Tuesday, July 26, 2011

Hong Kong SFC Enforcement Director Discusses Criminal vs Civil Actions in Market Misconduct Cases and Use of Sec. 213

The Hong Kong Securities and Futures Ordinance earmarks insider dealing and market manipulation as criminal offences, noted Mark Steward, Enforcement Director for the Securities and Futures Commission, and they should be prosecuted as crimes where there is sufficient evidence to establish the case to the criminal standard of proof and a prosecution is not otherwise inconsistent with public policy. In recent remarks, he said that there is some confusion between criminal prosecutions and civil proceedings before the Market Misconduct Tribunal.

Both procedures deal with the wrongdoer and both apply deterrent sanctions, albeit with different degrees of severity and using different standards of proof. The securities legislation provides that if a market misconduct case is brought before the Tribunal then the parties involved cannot be prosecuted criminally for the same misconduct. In effect, the commencement of Tribunal proceedings confers an automatic statutory immunity from prosecution for the same misconduct. The rationale for this immunity is the double jeopardy rule that a person cannot be punished for the same misconduct twice.

The Securities and Futures Ordinance recognizes that the Tribunal is involved in the application of deterrent or quasi-deterrent sanctions and a person should not also face punishment for the same conduct through the criminal process. Legislative history indicates that the purpose of the Tribunal is to inquire into and punish all forms of market misconduct, albeit using these powers calibrated to the civil rather than the criminal, standard of proof.

According to the Director, the Commission gives priority to criminal proceedings over Tribunal proceedings where the conduct in question can be established to the criminal standard of proof and it is in the public interest to prosecute the case. The SFC will not commute what is otherwise a criminal offence into a civil contravention. If the evidence does not support the laying of criminal charges, but is still sufficient to establish market misconduct using the lower civil standard of proof, then the SFC will refer the case to the Financial Secretary to consider initiating Tribunal proceedings.

The Director turned to a discussion of Section 213 of the SFO which permits the Commission to make applications to the Court of First Instance where a person has contravened the law. Under this provision, the court can order injunctions and, in effect, make orders reversing the consequences of alleged contraventions for the benefit of those who are on the adverse end of them. Section 213 actions are being used when defendants are not within the jurisdiction and thus criminal proceedings cannot be commenced. However, unlike a criminal prosecution or Tribunal proceedings, these cases are not concerned with punishment or deterrent sanctions against the wrongdoer. Instead, they are directed to the consequences of wrongdoing

The jurisdiction invoked here is a new one, acknowledged the Director. Section 213 has been in the legislation since it was enacted but it has not been used very often. Despite a recent judicial setback, the Commission is determined to give effect to the language and the purpose of the provision. While its use raises several novel questions, said the Director, in one sense the jurisdiction is an old one, akin to the well established equitable jurisdiction of the court to disaffirm or repudiate contracts induced by fraud.

In the case of insider dealing, insiders who possess inside information, by their conduct, represent to the market generally and to corresponding buyers and sellers, in particular, that they are legally competent to trade when in fact they are prohibited from doing so. In effect they misrepresent their status, position as well as their competence i.e. ability to trade. All of these matters would give rise to remedies for misrepresentation in a face to face transaction. The falsity of the insider’s representation is not detectable because all traders are anonymous, said the Director, yet the representation is as false as any false statement in a fraud case. In the case of market manipulation, the falsity of the representations arises from the false appearance of real market activity.

The rationale for pursuing cases seeking both deterrent and remedial sanctions is the Commission’s view that as the champion of market integrity and fairness, as well as the agency with a statutory mandate to protect investors, the SFC has a duty not only to bring cases against wrongdoers but also to attack and remediate the consequences of wrongdoing.

Recently, the Court of First Instance ruled that only a court exercising criminal jurisdiction or the Market Misconduct Tribunal has jurisdiction to determine whether a contravention of Hong Kong’s insider dealing and market manipulation laws has occurred, with the result that the Securities and Futures Commission cannot seek final orders under section 213 without such a prior determination.

The Securities and Futures Ordinance created a dual regime of civil actions before the Market Misconduct Tribunal or criminal proceedings, noted the court, and does not contemplate a tripartite regime with, in addition to criminal prosecution or an inquiry by the Market Misconduct Tribunal, a third procedure by which the Commission could ask the court to determine whether there had been a violation of the insider dealing provisions. The SFC challenges the correctness of this court decision and intends to appeal the ruling.