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27 November 2018
The Securities and Futures Commission (SFC) has been using Section 213 of the Securities and Futures Ordinance (Cap 571) to good effect to secure (among other things) compensation on behalf of counterparty investors to impugned transactions (for further details please see "Regulator's use of Section 213 'combo' civil proceedings" and "Regulator's use of civil proceedings casts a wide net"). As a result of a recent landmark judgment of the Court of Final Appeal,(1) the SFC's remit under Section 213 extends not only to (for example) insider dealing involving locally listed securities and regulated trades, but also to contraventions of Section 300 – namely, transactions involving locally listed or overseas listed shares carried out through means of fraud or deception.
The relevant background is set out in "Regulator's use of Section 213 'combo' civil proceedings" and "Regulator's use of civil proceedings casts a wide net". In brief, the three appellants were alleged to have been party to a scheme to buy shares in a company listed on the Taiwan Stock Exchange after having obtained inside information from a 'tipper'. Had the conduct occurred in connection with locally listed shares, it appears that it would have constituted insider dealing.
The SFC commenced civil proceedings pursuant to Section 213 of the Securities and Futures Ordinance seeking determinations that the conduct of one or more of the defendants constituted a contravention of Section 300. Such a determination (or finding) provides a basis for seeking orders that (among other things) the defendants give up the profit made on the impugned transactions.
Notably, Section 213 proceedings are civil in nature. While a breach of Section 300 can constitute a criminal offence, the defendants were not charged with such.
In the lower courts (at first instance and on appeal), findings were made and upheld that the conduct of three of the defendants amounted to a contravention of Section 300 – namely, a transaction involving shares carried out through means of fraud or deception. A fourth defendant was found to have been involved in the contravention, but not to have contravened the section herself.
The appellants (three of the four defendants) appealed to the Court of Final Appeal. The principal issues that arose in the final appeal essentially turned on the construction of a piece of securities legislation intended to protect the integrity of the markets.
The appellants argued that:
All of the appellants' points of appeal were dismissed by the Court of Final Appeal. While the appellants' appeal was unanimously dismissed, the five judges handed down four judgments between them. On the face of it, the points raised by the appellants appeared complicated. However, the Court of Final Appeal tried to simplify them.
First, the word 'transaction' should be given a wide meaning and includes the different components of dealing in shares – for example, the purchase or sale of shares in order to make a gain or avoid a loss by the misuse of inside information.
Second, properly construed, the words "in a transaction involving securities" in Section 300 mean in connection with or in relation to a transaction involving securities. There is no requirement that the defendants be a party to an impugned transaction. However, had it mattered, it appears that the Court of Final Appeal judges would have been content to proceed on the basis that the appellants had been parties to share dealing transactions.
Third, insider dealing and conduct in contravention of Section 300 are not victimless. In effect, they constitute a fraud on the public. Further, the defendants' scheme clearly came within Section 300 and constituted a fraud or deception practised on the counterparty to the impugned transaction. Section 300 was not confined to shares listed in Hong Kong.
The outcome of this case, which was widely anticipated, is an outright win for the SFC. The courts in Hong Kong (particularly the appeal courts) in a series of recent cases have taken a purposive and wide interpretation of local securities legislation given the mischiefs of insider dealing or transactions carried out by means of fraudulent or deceptive conduct.
Section 300 is wide. In effect, it catches any person who plays a part in any transaction involving shares or regulated trades where the misuse of inside information occurs in Hong Kong, irrespective of whether the execution of the transaction takes place on an overseas stock exchange.(2) This is not to state that the section has extra-territorial effect – it does not. There must be some nexus between a defendant's conduct and Hong Kong.
Armed with these two important provisions of the ordinance (Section 291 on insider dealing and Section 300) the SFC's Section 213 armoury has become more extensive.(3) The SFC can pursue these market transgressions itself and does not need to wait for a prosecution and a finding in a criminal court.(4)
To date, Section 213 proceedings commenced by the SFC have resulted in significant restorative (compensation) orders and huge legal bills for those found to be in contravention (whether they be located in Hong Kong or overseas).
For further information on this topic please contact Ben Yates or Warren Ganesh at RPC by telephone (+852 2216 7100) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(3) The Court of Final Appeal's judgment makes it clear that, where criminal proceedings are commenced, insider dealing with respect to locally listed shares should be pursued under Section 291 and not Section 300 of the ordinance.
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