In the recent case of Securities and Futures Commission v Tiger Asia Management LLC & Ors [2011] HKEC 824 (the Tiger Asia case), a judge has ruled that section 213 ("Injunctions and other orders") of the Securities and Futures Ordinance (Cap.571 – the SFO) does not permit the Securities and Futures Commission (the SFC) to seek a finding of insider dealing from the High Court in civil proceedings against the defendants. For now it follows that in the event the SFC wishes to apply under section 213 for final injunctive relief (such as an order to freeze assets and/or a ban on trading) against persons on the basis of alleged insider dealing contrary to section 291(5) of the SFO, there must first be a finding of insider dealing pursuant to either civil proceedings before the Market Misconduct Tribunal (MMT) or criminal proceedings in Hong Kong. For now, there is no "third way".

Facts and background

In the Tiger Asia case the SFC alleges that the defendant New York hedge fund and a number of its managers in New York engaged in insider dealing activity with respect to certain Chinese bank shares in contravention of section 291(5) of the SFO ("Offences of insider dealing"). The SFC commenced ordinary civil proceedings in the Hong Kong courts alleging insider dealing type activities against the defendants and served these proceedings on them in New York.

Interestingly, and crucial to the SFC's strategy, in the civil proceedings the SFC sought a declaration from the court that was tantamount to asking it to make a finding of insider dealing activity in contravention of section 291(5). A declaration is a form of relief and normally involves a civil court making a finding of fact or law that is determinative of certain legal rights. The court's statutory and common law powers to grant declaratory relief are wide and the SFC's tactics are a novel attempt to secure findings of insider dealing without having to go through the MMT or a criminal court process.

The defendants argued that the court had no jurisdiction to entertain the SFC's civil proceedings for relief under section 213 of the SFO and that those proceedings should be dismissed outright on the basis they constituted an abuse of process.

Key points

  • As the market regulator tests its powers under section 213 of the SFO against alleged insider dealers it looks as if the SFC will almost certainly appeal the Tiger Asia case. If that appeal fails a further attempt to appeal to the Court of Final Appeal is quite likely.
  • If the SFC is successful on appeal this could have significant regulatory repercussions.
  • The Tiger Asia case and other recent developments suggest that the SFC is seeking ways of pursuing alleged insider dealers in addition to civil proceedings before the MMT or criminal proceedings before a court of law in Hong Kong. Expectations of the SFC are high. However, its job is not made easy by the fact that shares in Hong Kong listed companies are heavily traded outside of Hong Kong and by persons who freely come and go (or do not come to Hong Kong at all).
  • The SFC is, no doubt, conscious of the need to take action and to be seen to be taking action against alleged insider dealers. Civil proceedings before the MMT can be slow and cumbersome and it is the Financial Secretary on behalf of the Government who decides whether to pursue such proceedings (not the SFC). Alternatively, serious offences under the SFO are prosecuted by the Department of Justice; not only do criminal proceedings require a higher burden of proof they are generally only effective if defendants are physically in Hong Kong.
  • The SFC's attempts to secure a "third way" to pursue alleged insider dealers through alternative ordinary civil proceedings (not before the MMT) may be indicative of the SFC seeking more control in the fight against insider dealing activity in Hong Kong.
  • It should be noted that nothing in the Tiger Asia case impacts on the SFC's powers to seek interim orders (for example in the nature of injunctive relief) in exercise of its powers under section 213 of the SFO pending civil proceedings before the MMT or a criminal conviction. What the SFC is seeking in the Tiger Asia case are final orders on the back of a request in ordinary civil proceedings for a finding (declaration) of insider dealing activity.

Issue

The issue before the court was whether under section 213 of the SFO a civil court had jurisdiction to grant a declaration that the defendants had contravened insider dealing provisions of the SFO without such a contravention first being established before the MMT or in a criminal court in Hong Kong.

Decision

In something of an emphatic judgment the judge ruled that the court did not have such jurisdiction.

As a result, it would appear that the SFC's civil proceedings against the defendants for declaratory relief will be dismissed, although the judge's order has been stayed pending the outcome of a court hearing on 11 July 2011 to entertain arguments on the exact terms of that order. The SFC has indicated that it will appeal to the Court of Appeal and it is possible that the judge's order will be stayed pending an appeal.

A passage from the judgment reads as follows:

"... I do not understand it to be in dispute that the purpose of Parts XIII (MMT) and XIV (Offences) was to introduce a 'dual civil and criminal regime' for dealing with market misconduct. No material has been put before me that suggests that the purpose of Parts X (Powers of Intervention and Proceedings), XIII and XIV was to introduce 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 go to the Court and ask it to determine whether there had been a contravention of Parts XIII or XIV."

Comment

The "third way" sought by the SFC to pursue alleged inside dealing activity is an example of the SFC testing its powers. In Kayden Limited v SFC [2011] 2 HKC 44 the Court of Final Appeal left open the question of whether section 213 of the SFO was free standing and allowed the SFC to seek a declaration of criminality involving insider dealing activity contrary to section 291(1) of the SFO; the Court of Final Appeal declined to express a view on this point as it did not properly arise in that case.

It would appear that the Tiger Asia case is the first case in which the SFC and its lawyers have taken up what they might perceive as something of an invitation to return to an appeal court for a determination on this issue. The civil proceedings commenced by the SFC in the Tiger Asia case might be seen as part and parcel of its strategy following the outcome in the Kayden case.

The eventual outcome of the Tiger Asia case on an appeal should be of considerable interest to those persons overseas who are pursued by the SFC for alleged insider dealing activities. If the SFC is eventually successful in the appeal (and it clearly believes it is in with a chance) then the scope to evade a finding of insider dealing before a court in Hong Kong simply by reason of being overseas will be curtailed. For now, as the judge acknowledged in the Tiger Asia case:

"... any prospect of the three hedge fund managers passing through Hong Kong and risking prosecution is more than remote." What the SFC also appears to want to do is to preserve the option of a criminal prosecution in the event that a defendant lets his guard down, passes through Hong Kong and is caught, while in the meantime pursuing civil proceedings but not before the MMT; defendants have been known to drop their guard before – HKSAR v Du Jun [2009] HKCU 2136. For now the judge in the Tiger Asia case has decided that, properly construed, the two statutory regimes for pursuing alleged insider dealing activity (civil proceedings before the MMT or in the criminal courts) are mutually exclusive and the SFC's "third way" is not permitted.

The Tiger Asia case appears to be far from over and, going forward, any appeal is likely to raise difficult points of law and of statutory construction in the SFC's fight against insider dealing activity in Hong Kong. Clearly, the stakes are going to be high both for the SFC and those it seeks to pursue.

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