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.
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.