March 13 2012
On February 23 2012 the Court of Appeal allowed the appeal of the Securities and Futures Commission (SFC) in the Tiger Asia proceedings, which had raised an important issue about the extent of the SFC's powers in cases of suspected market misconduct. Pending the outcome of the inevitable further appeal, this victory will give the SFC an important psychological boost. It also provides an opportunity to consider the SFC's future enforcement strategy in relation to market misconduct.
The case began in 2009 when the SFC successfully applied to the High Court to freeze nearly HK$30 million-worth of assets of Tiger Asia, an overseas hedge fund with no presence in Hong Kong. The SFC alleges that Tiger Asia contravened laws prohibiting insider dealing and market manipulation, through trading in shares of China Construction Bank Corporation and Bank of China Limited.
The case against Tiger Asia was commenced by the SFC under Section 213 of the Securities and Futures Ordinance, which provides that where a person has contravened a relevant provision of the ordinance, the Court of First Instance has the power to make a number of orders. These include injunctions and orders requiring the person to take such steps as the court directs to restore the parties to a transaction to their position before entering into the transaction. The SFC sought remedial orders and injunctive relief against the Tiger Asia parties.
In June 2011 the Court of First Instance ruled that only a court with criminal jurisdiction, or the Market Misconduct Tribunal, has jurisdiction to determine whether a contravention of insider dealing laws and market manipulation laws has occurred, with the result that the SFC cannot seek final orders under Section 213 without such a prior determination.
The Court of Appeal unanimously overturned the Court of First Instance decision. It decided that the court can grant final relief pursuant to Section 213 before a determination of proceedings before the Market Misconduct Tribunal or criminal proceedings. The Court of Appeal held that Section 213 is a remedy in its own right, commenting that if the legislature had intended to make a finding of contravention of the ordinance by another tribunal or court a condition precedent to the exercise of jurisdiction by the Court of First Instance under Section 213, it would have made this explicit.
It is likely that the case will reach the Court of Final Appeal - the case turns on statutory interpretation and the issues attract interest from an academic perspective. However, if the Court of Appeal decision stands, the SFC may fundamentally shift its strategic approach. Hitherto, the SFC has preferred to prosecute insider dealing and market misconduct in the criminal courts. Insider dealing is a notoriously difficult area to prosecute, as the outcome turns on finely balanced and sometimes highly technical issues. Despite this, since the first criminal conviction in July 2008, the SFC has successfully secured at least 10 convictions for insider dealing - although the amounts involved, in terms of profits, have been relatively small. The SFC seems to have favoured the criminal route over the Market Misconduct Tribunal route. One reason is that the Market Misconduct Tribunal process is regarded by many as cumbersome and in need of reform, and the SFC may see the courts as offering a more effective forum for determining whether market misconduct has occurred.
The Court of Appeal decision in Tiger Asia means that it is open to the SFC to bypass the Market Misconduct Tribunal process and apply directly to the court for relief. Now that this door to the court is open, cases are likely to start creeping through. If so, the Market Misconduct Tribunal may become redundant, which would cut across the whole architecture of the ordinance. The SFC may see this as a way of jumping ahead to its ultimate, often-stated goal: to compensate third parties that have suffered losses as a result of market misconduct through remedial court orders. Nonetheless, in many cases identifying the third parties and their losses will be difficult. Tiger Asia is expected to add impetus to the SFC's enforcement strategy, with the regulator looking to use Section 213 and other sections of the ordinance imaginatively in its efforts to combat market misconduct.
For further information on this topic please contact Paul Li or Abdulali Jiwaji at Simmons & Simmons by telephone (+852 2868 1131), fax (+852 2810 5040) or email (or firstname.lastname@example.org email@example.com).
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