Hong Kong’s securities regulator won the right to independently seek civil remedies from suspected rule breakers after a court reversed the striking out of its case against hedge fund Tiger Asia Management LLC.
Court of Appeal Judge Robert Tang wrote in a ruling handed down yesterday that such a power “provides much needed ammunition to the commission to protect investors.”
The Securities and Futures Commission has been fighting for the ability to sue for relief before asking the Financial Secretary to bring a civil market misconduct inquiry. Criminal prosecution is a challenging alternative when nearly half of share trading turnover comes from overseas investors, according to the most recent Hong Kong stock exchange data.
Mark Steward, the SFC’s enforcement chief, said the judgment vindicated the agency’s actions in several such cases, which it will “continue to prosecute fairly and vigorously.”
The SFC alleges that New York-based Tiger Asia traded on inside information from bankers arranging placements of China Construction Bank Corp. (939) and Bank of China Ltd. shares in 2008 and 2009, pocketing HK$38.5 million ($4.9 million). The hedge fund firm, which has no employees and physical presence in Hong Kong, denied the allegations in an Oct. 12, 2010 letter to investors.
The decision means the SFC’s case against the hedge fund firm “will proceed,” the regulator said in a statement yesterday without elaborating.
Simon Clarke, a lawyer for Tiger Asia employee William Tomita, said the defendants plan to appeal the case to Hong Kong’s highest court.
Former SFC enforcement head Alan Linning, who represents the hedge fund firm, has argued the regulator can’t use a provision for obtaining temporary freezing orders -- known as section 213 of the Securities and Futures Ordinance -- to bring its own lawsuit seeking to ban Tiger Asia from trading in Hong Kong and to unwind its transactions.
Under Steward, the commission has sought to assert this power in lawsuits against Hontex International Holdings Co. (946), and former executives of China Forestry Holdings Ltd. and Gome Electrical Appliance Holding Ltd.
The SFC is seeking to return to investors HK$1 billion raised by Hontex in a 2009 initial share sale after alleging it disclosed false or misleading information in its listing prospectus. Prosecuting those in charge of the company isn’t possible because they fled to Taiwan or mainland China, Simon Westbrook, a lawyer for the SFC, said in June.
Outside the Jurisdiction
A Hong Kong double jeopardy rule makes criminal prosecution and civil tribunal proceedings mutually exclusive. Tang wrote in the judgment that investor protection shouldn’t “come at the price of forgoing criminal prosecution” where defendants are outside of the jurisdiction.
Almost one in four companies listed in Hong Kong are neither incorporated nor domiciled within the jurisdiction, according to data compiled by Bloomberg. Mainland Chinese companies made up 46 percent of the exchange’s market capitalization through the end of December, according to stock exchange statistics.
“It’s important for the market as a whole to know what the boundaries of the SFC’s powers are,” said Gareth Hughes, a Hong Kong-based disputes lawyer at Ashurst LLP.
The regulator is focused on putting counterparties and other victims of market misconduct back into the position they were in before any questionable transactions took place, Steward said in an interview before the appeal.
“If a person is not in the jurisdiction but their assets are, then the court can decide whether there are grounds to freeze them,” he said. “We can’t say the job is done until victims have been remediated.”
The case is Securities and Futures Commission and Tiger Asia Management LLC, Sung Kook Hwang Bill, Raymond Park, William Tomita, CACV178/2011 in the Hong Kong Court of Appeal.
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