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Jake's View
PUBLISHED : Thursday, 16 May, 2013, 12:00am
UPDATED : Thursday, 16 May, 2013, 3:53am

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

BIO

Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.
 

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.

SCMP, May 14

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.

The difference, says the SFC, is that the unit owner has little or no control over the manager in the Apex Horizon case.

Perhaps, but how much control does a unit holder with a DMC have over the manager in a 1,000-unit housing development in which the developer keeps the commercial podium? It cannot be more than in the Apex Horizon case, probably less.

I don't know whether this argument forms part of Cheung Kong's case. All I do know is that there are some critical questions to be answered here and the best place to answer them is in a court of law.

But now they won't be. The SFC decided to go nuclear and haul out its ultimate weapon, Section 213, which allows it unilaterally to unwind a transaction if, for a wide range of possible reasons, it doesn't approve.

The threat was enough to make Cheung Kong back down and agree to unwind all the Apex Horizon purchases on its own. The quick surrender should be no surprise. The SFC has just won a decision in the Court of Final Appeal, upholding its right to invoke Section 213 pretty much whenever it wants.

For Cheung Kong to fight it now could mean that the whole Apex Horizon is frozen for two years or more under Section 213 until the case has gone right up to the CFA. This would do Cheung Kong's reputation immense damage with unit buyers and even with its shareholders. Better in such circumstances to submit to the SFC terminator and maintain good investor relations.

And that brings me back to J.P. Morgan and his answer of trust. Leave alone that it is impossible anyway for these Section 213 orders to recreate the past in a state before any given transaction took place, they do far more damage than the SFC knows. They destroy trust. They are not like a builders' lien or like setting disputed sums in escrow until a later judgment is made. An investment manager, who relies absolutely on his good name, may find his business ruined if he is hit by one or a listed company find its reputation thoroughly tarred.

This would be all very well if any of them deserve it and I have no objection if they do. But the proper person to decide this question is a judge in a court of law, not a regulator at his own whim. What we have here is a government agency that has written its own law and then enforces that law itself as policeman, prosecutor, jury and judge all rolled into one.

Ban the bomb. We need to put a leash on the SFC's use of Section 213.

jake.vanderkamp@scmp.com

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This article is now closed to comments

caractacus
Why don't you put a sock in it, FOOL?
wwong888
jake, you are truly a moron. its incredible. first the piece defending blatant insider trading - even the accused admitted the crime to the SEC... and now this drivel... you are a hazard to impressionable minds...
KwunTongBypass
Yes, T R U S T should be the foundation of finance - and actually business at large. Now, Mr. van der Kamp, who do you think deserves to be trusted more?? Leech Cash In or the SFC?
impala
The SFC can't do much right, can it Mr van der Kamp? I am beginning to think you are on some kind of personal vendetta against it.

In the light of everything that has happened in the past five years, I am wholeheartedly in favour of strong and zero-tolerance financial regulators. Especially in Hong Kong, where the excesses of the unregulated, unbridled kind of free maketeering are visible on every street corner. And yes, sometimes a watchdog might bite the wrong culprit, and some collateral damage arises that will need to be redressed, but not in this case.

CK is free to go to court. They didn't want to. They dug thsemlves too deep a hole by insisting this is a commercial property scheme while they were trying to avoid the residential regulation. The legal shape of the deal they structured makes it clear the SFC has a very valid point, and it is very, very different from a residential DMC. CK missed this angle completely. They were too busy with the stamp duty story. They wouldn't stand a chance in court, as there is a lot of recent jurisprudence from the Lehman mini bond case. And they know it. So they settled. A perfectly normal outcome between a regulator and a regulated party. End of story.

Power ahead SFC, go get'em.

(By the way, I am waiting for your passionate defense of Carson Yeung's money laundering. When a supposedly innocent public housing tenants stood accused, you were all over it. Mr Yeung's case is very similar, but I don't hear a peep.)
johnyuan
The selling of Apex may have been showing a political gamesmanship from LKS. It is a in your face against CY Leung’s difficult effort in take charge of housing. The sale of those rooms may have the intention to evade residential property tax for the possible residential use by buyers. LKS doesn’t need to sell those 300 plus hotel rooms. His lawyers must know the existence of Section 213 and noted to LKS. But the show of power over the government must continue. LKS took a gamble. What I still want to know why didn’t SFC acted earlier? Perhaps a delayed outcome is to down-size LKS politically? The government looks like has won. But without a sense of social responsibility by conglomerates in Hong Kong, private empty lands would still sit around longer than their social value.
 
 
 
 
 

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