Introduction

As noted in an earlier update,(1) the Securities and Futures Commission (SFC) (the lead market regulator in Hong Kong) has cast a wide net with its use of civil proceedings pursuant to Section 213 of the Securities and Futures Ordinance (Cap 571). Recently, the Court of Appeal dismissed an appeal arising out of the SFC's use of Section 213 proceedings to obtain declarations that (among other things) three defendants based in Hong Kong had contravened Section 300 of the ordinance by engaging in a deceptive course of business in transactions involving shares listed on an overseas stock exchange.

Background

In SFC v Young(2) the Court of First Instance handed down what is thought to be the first reasoned decision on the scope and application of Section 300.(3)

In brief, that provision makes it unlawful for a person to engage in a fraudulent or deceptive practice or course of business in a transaction involving (among other things) securities. It was alleged that one or more of the defendants was in possession of price-sensitive information at the time of entering into transactions involving shares listed on the stock exchange of Taiwan.

According to the judgment, the SFC's application of Section 300 did not involve an extraterritorial application of the law. Section 300 was directed at the use of deceptive or fraudulent conduct and it did not matter that the completed transactions were with respect to securities traded outside Hong Kong.

Appeal

In a recent appeal,(4) the three defendants (the appellants) raised the issue of whether Section 300 of the ordinance applied in circumstances where the completed transactions had taken place outside Hong Kong. In dismissing the appeal, the Court of Appeal stated that the proper issue for determination was "whether a substantial measure of the activities constituting the contravention of section 300 took place in Hong Kong".(5)

On the facts, the Court of Appeal was unwilling to disturb the judge's findings, noting that the greater part of the conduct with respect to the impugned transactions had taken place in Hong Kong.

Comment

The two judgments are interesting and fully reasoned. It is important to recognise that proceedings pursuant to Section 213 are civil in nature. A declaration made in Section 213 proceedings that a person has contravened Section 300 (or Section 291 – "insider dealing") is not a finding of criminal liability, although it is a serious matter. On the back of such a declaration, the SFC can seek restorative orders and ancillary relief.(6)

In addition to criminal proceedings in the courts or civil proceedings before the Market Misconduct Tribunal, Section 213 is a third way for the SFC to combat market misconduct-type activity in Hong Kong. Section 213 is the procedure. Section 300, in this case, was one of the relevant provisions of the ordinance found to have been contravened. There was also a finding in the first judgment that Section 291 (insider dealing) had been contravened by some of the defendants with respect to other transactions, but that provision did not apply with respect to securities listed on an overseas stock exchange.

Given the wide meaning of 'transaction' in Section 300(3) of the ordinance, the SFC has another provision to use in combination with Section 213 proceedings – namely, with respect to persons whose alleged misconduct takes place substantially in Hong Kong and involves (for example) the use of confidential and materially price-sensitive information regarding transactions in securities listed overseas.

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For further information on this topic please contact Ben Yates or David Smyth at RPC by telephone (+852 2216 7000) or email (ben.yates@rpc.com.hk or david.smyth@rpc.com.hk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) For further details please see "Regulator's use of civil proceedings casts a wide net".

(2) [2016] 1 HKLRD 1249.

(3) "Offence involving fraudulent or deceptive devices, etc. in transactions in securities, futures contracts or leveraged foreign exchange trading".

(4) CACV 33/2016, November 9 2017.

(5) Supra note 4, at paragraph 53.

(6) While the SFC has had a large measure of success with its use of Section 213 proceedings in the last few years, recent reports suggest that it has dropped its proceedings against two international banks with respect to their roles in the initial public offering of China Forestry Holdings Co Ltd in 2009.