November 03, 2023

Hong Kong Court of Final Appeal Confirms the SFC’s Extra-territorial Reach

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Other Author      Sara Troughton, Professional Support Lawyer (Litigation)

The Hong Kong Court of Final Appeal (CFA) has ruled that the Securities and Futures Commission (SFC) did not have to obtain permission from the Court of First Instance (CFI) to serve proceedings on overseas defendants out of the jurisdiction in actions under section 213 of the Securities and Future Ordinance (SFO) for allegedly engaging in false trading in contravention of section 274 of the SFO. This is because the combined effect of sections 213 and 274 of the SFO expressly contemplates proceedings being brought against persons who are suspected of engaging in false trading “in Hong Kong or elsewhere”. Please see the CFA’s judgment and the SFC’s announcement.

In more detail:

  • The SFC alleges that a syndicate has orchestrated a scheme of false trading in the shares of a Hong Kong listed company, Ching Lee Holdings Limited. It is estimated that some 896 market participants suffered an aggregate loss of over HK$101.28 million and the scheme generated profits of around HK$124.99 million. The syndicate includes six defendants who are outside of Hong Kong – two individuals reside in the United States and certain companies are incorporated in the Cayman Islands, Delaware and the Seychelles.
  • The SFC first obtained permission from the CFI to serve proceedings upon the overseas defendants, but this was later challenged by the overseas defendants who argued that the CFI in fact lacked jurisdiction over them and that the SFC’s claims do not fall within any of the “gateways” set out in the Rules of the High Court. The overseas defendants appealed and the lower courts upheld the granting of permission.
  • When the appeal came before the CFA, the judges clarified that the SFC did not need to obtain the CFI’s permission to serve proceedings upon the overseas defendants outside of Hong Kong. This is because section 274 of the SFO expressly applies to persons who have engaged in false trading “in Hong Kong or elsewhere” as long as that person has done or caused an act that constitutes false trading affecting the Hong Kong market. Further, if a person engages in false trading, the SFC may, relying on section 213, apply to the SFC for injunction, declaration or other orders (such as restoration order and order to appoint an administrator over properties). These two sections are intended to operate in combination and should be read together.
  • The CFA further remarked that the SFO’s policy of conferring jurisdiction over persons who engage in false trading “elsewhere” that affects the Hong Kong market is “clear and unsurprising”. Since trading on the Hong Kong stock exchange is global, it only makes sense for sanctions to be available against overseas parties who cause losses to Hong Kong investors.

This judgment serves as a helpful reminder that certain market misconduct provisions of the SFO (including false training, price rigging, disclosure of false or misleading information inducting transactions, and stock market manipulation) have extra-territorial reach and that the SFC has broad powers under section 213 of the SFO to take actions against overseas parties in aid of possible Market Misconduct Tribunal proceedings or criminal prosecution, so as to protect the local market in Hong Kong as well as victims of market misconduct.

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