Tiger Asia: Court of Appeal Gives the SFC Sharper Claws to Fight Market Misconduct

The Court of Appeal has confirmed the Securities & Futures Commission (SFC) can apply for relief from the Court of First Instance (CFI) prior to pursuing proceedings in either the criminal court or the Market Misconduct Tribunal (MMT).¹ The decision bolsters the SFC’s weaponry in pursuing those found to have been involved in market misconduct, particularly where traders are located overseas.

Market Misconduct under the SFO

The Securities & Futures Ordinance (SFO) (Cap 571) regulates the securities and futures market in Hong Kong and creates civil and criminal liabilities for those who contravene the SFO.

The SFO creates a mutually exclusive dual civil and criminal regime for market misconduct through which civil offences are generally referred to the Market Misconduct Tribunal (MMT) and more serious misconduct to the criminal courts.

Under Section 213 of the SFO, the SFC can apply to the CFI for a variety of orders, including injunctions and remedial orders, to avoid a transaction or provide restitution where there has been market misconduct.

The Tiger Asia Case

The SFC alleges Tiger Asia Management LLC (Tiger Asia), a hedge fund based in the United States, and some of its employees contravened insider dealing and market manipulation laws when it took short positions in Hong Kong listed companies shares after it received price-sensitive information in 2009.

The SFC commenced CFI proceedings seeking orders pursuant to section 213, including injunctions to freeze the assets of Tiger Asia, remedial orders and declarations the Tiger Asia parties had contravened insider dealing and market manipulation provisions of the SFO.

Tiger Asia contended the CFI had no jurisdiction to make the orders sought - the legislature did not intend section 213 to create a third route, aside from the MMT and the criminal courts, through which persons could be found to have committed market misconduct. An adverse finding had to be made by the MMT or the criminal courts before the SFC could seek the section 213 orders.

The CFI held in favour of Tiger Asia and struck out the proceedings on the basis the CFI had no jurisdiction to determine whether market misconduct had occurred. The SFC appealed the CFI’s decision.

The Court of Appeal’s Decision

The Court of Appeal overturned the decision of the CFI. It held the CFI has the jurisdiction to determine whether there has been a contravention of market misconduct and make orders pursuant to section 213 in the absence of a criminal conviction or adverse finding by the MMT .

The Court of Appeal found the purpose of the MMT and the criminal courts was to deal with the conduct of the wrongdoer. On the other hand, section 213 was remedial in nature and more concerned with handling the consequences of wrongdoing.

In contrast to the mutually exclusive jurisdictions of the MMT and criminal courts, the Court of Appeal held that section 213 are stand alone proceedings and intended to assist the SFC to protect investors and provide remedies for contraventions of market misconduct.

Impact

The reach of the SFC is substantially extended by the Court of Appeal’s decision in the Tiger Asia case. Section 213 proceedings can be commenced before and independent of any MMT or criminal proceedings against the alleged offender. The Court of Appeal’s decision increases the options available to the SFC to obtain wide-ranging relief from the CFI, particularly where traders are located overseas. The Tiger Asia parties had no presence in Hong Kong and are outside the jurisdiction of the Hong Kong criminal courts. But the Court of Appeal’s decision confirms the SFC can apply for section 213 orders which include relief against parties irrespective of their location, and in doing so, creates a significant deterrent to offshore traders who contravene the SFO.

As the Court of Appeal was concerned with the question of jurisdiction only, it remains to be seen whether the CFI will find sufficient evidence of market misconduct to grant the section 213 orders sought by the SFC in the Tiger Asia case.

For inquiries related to this Legal Update, please contact Nick Hunsworth, Susanne Harris, or your usual contacts with our firm.