On 26 September 2022, the Court of First Instance (“CFI”) dismissed a judicial review application against the Securities and Futures Commission (“SFC”) regarding the issuance of restriction notices (“RNs”) in an investigation into a suspected market misconduct in respect of shares in WMCH Global Investment Ltd, stock code: 8208 (“WMCH”). Click here to read the full judgment of Tam Sze Leung & Ors (Applicants) v Secretary for Justice and Securities and Futures Commission [2022] HKCFI 2330.
What was the SFC’s investigation about?
The suspected activity was a large-scale ‘Ramp and Dump Scheme’, which is a form of unlawful market manipulation where perpetrators use various dishonest means to “ramp” up the share price of a listed company and “dump” the shares onto retail investors at an artificially high price.
From the date that WMCH was listed to 9 September 2020, WMCH shares had been trading within the range of HK$0.27 and HK$0.4. Between 10 September and 25 November 2020, the SFC suspected that the syndicate members ramped up the price of WMCH shares to an artificially high level – the share price rose from HK$0.315 to HK$3.27 (at its peak), representing a price surge of 938% over the period of 51 trading days.
On 25 November 2020, after the SFC executed search warrants at the residential premises of the 1st and 2nd Applicants, the suspected syndicate members began to offload their holdings in WMCH shares, which plunged to HK$0.26 on 26 November 2020, a drop of 92% from the close on the previous day. It was suspected that the Applicants were part of the scheme.
In March 2021, the SFC issued RNs to a total of 15 licensed corporations (“LCs”) in relation to 32 trading accounts held by 26 individuals, including the three Applicants. Their assets totaling more than HK$35 million were frozen. The RNs were in effect up to the time of the hearing, i.e. more than 16 months.
What is a RN?
The SFC is given powers under Sections 204 through 207 of the Securities and Futures Ordinance (“SFO”) to issue RNs. Sections 204, 205, and 206 of the SFO authorize the SFC to impose prohibitions or requirements on LCs in relation to restriction of business, restriction on dealing with property and maintenance of property. Section 207 of the SFO specifies circumstances in which the prohibition or requirement under Section 204 to 206 may be imposed. A relevant subsection to this case is subsection (e):
- Imposition of prohibition or requirement under section 204, 205 or 206
The Commission may impose a prohibition or requirement under section 204, 205 or 206 in respect of or with reference to any licensed corporation if it appears to the Commission that—
….
(e) the imposition of the prohibition or requirement is desirable in the interest of the investing public or in the public interest.
What was the basis of the judicial review application?
The Applicants challenged the use of RNs by the SFC to freeze their assets. The Applicants argued that the powers under section 204(1)(a) and 205(1) interfere with their property rights guaranteed by Article 6 and Article 105 of the Basic Law.
They alleged that the powers were unconstitutional on two grounds, namely, (1) they were not prescribed by law; and (2) the powers were unproportional.
What was the CFI’s view?
Although Coleman J agreed that the administrative intervention powers granted to the SFC are “highly intrusive” to individual property rights under Articles 6 and 105 of the Basic Law, he ultimately found that Sections 204 and 205 of the SFO, when invoked on the basis of Section 207(e) of the SFO, satisfy the “prescribed by law” requirement. The reasons include, but are not limited to, the following:-
- The SFO provides sufficient statutory context to the meaning of “public interest” in Section 207(e) of the SFO;
- The review mechanism in the Securities and Futures Appeals Tribunal (“SFAT”) provides an infrastructure which is conducive to the gradual development or clarification on the meaning of section 207(e). Further assistance or development may come from Court decisions, either on appeal from the SFAT or in judicial review; and
- While there is no time limit for RNs and periodic reviews of RNs are not legally required, the SFC, as a public authority, is subject to public law control. The SFAT also has the power to review and decide the reasonableness of the duration of a RN.
As to the second challenge, the Court acknowledged that the restriction or limitation temporarily deprives a client of a LC access to funds, RNs preserve the status quo of matters pending the outcome of investigations. Therefore, the power to restrict or limit pursues a legitimate aim. Paragraph 187 of the Court’s judgment reads “The restriction or limitation is on balance no more than is necessary to accomplish that legitimate aim, and strikes a reasonable balance between the societal benefits of the encroachment and inroads made with the constitutionally protected rights of the individual, and does not result in an unacceptably harsh burden on the individual.”
Interestingly, these applicants were the same applicants that challenged the constitutionality of the “No Consent Regime” – click here to read our earlier article on this topic. One cannot help but wonder if the Applicants believe that the judicial review route is a possible “get out of jail free” card when caught between a rock and a hard place, lawfully speaking.
Click here to read the SFC’s enforcement news covering the Court’s decision.