Is the SFC punching hard enough to clamp down on market misconduct?

Hong Kong’s securities regulator has reportedly stepped up its use of criminal proceedings to deter market misconduct in years

By A. Au

Hong Kong’s Securities and Futures Commission (SFC) recently opened proceedings against several individuals for alleged insider trading of a listed property company’s shares. The company’s secretary and chairman’s personal chauffeur are both suspected of instructing friends and relatives to buy the company’s shares on the eve of its announcement of important news, and then selling the shares after the announcement. They made profits of more than HK$200,000 ($25,600) and HK$100,000, respectively.

In the case of eventual convictions, each will likely have to pay fines, cover the SFC’s investigation expenses and could even face prison time. They may ultimately end up losing more than they gained.

Under the existing “dual-track” system, if the SFC initiates criminal proceedings against someone, it will no longer pursue a civil case against the individual. The decision to go down the criminal or civil path is made jointly by the SFC and the Department of Justice. However, in order to strengthen its deterrent power, the SFC is reportedly turning more to criminal prosecutions to combat market misconduct, including the type mentioned above.

For example, the SFC has signed a memorandum of understanding with the Department of Justice to cement terms of their cooperation for criminal cases under the Securities and Futures Ordinance and other pertinent legislation, with a view to ensuring that misconduct is dealt with in a timely and effective manner and that investors in Hong Kong’s securities and futures markets are protected.

Under section 303 of the Securities and Futures Ordinance, a person involved in market misconduct, such as insider dealing, price fixing, false trading or providing false transaction data, is liable for a maximum of up to three years’ imprisonment and a fine of HK$1 million upon criminal prosecution under the Summary Offences Ordinance. For more serious cases, the penalty is up to 10 years’ imprisonment and fines of up to HK$10 million.

One of my law-abiding friends works as a senior executive of a listed company. He once received a notice from the SFC requesting a meeting. He has a duty to attend because, under section 183 of the Securities and Futures Ordinance, the SFC has the power to request any person under SFC investigations or any person believed to be in possession of records, documents or data relating to any offense covered by section 182 (such as market misconduct, breach of disclosure requirements, fraud or misconduct) to meet for an interview at a time and place designated by SFC investigators to answer any questions related to the matter.

Failure to attend the meeting without any reasonable excuse is a criminal offense and carries a maximum penalty of a fine of HK$200,000 and up to one year in prison. Reasonable excuses include failure to receive the SFC’s notice, or if the recipient’s email address is wrong or has been changed.

It all sounds quite serious, but I also told my friend not to be too concerned and suggested he should first determine whether he was a “person under investigation” or a “person assisting an investigation”. If he did not do anything wrong, he was probably only approached to provide information for an individual case. But if he is a person under investigation, then he could quite possibly be suspected of wrongdoing.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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