SFC "TCOB"

Just like this Industry Insights, a Securities and Futures Commission ("SFC") 2018 year end litigation report might well be (sub-)titled "Taking Care Of Business". The expression might resonate with some of the higher-ups in the SFC's enforcement division.

There were a number of year end "highlights".

In the landmark judgment of the Court of Final Appeal ("CFA") in SFC v Lee & Ors [2018] HKCFA 45, the CFA considered the ambit of s. 300 of the Securities and Futures Ordinance (Cap. 571); in short, transactions involving securities or other regulated trades using allegedly fraudulent or deceptive conduct.

The CFA held that the word “transaction” should be given a wide meaning given the context and purpose of s. 300. It is a general provision that makes it an offence to engage in fraudulent conduct in securities transactions. The word "transaction" includes steps taken with a view to profit or to avoid loss by misusing inside information; for example, such as opening a securities trading account and giving instructions for the purpose of trading in securities.

While the appellants' conduct in issue in the appeal did not contravene s. 291 of the Ordinance (insider dealing), because the shares in question were not listed in Hong Kong, the impugned transactions were carried out through means of fraud or deception.

Therefore, where a person plays a part in any transaction involving securities or regulated trades and the disclosure or misuse of inside information occurs in Hong Kong (whether with respect to securities listed in Hong Kong or on an overseas stock exchange) that person risks: (i) criminal prosecution in Hong Kong; (ii) civil proceedings brought by the SFC, pursuant to s. 213; or (iii) both.

In SFC v Yiu & Ors [2018] HKCFA 44, the main issue for the CFA was whether, on the findings of the Market Misconduct Tribunal, it was correct as a matter of law to hold that the two principal respondents were entitled to rely on a section 271(3) defence; namely, the "innocent purpose" defence. In allowing the SFC's appeal against the decisions of the MMT and the Court of Appeal, the CFA (among other things) disapproved of the argument that a so-called "behind closed doors" justification provided a basis for exoneration under s. 271(3) – thereby, limiting an "innocent purpose" defence.

In SFC v Cheng [2018] HKCA 590, the Court of Appeal allowed the SFC's appeal and remitted the matter back to the MMT for a determination of whether the respondent had "dealt" with the shares in question. The case is an example of circumstantial evidence that might give rise to an inference of an alleged "dealing". The appeal judgment also reiterates the inquisitorial nature of a MMT inquiry, where the focus is not on a burden of proof but on the SFC presenting its case and the MMT determining issues based on a civil standard of proof.

These cases represent significant successes for the SFC. They also help illustrate the SFC's enforcement priorities. The market regulator has proven true to its word a few years back that it intends to pursue alleged wrongdoers "wherever in the world they may lurk". As some might say in the trade – "taking care of business".

Editorial Note – Also see Moody's Investors Service Hong Kong Ltd v SFC [2018] HKCFA 42; another overall success for the SFC.

The information provided here is intended to give general information only. It is not a complete statement of the law. It is not intended to be relied upon or to be a substitute for legal advice in relation to particular circumstances.

Jurisdictions: 

Senior Consultant, RPC

Partner, RPC