Securities and Futures Commission v Sun Min(1) is another recent example of the Securities and Futures Commission (SFC) using Section 213(2)(b) of the Securities and Futures Ordinance to obtain restitution, in the form of so-called 'restorative' orders, on behalf of counterparties to impugned transactions. In doing so, the lead market regulator in Hong Kong effectively assumes the role of a class action representative claimant in civil proceedings. What is interesting about this particular case is that the judge expressed some concern as to whether the amount of restoration sought might result in a windfall for the counterparties involved. Market observers in the past have queried exactly how certain counterparties are identified and, more particularly, how the amount of restoration is quantified in civil proceedings pursuant to Section 213(2)(b) of the ordinance.
In March 2013 the Market Misconduct Tribunal (MMT) found that the defendant committed insider dealing by purchasing a large number of shares in a listed company when she had knowledge of a potential takeover bid (which was not generally known to the public).(2) After the MMT handed down its decision, the SFC applied for an order from the High Court pursuant to Section 213(2)(b) of the ordinance to restore certain counterparties (sellers of the shares to the defendant) to the position before the impugned transactions were executed. Fifty-one counterparties were identified and the amount of restoration sought was approximately HK$15.6 million.
By the time the case was heard, the SFC and the defendant had agreed the terms of the order, which required the defendant (among other things) to pay the counterparties an amount representing the difference between the price at which they sold their shares and a valuation of the shares taking into account the insider information (ie, information about the potential takeover bid). After declining to deal with the matter on the papers and requiring a hearing, the court granted the order sought as it was agreed between the parties and the evidence before the court confirmed a contravention of a relevant provision of the ordinance.
At the same time, the judge expressed reservations about how Section 213(2)(b) should operate.
On the basis of the regulator's argument, while Section 213(2)(b) envisaged a payment that was restitutionary in nature, it was not a matter of compensating a counterparty. Rather, the amount of restoration could be calculated based on an assumption that the counterparty had retained the shares and been in a position to sell them when the share price rose.
However, what appears to have concerned the judge was that if the regulator's argument was right, it could result in a defendant having to pay an amount of restoration that was neither a disgorgement of the profit allegedly made by the defendant nor a restoration of the loss allegedly suffered by the counterparties.(3) Other than describing the amount as restorative, it is difficult to categorise – for example, some might call it a windfall.
Readers may recall the landmark decision on Section 213 – SFC v Tiger Asia Management LLC(4) – which culminated in Tiger Asia Management being ordered to pay approximately HK$45.3 million to certain counterparties said to have been affected by its insider dealing in certain Hong Kong-listed stocks. It was alleged that Tiger Asia Management, in anticipation of various placements of shares of two listed banks, short-sold shares in the banks and subsequently purchased their shares to cover the short sales. In other words, the counterparties may have purchased shares in the two banks without knowing that the shares would potentially be sold at a discount – they might be said to have 'overpaid' for those shares and, therefore, to have suffered a loss.
In the Sun Min case the counterparties sold shares to the defendant without knowledge of a potential takeover bid for the company. For the purposes of calculating an amount of restoration pursuant to Section 213(2)(b) of the ordinance, the regulator appears to be of the view that the court can assume the counterparties would have retained the shares and taken advantage of the increase in share price after release of information about the bid. A contrary argument is that the counterparties intended to (and may well have been content to) sell their shares at the price they did prior to the release of the information. This situation is different (for example) to where an investor buys shares in reliance of certain misstatements issued by the company, resulting in a loss.
The concept of 'reliance' in the context of securities class actions has been the subject of some legal debate in various jurisdictions recently. A significant issue arises as to whether class action claimants are required to show that they relied on a defendant's misstatements when making their investment decisions.
The comments made by the judge in the Sun Min case and the debate about 'reliance' both concern fundamental questions – for example, whether the counterparty trades were affected by the alleged market contraventions and, if so, how significant was the impact.
In Hong Kong, where there is no formal class action regime, the case is a reminder of issues concerning the legal and evidential basis for how restorative orders are quantified in civil proceedings pursuant to Section 213(2)(b) of the ordinance. As the court noted, these are issues that may come before the court on another occasion when the terms of an order are disputed.(5) In the meantime, there are likely to be other occasions when a defendant (for practical reasons) does not dispute the amount of restoration to be paid.