In this e-briefing article we combine, for ease of reference, three recent short articles that we have written concerning the Securities and Futures Commission’s ongoing high profile market misconduct court and tribunal proceedings in Hong Kong against Tiger Asia Management LLC and three of its principal officers. The proceedings and the issues raised should be of interest to those who trade in locally listed shares, for example hedge funds and overseas traders. No doubt, insurers and insureds are considering coverage issues under any applicable insurance policies.
In short, the SFC is exercising old and “new found” powers under the Securities and Futures Ordinance to tackle alleged market misconduct in Hong Kong listed shares, be the trades conducted in Hong Kong or offshore. Some of the issues raised are as complicated as they are serious. However, the SFC appears to be sending out a strong message to the market. The expectation is that the SFC is looking to raise the stakes in these proceedings and may have other “Asian Tiger” investors or hedge funds in its sights.
Hong Kong regulator takes second shot at Asian Tiger
SFC launches market misconduct proceedings
18 July 2013
Hong Kong’s principal regulator the Securities and Futures Commission (SFC) has confirmed that it has launched proceedings before the Market Misconduct Tribunal (MMT) against Tiger Asia Management LLC and three of its principal officers. MMT proceedings are civil in nature and are an alternative to criminal proceedings for cases of alleged market misconduct.
Readers of our article dated 23 May 2013 will be aware that the SFC has already opened up a “third way” to prosecute alleged market misconduct. That third way is by means of section 213 of Hong Kong’s Securities and Futures Ordinance (SFO) and is in addition to MMT or criminal proceedings; those other two options being mutually exclusive. Crucially, Hong Kong’s appeal courts have recently ruled that the SFC can pursue section 213 civil proceedings in order to obtain final “restorative orders” and the like against transgressors, without there first being a finding of market misconduct (eg “insider dealing”) in a criminal court or before the MMT.
It was, perhaps, something of a surprise that press reports began to circulate, as confirmed by the SFC’s press release of 15 July, that the SFC is also pursuing MMT proceedings against Tiger Asia. The SFC’s MMT “Statement for Institution of Proceedings” is dated 11 July 2013 and is available on MMT’s website (www.mmt.gov.hk – see link to the alleged impugned transactions ie “Bank of China and China Construction Bank”, under “Rulings/Notices”).
The MMT’s role is to determine whether market misconduct has taken place and, if so, by whom. It can make a variety of orders, including an order that anyone identified to have engaged in market misconduct:
- pay the Hong Kong government an amount representing the profit gained or loss avoided as a result; and/or
- be disqualified from holding directorships (and the like) and/or from trading in certain asset classes for up to five years, other than with permission of the court (breach of which would constitute a criminal offence).
A number of observations can be made at this stage and as matters evolve:
- The SFC’s “second shot” across Tiger Asia’s tail suggests that it has no intention of backing-off. Indeed, the SFC seems intent on raising the stakes. That said, MMT proceedings are not known for speed and could take a couple of years or so to conclude. The SFC’s press release states that its section 213 proceedings “are continuing” now that the jurisdictional issue has been resolved.
- MMT proceedings are an alternative to criminal proceedings. Therefore, Tiger Asia and the three officers concerned no longer face the prospect of criminal proceedings in Hong Kong arising out of the particular transactions under investigation by the SFC. In any event, criminal proceedings may have been impractical given that Tiger Asia and the officers concerned are based in New York and, presumably, have no particular inclination to pass through Hong Kong anytime soon.
- The MMT proceedings are also an acknowledgment by the SFC that criminal proceedings against Tiger Asia in Hong Kong could fall foul of the common law “double jeopardy” rule – which still exists in Hong Kong – given that Tiger Asia has already settled related “insider dealing” offences in the US and two of its officers were charged with related civil offences by the Securities and Exchange Commission.
- This is the first time that the SFC has itself initiated proceedings before the MMT. Up until 2012, only Hong Kong’s Financial Secretary had done so. It will be interesting to see if the SFC is able to progress the MMT proceedings any quicker than has been the case in the past with expectation that it might. As it is, the transactions under investigation took place over four years ago. To date, there has been no finding in Hong Kong that Tiger Asia or its officers engaged in any wrongdoing.
- If Tiger Asia and the officers concerned choose to defend the MMT proceedings, some interesting questions concerning coverage for “defence costs” and other policy issues could arise under any applicable insurance policies.
Regulator’s pursuit of market misconduct in Hong Kong
Top court delivers written judgment
23 May 2013
As noted in our article dated 30 April 2013, the Court of Final Appeal in Hong Kong (CFA) abruptly dismissed the appeal in Tiger Asia Management LLC & Ors v Securities and Futures Commission (the SFC), FACV Nos. 10, 11, 12 and 13 of 2012. The CFA handed down its written judgment on 10 May. There were no surprises.
Some key points are:
- The jurisdiction of the High Court of Hong Kong to grant final “remedial orders” under section 213 (Injunctions and other orders) of the Securities and Futures Ordinance (the SFO) is not dependent on a prior finding of market misconduct (eg “insider dealing”) by either the Market Misconduct Tribunal (the MMT) or a criminal court in Hong Kong.
- Such final remedial orders can include injunctions, declarations, and “restorative” orders. According to the judgment, the policy underpinning section 213 is to provide “remedies for the benefit of parties involved in the impugned transactions”. In pursuing such civil proceedings, the judgment states that: “the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct”.
- According to the judgment, section 213 proceedings are “plainly civil proceedings” and more analogous to a private action for damages by individuals under section 305 of the SFO; they are not a substitute for criminal prosecution of market misconduct or MMT proceedings.
- The judgment notes that, in pursuing a defendant under section 213, the SFC is not seeking the equivalent of a declaration that the defendant has committed a “market misconduct” offence; rather, the SFC is seeking a declaration that the defendant has committed “acts” which “found jurisdiction” under section 213 (even if those “acts” happen to be criminal acts, which is a matter for a criminal court). This is an important distinction in the judgment, albeit one that could sound rather legalistic to those being pursued by the SFC.
- The CFA judgment is final and binding on the courts in Hong Kong. It is important to bear in mind that the judgment decides whether the SFC should be allowed to continue its proceedings; not whether anyone has engaged in market misconduct.
Shares listed on the stock exchange are widely traded by institutional and retail investors all over the world. To date, the SFC has found it hard to prosecute alleged “insider dealers” who are not present in Hong Kong and who show no inclination of passing through. Such defendants are usually careful not to drop their guard; a notable exception, perhaps, being HKSAR v Du Jun  HKCU 2136 and  6 HKC 119.
Criminal proceedings in Hong Kong for alleged market misconduct have often proved expensive and slow. Proceedings before the MMT have not fared any better.
As a result of the CFA’s judgment the SFC is able to pursue alleged market misconduct “acts” through civil proceedings (subject to a lower standard of proof) without first having to go through the criminal courts or the MMT in order to obtain final remedial orders against defendants. This “third way” should prove useful to the SFC, wherever defendants or their assets may be.
In this case, the SFC is seeking final remedial orders in civil proceedings against Tiger Asia Management LLC (a New York based hedge fund) and three of its senior personnel. In light of a settlement last year of related “insider dealing” claims brought by the Securities and Exchange Commission in the US, the defendants can expect the SFC to pursue the civil proceedings in Hong Kong through to judgment (or earlier settlement).
That said, and sometimes overlooked, there may be real difficulties in quantifying the “restoration” due to “other investors” had the alleged impugned transactions not happened (let alone trying to identify such investors). This is unlikely to hold the SFC back in its pursuit of this case.
The CFA’s description of section 213 proceedings as “plainly civil proceedings” will require insurers, insureds and their legal representatives to give careful consideration to the coverage position under any available D&O insurance.
Prosecuting “insider dealing” in Hong Kong
Hong Kong’s top court expected to confirm there is a “third way”
30 April 2013
On 30 April 2013, the Court of Final Appeal in Hong Kong (CFA) dismissed the appeal in Tiger Asia Management LLC & Ors v Securities and Futures Commission (the SFC), FACV Nos. 10, 11, 12 and 13 of 2012.
In doing so, the CFA judgment has upheld a Court of Appeal judgment deciding that the Court of First Instance in Hong Kong has jurisdiction under section 213 of the Securities and Futures Ordinance (the SFO) to make a determination in civil proceedings commenced by the SFC that there has been “ma+rket misconduct” and to make final “remedial orders”. Crucially, such a determination is not dependent on there first being a finding of market misconduct (eg “insider dealing”) by either the Market Misconduct Tribunal (MMT) or a criminal court in Hong Kong. In this case, the SFC is seeking “remedial orders” against Tiger Asia Management LLC (a New York based hedge fund) and three of its managers.
To pursue market misconduct under section 213, it would appear to be enough that the SFC persuades a civil court (on a civil burden of proof) that there has been a contravention of, among other things, one or more of the relevant provisions of the SFO. An actual finding of a contravention, as part of a determination by the MMT or a criminal court, is not necessary.
The CFA’s written judgment (with reasons) is awaited with considerable interest in the financial markets in Hong Kong. It opens the possibility of the SFC pursuing civil proceedings for alleged contraventions of the SFO and (if successful) enforcing civil judgments against defendants wherever they may be based. It remains to be seen how the SFC will use this power in practice going forward. However, there appears to be a “third way” (besides the MMT or criminal courts). Interested stakeholders such as directors and officers and their insurers will be taking note.
Once the CFA’s written judgment is released we will write more about its implications.