Whilst the Taiwanese authorities’ investigations into possible insider dealing in securities on the part of family members of President Chen have caused widespread political instability on the Island, it is noteworthy that in Hong Kong insider dealing is both a civil wrong and a crime under the Securities and Futures Ordinance ("SFO").
What Is Insider Dealing
As once observed by The Honourable Mr Justice McMahon, insider dealing is ‘the conscious use for the purpose of profit or of the avoidance of loss of confidential price-sensitive information to buy or sell shares to which that information relates, or the disclosure of confidential price-sensitive information to a person likely to use that information for that purpose’.
There are three forms of insider dealing: the ‘basic’ form, the ‘tipper’ form and the ‘tipee’ form. One of the crucial elements of all these forms of insider dealing is the presence of ‘relevant information’, which is defined as specific information in respect of (a) a corporation; (b) its shareholders or officers; or (c) the listed securities of the corporation or their derivatives, which information is not generally known to other potential investors, but should it be known to them, it would materially affect the price of the listed securities of that corporation.
The ‘basic’ form of insider dealing takes place with the presence of the following elements: (a) a person connected with a listed corporation (the "Connected Person"), (b) the Connected Person’s possession of relevant information, (c) knowledge of the Connected Person that the information in question is relevant information and (d) dealing by the Connected Person in the listed securities of that corporation, or his counselling or procuring others in so doing.
The ‘tipper’ form of insider dealing takes place where the Connected Person does not deal in the securities himself but discloses the relevant information to another person (the "Tipee"), knowing or believing that such a person will make use of the relevant information to deal in the securities or procure a third party to do so.
The ‘tipee’ form of insider dealing is where (a) the Tipee receives relevant information whether directly or indirectly from the Connected Person, whom he knows is connected with the corporation, (b) the Tipee knows that the information is relevant information and (c) the Tipee deals in the listed securities of the corporation or counsels or procures an other person to do so.
Civil Sanctions – Market Misconduct Tribunal
A Market Misconduct Tribunal ("MMT") is established under Part XIII of the SFO. It is empowered to inquire into and punish market misconduct with a wide range of civil sanctions. Insider dealing is one of the forms of such market misconduct.
Orders which the MMT may make at the conclusion of its inquiry in respect of a person identified as having engaged in market misconduct include orders that:-
- the person shall not be a director or involved in the management of a listed corporation for a period of up to 5 years;
- the person shall not directly or indirectly deal in Hong Kong with securities or other regulated financial products for a period of up to 5 years;
- the person shall not again perpetrate any conduct which constitutes such market misconduct as is specified in the order;
- the person shall pay to Government an amount not more than the profit gained or loss avoided by him as result of the market misconduct;
- the person shall pay to Government and/or the Securities and Futures Commission (the "SFC") costs and expenses reasonably incurred in relation to the inquiry and related investigations; and
- a body which may institute disciplinary action against that person be recommended to do so.
Insider dealing is both a civil contravention and a criminal offence under the SFO.
A person who commits insider dealing as an offence is liable upon conviction on indictment to a fine of HK$10 million and to imprisonment for 10 years, or on summary conviction to a fine of HK$1 million and to imprisonment for 3 years.
The decision as to whether to institute criminal proceedings in a criminal court or civil inquiry in the MMT lies with the Secretary for Justice.
If you wish to know more about insider dealing or any form of market misconduct, lawyers in our Litigation and Dispute Resolution Department who are experienced in defending clients in related investigations commissioned by the SFC and inquiries in the relevant Tribunal will be happy to assist you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.