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Market misconduct under the Securities and Futures Ordinance

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Market misconduct under the Securities and Futures Ordinance

CRIMINAL LIABILITY

All forms of market misconduct (including insider dealing) and the new offences created by Division 4 are liable to prosecution as a criminal offence under Part XIV of the SFO. Previously insider dealing was subject only to civil proceedings before the IDT. Some forms of market misconduct were previously criminal offences under the SO and the CTO.

Penalties

The maximum criminal sanctions were increased by the SFO to a maximum of 10 years’ imprisonment and fines of up to $10 million. Previously the maximum penalties under the different ordinances were inconsistent. The court may also impose 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.

On 7 December 2007, the SFC successfully prosecuted Mr Ho Lai on 14 charges of market manipulation for both shares and warrants in five securities between May and December 2006. A term of imprisonment of six months was to be served immediately. This was the first time the Court had imposed an immediate custodial sentence on a person for an offence under the SFO.

No double jeopardy

A person will not be subject to the “double jeopardy” of both civil proceedings under Part XIII and criminal proceedings under Part XIV 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.

CIVIL LIABILITY – Private right of action

The SFO creates a private right of civil action in favour of anyone who has suffered financial loss as a result of market misconduct or any offence under Part XIV to seek damages from the person who committed the market misconduct or Part XIV offence. The perpetrator is liable to pay damages, unless it is fair, just and reasonable that he should not (Sections 281 and 305).

A person will be taken to have committed 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. 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, as under the previous legislation, that a transaction is not void or voidable by reason only that it constitutes market misconduct or contravenes Part XIV.

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. This is an extension of the duty contained in the S(ID)O. Under the SFO the duty applies to all forms of market misconduct and not just insider dealing.

The definition of an “officer of a corporation” is also broader than under the S(ID)O. It 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) was not included in the S(ID)O definition and 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 by 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. However, a breach of the Section 279 duty will not expose a person to civil suits by third parties unless he has been identified as having engaged in market misconduct.

Civil Liability

As described above, the SFO clearly provides that anyone who suffers financial loss as a result of market misconduct or a Part XIV offence 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.

MISCELLANEOUS

Safe Harbour Rules

To allow for future business practices, the SFO allows the SFC to make rules creating defences to the market misconduct civil and criminal provisions, subject to prior consultation with the Financial Secretary (Sections 282 and 306). A safe harbour has been established for price stabilisation in public offerings over $100 million under the Securities and Futures (Price Stabilising) Rules.

MAY 2012

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.

Hong Kong market misconduct

Part XIV of the Securities and Futures Ordinance

Part XIII of the Securities and Futures Ordinance

Hong Kong Market Misconduct Tribunal

False trading in Hong Kong

Civil market misconduct

Price rigging in Hong Kong

Hong Kong stock market manipulation

Disclosure of False or Misleading Information

Securities and Futures Commission

Hong Kong financial regulator
SFC news

 

Skills

Posted on

2014-05-16