Section 300 of the Securities and Futures Ordinance – “Catch-all Provision”

Securities and Futures Commission v Lee Kwok Wa & Ors, CACV 33/2016, 9 November 2017, is an appeal that arises out of (among other things) the application of s. 300 of the Securities and Futures Ordinance (Cap. 571) to securities listed on a foreign exchange (in this case in Taiwan).

Two of the original defendants and one of the appellants are solicitors and some of the background to the case is mentioned in an Industry Insights for March 2016 (“Solicitors and Inside Information”). As previously noted, the case serves as a reminder to law firms to review their internal policies and procedures concerning “Insider Lists”.

In this case the relevant provisions contravened are said to have included s. 300 of the Ordinance (“Offence involving fraudulent or deceptive devices, etc. in transactions in securities, futures contracts or leveraged foreign exchange trading”). The first instance judgment, thought to be the first reasoned judgment on the scope and application of s. 300, concluded that three of the defendants committed acts in contravention of (among other things) s. 300 with respect to certain transactions involving shares listed on the Stock Exchange of Taiwan.

In the appeal proceedings, one of the principal issues raised was whether s. 300 was engaged where the transactions were carried out on an overseas exchange. Referring to s. 300 of the Ordinance as a “catch-all provision”, the court considered that the proper question was “whether a substantial measure of the activities constituting the contravention of s. 300 took place in Hong Kong” (para. 53 of the judgment). There was no extra-territorial application of the law.

The court noted that the essential elements of s. 300 are the employment of a scheme with intent to deceive or engagement in a deceptive course of business with respect to the impugned transactions. In the court’s opinion, the preponderance of the activities under the scheme or the course of business in question took place in Hong Kong and it did not matter that the final acts in the transactions (such as placing purchase orders and acceptance of a tender offer) took place in Taiwan.

The court concluded by noting that provided a substantial measure of the activities took place in Hong Kong, there was no reason to exclude fraud or deception with respect to securities listed overseas from the application of s. 300(3) of the Ordinance.

The case is yet another example of the SFC’s use of civil proceedings, pursuant to s. 213 of the Ordinance, to obtain declarations that one or more relevant provisions of the Ordinance have been contravened. On the back of such declarations, the SFC can obtain restorative orders and other reliefs. There is also the issue of liability for the SFC’s significant legal costs. The SFC commenced the civil proceedings in 2010.

The court’s confirmation that s. 300 of the Ordinance can apply even where the securities are listed on a foreign exchange may have a broader impact. In particular, there has been recent controversy over trading scams on cryptocurrency exchanges around the world. It will be interesting to see whether the SFC takes action in relation to such scams, where (for example) the digital tokens traded fall within the definition of “securities” and a “substantial measure” of the activities take place in Hong Kong.

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RPC, Senior Associate in Commercial Disputes

Ben Yates is an experienced commercial litigation and arbitration solicitor in RPC’s Hong Kong office. His practice focuses on complex disputes involving cyber law, data protection and fintech, often with a cross-border element.