And the tiger roars! A further analysis that the SFC will not tolerate market misconduct
Mohan Datwani, the Institute’s Director of Technical and Research, gives his views of the Court of Final Appeal’s landmark decision in the Tiger Asia case. He argues that the practical outcome of the CFA decision is satisfying in that the market manipulator, Tiger Asia, obtained what it deserved and that the case sends a clear message that SFC will not tolerate market misconduct in Hong Kong and will zealously guard its reputation as an international financial centre.
30 April 2013 was no doubt an important day for the Securities and Futures Commission (SFC) at the
Hong Kong courts. It was the day of the hearing by the Court of Final Appeal (CFA) in the Tiger Asia case. This related to the regulatory powers of the SFC under Section 213 of the Securities and Futures Ordinance (SFO). In legal and compliance circles this was perhaps one of the most anticipated cases for some time. After hearing counsels for Tiger Asia, the CFA, comprising Chief Justice Ma, Justices Chan, Ribeiro, Bokhary, and Lord Hoffmannn, ruled in favour of the SFC without a need to even hear counsels for the SFC. This was an outright win for the SFC.
Tiger Asia Management LLC (Tiger Asia) is a New York hedge fund whose strategy includes shorting stocks for profit. But it overstepped the bounds, at least in Hong Kong, when it engaged in insider dealing and other market misconduct. It agreed to take placements of shares of the Bank of China and China Construction Bank on various occasions. It then shorted the stocks before the market had knowledge of the placements. The expectation was that the price of the stocks would go down and by squaring the shorts, Tiger Asia would profit. The actual trades occurred between December 2008 and January 2009 and Tiger Asia profited on all occasions except on the last trade. In all, it made a notional profit of over USD$3.5m.
Testing Section 213
An apparent problem for the SFC was that Tiger Asia did not have any presence in Hong Kong. It did not have an office or any employees in Hong Kong. It would therefore be a daunting, if not impossible, task to pursue the traditional routes of pursuing market misconduct – namely, a civil claim with the Market Misconduct Tribunal (MMT) under Part XIII of the SFO, or a criminal case at the courts, after coordinating with the Department of Justice (DOJ), under Part XIV of the SFO, which are the mutually exclusive civil and criminal remedies. This was because there were various procedures and protections afforded to Tiger Asia that needed to be complied with and the lack of presence was an issue.
The SFC chose to invoke Section 213 of the SFO. The section is a general one and was on the statute books before the creation of the mutually exclusive civil and criminal regimes (Parts XIII and XIV respectively) on 1 April 2003. This section says that, where a person has ‘contravened’ any of the relevant provisions of the SFO, the High Court, on the application of the SFC, can make wide-ranging orders including requiring parties to cease-and- desist their conduct and unwind the relevant transactions. The High Court can also order such ancillary orders as it considers necessary. These orders can be granted on an interim basis prior to final determination of the contravention of the relevant provisions of the SFO. In many cases, the interim orders will facilitate settlement of the contravention of the provisions of the SFO.
However in the Tiger Asia case the SFC chose, instead of interim orders, final orders under the Section 213 application to the High Court. Further, the application itself was made under an ‘Originating Summons’, which is a procedure more appropriate for determining an issue of law as against facts. The SFC also sought other orders, including for Tiger Asia to account for its profits made or losses avoided under the SFO. Later, the SFC asked for a redistribution of the profits made to the counterparties to Tiger Asia’s trades.
The case history
At the High Court the SFC lost the Tiger Asia case. Mr Justice Harris was perplexed by the use of an Originating Summons, including the lack of particulars as to what the SFC was asking for. Rather, in his view, a ‘Writ of Summon’ with full argument of the facts and supporting affidavits was appropriate. The SFC then
made it clear before the hearing that it was seeking to allege a contravention of Part XIV of the SFO, meaning a criminal contravention of market misconduct which carries with it a higher standard of proof than a civil case (criminal cases require the facts to be proved ‘beyond reasonable doubt’, whereas civil cases are decided on a ‘balance of probabilities’). Specifically, in its Section 213 application, the SFC sought to establish that Tiger Asia had contravened Sections 291 and 295 of Part XIV the SFO relating to criminal insider dealing and other market misconduct.
Mr Justice Harris ruled that Section 213 provides a mechanism for the SFC to obtain interim relief prior to the determination of civil proceedings with the MMT or criminal proceedings by the courts under Parts XIII and XIV, or final relief after such proceedings. It does not provide a ‘third route’. That is, the SFC should have pursued Part XIII and XIV proceedings before going under Section 213 if it desired any final orders as against interim orders.
After losing the High Court case, the SFC appealed to the Court of Appeal. Mr Justice Tang VP for the Court of Appeal allowed the SFC’s appeal and wrote the unanimous decision for the court. The Court of Appeal identified that the issue relating to the appeal was whether Section 213 of the SFO, which can apply on an interim basis, can also be applied on a final basis to determine a contravention of the criminal provisions under Part XIV of the SFO, specifically Sections 291 and 295 of Part XIV of the SFO. However, instead of determining the entirety of the question, the Court of Appeal felt it was sufficient for it to determine whether the High Court had powers under Section 213 to determine whether there was market misconduct. This was because Section 213 was remedial in nature.
The Court of Appeal’s decision left open the issue as to how Section 213 can be used in an abridged manner, under an Originating Summons, to determine whether there was a criminal breach under Part XIV of the SFO which carried with it a higher standard of proof. The CFA has now determined the issue, and clarified that there is no abridged determination of a criminal matter.
The CFA decision
The CFA’s decision is that when the SFC makes an application under Section 213, even where it alleges a criminal breach, the application is still a civil one and for remedies only. Lord Hoffmann stated that ‘Section 213 serves a different purpose from the penalties which can be imposed by a criminal court or the MMT. The latter are imposed in the general public interest, avowedly to punish in the case of criminal sanctions and, in the case of the MMT, as near as one can get to punishments without running the risk of the proceedings being categorised as criminal’.
He further stated that ‘Section 213… provides remedies for the benefit of parties involved in the impugned transactions… In these proceedings the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct’.
Lord Hoffmann then went on to explain in the Tiger Asia case that: ‘… the SFC is not seeking a declaration that Tiger has committed a criminal offence. It is seeking a declaration that it has done acts which found jurisdiction under Section 213 but which also happen to be criminal offences.
The question of whether Tiger has committed a criminal offence remains entirely a matter for the criminal court. There is no question of the civil court’s declaration being admitted or in any way influencing a criminal trial. If there were a prospect of such a trial, the court would have jurisdiction to put in place protective measures to ensure that publication of materials arising in the civil proceedings did not prejudice the accused’.
It follows that for a case where there is a clear contravention of the SFO, as with Tiger Asia, the quoted passages will not present difficulties. The difficulty is presented where the SFC alleges, under a Section 213 application, a criminal contravention involving a less clear case. What evidence relating to a criminal contravention has to be proffered in the context of a civil determination? This remains an area of concern that the CFA has not addressed. In practice, the issue will be easily avoided where the SFC, under a Section 213 application, alleges a criminal contravention for the clearest of cases or a civil contravention of provisions of the SFO with a lesser standard of proof.
But the situation can still be confounded and Lord Hoffmann’s mention illustrates the point: ‘The Court of First Instance may find a contravention under Section 213 but the criminal court, or even the MMT, might find no such contravention proved. That is true. These things happen. A jury acquitted OJ Simpson of the murder of his girlfriend but he was found liable in civil proceedings for wrongfully causing her death. Inconsistency is always a possibility when different tribunals have jurisdiction to decide the same issue. But that is no reason to say, in the face of plain contrary language, that the legislature must have intended to confer jurisdiction upon only one tribunal’.
The law is as stated by the CFA and the practical outcome of the CFA decision is satisfying in that the market manipulator, Tiger Asia, obtained what it deserved. It also sends a clear message that SFC will not tolerate market misconduct in Hong Kong and will zealously guard its reputation as an international financial centre.
Director, Technical and Research, HKICS