The Securities and Futures Commission ("SFC") secured a victory in the Court of Appeal last week in its ongoing battle against the New York-based hedge fund Tiger Asia Management LLC and several of its officers.

In its judgment last week, the Court of Appeal upheld the SFC's appeal in which the regulator successfully argued for its right to seek, for investor protection purposes, remedies against perpetrators of market misconduct, in addition to and independent of any findings of a criminal court or the Market Misconduct Tribunal ("MMT"). This latest decision has clarified an important question which was previously left unanswered, and, subject to the outcome of any appeal to the Court of Final Appeal lodged by the Tiger Asia parties, strengthens the SFC's ability to combat cross-border market misconduct.

What was decided at first instance

The Court of First Instance ("CFI") previously held that it did not have jurisdiction to grant final orders that the SFC was seeking under section 213 of the Securities and Futures Ordinance ("SFO") against the Tiger Asia parties, including orders to freeze their assets and to ban them from trading in the Hong Kong market, as the criminal court/the MMT had not yet determined whether insider dealing had taken place. In the CFI's view, if it were to grant such orders, the effect would be to circumvent the dual civil/criminal regime laid down by the SFO. The SFC appealed.

What the Court of Appeal said

The Court of Appeal overturned the CFI's decision, and agreed with the SFC that by the plain and natural meaning of the wording of section 213, what needs to be established is the fact that someone has contravened a relevant provision (eg, one of the insider dealing provisions under the SFO), rather than a previous finding of such contravention by some other tribunal (eg, a criminal court/the MMT). It took the view that had the legislature intended to make the CFI's exercise of its jurisdiction under section 213 conditional upon a tribunal's prior finding, it would have made it an explicit requirement under the SFO.

While the CFI based its finding on its view that the SFO has only put in place a dual civil/criminal regime rather than a "tripartite regime" to tackle market misconduct, the Court of Appeal focused instead on the SFC's regulatory objectives, and the fact that the nature and purpose of section 213 is different from civil/criminal market misconduct proceedings. To the Court of Appeal, section 213 plays an important role in augmenting the SFC's ability to protect the investing public and provide remedies for contraventions. It referred to the fact that under sections 281 and 305 of the SFO, provisions which give individuals a right to sue a perpetrator of market misconduct for compensation, the CFI already has the power to determine whether market misconduct has taken place, even when the person concerned has not been found liable for market misconduct either by a criminal court or the MMT. A prior finding of contravention by a tribunal is not necessary for the CFI to determine, on its own accord, that market misconduct has occurred and that the person responsible should compensate those who have suffered a loss as a result.

In response to Tiger Asia's argument that since proceedings under the dual regime are controlled by the Financial Secretary and the Secretary for Justice who act as "gatekeepers", and that the SFC's interpretation of section 213 bypasses the gatekeepers and permits it to take actions unilaterally, the Court of Appeal agreed with the SFC that this argument ignores the difference in nature between criminal/MMT proceedings on one hand, and section 213/281/305 proceedings on the other. While the former are concerned with the conduct of the wrongdoer, the latter are concerned with the consequences of the wrongdoing and the corresponding remedial/compensatory actions. Just because the dual regime has put in place so-called gatekeepers, it does not follow that there should also be gatekeepers for remedial or compensatory proceedings.

The Court of Appeal also addressed the "double jeopardy" argument – that the SFC is not barred from pursing criminal proceedings against the Tiger Asia parties after it has commenced section 213 proceedings, as it would be if it opted to pursue MMT proceedings against them (and vice versa). The court reasoned that while the civil and criminal market misconduct sections under the SFO serve a common objective and are rightly made mutually exclusive, section 213 serves a different purpose: it provides the SFC with valuable tools to protect investors and maintain confidence in the financial services industry. In other words, the option of pursuing investor protection under section 213 and the option of seeking criminal sanctions against a wrongdoer should not be mutually exclusive.

Comments

The latest decision has confirmed that the SFC is at liberty to seek section 213 remedies from the CFI independently from any pre-existing finding by a criminal court or the MMT, and provides the SFC with "much needed ammunition" to protect investors. This is of particular importance in the context of combatting market misconduct perpetrated by offshore market participants. In such a case, prosecution will ordinarily be difficult (if not impossible), unless, for example, a bilateral extradition agreement is in place between Hong Kong and the jurisdiction where the defendants are located, and the relevant enforcement agencies do in fact utilise such arrangements (or in the unlikely event, the defendants were to surrender to Hong Kong's jurisdiction). MMT proceedings, on the other hand, are regarded by the SFC itself as a "slow and cumbersome procedure… which can result in many years passing before a determination of a contravention is reached"1. In addition, bringing MMT proceedings would automatically deprive the SFC of the opportunity to prosecute the same parties for the same offence. The ability to uphold investors' interest by means of section 213 thus represents a practical and efficient alternative to seeking resolution through the criminal court or the MMT. On the other hand, market participants need to be aware that the SFC may now obtain what are practically sanctions against them without first going through the criminal court or the MMT, on its own view of whether market misconduct has taken place.

The Court of Appeal's decision has also provided welcome clarification to a question which has long been left unanswered in previous court decisions (eg, in the Court of Final Appeal's decision in Kayden Ltd v SFC2), which is whether the court has jurisdiction under section 213 to adjudicate on alleged market misconduct and to make orders accordingly. It is likely that this issue will be subject to further examination in future appeals before the Court of Final Appeal, given the Court of Final Appeal's previous refusal to express any view on it.

The SFC has indicated that it will now proceed with its case against the Tiger Asia parties (while it is widely speculated that the Tiger Asia parties will appeal the decision before the Court of Final Appeal). Bearing in mind the fact that (i) section 213 has broader application than the market misconduct offences (the SFC can rely on this section to seek remedies for the alleged contravention of any SFO provision, as well as certain Companies Ordinance provisions); and (ii) tackling market misconduct has been and will remain a top priority for the SFC, we expect that the SFC will increasingly rely on section 213 in pursuing wrongdoers, both locally and abroad.