The Securities and Futures Commission (the SFC), Hong Kong’s principal securities regulator, won a significant victory this past April in a long-running, high-profile case against New York hedge fund Tiger Asia Management LLC and three of its officers (Tiger Asia).
The landmark decision by Hong Kong’s highest appeals court represents an important win for the SFC, which has taken more vigorous action in recent years against market misconduct.
The case affirms that the SFC can use section 213 of the Securities and Futures Ordinance (the SFO) as a standalone provision to seek injunctive and other remedies against a potential defendant, absent any criminal prosecution or any proceedings before the Market Misconduct Tribunal (the MMT). Tiger Asia had argued that a criminal prosecution or MMT proceeding was required in order to invoke section 213.
The case has far-reaching implications for overseas financial institutions that trade in the Hong Kong market. The outcome of this case makes it clear that even though an overseas institution does not have any presence in Hong Kong, it can still be subject to the SFC’s enforcement powers.
Tiger Asia was accused of insider trading in shares of China Construction Bank and Bank of China in 2008 and 2009. It pleaded guilty in a US federal court and reached a settlement with US regulators in December 2012.
In 2009, the SFC applied to the Court of First Instance (the CFI) for several orders under section 213 of the SFO, including restraining Tiger Asia from trading in listed securities on the Stock Exchange of Hong Kong or its derivatives, and freezing Tiger Asia’s assets.
Section 213 states that where a person has contravened any of the relevant provisions, including the insider dealing provisions, the CFI on application by the SFC may make one or more of the orders specified in that section. Before making an order, the CFI must satisfy itself that “it is desirable that the order be made, and that the order will not unfairly prejudice any person.”
Therefore, in order to grant reliefs under section 213, the CFI has to be satisfied that:
- Tiger Asia has contravened Hong Kong’s insider dealing laws;
- the orders sought fall within the list in section 213; and
- the orders are desirable to be made and will not unfairly prejudice any person.
Tiger Asia tried to nullify the SFC’s actions in 2010 on the ground that the CFI had no jurisdiction over insider dealing. It claimed that this belonged to the MMT or the criminal court only.
Tiger Asia initially won at the CFI. The CFI decision was overturned by the Court of Appeal. The Court of Final Appeal affirmed the Court of Appeal’s decision and ruled in favor of the SFC that the CFI has jurisdiction under section 213.
The result as to the CFI’s jurisdiction is likely to kick off another round of proceedings relating to the substantive reliefs being sought by the SFC.
This case has affirmed the routes that the SFC can take against market misconduct, and the outcome is important for the SFC because it is common for the SFC to seek injunctive and other forms of relief before the SFC has completed its investigation. It is also important because the SFC may not be able to pursue a criminal prosecution against a potential defendant who is based overseas and does not have any staff in Hong Kong, and the MMT proceedings are also somewhat cumbersome to pursue. The Tiger Asia case makes it clear that the SFC can invoke section 213, under which it can seek a wide range of remedies against market misdeeds and protect investors, absent any criminal prosecution or MMT proceedings.
The SFC also invoked section 213 in another high-profile case against Hontex International Holdings Company Limited for allegedly disclosing materially false information in its 2009 initial public offering prospectus. The same jurisdictional issue was raised in that case, but since Hontex agreed to settle and pay compensation, the issue of jurisdiction was not considered. Mark Steward, the SFC’s Executive Director of Enforcement, said after the Tiger Asia case, “Today’s decision by the Court of Final Appeal vindicates our position and our strategy in seeking remedial orders under section 213.”
We expect the SFC will be more aggressive in using section 213 for prosecuting market misdeeds in the future. Global financial institutions should be aware of the broad enforcement powers of Hong Kong regulators. In particular, since section 213 proceedings and criminal prosecution are not mutually exclusive – only MMT proceedings and criminal prosecution are mutually exclusive – a potential defendant may be subject to both criminal liability and civil remedies under section 213.