Making full use of available legal powers and operating independently are the twin keys that have enabled the Securities and Futures Commission to achieve significant results in its enforcement actions, noted Director of Enforcement Mark Steward. In recent remarks before the Hong Kong Securities Institute, Mr. Steward said that enforcement must be grounded in the SFC’s statutory objectives of fair and honest markets, reduction of misconduct, and investor protection. But beyond these statutory goals, he emphasized that there must also be a recognition of the devastating impact of crime and misconduct on real people, families, businesses and investors. There must also be a desire to diagnose the problems and rectify the harm caused by misconduct effectively and without bureaucratic delay. And underlying all of this is the need for what the Director called ``regulatory pragmatics.’’
Before joining the SFC, Mr. Steward held several senior positions with the Australian Securities and Investments Commission, most recently Deputy Executive Director of Enforcement. He has also been involved in corporate and securities regulation since 1987 in both Australia and in the UK, specializing in investigatory work and resulting litigation
The Director detailed the Commission’s active commitment to fight insider dealing with both criminal and civil remedies. He noted that the Commission has secured nine criminal convictions with immediate jail terms in five cases inside the span of 12 months. These are the results of the first criminal proceedings for insider dealing in Hong Kong’s history, he said, and include the first indictable prosecutions under the Securities and Futures Ordinance.
Courts have frozen approximately $100 million in a number of suspected insider cases. Mr. Steward noted that the Commission overcame challenges in one of these actions involving an overseas firm which, if successful, would have left the SFC without a remedy to combat traders who route illegal orders through overseas entities. In this case, the court accepted the Commission’s argument that the injunction remedy in the Securities and Futures Ordnance is a substantive one in which the court could also compel a wrongdoer to pay compensation. According to the enforcement chief, this was a landmark decision confirming the SFC’s view that this remedy existed when the Commission could establish a contravention of the ordinance. This decision may yet be reviewed by the Court of Final Appeal.
At the same time, the Commission has commenced an enforcement action against a New York-based hedge fund for the alleged manipulation and insider dealing in shares of one of Mainland China’s largest banks. The Commission is seeking an asset freezing order equal to the profit alleged to have been made in the relevant trading, as well as orders unwinding the transactions and compensating any third parties. The hedge fund has neither a presence nor assets in Hong Kong, noted the Director, but it will now have to defend its conduct in a Hong Kong court.
Separately, the Commission has developed new remedies in relation to corporate governance. The SFC has commenced the first cases to disqualify company directors from being involved in management on the grounds of misconduct, observed the senior official, and the first cases in which the Commission will be asking the court to order the directors concerned to compensate the company for losses allegedly caused by their breaches. Just as there should be no safe haven for insiders who misuse confidential corporate information, reasoned the Director, there should be no tolerance for company directors who misuse shareholders’ funds for their own or another’s benefit.
A recent enforcement action against the former chairman of China’s largest electronic goods retailer alleging breaches of duty and fraud in relation to a share buy-back resulted in the largest interim freeze order the Commission has obtained to date. The SFC is also seeking final orders to pay damages to the company and any third parties for losses incurred as a consequence.
The Commission is also looking at licensed intermediaries and registered institutions. The SFC revoked the license of a substantial leveraged foreign exchange trader, he noted, which was the first time the Commission had exercised the revocation power on the basis of continued misconduct. Since revocation is no longer a theoretical possibility, the Director emphasized that the Commission is quite prepared to put firms out of business where non-compliance is an ongoing problem.
The SFC has also introduced new approaches to stimulate compliance by intermediaries and to curb future misconduct with programs to impose deterrent sanctions using an accelerated disciplinary process if previously detected issues are not properly dealt with and they re-surface. The SFC has taken action against a number of license holders and registered institutions, rather than individual staff members, to drive home the message that senior management has prime responsibility to maintain relevant standards of conduct.
The SFC’s investigations into the sale of Lehman Brothers’ minibonds reflected this approach, said the Director. While tens of thousands of complaints alleged mis-selling in individual cases, the Commission concentrated on management systems and controls, focusing on the way in which distributors understood the product they were selling, trained the staff who were selling it, understood their customers’ financial position and needs, and ensured that the product was suitable for them.
The SFC also examined the ways in which distributors supervised and managed the sale process. An agreement was reached under which the banks promised to pay for a review of their sale processes according to detailed specifications set down by the SFC. According to the Director, the outcome will be a re-engineering of management systems and controls intended to ensure that distributors are equipped to meet the highest standards and to reduce the risk that this kind of controversy will affect the markets again.
.