This month has seen the effective and powerful section 213 of the Securities and Futures Ordinance hard at work. The saga of Tiger Asia has finally come to an end, with the Hong Kong Court of Final Appeal confirming that relief under section 213 is “free-standing” and not contingent upon there being a finding of a contravention of the Ordinance. This provides the Securities and Futures Commission with a powerful new tool to act “as protector of the collective interests of persons” who have been injured by misconduct.
To summarise, the Tiger Asia proceedings arose from allegations made by the Securities and Futures Commission (“SFC”) of insider dealing by Tiger Asia Management LLC (“Tiger Asia”) and three of its officers, a US based hedge fund. In 2009, the SFC sought a number of orders against Tiger Asia including: freezing Tiger Asia’s assets, prohibiting Tiger Asia from trading and unwinding the alleged insider dealing transactions. Tiger Asia contested this , winning in the Court of First Instance (which held that it did not have jurisdiction to grant orders under s.213 unless and until there is a finding of market misconduct, by either the Market Misconduct Tribunal or the criminal courts). The SFC appealed and Tiger Asia lost in the Court of Appeal (which held that a court’s jurisdiction under s.213 was not contingent upon a finding of market misconduct). Earlier this month, the Court of Final Appeal (“CFA”), in Securities and Futures Commission v Tiger Asia Management LLC1 agreed with the Court of Appeal, thus confirming that the SFC could apply for court orders under s.213 without there first being a finding of market misconduct. The full decision can be found here.
Our previous alert on the Court of Appeal decision can be found here.
The Tiger Asia Decision
The CFA judgment has put beyond doubt the SFC’s power to seek orders pursuant to s.213 of the Securities and Futures Ordinance (“SFO”) without a prior finding by the Market Misconduct Tribunal (“MMT”) or the criminal courts.
The key elements of the CFA’s decision are:
- That proceedings in the MMT and criminal proceedings are not the exclusive avenues available to the SFC when pursuing market misconduct. To interpret the Ordinance in such a way “simply does not follow”. The CFA approved a passage in SFC v C  4 HKLRD 315 in which Le Pichon JA held that section 213(2) was “entirely free-standing and is not contingent or conditional on there being proceedings in the Market Misconduct Tribunal…”
- Section 213 serves “a different purpose” to the MMT and criminal proceedings, in that it is intended to protect “the collective interests of the persons dealing in the market who have been injured by market misconduct” as opposed to seeking punitive measures against the alleged wrongdoer. Tiger Asia’s argument that this would give the SFC power to “avoid, sidestep, finesse, evade and set at naught” all of the protections accorded to defendants in the MMT and courts was not accepted by the CFA.
- The CFA also dismissed Tiger Asia’s argument that the ability of the SFC to seek a court order under section 213 order and to seek a finding of market misconduct from either the MMT or the criminal courts could lead to inconsistent decisions. The CFA agreed “That is true. These things happen.” but went on to say that is no reason to say that the legislature intended to confer jurisdiction on only one tribunal.
The versatility of section 213
Quickly following the judgement in Tiger Asia, the versatility of s.213 was demonstrated in the Apex Horizon case, where the SFC was poised to apply for court orders seeking the unwinding of agreements to purchase hotel room units and the return of deposits and payments to purchasers. This resort to the courts became unnecessary when the SFC announced an agreement with the vendor of hotel room units at The Apex Horizon to unwind the sales of the units, and to make certain reimbursements to purchasers.
This highlights the wide-ranging orders that can be made under section 213. The SFC’s press release can be found here.
Checks and balances
Although it can seem that the SFC can easily obtain court orders under s.213, in fact the section itself contains checks and balances. Firstly, the court should consider whether it is desirable to make the order sought and whether the order will “unduly prejudice” any person2. Secondly, the SFC’s rationale to seek court orders under s.213 should be subject to judicial review, under the usual principles for judicial review. It is interesting that the CFA commented:
“It should be emphasised that although s 213 also confers jurisdiction to make orders (subject to the overriding requirements of desirability and lack of prejudice in subs (4)), on the grounds that it “appears” to the SFC that a contravention may have occurred, this is not an issue in the present appeal.”
It remains to be seen how potential challenges to s.213 will develop in future.
What this means for you
The Tiger Asia decision is significant as it makes it clear that the SFC can seek orders under s.213 without a finding by the MMT or the criminal courts, and, furthermore, without any proceedings against an individual or a company having been commenced. The range of orders that can be sought are broad and include (as was the case in Tiger Asia) freezing orders and directions to unwind transactions, which in the view of the SFC, were in contravention of the SFO. The SFC has already used s.213 with great effect, but now that the scope of the power has been clearly established, the expectation is that the SFC will use it more frequently. As to future cases, it will be interesting to see whether the SFC looks to combine the use of other powers with s.213, for example applying to conduct a dawn raid under section 191 and then seeking orders under s.213 on the basis of information obtained in that process.
The Tiger Asia decision is just one of a number of recent instances where sanctions can be effectively imposed without a finding that a contravention of law has occurred. Take, for example, recent cases involving allegations of money-laundering; in the case HKSAR v Yam Chim Kwan3 the defendant faced a number of charges under s.25(1) of the Organized and Serious Crimes Ordinance (Cap 455) for dealing with property known or believed to represent the proceeds of an indictable offence. However, section 25(1) does not require the prosecution “to prove that the property in question in fact represented the proceeds of an indictable offence”. The prosecution did not even need to bring evidence before the Court “that a certain serious crime had occurred and that the property dealt with by the defendant was related to that crime.”
What you need to do
The reality is that defending your organisation in a regulatory action can be a long and expensive process and there may be damage to your reputation and business in the meantime, even though there is no finding of misconduct. This requires organisations to be pro-active, and using a risk-based approach, to:
- identify high-risk areas for misconduct;
- spend time and resources on establishing good internal controls in these high-risk areas;
- regularly review your controls; train your staff; they should understand the risks of misconduct;
- pro-actively engage the SFC before they start section 213 proceedings in an appropriate case; and
- where section 213 proceedings have started, consider if the court orders sought would unduly prejudice any person.