In the past couple of years we have seen the Hong Kong Securities and Futures Commission (the "SFC") creatively using section 213 of the Securities and Futures Ordinance ("SFO") with increasing effectiveness. What makes section 213 so useful to the SFC is that it allows the SFC to seek a broad range of orders from the Court, including orders to freeze assets, restraining orders, and orders to unwind transactions that are allegedly in contravention of the SFO without the need for a finding by the Market Misconduct Tribunal (the "MMT") or the criminal court that there has been a breach of the SFO. Section 213 can be relied upon where it appears to the SFC that there may have been a contravention of the SFO.
Whilst section 213 has been used by the SFC in the past, the SFC’s use of it survived a major challenge last year in the Court of Final Appeal (the "CFA") - the city's highest court - in Securities and Futures Commission v Tiger Asia Management LLC.1 In that case the CFA affirmed the Court of Appeal decision that section 213 is entirely free-standing and is not contingent or conditional on there being proceedings in the MMT. It is expected that this decision will result in the SFC using section 213 more often and with greater effect.
The Tiger Asia case
In 2009, the SFC alleged that Tiger Asia Management LLC ("Tiger Asia"), the New York-based hedge fund with no physical presence or employees in Hong Kong, together with its three officers engaged in insider dealing, and the SFC sought a number of orders against Tiger Asia under section 213, including orders freezing Tiger Asia's assets, prohibiting Tiger Asia from trading in Hong Kong and unwinding the alleged insider dealing transactions.
The orders sought under section 213 were based on the SFC's allegation that Tiger Asia had contravened the SFO, but there was no criminal conviction against Tiger Asia, nor had the MMT found against Tiger Asia.
Tiger Asia successfully opposed the SFC's action at the first instance arguing that the court had no jurisdiction to make those orders without a criminal conviction or an MMT determination. However, the Court of Appeal reversed the first instance decision and held that section 213 was a free-standing remedy which "provides valuable tools to the [SFC] to protect the investing public" and "much needed ammunition to the [SFC] to protect investors".2
In May last year, CFA decided unanimously that the Court of Appeal was correct in reaching its conclusion, and put beyond doubt that the SFC has the power under section 213 to seek orders from court without a prior finding by the criminal court or the MMT. The CFA also noted that section 213 serves "a different purpose" to the criminal court or the MMT, in that the provision 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.3 The “collective interest” language suggests something akin to remedies available in other jurisdictions through investor class actions and given this finding it would not be surprising to see the SFC use the section 213 power to obtain redress for a class of investors who have suffered loss as a result of market misconduct, in effect a defacto class action.
The life after Tiger Asia
Since the decision in Tiger Asia, the SFC now has the imprimatur of the CFA to use section 213 as a free standing remedy and we have already seen it used in different scenarios, not only in relation to market misconduct, including:
In December 2013, the SFC obtained an interim injunction to freeze assets of up to $1,968,000,000, against Qunxing Paper Holdings Company Limited (“Qunxing”) and its subsidiary, Best Known Group Limited, on the basis of an allegation that Qunxing’s prospectus for its initial public offer in 2007 and the announcements of its annual results for 2007 to 2011 contained materially false or misleading information. The Court varied the injunction in January 2014 to allow Qunxing to withdraw some funds for operational and legal expense, but it remains in place and the case is ongoing.
Final restorative orders
Also in December 2013, the SFC obtained orders in relation to the long running Du Jun case. Those orders required almost $24 million to be paid to 297 investors as a result of insider dealing in shares of CITIC Resources Holdings Limited (CITIC Resources) between 15 February and 30 April 2007.
Similar orders were also obtained in January 2014 in respect of a case involving price rigging by a futures trader, Tsoi Bun. The orders required payment of over HK$13 million to around 500 investors. In respect of these orders the SFC's Executive Director of Enforcement, Mr Mark Steward, said: “It is only by understanding the actual consequences of misconduct that victims can properly be vindicated. The SFC will continue to ensure price riggers are caught and made to account wherever possible.” Comments such as these suggest that the SFC will continue to use section 213 as a means to ensure that investors are compensated for losses.
Is Section 213 an answer to the absence of an investor class-action regime?
Hong Kong does not have a class action regime which would allow aggrieved investors to take action to recover their losses from market misconduct so it is interesting that the court took the view in Tiger Asia that SFO section 213 serves the purpose to protect the collective interests of investors. It is also interesting to see that the court is ready to make restorative orders under section 213 (such as those referred to above) to pay back investors in transactions that, in the view of the SFC, contravened the SFO. It is still early to say whether section 213 could become a means for de facto investors’ class action regime, or just an additional weapon in SFC’s arsenal to combat market misconduct. However, there is certainly an indication from the SFC that it intends to use this section to ensure that investors are compensated where they are impacted by market misconduct.