Price-sensitive information and the Market Misconduct Tribunal – A primer for listed companies and their directors
The Securities and Futures Commission (SFC) has prioritised listed company malfeasance for enforcement action. As a result, listed companies and their directors will come under increasing scrutiny as to how they manage price-sensitive information. Timothy Loh, Managing Partner, Timothy Loh LLP, provides guidance to listed companies and their directors on how to respond if the SFC targets them for enforcement action.
Tom Atkinson, the new Executive Director of the SFC responsible for the Enforcement Division, recently confirmed that listed company malfeasance, including insider dealing and market abuse, is at the top of the Enforcement Division’s priority list. The confirmation is consistent with the empirical evidence – the SFC is increasingly taking action against listed companies and their directors on the basis that they have failed to disclose non-public, price-sensitive information in a timely or accurate manner or traded whilst in possession of such information.
In some cases, this enforcement action may result in proceedings before the Market Misconduct Tribunal (MMT). MMT proceedings can result in significant reputational damage and financial liability, both for the directors and the listed companies concerned. A finding of liability by the MMT can trigger further action by the SFC to compensate investors and can form the basis of statutory actions by investors to recover losses, with the finding of the MMT being admissible as proof of wrongdoing. In the case of Tiger Asia, the SFC sought compensation orders of over HK$45 million from the hedge fund and its officers. Similarly, in the Du Jun and Tsoi Bun cases, the SFC sought compensation orders of over HK$23 million and HK$13 million respectively.
A director found liable by the MMT may be disqualified from serving as a director, and may be banned from trading in the market, for up to five years. A director may also face monetary penalties including orders to account for any profit gained or loss avoided, to pay a regulatory fine, or to pay the government and the SFC any costs reasonably incurred by them as a result of the misconduct. The costs can be relatively high, with figures in the HK$3 million to HK$7 million range not being unusual.
Directors and officers liability insurance may not provide adequate coverage. Though not yet settled, even where policy language covers regulatory fines, case law suggests that even a finding of a negligent breach of regulatory requirements may be sufficient to bar indemnity.
Proceedings before the MMT are invariably foreshadowed by an SFC investigation. The investigation typically includes a demand for production of documents and interviews with persons who may be able to assist in the investigation, as well as persons who are under investigation.
The SFC’s powers of investigation are draconian. The SFC may require a person to answer a question even if the answer may tend to self-incriminate. Whilst an answer cannot, if an appropriate claim is made, generally be used in criminal proceedings against the person, MMT proceedings are not criminal. As a result, a person may be required to give evidence which would tend to establish his own liability in any subsequent MMT proceedings.
Significance of the investigation stage
The investigation stage is arguably the most critical stage of the enforcement process. It is at this stage that the SFC will decide whether or not to prosecute. Thus, whilst some lawyers prefer to advise clients to remain as tight-lipped as possible and to wait for their day in court, we often advise clients to present their story as forcefully as possible at this stage. The story should emphasise the legal and human elements which would most persuasively argue against prosecution and should, naturally,
reflect conduct consistent with the regulatory framework.
At the same time, the investigation stage lays down the evidential foundation for any subsequent MMT or other proceedings. Any future statement in such proceedings will be measured against any statement or other evidence tendered earlier during the investigation stage. An inconsistent story may damage credibility.
Legal professional privilege
If legal advice has been obtained in relation to the handling of price-sensitive information which has become the subject of an investigation, companies will need to consider at the investigation stage whether or not they can and should insist upon legal professional privilege to shield such advice from production. Producing such advice may help to characterise the company as being cooperative and may lay the groundwork for an argument of the reasonableness of the conduct of the company and its directors. If this approach is taken, the company will need to further consider the risk of loss of confidentiality over all the legal advice given, even if only some of the advice is disclosed. Refusing to produce such advice may frustrate the ability to tell the story and hence, justify conduct. In the case of a director, the consequence of such frustration however, may be to lay the groundwork for a defence by the director that he does not have a reasonable opportunity to be heard. In this regard, as a matter of natural justice, the MMT has no jurisdiction to make a finding against a director who has not had such an opportunity to be heard.
Prosecution and other options
Following at least an initial investigation, the SFC may decide to prosecute or take remedial action or both. Prosecution options vary depending on the type of alleged misconduct.
Market manipulation and insider dealing
If the way that price-sensitive information was handled is classified as market manipulation or insider dealing and the SFC chooses to prosecute, it can generally do so by initiating either criminal proceedings or proceedings before the MMT.
Proceedings before the MMT are civil rather than criminal in nature. Nevertheless, in addition to reputational consequences, such proceedings can result in a range of penalties including:
- a disqualification order, meaning for a director that he or she will be disqualified from being a director for a period of up to five years
- a cold shoulder order, meaning that the company or a director will be prohibited from dealing in any securities for a period of up to five years
- a cease and desist order, meaning that the company or a director will be prohibited from perpetrating the conduct that constitutes market misconduct and may commit a criminal offence if the company or the director is found by the MMT in the future to have failed to comply with this prohibition
- a cost order, meaning that the company must pay the costs incurred by the government or the SFC in pursuing the market misconduct, and
- a disgorgement order, meaning that the company or a director must pay an amount not exceeding the amount of profit gained or loss avoided as a result of the market misconduct.
MMT proceedings differ from criminal proceedings in two significant ways. First, criminal proceedings may result in jail time whereas MMT proceedings cannot. Jail time in criminal proceedings for an offence committed by a director or a listed company of which he or she is a director can be as high as 10 years. Secondly, the rules of evidence and the standard of proof are higher in criminal proceedings compared to MMT proceedings. For example, in a criminal proceeding, the prosecution must prove its case beyond reasonable doubt. In contrast, in an MMT proceeding, liability will be established if it is simply more probable than not that the specified person engaged in market misconduct (that is on a civil standard of proof).
As a general principle, a person cannot be subjected to both criminal proceedings and MMT proceedings for the same conduct in reliance of the market misconduct provisions of the Securities and Futures Ordinance (SFO) governing insider dealing and market manipulation. In other words, the initiation of criminal proceedings for particular conduct will preclude MMT proceedings for the same conduct. Conversely, the institution of MMT proceedings for particular conduct will preclude criminal proceedings for the same conduct.
This is not to say that there is no risk of prosecution both through criminal and MMT proceedings. For example, although there is no precedent, there is a theoretical possibility that insider dealing may be prosecuted both through the MMT under the market misconduct provisions governing insider dealing and through the criminal courts relying on the anti-fraud provisions of the SFO as these anti-fraud provisions are not per se market misconduct provisions.
Non-disclosure of inside information
The failure to disclose non-public price-sensitive information in a timely or accurate manner may result in a breach of the requirement for a listed company and its directors to disclose inside information. If the failure is so classified (as opposed to being classified as market manipulation), it may be prosecuted only through MMT proceedings. There are no statutory provisions establishing criminal offences for this type of breach.
MMT proceedings for this type of breach may result in a fine of up to HK$8 million (but not an order for disgorgement). At the same time, on a finding of a breach, the MMT may order that the listed company appoint an independent professional adviser to advise on compliance or that the directors undergo compliance training. As with market manipulation and insider dealing, directors may face a disqualification order, a cease and desist order and a cold shoulder order as well as orders to pay the SFC’s costs in the investigation and proceedings.
Separate from prosecution, the SFC may seek remedial action even before any liability has been established by the MMT or a criminal court. For example, the SFC can apply to court to freeze the assets in Hong Kong of suspected wrongdoers with the idea that the frozen assets may later be applied to compensate investors for losses arising from the misconduct.
Such remedial action is sought before a judge in the High Court of Hong Kong rather than through the MMT. Remedial court orders can result in financial consequences that may well exceed the maximum fine that could be ordered by the MMT itself. This is because the loss to investors arising from the mishandling of price-sensitive information can run very high and there is no statutory limit on the amount of compensation the court may order to be paid for such loss.
Market Misconduct Tribunal
The MMT is an administrative body akin to a court. It is chaired by a judge and assisted by two lay members. The lay members are typically academics in finance or business studies or members of the finance industry. Their presence is intended to provide greater market expertise to the tribunal.
In theory, the MMT is an inquisitorial tribunal, meaning that its function is to investigate and report on what happened. In practice, the MMT assumes a role similar to a court in an adversarial proceeding, with the defendants, called specified persons, squaring off against a prosecutor, called the presenting officer, appointed by the SFC. The specified persons will normally be represented by both their solicitors and counsel. The presenting officer will typically be a senior member of the bar instructed by the SFC’s legal department.
Proceedings before the MMT are generally open to the public. This means, for example, that journalists can attend MMT hearings and report on the proceedings as they unfold. In the past, the news media has given substantial profile to certain cases. Accordingly, a listed company and its directors who are subjected to MMT proceedings may be exposed to risk of reputational damage even before the MMT makes any adverse finding or determination.
Managing Partner, Timothy Loh LLP
The author gratefully acknowledges the assistance of Francis Comtois, a Partner at Timothy Loh LLP, and Gigi Ma, a trainee solicitor at Timothy Loh LLP. This article is not and should not be relied upon as legal advice. Timothy Loh LLP and its partners disclaim any liability to any person so relying upon this article as such.
Copyright: Timothy Loh LLP