Hong Kong Regulator's Court Loss Could Prove Hurdle for New Enforcement Focus, says Law Firm

Hong Kong's Securities and Futures Commission ("SFC") should act less like a prosecutor and more like a fair-minded regulator in cases relating to corporate disclosure, a court said. In a key ruling by the Court of First Instance, the Hong Kong regulator lost a disqualification case it had pursued against the former chairman and directors of Inno-Tech Holdings over alleged misconduct that it said had caused the company losses of more than HK$120 million. 

The ruling could prove a hurdle for the SFC's new and more focused enforcement approach, as outlined by its new director for enforcement, Thomas Atkinson, late last year, said law firm Clifford Chance. In a client briefing, the law firm said the ruling also provided reassurance to those under investigation of "the courts' willingness to step in to ensure the interests of justice are served".

The SFC first filed charges against the former chairman and three directors in March 2015, alleging they had breached their duties as directors in relation to the acquisition or disposal of interests in three hotels and a gold mine in mainland China between 2007 and 2010 – resulting in substantial and material losses to the company. 

The proceedings were commenced under s. 214 of the Securities and Futures Ordinance, under which the court could have them disqualified from being a director or being involved in the management of any corporation for up to 15 years. 

As the case was filed more than four years after the alleged misconduct happened, the former chairman and directors requested the SFC to provide a list of the materials it had obtained to pursue the case against them, something the regulator refused to do. 

In its ruling, the Court disagreed with the SFC's approach, saying the standard of discovery in proceedings seeking disqualification should be for a public and not private purpose. It said the SFC's disclosure in disqualification proceedings should "ordinarily include the information and documents it has obtained from the investigation of the transactions that are eventually relied upon and complained of in the disqualification proceedings…".

It also said the SFC's role in such cases was "not a prosecutor bent on securing the disqualification of a respondent" but rather to act as "a fair-minded regulator willing if not anxious to make all materials available for potential use in the trial to ensure a just outcome".

The test for disclosure of documents by the SFC in disqualification proceedings was more akin to that in a criminal, rather than a civil trial, the law firm said. 

The SFC was ordered to file a list within 28 days of documents which are or have been in the SFC's possession, custody or power relating to "any matter in question in proceedings".

"The requirement for the SFC to take a 'generous view' of the relevance of documents for individuals seeking to establish their innocence (at least in disqualification proceedings) marks the most substantial setback for the regulator before the courts in a while," Clifford Chance said in the briefing. 

New Focus

Thomas Atkinson, who was appointed head of enforcement at the SFC in May last year, recently said the regulator would focus its enforcement actions on high-profile cases and holding individual wrongdoers accountable for their misconduct. As part of this effort, the enforcement division will establish a number of teams focusing on corporate fraud, corporate misfeasance, insider dealing, market manipulation and intermediary misconduct, he said. 

The enforcement division has also set up four temporary specialised teams to tackle emerging risks, including a sponsor team that focuses on sponsor misconduct during initial public offerings, a GEM team that investigates irregularities in the Growth Enterprise Market, an AML team that targets know your customer/anti-money laundering control failings and a specific products team to deal with mis-selling of specific investment products. 

Furthermore, the SFC in late December said it would implement a regime for mapping managers in charge of financial firms' regulated activities. Under the new regime, licensed firms will have to submit up-to-date management structure information and organisational charts to the SFC by 17 July 2017.


North Asia editor for Thomson Reuters Regulatory Intelligence. He is based in Hong Kong.