A parallel civil-criminal regime
The Securities and Futures Ordinance (Cap 571) (SFO) came into force in 2003 and introduced a dual civil and criminal regime for market misconduct. The civil regime is set out in Part XIII of the SFO, while the criminal regime is found in Part XIV. The SFC and HK Government have noted that in deciding whether to pursue the civil or criminal route, the decision is based on sufficiency of evidence and if prosecution is in the public interest.
Reference: Market Misconduct Tribunal
The SFO expressly provides for ‘double jeopardy’: a person cannot be tried twice under the civil and criminal regimes for the same facts.
Criminal cases are initiated in the Magistrates’ Court and progress towards the High Court depending on the severity of the offence. The Market Misconduct Tribunal (MMT) consists of a chairman who must be a judge and two other members who must not be public officers (these individuals tend to be from the legal, accounting and business professions).
Reference: Section 251 of the Securities and Futures Ordinance (Cap 571) (SFO)
The SFC may institute proceedings before the MMT by notice in writing if it appears that market misconduct has or may have taken place. The MMT will hear and determine any issue arising out of such proceedings.
Reference: SFO, s 252
For further reading, see ‘Butterworths Securities Handbook – 4th edition’.
Insider dealing
SFO, s270 and s291 sets out seven circumstances which insider dealing occurs. Typically insider dealing takes place when a person connected with the company with inside information deals, or counsels or procures another person to deal, in the listed securities or derivatives of the company, or discloses inside information to others.
Reference: SFO, s 270 (1), s291(1)
A ‘connected person’ is widely defined and includes directors, employees, substantial shareholders as well as individuals who have a professional or business relationship with the listed corporation.
Reference: SFO, s 247, s287
‘Inside information’ includes specific information about a listed company, one of its shareholders or officers or the listed securities of the company or its derivatives which is not generally known but if known would likely materially affect the company’s share price.
Reference: SFO, s 285
If found guilty of insider dealing, an individual faces a fine of HK$10 million and imprisonment of up to ten years on indictment, or a HK$1 million fine and imprisonment of up to three years on a summary conviction.
Reference: SFO, s303
They may also face a disqualification order, a restriction order banning a person from dealing in securities, a disciplinary referral and are also liable to pay a sum equal to the profit gained or loss avoided to the government. These penalties apply to all market misconduct offences.
There are a number of statutory exemptions to insider dealing set out in the SFO. These involve situations where ‘insiders’ were not taking advantage of the availability of the information.
References:
SFO, s 271, s 292
SFO, s 272, s 293
SFO, s 273, s 294
False trading
There are four types of false trading:
- creating the appearance of active trading
- creating or maintaining an artificial price
- wash sales (transactions which do not result in a change of beneficial ownership)
- matched orders (transactions that ‘match’ the price and quantity as an individual’s own dealing)
Reference: SFO, s 274, s295
An individual commits an offence where they intentionally or recklessly do anything that creates the effect of a false market and will cover trading pools and churning (where traders holding shares in a particular company continue to make buying and selling orders to increase turnover).
SFO, s274(5) and s295(5) introduce a deeming provision whereby a person who engages in an on-market “wash sale” or “matched order” is presumed to have done so intentionally or recklessly as to whether, his conduct creates or is likely to create a false or misleading appearance of active trading, the market for, or price of, the securities
Price rigging
Two kinds of price rigging are prohibited under the SFO:
- wash sales that maintain, increase, reduce, stabilise or cause fluctuations in the price of securities
- fictitious or artificial trades that maintain, increase, reduce, stabilise, cause fluctuations in the price of securities, whether conducted intentionally or recklessly
Reference: SFO, s 275, s 296
Disclosure of information about prohibited transactions
Prohibited transactions includes any conduct or transaction which amounts to market misconduct or a contravention of provisions in Part XIV of the SFO, including insider dealing, false trading, price rigging and other forms of market misconduct.
Reference: SFO, s 276, s 297
Any disclosure of market misconduct by a party to the misdeed or the person who has benefitted from it is thus prohibited.
It is a defence if a person can establish that the benefit which he or his associate has received or expected to receive was not from a person involved in the prohibited transaction; or the benefit he or his associate has received or expected to receive, was from a person involved in the prohibited transaction, but up to (and including) the time of disclosure, circulation or dissemination of the information he has acted in good faith.
Reference: SFO, s 276(2), s297(3)
Disclosure of false or misleading information
The intentional, reckless or negligent circulation or dissemination of false or misleading information likely to induce another person to subscribe for securities, or deal in futures contracts, induce the sale or purchase of securities by another person to maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts is prohibited.
Reference: SFO, s 277, s298
There are exemptions available for those who issue or reproduce information in the ordinary course of a business. Likewise, if the information is re-transmitted or broadcast live in the ordinary course of business, there are exemptions available. A common example are publishers and printers who reproduce information supplied by others.
Reference: SFO, s 277(2), s298(3)
Stock market manipulation
Stock market manipulation takes place where two or more transactions have the effect or likely to have an effect of increasing, reducing, maintaining or stabilising the price of securities with the intention of influencing another person’s investment decisions.
Reference: SFO, s 278, s 299
The typical scenario is where individuals buy securities to prevent a decline in the stock’s share price.
Civil remedies for market misconduct
An individual who commits the above market misconduct offences is also liable to pay compensation by way of damages to any other person who sustained a pecuniary loss.
Reference: SFO, s 305
There is also potential liability for furnishing materially false or misleading communications regarding securities and futures contracts for people who incurred a loss as a result of relying on these communications.
Reference: SFO, s 391
The SFC has also sought injunctions, restraining orders and remedial orders as a freestanding avenue of civil redress (that is separate from the civil and criminal routes mentioned above).
Reference: SFO, s 213
Disclosure of inside information
The SFO was amended a number of times to add a statutory requirement that listed corporations disclose price sensitive information (PSI) in a timely manner. A breach of the requirement for disclosing PSI amounts to a civil offence, and listed companies and their directors are liable on conviction to a fine of up to HK$8 million.
Reference: SFO, s 307N
Under Part XIVA of the SFO, listed corporations must disclose PSI as soon as reasonably practicable when the information has come to the knowledge of an officer of the company.
Reference: SFO, s 307B
The SFC has issued guidelines as to what constitutes inside information in this respect. Typical events or circumstances which would trigger an obligation to disclose PSI include:
Reference: Guidelines on Disclosure of Inside Information
- changes in performance, or the expectation of performance of the business
- changes in financial condition
- changes in control
- changes in directors
- changes in directors’ service contracts
- changes in auditors
- changes in share capital
- the issue of debt securities, convertible instruments, options or warrants
- takeovers and mergers
- purchase or disposal of equity interests or other major assets
There are a number of ‘safe harbours’ against disclosure, including situations where:
- disclosure is prohibited by a court order
- the information is sensitive and involves an incomplete negotiation
- it is a trade secret, or
- it concerns liquidity support by a central bank
Reference: SFO, s 307D
The Listing Rules
Orderly conduct of the markets is also governed by the Stock Exchange of Hong Kong’s (SEHK) Listing Rules. Although the rules lack statutory backing, issuers face disciplinary actions for breaches and the SEHK can also make referrals to other law enforcement agencies for conduct which falls inside their jurisdiction.
Reference: Hong Kong Stock Exchange
The SEHK may also direct a trading suspension and, in extreme cases, cancel the listing of the issuer.
Prospectus liability
Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), untrue statements contained in a prospectus attract civil and criminal liability. There is civil liability to compensate investors who rely on untrue statements in a prospectus. This responsibility extends not only to directors but also to promoters of a company and every person who has authorised the issue of the prospectus.
Reference: Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO)
Criminal liability may attach to mis-statements made in respect of a prospectus issued by a company incorporated in Hong Kong. Where a prospectus contains an untrue statement, the person who authorised it (unless it can be shown the statement was immaterial or there were reasonable grounds to believe the statement was true), faces a sentence of up to three years in prison on indictment and a fine of HK$700,000. Where the matter is tried summarily, the maximum sentence is 12 months’ imprisonment and a fine of up to HK$150,000.
Reference: CWUMPO, s 40A
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