition, or alternatively, the SFC may impose a fine not exceeding the greater of $10 million or 3 times the amount of the profit gained or loss avoided by the regulated person as a result of his misconduct, or such other conduct which led to the SFC’s opinion that he is not fit and proper. The SFC may also impose prohibition orders preventing an offending person from, among other things, applying to be registered or licensed under the SFO. Approvals granted to ‘responsible officers’ may also be suspended or revoked. Persons covered by these provisions include corporations licensed under the SFO, their responsible officers and persons involved in their management. Significantly, authorised financial institutions (now required to be registered with the SFC if carrying out certain regulated activities), their executive officers, persons involved in the management of their regulated business and individuals named in their register as carrying out a regulated activity, are also now subject to the SFC’s disciplinary regime.

PROCEEDINGS UNDER SECTION 213 SFO

The decision of the Court of Final Appeal in the Securities and Futures Commission v Tiger Asia Management LLC (Tiger Asia) and others confirmed the power of the courts to make final orders sought by the SFC under section 213 SFO without there having been a prior finding of insider dealing or other market misconduct by either the MMT or a criminal court.

Section 213 SFO allows the court to grant orders sought by the SFC to prevent or remedy breaches of, among others, the Securities and Futures Ordinance, including injunctions and orders requiring the person to take steps to restore the parties to a transaction to the position they were in before the transaction. Tiger Asia was a New York-based asset management company with no physical presence in Hong Kong. Tiger Asia and two of its senior officers were found to have breached the insider dealing and market manipulation provisions of the Securities and Futures Ordinance in dealing in shares of two Hong Kong listed banks. The court ordered Tiger Asia and the two senior officers to pay HK$45 million to investors affected by their insider dealing.

It is also clear from the December 2013 case of Mr. Du Jun, a former Morgan Stanley Asia managing director, that the SFC can pursue both criminal proceedings for insider dealing or other market misconduct offences and an order under section 213 SFO. Mr. Du Jun was convicted of insider dealing for which he was sentenced to six years’ imprisonment and fined HK$1.7 million. In separate section 213 proceedings in December 2013, the court granted a restoration order against Mr. Du Jun ordering him to pay HK$23.9 million to investors affected by the insider dealing. The amount ordered to be paid was intended to restore counterparties to the insider dealing transactions to their pre-transaction positions through payment of the difference between the shares on the date of the transaction (taking into account the inside information possessed by Mr. Du Jun) and the actual transaction price.

JULY 2014

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.

Insider dealing under the Securities and Futures Ordinance

Hong Kong market misconduct

Inside information of Hong Kong-listed companies

Hong Kong Market Misconduct Tribunal

Market manipulation provisions of the Securities and Futures Ordinance

Part XIV of the Securities and Futures Ordinance

Part XIII of the Securities and Futures Ordinance

 

Skills

Posted on

2014-07-15