Jake's View | Trigger-happy SFC's nuclear option
To Cheung Kong's cost in Apex case, the regulator's ready resort to Section 213 usurps a court's powers, and trust is the collateral damage
Cheung Kong (Holdings) will refund deposits and cancel the sales of its hotel suites after a securities watchdog probe found the deals breached the law as unauthorised investments.
The famous American banker J.P. Morgan was once asked in a congressional hearing what he thought to be the foundation of finance. Is it profit or wealth, a congressman asked. "No, Sir," Morgan replied. "It is trust."
The question that the Securities and Futures Commission raised about Cheung Kong's sale of individual units in the Apex Horizon hotel project in Kwai Chung was whether it constituted a collective investment scheme. If so, it would be subject to the tight regulation of the Securities and Futures Ordinance and be subject to much stricter regulation.
The SFC predictably said that the ordinance applies. Cheung Kong, which has taken its own legal advice, said it does not.
There are different ways of looking at it. In one way the arrangement does look like a security. You buy one of 360 units in the hotel, you get a piece of paper saying you have done so, and you entrust Cheung Kong to manage the building. What is so different from buying shares of Cheung Kong on the stock market?
In another way, however, there is also not much different here from a deed of mutual covenant. With a DMC, which covers most home ownership in Hong Kong, you buy a flat in a block, you get a piece of paper saying you own a certain fraction of that block while reserving one specific flat to yourself and you appoint a manager of the block, usually an arm of the developer.