Tiger Asia case: No short cut to market misconduct determination

In its recent decision in Securities and Futures Commission v Tiger Asia Management LLC and others (HCMP 1502/2009), the High Court of Hong Kong defined its jurisdiction under section 213 of the Securities and Futures Ordinance (Cap. 571) (SFO) in the context of market misconduct offences. The High Court ruled that the Securities and Futures Commission (SFC) cannot ask the High Court under a section 213 application to determine whether the market misconduct provisions have been contravened; instead it has to go through one of the dual civil and criminal regimes established under the SFO.

This decision has implications for how the SFC approaches cases in the future and may limit the ability of the SFC to pursue potential defendants and their assets overseas. The SFC intends to appeal.

Tiger Asia Management LLC (the 1st Defendant), is a New York-based hedge fund manager specialising in equity investments in China, Japan and Korea with no physical presence in Hong Kong. All of its employees (including Sung Kook Hwang Bill (the 2nd Defendant), Raymond Park (the 3rd Defendant) and William Tomita (the 4th Defendant)) are located in New York.

The SFC alleged that the 1st Defendant to 4th Defendant (together, the Defendants) had committed insider dealing and false trading in two short sales and one long sale of the shares of China Construction Bank Corporation and the Bank of China in December 2008 and January 2009 after receiving price sensitive information from its bankers. Under the SFO, there are civil and criminal regimes for market misconduct offences. If a defendant is prosecuted under one regime, he cannot subsequently be prosecuted for the same offence under the other, i.e. they are mutually exclusive regimes. No formal proceedings in the Market Misconduct Tribunal (MMT) or criminal proceedings had been commenced against the Defendants in relation to these allegations.

In August 2009, the SFC applied to the High Court for injunctive relief against the Defendants, including final orders restraining the disposal of assets and for the account of profits, under section 213 SFO. Section 213 SFO provides the SFC with the authority to apply to and obtain from the High Court, injunctive and other interim relief, and sets out the procedure for the application of such an order.

The SFC sought injunctive relief under section 213 of the SFO by relying on alleged contraventions of Part XIV of the SFO (i.e. the market misconduct offences under the criminal regime). In addition, the SFC sought various declarations from the High Court to the effect that the Defendants had contravened the criminal provisions under sections 291 (insider dealing) and 295 (false trading) of the SFO and, thus, fell within the ambit of section 213 SFO.

The Defendants’ case was that the High Court does not have the jurisdiction to make the declarations sought by the SFC and, therefore, the SFC’s case did not disclose a reasonable cause of action, was an abuse of process and should be struck out.

The SFC referred to various cases in which the High Court had considered applications under section 213 SFO (including cases involving market misconduct offences), but questions of jurisdiction had not been raised in these cases.

The case was heard before Hon Harris J. The issue was how a contravention of a provision in both Parts XIII (the civil regime) and XIV (the criminal regime) of the SFO is established.

In his judgment, Hon Harris J agreed with the Defendants and held that the High Court does not have jurisdiction to make the declarations sought by the SFC, i.e. whether the Defendants contravened sections 291 and 295 SFO.

The judgment sets out a detailed analysis of the legislative intent behind the market misconduct offences (both civil and criminal) under the SFO:

1. Parts XIII and XIV SFO introduced dual track civil and criminal regimes for the purposes of dealing with misconduct in financial markets. The SFO defines various activities as both market misconduct under Part XIII of the SFO (a civil offence) and a criminal offence under Part XIV. These activities include insider dealing and false trading.
2. Following investigations, the SFC may (a) refer potential cases of market misconduct to the Financial Secretary for civil proceedings before the MMT or (b) refer the potential case to the Secretary of Justice for criminal prosecution on indictment. The SFC can prosecute less serious offences itself summarily, subject to the Department of Justice’s right of intervention. The Financial Secretary plays the role of a gate-keeper in respect of the civil proceedings. Only the MMT can find a contravention of the civil offences in Part XIII and the criminal court can find a contravention of Part XIV. Parts XIII and XIV provide the exclusive procedures for determining a contravention of those provisions that appear in both parts of the SFO.
3. Section 213 SFO provides a mechanism for the SFC to obtain (a) interim relief prior to the determination of civil or criminal proceedings or (b) final relief after the conclusion of such proceedings. However, section 213 SFO does not provide any additional route by which the SFC can seek a declaration, i.e. a determination by the High Court of conduct prohibited by Parts XIII and XIV of the SFO. It was not intended to allow the SFC to seek a declaration from the High Court that criminality has occurred.
4. Therefore, the High Court cannot determine any contravention of prohibitions that appear in both Parts XIII and XIV on an application by the SFC pursuant to section 213 SFO as the High Court does not have such jurisdiction.

In an attempt to explain why it did not go through one of the dual civil and criminal regimes under the SFO to establish a contravention, the SFC submitted that this was a clear case of insider dealing that should be prosecuted, but as the Defendants were in New York this had not been possible. By commencing proceedings in the High Court the SFC left open the option to refer the matter to the Department of Justice for criminal proceedings if any of the 2nd to 4th Defendants came to Hong Kong (which the SFC accepted was a remote possibility).

Hon Harris J noted the Defendants’ observation that the SFC simply wished to avoid what it perceived as the slow and cumbersome procedure under Part XIII of the SFO (the market misconduct regime), which could result in many years passing before a determination was reached.

In a subsequent hearing held on 11 July 2011 before Hon Harris J, the SFC argued that despite the High Court’s earlier decision, the High Court could still make the order sought by the SFC under section 213 of the SFO to ban the Defendants from dealing in Hong Kong listed securities and their derivatives on the basis that it appeared to the SFC that the Defendants had breached the SFO or been involved in breaches or may do so in the future. The SFC further argued that the order on the trading ban did not require the High Court to find a contravention and this part of the SFC’s case should not be struck out.

Hon Harris J considered that the SFC had not argued this in the earlier hearing and held that the High Court did not have jurisdiction to make final orders that determine the Defendants’ substantive legal rights on the basis without proof of an actual contravention, ie prima facie evidence of a contravention does not justify a final order. Hon Harris J reiterated his earlier decision that the High Court does not have power to make final orders sought by the SFC under section 213 of the SFO without a prior finding of a breach of the SFO by the MMT or a criminal court.

The whole of the SFC’s proceedings against the Defendants were therefore struck out.

The SFC has announced that it challenges the High Court’s decisions and intends to appeal.

It is not mentioned in the judgment whether the SFC has considered or is considering the possibility of extraditing the 2nd to 4th Defendants to Hong Kong for prosecution under the Agreement for the Surrender of Fugitive Offenders between Hong Kong and the United States of America, which came into force in 1998 and covers offences relating to securities trading.

Whilst it was held that the High Court does not have jurisdiction to make declarations of contraventions of prohibitions that appear in both Parts XIII and XIV SFO, Hon Harris J left open the question of whether the SFC can apply under section 213 for declarations of criminal offences under Part XIV that do not have equivalent civil offences under Part XIII (e.g. the criminal offence involving fraudulent or deceptive devices etc. in transactions in securities, futures contracts or leveraged foreign exchange trading under section 300). It remains to be seen whether Hon Harris J’s comments will be followed up.

The High Court’s decision in the Tiger Asia case has clarified for now that in the context of market misconduct offences, the SFC must go through one of the dual civil or criminal regimes under Parts XIII and XIV of the SFO to establish a contravention. During or following such process the SFC may apply for injunctive relief under section 213 SFO, although it can only obtain interim relief prior to an MMT/criminal court decision, andit cannot circumvent the statutory regimes of Part XIII or Part XIV by applying to the High Court directly for a determination of a market misconduct contravention.