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Market misconduct under the Securities and Futures Ordinance

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Market misconduct under the Securities and Futures Ordinance

ADDITIONAL OFFENCES

Division 4 of Part XIV creates 3 additional offences. These are not within the definition of market misconduct and are therefore not liable to proceedings before the MMT and are instead subject only to criminal proceedings.

Use of Fraudulent or Deceptive Devices in Transactions in Securities, Futures Contracts or Leveraged Foreign Exchange Trading (Section 300)

This offence provides that a person shall not, directly or indirectly, in a transaction involving securities, futures contracts or leveraged foreign exchange trading:

  1. employ any device, scheme or artifice with intent to defraud or deceive; or
  2. engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.

Disclosure of False or Misleading Information Inducing others to enter Leveraged Foreign Exchange Contracts (Section 301)

A person shall not, in Hong Kong or elsewhere, disclose, circulate or disseminate, or authorise or be concerned in the disclosure, circulation or dissemination of, information that is likely to induce another person to enter into a leveraged foreign exchange contract in Hong Kong, if:

  1. the information is false or misleading as to a material fact or through the omission of a material fact; and
  2. the person knows that, or is reckless as to whether, the information is false or misleading as to a material fact or through the omission of a material fact.

This prohibits the same conduct in relation to leveraged foreign exchange contracts as is outlawed in respect of securities and futures transactions under Section 298. Section 301 also provides the same narrowly drafted defences as that section for those who passively disseminate information received from others such as printers, internet website operators and broadcasters.

Falsely Representing Dealings in Futures Contracts on behalf of others (Section 302)

A person shall not represent to another person that he has on behalf of the other person dealt in, or facilitated or arranged for any dealing in, a futures contract traded on an exchange or through an ATS in Hong Kong (or a contract or other instrument substantially resembling a futures contract in accordance with the rules of a futures market outside Hong Kong), if he has not in fact done so and he knows that, or is reckless as to whether, he has not done so.

EFFECTS OF MARKET MISCONDUCT

The Hong Kong Market Misconduct Tribunal (“MMT”)

Part XIII of the Securities and Futures Ordinance extends the civil market misconduct regime to cover all types of market misconduct, not just insider dealing as was previously the case. The MMT, which replaces the IDT, is chaired by a judge assisted by two members and a presenting officer appointed by the Secretary for Justice conducts proceedings. Like the IDT it is inquisitorial and is entitled to direct that the SFC carry out further investigations and report its findings to the MMT. It differs from the IDT in that:

  1. the sanctions available to it are different from those available to the IDT; and
  2. the role of the presenting officer has been clarified. Under the SFO the presenting officer is a lawyer whose role is to present evidence to the MMT. The intention is that he should be more like a prosecuting counsel, rather than a counsel assisting the tribunal as was the case with the IDT and that he should have more independence.

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). However, like the IDT, 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 Section 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.

The ability of the IDT to impose high fines (which could be up to 3 times the amount of profit made or loss avoided as a result of insider dealing) has been abandoned in favour of a wider range of civil sanctions. In addition, 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)).

Cold shoulder orders, cease and desist orders, SFC costs orders and disciplinary referral orders were introduced by the SFO. 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 standard.

Skills

Posted on

2014-05-16