Government deals out odd about-face
It has been panned as toothless and praised as the envy of the world. It has rapped Li Ka-shing on the knuckles and pounded others with HK$47 million in penalties. It has even produced a scandal.
Hong Kong's insider dealing tribunal has a fairly turbulent past. The future however looks to be even more of a roller-coaster ride.
To begin with, the tribunal's worst cases are to be handed over to the criminal courts under the proposed Securities and Futures Bill.
In a brazen about-face by the Government, insider dealing is to be punishable by up to 10 years in jail and a HK$10 million fine.
The logic is somewhat hazy.
For the past 25 years or so, the Government has been adamant that criminalising illicit trading simply would not work in a financial market such as Hong Kong.
Presumably this is why it declined to make a 1974 law criminalising the deed operative. It instead amended the Securities Ordinance four years later to empower a tribunal to carry out civil inquiries.
So why the sudden change of heart now?
It is apparently time for Hong Kong to come into line with the rest of the world. At the same time, regulators hope to send out a stern warning to market misfits. Criminal sanctions serve as a potent deterrent. Or so the theory goes.
In reality, criminal sanctions have been deemed fairly ineffective in most jurisdictions which try to impose them against insider dealers.
The rest of the world is swinging in the opposite direction to Hong Kong: toward civil sanctions.
In Britain, the proposed Financial Services and Markets Act will equip regulators with civil sanctions. This is after a fairly abysmal conviction rate from the criminal courts. In the 20 years to 1998, only 20 convictions were secured. Since 1980, the figure is only 12.
In Australia, the New Chartered Institute of Companies Secretaries recently called for civil tools to fight insider dealing after dubbing the criminal route both 'inefficient and ineffective.'
The United States has a more successful track record - but most cases are settled before they proceed to trial, explains Douglas Arner, assistant law professor at Hong Kong University.
'They do not necessarily plead guilty, but will pay a large fine and agree to desist from any illegal activities.'
Up to 90 per cent of all cases are settled this way. On a civil level, the burden of proof is less onerous.
The problem with proving insider dealing in a criminal courtroom is that there is no smoking gun.
A lack of physical evidence and the need to prove beyond a reasonable doubt what is basically in the mind of a trader makes it extremely tough to convict. Evidence is intrinsically circumstantial.
The beauty of a civil system is that the burden of proof and rules of evidence are not as overwhelming.
'With insider dealing,' said Securities and Futures Commission chief counsel Alexa Lam, 'our regime is effective and has actually been the envy of a lot of other jurisdictions. Why? Because we have built a system whereby the tribunal can develop the evidence as the hearing goes along.
'Whereas in other countries, such as the US or UK for instance, they started with criminalising insider dealing and it is almost impossible to prove [to a criminal standard].'
Even Hong Kong's own insider dealing chairman fears criminal sanctions may be futile. Mr Justice Michael Hartmann warned recently that convictions would be rare. He urged the Government to consider only cases involving a high degree of moral culpability for trial.
The judge also warned of the 'cheap option' - pursing a case simply because the accused has confessed and insider dealing is easily provable.
The tribunal under Mr Hartmann is widely viewed as having finally found its feet after a rocky few years.
This tempestuous past includes the Paragon 'sorry saga', in which a former chairman was slated by the courts for conducting illicit proceedings and for asking the tribunal counsel to ghost-write the final report.
The tribunal has also been criticised for taking too long, for its associated costs and relatively small caseload.
Other tribunal findings have been challenged in the courts - either because of questionable remarks made by tribunal members or because of the severity of the fines imposed.
It could be argued, however, that the court challenges are all part of the tribunal's evolution.
Having overcome most of them, the body seemed finally to bare its teeth most recently in
the Hanny Magnetics (Holdings) case, in which penalties of HK$47 million were levied on former chairman Wong Sun.
If you want to hit someone hard in Hong Kong, the pocket is always a good bet. The tribunal exercised its right to impose fines of up to three times the profit made or loss avoided as a result of insider dealing. This arguably is its most powerful weapon.
Under the new securities legislation however, it will be stripped away: a move dubbed by critics as 'taking the bullet out of the gun'.
Instead, a market misconduct tribunal (MMT) will punish insider dealers with the 'cold shoulder' and 'cease and desist' orders, decidedly softer sanctions than the hefty penalties.
Again, the Government's rationale is fuzzy. Citing developing jurisprudence in the European Court of Human Rights, the administration argued that it would be improper to impose such a fine in a civil context with such low rules of evidence. It could indeed be construed as 'criminal.'
Interestingly, it has been none other than the Hong Kong Bar Association to baulk at such a bitter pill. The Bar has further called the Government's motive into question. Is it simply criminalising to make up for the fact that the MMT will be losing its most effective weapon?
It has urged the Government to go public with the legal advice - as yet unpublished - it gleaned from independent counsel to back up its decision.
'Only then can the case law and arguments in the advice be properly addressed,' the association said.
The Bar wants the penalties to remain firmly in place.
'Such change will dramatically alter the effectiveness and deterrent value [of the tribunal],' it said.
Such criticisms do not bode well for the new tribunal.
Factor in the utter lack of support for criminal sanctions or faith in the courts' success.
It does not exactly scream 'recipe for success' for our regulators attempting to put the hard squeeze on illicit trading. Far from it. At this rate, the only thing they will be tightening is their seat belt. Insider dealers, take heart.