In this issue we cover some legal and regulatory developments in Asia, Europe and the US.
Asia: Hong Kong
Tiger Asia admits insider dealing and is ordered to pay investors HK$45m in Court proceedings
The Hong Kong Court of First Instance has ordered Tiger Asia Management LLC (Tiger Asia) and two of its senior officers, Mr Bill Sung Kook Hwang and Mr Raymond Park (collectively the Tiger Asia parties), to pay HK$45,266,610 (the restoration amount) to around 1,800 investors in Hong Kong and overseas affected by their insider dealing involving two Hong Kong-listed banking stocks. Independent administrators have been appointed to take charge of the distribution of the restoration amount. The restoration amount represents the difference between the actual price of the relevant shares sold by Tiger Asia and the value of those shares taking into account the inside information known to Tiger Asia. The Court orders followed admissions by the Tiger Asia parties in a statement of agreed and admitted facts filed in section 213 proceedings brought against them by the Securities and Futures Commission (SFC) that they contravened the relevant insider dealing provisions in the Securities and Futures Ordinance (SFO) when dealing in two Hong Kong-listed banking stocks during the period December 2008 to January 2009. The same admissions have been made in the Market Misconduct Tribunal (MMT) proceedings commenced by the SFC, to which the SFC has indicated that it will be seeking a cease and desist order and an order prohibiting Tiger Asia parties from dealing in Hong Kong without leave of the court for up to five years. The MMT has now fixed three days starting on 7 May 2014 to hear submissions as to what orders, if any, ought to be made by the MMT against the Tiger Asia parties. Hong Kong court dismissed application to strike out insider dealing and fraud case brought by the Securities and Futures Commission The Hong Kong Court of First Instance has dismissed an application by two solicitors to strike out proceedings brought against them by the Securities and Futures Commission (SFC) under section 213 of the Securities and Futures Ordinance (SFO) alleging insider dealing and fraud 1 . The SFC alleges that the solicitors received inside information relating to confidential deals because of their employment by separate law firms. The first deal involved a proposed takeover of a Taiwan listed company and the second involved a proposed privatisation of a Hong Kong listed company. The solicitors and their relatives traded in the securities of these listed companies while in possession of inside information, and made a total profit of HK$2.9m. The SFC also alleges that the solicitors and their relatives used fraudulent and deceptive schemes in trading in the Taiwan listed securities (section 300 of the SFO) and that their actions amounted to insider dealing in Hong Kong listed securities (section 291 of the SFO). The SFC is seeking injunctions and remedial orders against the defendants. The case will proceed now that the application to strike out the proceedings has been dismissed. This is another case following the Tiger Asia case, in which the Hong Kong courts confirmed that the court has free standing jurisdiction to grant injunctions and remedial orders under section 213 of the SFO 2 . It is worth noting that under the Hong Kong insider dealing regime, the SFC may only prosecute insider dealing in either securities listed on the Hong Kong stock exchange or dual listed in both Hong Kong and overseas. In this case, the SFC brought proceedings for trading in the Taiwanese listed securities under section 300 of the SFO, which, in contrast to the provisions relating to insider dealing, do not contain a restriction on territorial scope. Section 300 creates an offence involving fraudulent or deceptive devices in transactions in securities, futures contracts or leveraged foreign exchange trading, which can potentially catch different types of market misconduct and there is no explicit restriction on its territorial application. Asia: People’s Republic of China China Securities Regulatory Commission fined and suspended major law firms for inadequate due diligence on initial public offerings The China Securities Regulatory Commission (CSRC) has taken enforcement action against two companies and their professional advisers (including the sponsors, legal advisers and accountants) in relation to two proposed listings. The CSRC identified material misstatements in the listing prospectuses and deficiencies in the due diligence work performed by the professional advisers 3 . In both cases, the companies withdrew their proposed listing, and CSRC conducted investigations, after media reports questioned the accuracy of information contained in the listing documents. The CSRC imposed fines on the companies and the professional advisers totalling RMB7,750,000 (or around US$1,240,000) and RMB5,930,000 (or around US$948,800) respectively for the proposed listings and ordered the relevant professional advisers to disgorge their fees. The CSRC also banned individuals, including directors of the two companies and employees of the professional advisers, from engaging in securities business and being directors or holding any management positions at listed companies. Europe: EU-wide developments CSMAD compromise proposals have important implications for firms In our Autumn 2013 issue we reported on the proposed Market Abuse Regulation to replace Directive 2003/6, which among other things, will extend the scope of market abuse to include manipulation of benchmarks and a wider range of investments, set minimum criteria for sanctions for market abuse, and provide for greater co-ordination between national regulators. In late December 2013, the European Parliament and Council published compromise text for the accompanying proposed Directive on criminal sanctions for market abuse (CSMAD). Broadly, the proposed CSMAD provides for criminal liability for individuals who commit insider dealing or market manipulation intentionally. However, there are also important implications for financial institutions, a few of which are summarised below. Corporate liability: article 7 provides for corporate liability (a) when a person in a ‘leading position’ commits a criminal offence of insider dealing or market manipulation or (b) when any employee commits one of these offences made possible because of a lack of supervision or control by a person in a ‘leading position’. As regards (a), a person in a ‘leading position’ is defined broadly and, depending upon how it is interpreted, could potentially encompass a large range of individuals at firms (including individuals who would not ordinarily be regarded as in a leading position, such as heads of trading desks or possibly below). Liability is restricted to instances where the relevant offence is ‘for the benefit’ of the firm but this falls far short of an employee following instructions or the firm’s policy. Also, there are no express defences for a firm, such as adequate training programmes or policies and procedures. Criminal or civil liability? Article 8 permits member states to legislate for criminal or non-criminal sanctions, however, recital 14 indicates that jurisdictions in which corporates can face criminal liability should extend corporate criminal liability to article 7 liability. Potential implications: firms can mitigate the risk of corporate liability by complying with the obligation under MAR to have systems and controls to prevent market abuse. Beyond that, firms will find it difficult to mitigate the risk of corporate liability specifically, other than raising awareness among staff that their actions can incur criminal liability for them and the firm in a wider range of circumstances. The UK has opted out of CSMAD, at least for the present, however, this does not mean that UK-based firms or branches will be unaffected by CSMAD. Cross-border trading by UK employees that constitutes insider dealing or market manipulation could give rise to corporate criminal liability in another EU state, depending on the jurisdiction rules of that state. Europe: France Landmark AMF fine in an insider trading case On 18 October 2013, the Sanctions Commission (Commission des sanctions) of the French Financial Markets Authority (Autorité des Marchés Financiers) (AMF), imposed a €14m fine on a trader for the use of inside information in relation to a takeover bid launched in 2008 by SNCF on Geodis, and a €400,000 fine on a banker involved in the deal who communicated the inside information to the trader. The trader made a net profit of €6.2m. The Sanctions Commission held that only the communication of the insider information by the banker to the trader could explain the purchase of the shares. In particular, the Sanctions Commission considered that these acquisitions: (i) were both uncharacteristic of the trader’s usual decisions and highly risky in view of the downward trend and lack of liquidity in Geodis shares; (ii) were performed shortly after the inside information was communicated to the banker; and (iii) the banker and the trader were relatives and had business relationships. The Sanctions Commission stated that fines in such cases must be set depending on the profit made and the gravity of the breach or misconduct, which itself depends on the position of the individuals involved in the market abuse. Also, fines should be large enough to be dissuasive. This landmark fine follows the previous record fine of €8m imposed on LVMH on 25 June 2013 and shows a trend toward tougher AMF sanctions decisions. Daimler, Lagardere and Seven Eads and Airbus executives face criminal charges for insider trading It has been reported by the media in France that a French investigative magistrate has referred the alleged insider dealing conduct of Daimler AG and Lagardere SCA, and seven Airbus and EADS executives, to the criminal Courts. The alleged offences were performed in 2006 in relation to delays in the delivery of the A380 superjumbo. This follows an AMF Sanctions Commission decision rendered in December 2009 on the same facts, by which the Sanctions Commission considered that no insider trading had been performed because the information did not qualify as insider information. Criminal court hearings are expected in late 2014. Europe: Italy CONSOB issues a statement of its priorities for 2014–15 In October 2013, CONSOB approved its three-year strategic plan for 2013–15. CONSOB classified the key areas of risk into two categories: those relating to changes in the economic and financial system (market risks) and those relating to changes in the regulatory framework (regulatory risks). In each category, Consob has identified its priorities for 2013–15, which include the following in relation to market risks: • strengthening the supervision of the financial information relating to issuers of financial instruments traded on Italian markets (including research analysis, ratings assessments, blogs, forums); • strengthening the supervision of the issuers at greatest systemic risk, such as those with the highest market capitalisation or financial institutions; • systematic analysis of conflict of interests situation for all FTSE Mib companies. For non-FTSE Mib companies, guided supervision (identified according to a specific risk-based analysis model) of corporate governance for those showing a greater risk of expropriation of minorities [CHECK WHAT THIS MEANS]; • supervising market intermediaries, focussing on placement, out-of-office offers of products marked by complex profiles and accentuated conflicts of interest; • reviewing the accuracy of disclosures given in product offer documentation with specific attention paid to the credit risk; the implementation and development of supervisory models of non-equity products; • strengthening supervision of information flows to Consob (transaction reporting) and to the public (transparency) through the development of computerised monitoring of compliance with obligations and strengthening the supervision of the regulation of best execution by the trader intermediaries, in particular, examining the automatic selection mechanisms of the trading platforms (smart order routing); and • strengthening the supervisory initiatives aimed at raising the quality of the organisational requirements and control systems for trading venues and investment firms operating in highly-automated environments (for example, algorithmic trading and high frequency trading), verifying and monitoring respect of suitable compliance levels with the European Securities and Markets Authority guidelines over time. Europe: Spain CMNV announces investigation into privileged information On 22 October 2013, Elvira Rodríguez, president of the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores, CNMV), announced that the CNMV will investigate possible irregularities in the share price of the Spanish listed company FCC (Fomento de Construcciones y Contratas). FCC’s share price increased by 5.42 per cent immediately before FCC announced that Bill Gates, founder of Microsoft, purchased a 6 per cent stake in FCC, initiating rumours of trading on this information before the announcement. Europe: UK Court of Appeal rules on market manipulation caused by automated hedging In a recent decision, the Court of Appeal confirmed that a market participant, which knows that the orders it places in contracts for difference (CFDs) will be mirrored automatically in share transactions, will be effecting transactions or orders to trade in or in relation to qualifying investments, which, if manipulative, could constitute market abuse pursuant to s118(5) of the Financial Services and Markets Act 2000 4 . Traders working for Swift Trade Inc did not access the London Stock Exchange (LSE) directly but placed orders with UK companies acting as direct market access (DMA) providers. Swift Trade placed CFDs in relation to shares on the LSE and these orders were automatically hedged by the DMA providers. The traders at Swift Trade Inc were then able to track the share price movements. Within a short time the original order and hedging order were both cancelled. In the meantime, however, the traders could take advantage of the share price movement. The FSA, the Financial Conduct Authority’s (FCA’s) predecessor, issued a decision notice in 2011 fining Swift Trade £8m for market abuse, which Swift Trade challenged, including on the basis that Swift Trade had not itself committed market abuse by effecting trades in qualifying investments. Swift Trade traded in CFDs , which are not ‘qualifying investments’ whereas the hedging transactions in shares listed on the LSE executed by the DMA providers were relevant qualifying investments for market abuse purposes. Therefore, Swift Trade contended that its traders were not involved in behaviour in qualifying investments that constituted market abuse. Both the Tribunal (in January 2013) and the Court of Appeal dismissed these submissions. The key points of the Court of Appeal judgment are summarised below. • The alleged ‘layering’ was market abuse. The hedging transactions or orders to trade in the relevant shares had been automatically effected by computer triggered by the orders placed by Swift Trade, and Swift Trade knew that this would happen; accordingly, Swift Trade had effected the transactions as much as the DMA providers had. • It was not necessary that behaviour contravening s.118(5) should be solely Swift Trade’s behaviour because s.118(1) envisaged that behaviour could be that of two or more persons acting jointly. ‘Jointly’ meant no more than ‘together with another’ and did not require that both parties acted with the same purpose. • Even if Swift Trade had not effected transactions in qualifying investments because CFDs were not qualifying investments, its behaviour had nevertheless occurred ‘in relation to qualifying investments’ because the orders for CFDs effected were contracts for differences in particular shares. Once the orders for CFDs had been made and automatically hedged by transactions in shares, Swift Trade’s behaviour had been ‘in relation to’ those shares. North America: US SEC sees uptick in ‘whistleblower’ tips of market abuse In its second full year in operation, the US Securities and Exchange Commission’s (‘SEC’) ‘whistleblower’ programme has seen an 8 per cent increase in tips about securities violations, such as fraud, manipulation, and insider trading. Under the 2010 Dodd-Frank Act, the SEC provides monetary awards to eligible individuals who provide original information that leads to certain successful SEC enforcement actions, including insider dealing and market manipulation actions. Awards are granted equivalent to between 10 and 30 per cent of the monetary sanctions collected above US$1m. The awards can be substantial. On October 1, 2013, the SEC announced an award of more than $14m to one whistleblower. The sources of information are global. Approximately 12 per cent of the tips came from individuals outside the US with the UK, Canada, and China leading the way and accounting for close to half of all non-US tips received. The whistleblower programme has caused some controversy because of the potential incentive for an employee to circumvent a company’s compliance programme and report violations directly to the government. In practice, the incentives offered to whistleblowers may mean that there are a larger number of unmerited reports and investigations commenced but the uptick in reports gives the SEC a rich source of potential enforcement actions to pursue.