Watchdog gets tough on insider dealing

Market regulators have adopted a zero-tolerance policy on insider dealing which has seen a spate of criminal convictions and jail terms in recent months, with further cases pending.

A determination by the Securities and Futures Commission to pursue criminal cases in the courts, rather than seeking civil remedies, has seen five people jailed for insider dealing since April, when the first prison sentences were imposed.

In the latest case, a former CLSA Equity Capital Markets director, Allan Lam Kar-fai, was jailed for six months at the District Court last week for spreading 'office gossip' about a deal to a friend, Ryan Fong Yen-kwung, who was jailed for a year.

The trend marks a radical shift in the approach to insider dealing in Hong Kong, which was not even considered a criminal offence until 2003.

Mark Steward, executive director (enforcement) for the SFC, told the Sunday Morning Post: 'It is important insider dealing is recognised as dishonest. It is a form of cheating and once it is seen in that light, there can be no tolerance of insider dealing.'

He said the convictions 'reflect society's disapproval and condemnation of this kind of behaviour. That is a good thing. It is good we are establishing these bright clear lines'.

Under the Securities and Futures Ordinance, insider dealing can be prosecuted in the criminal courts, where it carries a maximum penalty of 10 years' jail and a fine of HK$10 million. Alternatively, the SFC can ask the financial secretary to refer cases to the Market Manipulation Tribunal for civil proceedings.

Mr Steward said the forging of a good relationship between the SFC and the Department of Justice had proved crucial when taking criminal cases to court. The SFC's expertise in such investigations was being blended with the Department of Justice's experience in handling cases in court, he added.

'Taking strong action against insider dealing is a fundamental obligation for securities regulators because the investing public must have confidence the market is not rigged against them and that they are not prey to insiders exploiting an informational advantage at their expense.

'If investors believe the market is rigged against them in this way, they will not invest. It is as simple as that.'

Chim Pui-chung, the legislator for the brokerage industry, said prosecutions were more effective in discouraging insider dealing. 'Many directors and businessmen are wealthy. It would not be a pain for them to pay a fine if they face the tribunal hearing,' he said. 'However, criminal prosecution may lead to imprisonment and this would be much more serious.'

But he added that criminal cases needed evidence to prove guilt beyond a reasonable doubt, which the SFC may not always be able to get.

Christopher Cheung Wah-fung, chairman of the Hong Kong Securities Professionals Association, said the SFC actions to crack down on insider dealing would lead brokerage and investment professionals to be more careful in their own dealings.

'The SFC has suffered from the Lehman minibond fiasco. Its effort to crack down on insider dealing will help restore its reputation,' he said. 'The SFC is doing the right thing to maintain market order and strengthen the confidence of investors.'

Andrew Powner, of Haldanes law firm who has defended clients in white-collar cases, said the authorities seemed to have boosted their resources for chasing insider dealing. 'It certainly seems to be high on the government's agenda,' he said.

There are a number of insider dealing cases pending. The case of Du Jun, former managing director of Morgan Stanley Asia who has pleaded not guilty to insider dealing allegedly involving HK$87 million, is expected to conclude at the District Court this week.