After over two and a half years since US-based hedge fund manager Tiger Asia Management LLC and its three officers (collectively “Tiger Asia”) sought to strike out the application by the Securities and Futures Commission (“SFC”) for orders under section 213 of the Securities and Futures Ordinance (“SFO”) in the SFC’s market misconduct investigation of Tiger Asia, the Court of Final Appeal (“CFA”) has finally laid to rest Tiger Asia’s challenge of the court’s powers to make such orders by dismissing its appeal against an earlier Court of Appeal (“CA”) ruling.

  1. A recap of the previous proceedings

The SFC’s allegation was that Tiger Asia committed insider dealing by short-selling shares of two banks after being sounded out on proposed placements of those shares, in contravention of section 291(5) of the SFO (there were also market manipulation allegations relating to the same transactions). In 2009 and 2010, the SFC applied to the Court of First Instance (“CFI”) for various orders under section 213 of the SFO, including an injunction to freeze Tiger Asia’s assets for an amount which represented the notional profit made in the transactions, final orders to unwind the relevant transactions and to restore affected counterparties to their pre-transaction positions, and, for the first time ever, a ban from dealing in Hong Kong’s listed securities and derivatives market. The SFC’s action was premised on the argument that since the condition for the making of section 213 orders was fulfilled by Tiger Asia’s contravention of section 291(5), the CFI was empowered to grant the orders sought by the SFC. However section 213 does not expressly set out which tribunal is to determine that there has been such a contravention. It is the SFC and Tiger Asia’s disagreement over this jurisdictional issue that formed the basis of the proceedings.

The SFC suffered a setback at first instance, when Harris J agreed with Tiger Asia and held that the CFI did not have jurisdiction to grant final orders under section 213, as the criminal court/the Market Misconduct Tribunal (“MMT”) had not yet determined whether there had been a contravention of the relevant market misconduct provisions. According to Harris J, to grant the orders under such circumstances would amount to circumvention of the dual civil/criminal market misconduct regime as laid down in Parts XIII and XIV of the SFO. The SFC’s proceedings were struck out accordingly.

The SFC appealed, The CA allowed the appeal and decided that had the legislature intended to make the CFI’s exercise of its power under section 213 conditional upon a tribunal’s prior finding, it would have made that explicit in the SFO. The CA focused on the unique nature and purpose of section 213 ie, to protect the investing public and provide remedies for contraventions, and held that the section 213 procedure is free-standing from the dual civil/criminal market misconduct process.  

  1. What the CFA decided

Lord Hoffmann NPJ, in delivering the CFA’s unanimous decision, agreed “entirely” with the CA’s reasoning and conclusions. After hearing only Tiger Asia’s submissions, Lord Hoffmann held that the CFI does have the independent jurisdiction to make orders under section 213 without any prior finding by a criminal court or the MMT of any contravention of the relevant provisions of the SFO (which include the market misconduct provisions). In particular his Lordship held that:

  • While the civil and criminal procedures under the SFO to deal with market misconduct are mutually exclusive (ie, a criminal prosecution may not be instituted in relation to market misconduct which has already been pursued in the MMT, and vice versa), they are not jointly exhaustive of the procedures by which a determination of contravention of any relevant provision may be made. His Lordship pointed to the example of section 305 of the SFO, which empowers the court to determine that a criminal market misconduct provision has been contravened for the purposes of a civil claim for compensation brought by a person who has suffered loss as a result of the market misconduct.
  • As the CA found, if the legislature had intended that a contravention must be found by either a criminal court or the MMT before the SFC may seek section 213 orders from the CFI, it would have said so.
  • Section 213 orders serve a different purpose from the penalties that can be imposed by a criminal court or the MMT: while the latter are imposed in the public interest of punishing prohibited acts, the former are remedial in nature and are in the collective interests of persons dealing in the market who have been injured by market misconduct. Section 213 proceedings therefore are not substitutes for criminal prosecutions or MMT proceedings, and do not attract the kind of protection accorded to criminal defendants.
  • Contrary to Tiger Asia’s assertion, the CFI is not being required to make a declaration, in the capacity of a civil court, that Tiger Asia has committed a criminal offence. Rather, it is asked to declare that Tiger Asia was involved in acts which found jurisdiction under section 213, acts which also happen to be criminal offences. Whether Tiger Asia has committed any criminal offence remains strictly within the realm of the criminal court. According to Lord Hoffmann, “[t]here is no question of the civil court’s declaration being admitted or in any way influencing a criminal trial.”
  • Just because the CFI may reach a different decision compared to the decision of a criminal court/the MMTregarding an alleged contravention, it does not follow that the legislature must have intended to confer jurisdiction exclusively on one tribunal due to potentially inconsistent decisions. Lord Hoffmann referred to the example of O J Simpson’s murder trial to illustrate this point.
  • The legislative origin of section 213 supports the conclusion that the making of a section 213 order is not contingent on any prior finding by a criminal court or the MMT. Lord Hoffmann further approved, obiter, Le Pichon JA’s ruling in SFC v C [2009] 4 HKLRD 315 that “relief under section 213(2) is entirely free-standing and is not contingent or conditional on there being proceedings in the Market Misconduct Tribunal…Thus, the relief sought in section 213 proceedings is entirely self-contained.”
  1. Comments

The CFA’s decision has ultimately confirmed that in combating market misconduct, the SFC may, in addition to initiating criminal/MMT proceedings, seek section 213 orders from the CFI, even in the absence of a pre-existing finding of contravention by a criminal court or the MMT. It should be borne in mind that although section 213 orders are civil and remedial in nature (and can be obtained when the CFI is satisfied to the civil standard of proof that a contravention has/may have occurred), the impact on the subject of an order is often significant (eg, assets worldwide frozen, banned from trading in the Hong Kong market etc).

The availability to the SFC of free-standing section 213 orders 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 relevant bilateral extradition agreement is in place and utilised. MMT proceedings, on the other hand, are often perceived as a slow and cumbersome procedure, although they can lead to orders such as disgorgement of profits made or losses avoided. The seeking of section 213 orders thus represents a practical and efficient way to seek redress for investors.

With the fight over the CFI’s section 213 jurisdiction now over, the next step for the SFC, should it choose to continue with the case, would be to present evidence to the CFI in order to persuade the court to make a declaration that Tiger Asia has committed insider dealing and market manipulation, and that section 213 orders should be granted in the interest of investors. It remains to be seen whether Tiger Asia will fight those proceedings, bearing in mind the settlement between the US Securities and Exchange Commission and the fund and two of its officers last year, in which the fund (but not the officers) admitted to related insider dealing and market manipulation charges.

In any event, since the SFC can rely on section 213 not only in cases of alleged market misconduct, but also for alleged contraventions of any SFO provision and certain Companies Ordinance provisions, we can expect to see increasing reliance by the SFC on section 213 in pursuing wrongdoers.