An enforcement action by the Hong Kong Securities and Futures Commission against two solicitors for insider dealing and fraud will proceed after the Court of First Instance dismissed an application by the solicitors to strike out the proceedings. The action was brought under Section 213 of the Securities and Futures Ordinance (SFO). The allegations concern conduct in relation to two confidential deals which the two solicitors became privy to as a result of their employment by two different law firms in Hong Kong. The solicitors were employed at the relevant time by Slaughter & May and Linklaters, but are no longer employed by these firms. The court found that the solicitors owed fiduciary duties, including a duty of confidentiality, to their firms and its clients. They were also subject to the firms’ restrictions on trading securities and had to obtain approval before doing so. (SFC v. Fung, et al., HCMP 2575/2010, Oct 28, 2013, Chan, J.)
The SFC is seeking injunctions and remedial orders under Section 213 of the SFO. The defendants argued that the court had no jurisdiction under Section 213 of the SFO to seek court orders against them and that the SFC had no reasonable cause of action or the action was unlikely to succeed. The Court of First Instance found that the arguments to strike out the proceedings were misconceived and dismissed the application.
The first deal involved a proposed takeover of Hsinchu International Bank Company Limited (Hsinchu), a company listed on the Taiwan Stock Exchange, by Standard Chartered Bank (Standard Chartered). Shortly before the deal was announced, the defendants purchased shares in Hsinchu. The SFC alleges that at the time one solicitor was working on secondment within Standard Chartered on the proposed takeover.
The second deal involved a proposed privatization of Asia Satellite Telecommunications Holdings Limited (Asia Satellite) by CITIC Group and General Electric Capital Corp. The other solicitor was working for a different law firm which had been engaged to advise CITIC Group on the proposed transaction; and worked within the department of the law firm that was working on the deal. On the morning before trading in Asia Satellite shares was to be suspended for the proposed privatization, the solicitors began buying shares in Asia Satellite. The SFC alleges their trading accounted for 73% of the total trading on that day.
The SFC alleges that the defendants, who made a total profit of $2.9 million from the two transactions, contravened Section 300 of the SFO which prohibits the use of fraudulent or deceptive schemes in securities transactions in relation to the Hsinchu matter; and Section 291, which prohibits insider dealing in relation to the trading in shares of Asia Satellite. The SFC is unable to allege that the Hsinchu trades constituted insider dealing as well because the prohibition on insider dealing in the SFO does not apply to shares traded on the Taiwan Stock Exchange.
The main grounds claimed for dismissal concern the viability of the Commission’s causes of action based on Section 300, which provides that a person must not in a transaction involving securities or futures contracts employ any device, scheme or artifice with intent to defraud or deceive; or engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception. According to the court, it is reasonably clear from the natural meaning of Section 300 that it is intended to outlaw two types of conduct in transactions involving securities. First, fraudulent or deceptive conduct, which is relatively straightforward; and second, any device, scheme or artifice employed with intent to defraud or deceive.
The court rejected the contention that the person being defrauded or deceived must be a trading party in a transaction involving securities. There is nothing in Section 300 which suggests that the victim of the fraud or the device, scheme or artifice must be a party to the securities transactions, noted the court, and such limitation should not be read into the section since it would severely curtail its scope.