Damage control not enough, we must rebuild HK's image
So David Li Kwok-po has finally resigned from the Executive Council. The government may very well want this to be the end of the fiasco. Yet, it is not.
Mr Li's resignation is no more than a loss-cutting act. To recoup the loss that Hong Kong has suffered in his case, we need more than that. We need a bold move to rebuild the city's reputation as a fair market.
Why? Read the following:
'In this entrepreneurial city, connections are king and back-room deals are common. So that may help explain the muted reaction this week when a couple linked to a prominent banker was accused of insider trading in Dow Jones & Co stock.' Los Angeles Times, May 2007
'Observers say the [insider trading] problem is not regarded too seriously here, with the market driven by a volatile mixture of gossip and tips to invite comparisons with Hong Kong's horse-racing scene - itself often the subject of rigging charges.' Agence France-Presse, May 2007
'That is clearly aimed at embarrassing Mr Li. It also serves as a warning to gossipy Hong Kong, where tips are not necessarily given with any hope of an immediate return - but obligations can build up over a lifetime of shared information.' The Economist, February 2008
Thanks to Mr Li's celebrity status and the timely leakages by the US authorities, the Dow Jones case has been reported not just by international media but also city papers worldwide. Going down with the reputation of the influential banker is that of Hong Kong.
This is one of the worst things that can happen to our aspiration of becoming an international financial centre.
Sure, many of the Chief Executive's lieutenants will see this as further evidence of their long-held theory of western conspiracy against Hong Kong or even mainland China.
I have no doubt that our competitors will do whatever possible to undermine the credibility of our market for political and financial reasons. Yet, is the criticism fair? Are we doing enough in combating insider trading?
The figures do not speak favourably for us. Of the mergers and acquisitions disclosed between 2004 and 2006, an average of 41.6 per cent involved significant positive abnormal share price returns in the 31-day pre-announcement period, according to a study last year by Dr Brian Ho, council member of the Hong Kong Institute of Company Secretaries.
Neither do the anecdotes offer comfort. In the two weeks before China Cosco Holdings announced its acquisition of its parent's dry-bulk business, its share price gradually traded up 68.7 per cent from its three-month average while its daily volume tripled. This was against a 10.6 per cent rise in the Hang Seng Index.
Similarly, China Eastern Airlines' shares rose 56.9 per cent before investors officially knew the carrier was in talks with a strategic investor.
Against these is the slow progress in insider dealing tribunal cases. The civil tribunal has heard twenty-something cases in its 15 years of existence. All involved trades that took place three to eight years ago. Of the fines levied, about 60 per cent remain unpaid. A securities law in effect since 2003 makes insider dealing a crime, but there has been no prosecution so far.
To be fair, our regulators have not been oblivious to these. They now manage to complete more than 70 per cent of investigations within seven months, against a record of 36 per cent before 2006. They have also begun to seek court orders to freeze alleged insider traders' profits.
Our common-law peers have not been doing very well either. Britain's Financial Services Authority, which admitted abnormal price movement in at least 25 per cent of its mergers and acquisitions deals, has begun prosecuting its first criminal insider trading case only a few weeks ago.
Yet, with the spotlight intentionally or unintentionally on us, we are not doing enough to correct the impression that Hong Kong is a haven of insider traders. Much more has to be done in telling the world about our determination to catch these people.
I am not talking about several rounds of interviews and lunches for the international financial media (which government officials love to do) but a serious review of our tools in cracking down on insider trading.
Can more judges with commercial law backgrounds be hired to ease the bottleneck at the civil tribunal and speed up the processing time?
Should the Securities and Futures Commission be allowed to launch civil actions against insider traders instead of joining the long queue at the offices of the financial secretary and Department of Justice for the latter to decide whether to take any action?
Given the increasing participation of mainlanders in our market, can the co-operation between Hong Kong and mainland authorities be further improved to make cross-border investigations effective and efficient?
All these require a strong determination at the top. Compared with these tasks, getting Mr Li to step down is the easy part.