Section 300 of the Securities and Futures Ordinance (the “SFO”) prohibits the use of fraudulent or deceptive schemes or engagement in any practice which is fraudulent or deceptive “in a transaction involving securities, futures contracts or leveraged foreign exchange trading”. On January 15, 2016, Hong Kong’s Court of First Instance in the landmark ruling of The Securities and Futures Commission v Young Bik Fung & Others1 decided that Section 300 is not restricted to transactions involving Hong Kong listed securities, but also applies to transactions in Hong Kong involving overseas listed securities.2
This eUpdate is the second part in our series of eUpdates on Hong Kong market misconduct cases. The first part of the series discussed proceedings for alleged market misconduct against a U.S.-based person in connection with his research report regarding Hong Kong listed company published on a U.S.-based Internet website.
Details of the case
Hong Kong has civil as well as criminal regimes to deal with various offences under the SFO, including market misconduct.3 The civil and criminal regimes are mutually exclusive and proceedings under one mean that there can be no further proceedings under the other.4
In this case, however, the Securities and Futures Commission (the “SFC”) commenced proceedings against the defendants5 under Section 213 of the SFO which provides a “third route” for the issuance of final court orders and injunctions; criminal or civil proceedings are not a prerequisite for the issuance of such orders or injunctions (see theTiger Asia case).6 Under Section 213 of the SFO, the court has wide-ranging power to issue orders and injunctions on the application of the SFC.
The SFC commenced proceedings in December 2010. The case proceeded to hearing five years later, in January 2016. The delay was partially caused by pending resolution of the related jurisdictional question in the Tiger Asia case. For further information regarding the Tiger Asia case, refer to our eUpdate “How To Trap a Tiger – Regulators’ Nets Tighten Around Tiger Asia on Both Sides of the Pacific”.
The SFC alleged that the defendants violated insider dealing rules in transactions involving Hong Kong listed securities and engaged in fraud or deception in transactions involving Taiwan listed securities.7
In relation to the Hong Kong listed securities, the SFC alleged that in February 2007 one of the defendants (“Defendant A”) obtained information about the proposed privatization of the company’s securities in the course of his employment. This information was non-public, confidential and materially price sensitive. Subsequently, Defendant A tipped off the other defendants to purchase the securities before the announcement of the proposed privatization. The SFC alleged this amounted to insider dealing under Section 291 of the SFO.
In relation to the Taiwan listed securities, the SFC alleged that in September 2006 one of the defendants (“Defendant B”) obtained information about a tender offer for the company’s securities in the course of her employment. This information was non-public, confidential and materially price sensitive. Subsequently, Defendant B purchased the securities and tipped off the other defendants to purchase the securities before the announcement of the tender offer. The SFC alleged this amounted to fraud or deception under Section 300 of the SFO.
The SFC alleged that the defendants made a total profit of HK$2.9 million (equivalent to8 approximately US$373,918.54) in these transactions.
The Court found that the SFC’s allegations were proven against the defendants (except one, not being Defendant A or B), and acceded to the SFC’s application for remedial and restoration orders.
Significance of the case
In relation to the defendants’ dealings in the Hong Kong listed securities, the SFC and the court relied on Section 291 of the SFO.
Section 291 prohibits dealings in “listed securities” on the basis of insider information. Under the SFO, “listed” means listed on a recognized stock market.9 The term “recognized stock market” is not defined as such under the SFO. The SFC clarified that a recognized stock market is any stock market operated by a recognized exchange company.10 By virtue of Section 5(a) of Part 1 of Schedule 10 to the SFO, the Stock Exchange of Hong Kong Limited (the “HKEx”) is a “recognized exchange company”. Therefore, in Hong Kong, the only recognized stock market is the stock market operated by the HKEx, and “listed on a recognized stock market” means “listed on the HKEx”. Section 291 does not, therefore, extend to transactions involving overseas listed securities, and could not be applied to the defendants’ transactions involving the Taiwan listed securities.
In relation to the defendants’ transactions involving the Taiwan listed securities, the SFC and the court relied on Section 300 of the SFO.
Section 300 of the SFO prohibits the use of fraudulent or deceptive schemes or engagement in any practice which is fraudulent or deceptive “in a transaction involving securities”, without referring to “listed securities”. Section 300(3) of the SFO defines “transaction” widely to include “an offer and an invitation (however expressed)”. The transaction need not be a completed transaction. Section 300 does not have extra-territorial application. The issue in this case was whether the “offer” made through a Hong Kong intermediary (i.e., a broker in Hong Kong), and then transmitted to an overseas intermediary (i.e., a broker in Taiwan) for execution, fell within Section 300.
For the first time, the Court of First Instance held that Section 300 of the SFO:
- is not restricted to a transaction involving Hong Kong listed securities;
- applies to a transaction in Hong Kong involving overseas listed securities;
- applies to an offer (and thus a transaction) in Hong Kong involving overseas listed securities made through a Hong Kong intermediary and executed by an overseas intermediary; and
- applies to an acceptance (and thus a transaction) in Hong Kong of an offer involving overseas listed securities made outside of Hong Kong.
The application of Section 300 of the SFO to a transaction (including an offer or acceptance) under (2)-(4) above does not amount to an extra-territorial application of the law. Section 300 can be applied to an extra-territorial transaction (including an offer or acceptance) with a nexus to Hong Kong.
Section 300 of the SFO can now be used to prosecute insider dealers of overseas listed securities, even though the legislation may not have intended this. The SFC can also take action under Section 300 of the SFO in cases involving overseas listed securities even if the overseas regulator does not take action.