Hong Kong’s securities watchdog is fighting to defend the way it tackles offshore targets after losing the first round of its insider trading case against hedge fund firm Tiger Asia Management LLC.
The Securities and Futures Commission will try next week to overturn a court ruling that it can’t seek civil remedies from New York-based Tiger Asia under a law used to freeze the assets of suspected rule breakers. The regulator has invoked the law in at least three other pending cases.
The legal battle, which both the SFC and Tiger Asia’s founder Bill Hwang have pledged to take to Hong Kong’s top court, will determine whether the agency can sue independently for relief before asking government departments to bring criminal or civil market misconduct cases.
“Their first line of attack has been an injunction to freeze your assets,” said Nick Hunsworth, a disputes partner at Mayer Brown JSM in Hong Kong, of the city’s regulator. “If now they’re being told that wouldn’t work, it would impose on them a radical rethinking of their strategy.”
Though Hong Kong criminalized market manipulation offenses such as insider trading in 2003, prosecuting suspected offenders has been a challenge in a market where overseas investors made up 46 percent of equities trading turnover for the 12 months preceding September 2010, according to the most recent Hong Kong stock exchange data.
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.
“If a person is not in the jurisdiction but their assets are, then the court can decide whether there are grounds to freeze them,” Mark Steward, the SFC’s enforcement director, said in an interview. “Clearly we are attacking some vested interests who have a lot to lose if we succeed.”
Steward said the commission is focused on putting counterparties and other victims of market misconduct back into the position they were in before any questionable transactions took place. “We can’t say the job is done until victims have been remediated,” he said.
Tiger Asia’s lawyers, including Steward’s predecessor at the SFC, Alan Linning, argue 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 the unwinding of transactions and a ban against trading in the local market.
‘Abuse of Process’
Hong Kong Court of First Instance Judge Jonathan Harris agreed with the hedge fund firm, ruling in June that the commission must first seek criminal prosecution or ask the Financial Secretary to start a civil inquiry in a tribunal.
Harris called the SFC’s attempt to bring a market misconduct case to the court an “abuse of process.”
Hong Kong’s Market Misconduct Tribunal doesn’t have specific rules for compelling overseas defendants to answer claims in the city, Steward said.
Furthermore, a Hong Kong double jeopardy law shields defendants from standing in both tribunal and criminal proceedings, a lawyer for the SFC, Simon Westbrook, argued before Harris last year. A claim in the tribunal would immunize the Tiger Asia defendants from criminal prosecution.
“We have remedies here that are predicated on people being within the jurisdiction in Hong Kong,” Steward said.
Chinese Bank Placements
The Court of Appeal is scheduled to hear the SFC’s arguments on Feb. 7. After that, the case could be contested once more in the Court of Final Appeal. Hong Kong was guaranteed an independent judiciary and separate legal system when Britain returned its former colony to Communist-led China in 1997.
One of the so-called Tiger Cubs that received backing from Tiger Management LLC founder Julian Robertson, Tiger Asia and its employees traded on advance information from bankers arranging placements of China Construction Bank Corp. and Bank of China Ltd. shares in 2008 and 2009, the SFC alleged in court filings.
Tiger Asia, which has no employees and no physical presence in Hong Kong, denied the allegations in an Oct. 12 letter to investors. The firm also disclosed that it had received subpoenas from the U.S. Securities and Exchange Commission.
Steward declined to discuss the possibility of seeking extradition from the U.S. for Tiger Asia’s Hwang and officers Raymond Park and Will Tomita for prosecution in Hong Kong.
Morgan Stanley’s Du
“Extradition is something that exists between countries rather than between regulatory agencies,” Steward said. “It’s not a process we can easily tap into.” He declined to elaborate on the hurdles the commission faces.
The SFC has no record of extraditing suspected financial criminals to Hong Kong since its creation in 1989. Convicted former Morgan Stanley managing director Du Jun had fled to mainland China and stood trial on insider trading charges in 2009 only after he traveled back to Hong Kong on his own accord.
Civil actions based on section 213 have been brought by the SFC against Hontex International Holdings Co., as well as former executives of China Forestry Holdings Ltd. and Gome Electrical Appliance Holding Ltd.
Against Hontex, the SFC froze and is seeking to return to investors HK$1 billion ($129 million) raised by the company in a 2009 initial share sale. The regulator alleges Hontex disclosed false or misleading information in its listing prospectus.
Criminal prosecution of those in charge of the company isn’t possible because they fled to Taiwan or mainland China, Westbrook said in June.
Gome, China Forestry
The SFC’s share manipulation case against Gome founder Huang Guangyu and insider trading case against Li Han Chun, China Forestry’s former chief executive officer, have stalled. Both men were detained by Chinese authorities on the mainland.
Steward said the SFC is intent on using the law in Hong Kong to pursue remedies for investors to the fullest extent and that clarification from the courts is healthy and necessary.
Hong Kong legislators have also begun to consider a bill that could empower the regulator to start civil tribunal proceedings in cases involving failures to properly disclose price-sensitive information.
A victory in the Tiger Asia case would give the SFC a broader power to sue targets that would be a significant weapon in its arsenal, Hunsworth said.
“If you come and play in the Hong Kong market and you are accused of doing something wrong, you could immediately be faced with civil proceedings,” he said. “It would make it less inviting for overseas people to remain unlicensed and outside Hong Kong.”
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.