Hong Kong has a dual civil and criminal regime for market misconduct in Hong Kong. The Securities and Futures Ordinance (Cap 571) (SFO) identifies six offences, namely insider dealing, false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transactions, and stock market manipulation. Traditionally, the maximum criminal penalties on conviction on indictment are a fine of HK$10 million and imprisonment for ten years.
For market misconduct proceedings, the Market Misconduct Tribunal (MMT) can impose various orders on individuals, including a disqualification order, a cold shoulder, a cease and desist order, or a disgorgement and costs order. The MMT can also impose a fine, and the SFC may bring action for remedial orders in respect of investors who suffer losses as a result.
Stock market manipulation
Stock market manipulation occurs where a person enters into or carries out two or more transactions in the securities of a corporation which increase/reduce/maintain the price in any securities with the intention of inducing another to sell, or refrain from purchasing securities.
References:
Section 278 of the Securities and Futures Ordinance (Cap 571) (SFO)
SFO, s 299
False trading
This is a form of market misconduct where a person intentionally or recklessly creates a false or misleading appearance of active trading in securities or futures contracts in Hong Kong or another overseas market.
References:
SFO, ss 274 and 274(1)(a)
SFO, s 295
The mens rea of false trading was considered in Securities and Futures Commission v Liang Jiang [2013] HKEC 807. The defendant had been accused of purchasing shares in a listed company to push up the price of the shares, in effect creating a false or misleading market for the shares. The prosecution had alleged he was trying to ‘mark the close’ for the value of the shares. The defendant however explained his conduct as a desire to attempt to balance the allocation of shares in his fund’s portfolio. The magistrate found as a fact that the defendant knew the share purchase on the last trading days would boost the share price but accepted that it was probably the case he was doing so to carry out portfolio rebalancing for the fund, a process which is applied regardless of market conditions. The magistrate said that he could not be satisfied beyond reasonable doubt that the defendant had the intention that his bid orders to purchase shares had, or were likely to have, the effect of creating a false or misleading appearance of the market for, or the price for dealings in the shares. The court upheld the decision.
Another form of improper trading is ‘matched orders’ where a person, sometimes in concert with others, makes matching buy and sell orders for the same security for approximately the same price and quantity, to give the appearance of active trading in that security. On the other hand, ‘wash sales’ involve no change of beneficial ownership in shares. Unless the transaction in question is off-market, anyone who carries out a sale or purchase where there is no change in beneficial ownership of shares shall be conducting false trading. Both ‘matched orders’ and ‘wash sales’ create an illusion of a genuine market for securities. A defendant may make use of a statutory defence by showing that the purpose(s) for which he committed the act did not include creating a false or misleading appearance of active trading in the securities.
References:
SFO, ss 274(5)(a)-(c)
SFO, s 295(6)
Price rigging
Price rigging occurs when a person in Hong Kong or elsewhere directly or indirectly engages in a wash sale of securities or engages in any fictitious or artificial transaction which maintains, increases, reduces or stabilises (or causes fluctuations in) the price of securities or futures.
References:
SFO, s 275(1)
SFO, s 296(1)
Similar to wash sales, a person defending a case of price rigging may vindicate himself by establishing that the purpose for which the securities were sold or purchased was not to create a false or misleading appearance with respect to the price of securities.
Disclosure of information about prohibited transactions
A prohibited transaction is any conduct or transaction which constitutes market misconduct, including insider dealing, false trading and price rigging. Disclosure of information about prohibited transactions takes place when a person discloses, circulates or disseminates (or authorises or is concerned in the disclosure of) information to the effect that the price of securities will be maintained, increased, reduced or stabilized (or likely will be) because of a prohibited transaction. The individual or an associate in this case would have entered into the prohibited transaction or expects to receive a benefit as a result of the disclosure, circulation or dissemination of the information.
References:
SFO, s 276
SFO, s 297
Disclosure of false or misleading information inducing transactions
Under SFO, Pt XIVA companies have continuous disclosure obligations and must announce any price sensitive information as soon as reasonably practicable.
Disclosure of false or misleading information inducing transactions takes place when a person discloses, circulates, disseminates (or authorises or is concerned in the disclosure of) information that is likely to induce another to subscribe for securities or deal in futures contracts, induce the sale or purchase of securities or maintain, increase, reduce or stabilise the price of securities or futures if the information is false, misleading and the person knows it (or is reckless or negligent). This applies irrespective of the location of the person who disseminates the information.
References:
SFO, s 277
SFO, s 298
Conspiracy to defraud
Certain types of market manipulation could be dealt with under the common law offence of conspiracy to defraud. In Mo Yuk Ping v HKSAR [2007] 4 HKC 107, the prosecution alleged that the defendants created a false picture of active trading in the shares of a publicly listed company, Shanghai Land Holdings Limited. The defendants did this to maintain the market price of Shanghai Land shares at a specific level in order to avoid payments falling due under a loan agreement. Through a series of trades, the defendants sought to keep the share price of Shanghai Land above the level where repayment of the loan or a ‘margin call’ would be triggered.
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