The Court of Final Appeal judgment in the Securities and Futures Commission (SFC) v Tiger Asia case gives the commission more ammunition against market misconduct, by confirming that the SFC can use section 213 of the Securities and Futures Ordinance (SFO) as a third route of enforcement.
“The SFC has successfully demonstrated that section 213 is a versatile enforcement tool against a broad spectrum of market misconduct,” Sharon Nye, a Hong Kong-based senior associate at Hogan Lovells, told China Business Law Journal. “In particular, section 213 has been particularly instrumental in extending the long arm of the SFC against foreign-based wrongdoers.”
“The sanctions available to the SFC under the section 213 procedure can be severe,” Nye said. In the Tiger Asia case, the SFC sought to ban the hedge fund from dealing in Hong Kong indefinitely. “The Tiger Asia case is a warning shot to foreign-based hedge funds trading in Hong Kong. The possibility that section 213 can be used to obtain remedies such as lifelong trading bans have a draconian impact, both on hedge funds and individual traders.
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“Failed Chinese IPOs are also hot on the SFC radar,” Nye continued. “As the Hontex case demonstrates, the SFC will also use section 213 to obtain redress for Hong Kong investors who have suffered losses as a result of poor corporate governance and outright IPO fraud.” Under a conventional view, the SFC can only deal with market misconduct through a dual enforcement regime provided by the SFO, including civil proceedings through the Market Misconduct Tribunal (MMT) or alternatively criminal proceedings through the criminal courts.
The Tiger Asia case is a landmark in a series of test cases the SFC commenced to seek using section 213 of the SFO as a third route of market misconduct enforcement. The SFC accused Tiger Asia, a US-based hedge fund, of insider dealing.
“Traditionally, under the dual enforcement regime enshrined in legislation, the SFC’s hands would be tied – the option of criminal redress effective only if the foreign defendants come within the Hong Kong jurisdiction, or the slow process of pursuing civil sanctions through the MMT,” Nye said.
Also, “the two routes of civil and criminal sanction are mutually exclusive, protecting defendants from potentially facing double punishment for the same impugned conduct”.
In contrast, “with the use of the section 213 mechanism, the SFC can get quick civil sanctions against foreign-based defendants”, Nye said. “Subsequently if the foreign-based defendants for one reason or another come to Hong Kong, then the SFC can reserve its right to bring criminal sanctions as well. That’s the beauty of section 213 – giving the SFC the ability to take two bites of the cherry.”
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