Monday, March 12, 2012

Securities and Futures Commission Can Bring Insider Trading Action against NY-Based Hedge Fund Says Hong Kong Court of Appeal

The Hong Kong Securities and Futures Commission has jurisdiction to bring an insider dealer and market manipulation action against a New York-based hedge fund under Section 213 of the Securities & Futures Ordinance, ruled the Hong Kong Court of Appeal. Section 213 is a broadly drafted provision under which the court may make remedial orders granting an injunction to restrain recurrence, declaring contracts to be void and requiring a person to pay damages. Section 213 provides much needed ammunition to the Commission to protect investors, noted the appeals court, and it is neither reasonable nor desirable that investor protection under Section 213 should come at the price of forgoing criminal prosecution. SFC v. Tiger Asia Management, LLC, The High Court of the Hong Kong Special Administrative Region, Court of Appeal, Civil No. 178, Feb 23, 2012.

Indeed, continued the court, in the present case the alleged contraveners are outside the jurisdiction. Criminal prosecution may be difficult or impossible. The fund is a New York-based asset management company that specializes in equity investments in China, Japan and Korea. All of its employees are located in New York. The fund has no physical presence in Hong Kong.

The appeals court decision overturned an earlier ruling by the Court of First Instance 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 could not seek final orders under Section 213 without such a prior determination. The appeals court said that Section 213 is a free standing remedy that is not conditioned on a pre-existing criminal conviction or a determination by the Market Misconduct Tribunal.

Despite the availability of civil remedies to individual investors, observed the appeals court, there may be cases where investors cannot be expected to take proceedings individually to enforce their legal rights. There may be circumstances when it would be eminently reasonable for proceedings to be taken by the Commission under Section 213 for the investors' benefit. Section 213 provides valuable tools to the Commission to protect the investing public which is an important objective of the SFO. Section 213 is focused primarily upon remedial consequences, including injunctions, restitution, orders protecting property and avoiding contracts so as to restrain, reverse or compensate for the mischief in question.

As a result of the appeals court ruling, the SFC’s case against the fund in relation to its allegations of insider dealing and market manipulation will now proceed. The SFC’s Executive Director of Enforcement Mark Steward said that the ruling vindicates the position the SFC has taken in relation to Section 213 proceedings. He pledged that the SFC will continue to prosecute these cases fairly and vigorously.
In remarks last year, Director Steward explained that 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, it has a duty not only to bring cases against wrongdoers but also to attack and remediate 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. 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.