The Securities and Futures Commission (SFC) has once more confirmed its ability to protect, and seek compensation for, shareholders and investors. Specifically, for the first time ever in Hong Kong, the SFC has successfully applied for orders from the HK Courts to compensate innocent investors under the Securities and Futures Ordinance (SFO, the Ordinance). In doing so, the SFC has effectively achieved the same remedy as would otherwise, in countries such as the US or Australia, be achieved via shareholder/securities class action suits.
Section 213 of the SFO
Section 213 of the SFO is an important and powerful tool, designed to prevent and remedy the occurrence of misconduct under the Ordinance. Under this section, the SFC can start civil proceedings in the HK Courts for orders against a company or an individual to compensate innocent investors for their wrongdoings, in breach of the Ordinance.
The Court may make a broad range of orders in response to the misconduct committed, which includes amongst others, steps directed “to restore the parties to any transaction to the position in which they were before the transaction was entered into”.
The role of the SFC under Section 213 is to protect the collective interests of the victims of market misconduct. However, it was only recently that the SFC began actively using the power conferred upon it under Section 213 to protect investors’ interests by demanding compensation from wrongdoers.
Two of those have been in the last week - an indication that further aggressive steps may be taken more regularly in the face of incorrect or misleading disclosures to the market, via prospectus’ or other forms of offerings to the public.
Du Jun: insider trading - investors compensated for the first time in HK
In an unprecedented ruling made under Section 213 of the Ordinance by the HK Court on 12 December 2013, those who suffered loss as a result of insider dealing committed by Du Jun are to be compensated.
Du, the former managing director of Morgan Stanley Asia Limited, was ordered to pay HKD23.9 million to 297 investors for the loss they suffered as a result of his insider dealing in the shares of CITIC Resources Holding Limited. The restoration order is highly significant because it is the first time victims to insider dealing are to be compensated by an order under Section 213 of the Ordinance.
Du was convicted of insider trading in 2007 and sentenced to seven years of imprisonment. Although the sentence was later reduced to six years following an appeal, it remains the most severe sentence ever imposed for the offence of insider dealing in Hong Kong.
Qunxing: False or misleading information
On the same day, 12 December 2013, the SFC commenced proceedings in the HK Courts under Section 213 of the Ordinance to have Qunxing Paper Holdings Co (Qunxing) freeze funds raised from the public and to force it to repurchase shares from its shareholders.
The SFC has already successfully obtained an injunction order to freeze assets of Qunxing and its subsidiary, an amount of HKD1.97 billion, for allegedly providing false and/or misleading information to investors. The sum of HKD1.97 billion includes the funds raised by Qunxing via its initial public offering in 2007, with the balance flowing from a new share offer in 2010 and a warrant issue in 2011.
The SFC alleges (as yet, these allegations are unproven) that Qunxing breached a number of provisions of the Ordinance, which regulate the provision of reliable, correct and complete information to the investing public.
The SFC says in the new court proceedings that it intends to seek orders requiring the company to offer to all its current public shareholders to repurchase their shares and to holders of its unlisted warrants to unwind those warrant transactions.
Hontex: materially false and misleading statements in prospectus
This follows orders made by the HK Courts in 2012 against Hontex International Holdings Ltd. (Hontex), on application by the SFC under Section 213 of the SFO after finding false and misleading statements in Hontex’s prospectus.
The orders were made by agreement reached between the SFC and Hontex to restore the position of investors who had purchased Hontex’s shares during its IPO and in the three months immediately afterwards in the secondary market by repurchasing the shares at HKD1.03 billion in total.
By actively seeking to recover damages for innocent investors under Section 213 of the SFO, and seeking redress for investors arising from false or misleading prospectus or other offering documents to the retail market, the SFC has garnered additional momentum in its efforts to enhance shareholder protection - and now also the compensation of those investors.
In effect, although the value of loss and compensation will invariably differ to some degree, the new use of section 213 by the SFC to compensate investors is similar to it acting as the leader of a de facto class action law suit. Class actions have been the subject of discussion in HK since the HK Law Reform Committee paper recommended their introduction, in a balanced way with important safeguards and controls, in 2009. The SFC’s actions are pursuing the same outcome as shareholder or securities class actions in overseas jurisdictions seek to achieve, particularly in the more litigious private litigation countries such as the United States and Australia. Protection of investors and compensation where false or misleading market disclosures, or other breaches of securities laws, have been committed. A committee was formed earlier this year to consider court rules for the implementation of class action processes with the HK Courts, so this certainly remains on the agenda, although it appears not a high priority. It could possibly even be said that the SFC is accentuating its activity in this area partly due to the lack of progress in implementing any form of class action regime or processes in HK. 2014 may prove to be a turning point, one way or the other, in the field of investor protection and compensation.