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Legal Update

CFA Confirms SFC's Broad Powers on behalf of Victims of Market Misconduct

21 May 2013
Mayer Brown JSM Legal Update

The Court of Final Appeal (CFA) has confirmed the Securities and Futures Commission (SFC) can obtain wide-ranging relief under section 213 of the Securities & Futures Ordinance (Cap 571) (SFO), including freezing injunctions, before and independent of any Market Misconduct Tribunal or criminal proceedings.

On 10 May 2013, the CFA handed down its Reasons for Judgment in Securities and Futures Commission v. Tiger Asia Management LLC and Others (FACV Nos. 10, 11, 12 and 13 of 2012). The appeal by Tiger Asia Management LLC, a hedge fund, and three of its officers (the Tiger Asia parties) was unanimously dismissed by the CFA. Hong Kong's highest court held that the Court of First Instance has jurisdiction to make expedited final orders under section 213 of the SFO on the basis of a contravention of the insider dealing provision under the SFO, without a prior determination by the Market Misconduct Tribunal (MMT) or a criminal court.

Background to the Tiger Asia Case

In August 2009, the SFC applied to the Court of First Instance seeking relief under section 213 of the SFO. Section 213(2) of the SFO gives the Court of First Instance the power to make various orders, including: injunctions (which includes freezing injunctions); orders to direct a person to take steps to restore the positions of the parties to any transaction; orders to appoint an administrator of property; and/or orders to declare contracts void.

In this case, the SFC alleged that in December 2008 and January 2009, the Tiger Asia parties entered into transactions which contravened the insider dealing provision under the SFO. However, before the Court of First Instance determined the allegations by the SFC, the Tiger Asia parties applied to strike out the SFC's case. They did so on the basis that, in the absence of a prior determination by the MMT or a criminal court of there having been a contravention of the insider dealing provision, the Court of First Instance did not have jurisdiction in an application under section 213 of the SFO to determine whether there is such contravention and make final orders.

At first instance, the Court of First Instance agreed with the argument of the Tiger Asia parties and struck out the SFC's application. However, the Court of First Instance's decision was reversed by the Court of Appeal. For more information about the Tiger Asia case and the Court of Appeal's decision, please refer to our earlier legal update, "Tiger Asia: Court of Appeal Gives the SFC Sharper Claws to Fight Market Misconduct".

Decision of the Court of Final Appeal

Lord Hoffmann, who delivered the judgment of the CFA, entirely agreed with the reasoning and conclusion of the Court of Appeal. The CFA held that the words "where a person has contravened any of the relevant provisions" in section 213(1) of the SFO, which is the pre-condition for the Court of First Instance to make the orders in section 213(2) of the SFO, should not be construed to mean "where a person has been found by a criminal court or the MMT to have contravened any of the relevant provisions". Criminal proceedings and the MMT are not jointly exhaustive of the procedures by which market misconduct may be determined. The CFA also held that section 213 of the SFO serves to provide remedies for the benefit of parties involved in the impugned transactions and in proceedings under section 213 of the SFO, the SFC acts as a protector of the collective interests of the persons dealing in the market who have been injured by market misconduct.

In addition, in response to the arguments raised by the Tiger Asia parties, Lord Hoffmann stated that if a court has found that there is a contravention of the provisions under the SFO, it may make a declaration to that effect if it would be appropriate and useful to do so.

Conclusion

The SFC often commences proceedings pursuant to section 213 of the SFO to obtain, among other things, freezing injunctions, before prosecuting through the criminal court or proceedings in the MMT. This preserves the assets of the persons suspected of having contravened the provisions under the SFO for the purpose of unwinding and providing relief to those who have suffered loss as a result of the impugned transactions.

The judgment of the CFA removes any doubt that the SFC has an additional and separate power under section 213 of the SFO which strengthens its ability to provide protection for investors in the market. This is especially important to the SFC in cases where the persons alleged to have contravened the provisions under the SFO are outside Hong Kong, and may therefore be difficult or impossible to prosecute. However, there are limitations to which such orders against foreign parties may be possible. For further details, see our earlier legal update, "SFC's Powers to Fight Market Misconduct Returns to the Spotlight".

As the question before the CFA was on jurisdiction only, the CFA did not consider the circumstances in which the Court of First Instance should make the orders listed in section 213(2) of the SFO. Further clarification on the scope and application of SFC claims under section 213 of the SFO can be expected.

For inquiries related to this Legal Update, please contact Susanne HarrisWilson Fung or your usual contacts with our firm.

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