Section 213 – SFC Does It “Its Way”

As new and old Presidents move in and out of a “White House” and a “Blue House” respectively, to the tune of the song “My Way”, the Securities and Futures Commission in Hong Kong is doing things its way – particularly, as regards its fight against market misconduct type activity. This is no better demonstrated (for now) than by the SFC’s recent “s. 213” civil proceedings against China Forestry Holdings Co Ltd, two of its co-founders, two co-sponsors and former auditors, with respect to events said to have arisen in connection with the company’s IPO in 2009.

In January 2017, the SFC issued its writ of summons, pursuant to s. 213 of the Securities and Futures Ordinance (the “Ordinance”), seeking a number of injunctive and/or restorative type orders against the various defendants (or one or more of them)*. It is important to note that the proceedings are civil in nature and are quite different to proceedings in a criminal court or proceedings before the Market Misconduct Tribunal (“MMT”). Criminal proceedings involving market misconduct are generally prosecuted by the Department of Justice, although (as an alternative) the SFC can institute proceedings before the MMT (s. 252 of the Ordinance). Criminal proceedings can be problematic with respect to (for example) defendants who are not in the jurisdiction (and require a higher standard of proof); MMT proceedings are not generally known for their speed.

Ever since the landmark decision of the Court of Final Appeal in SFC v Tiger Asia Management LLC & Ors (2013) 16 HKCFAR 324, s. 213 civil proceedings offer the SFC a third option in order to pursue alleged transgressors. As some readers will recall, the Tiger Asia case decided that the Court of First Instance can make a determination in civil proceedings commenced by the SFC that a person has committed acts that contravene the relevant provisions of the Ordinance and, as a result, make certain final orders without there first being a finding of market misconduct by a criminal court or the MMT.

At the time, the Tiger Asia case was thought to be a ground-breaking decision and it has proved to be. The SFC has since generated something of an industry by its use of s. 213 proceedings in the civil courts. At the time of writing, the SFC’s writ in the China Forestry Holdings matter is one of the latest salvos, pursuant to s. 213 of the Ordinance, in its attempt to obtain final orders against alleged transgressors and/or to seek redress on behalf of those investors said to have lost out as a result of alleged market wrongdoing. What makes the writ unusual is that besides the normal principal targets (such as former directors) it names the co-sponsors and former auditors as additional defendants.

None of this is to suggest that s. 213 proceedings are without their difficulties. It will be interesting to see how (if at all) the SFC seeks to justify the grant of final orders based on any alleged wrongdoing on the part of professional service providers. Furthermore, s. 213 civil proceedings may be a “third way” but sometimes they may also be an acknowledgment that the SFC’s regulatory jurisdiction often stops at certain borders. As some seek to build walls in certain parts of the world, the SFC is seeking to work around them.


* HCA No. 117 of 2017, 16 January 2017. Also see SFC’s legal proceedings – (i) for an “interim order” in the matter of a Ms Yik Fong Fong (SFC’s press release, 3 February 2017); and (ii) pursuant to s. 214 of the Ordinance, against various parties in the matter of Hanergy Thin Film Power Group Ltd (SFC’s press release, 23 January 2017).

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