SFC's civil court pursuit raises concern
David Smyth and Warren Ganesh of Smyth & Co in association with RPC, analyse the regulator's pursuit of 'lesser spotted' hedge funds
Much has been written recently about the Securities and Futures Commission's pursuit of alleged market misconduct. This has come on the back of the recent Court of Final Appeal judgment in the Tiger Asia Management & Ors versus SFC case last month.
The case decided that the SFC does have jurisdiction under section 213 of the Securities and Futures Ordinance to obtain final remedies against alleged "insider dealers" in the civil courts, without first needing to secure a criminal conviction or a determination from the Market Misconduct Tribunal.
Some have taken objection to the judgment, suggesting that the SFC's pursuit of alleged insider dealers in the civil courts, without first securing a criminal conviction, is objectionable.
In contrast, the appeal court describes the SFC as "protector of the collective interests of the persons dealing in the market".
As a matter of statutory construction, the judgment finds that it is enough for the SFC to obtain injunctions, restorative orders and the like in civil proceedings against alleged insider dealers if the civil court finds that there are "acts" amounting to contraventions of the relevant provisions of the Securities and Futures Ordinance.
The SFC considers insider dealing and market misconduct to be serious matters. Both are defined in parts of the ordinance and can take various forms.
In essence (and without doing either justice), insider dealing is dealing in listed shares on the back of "inside information" or disclosing such information to another for the purpose of dealing. Market misconduct includes insider dealing, false trading, price rigging, disclosure of false or misleading information and market manipulation.
It is important to remember that there has been no finding that the defendants engaged in wrongdoing. The judgment decides an issue of jurisdiction, as a result of which the SFC can proceed with its civil claims in the High Court against New York hedge fund Tiger Asia and three of its senior personnel.
One anticipates that, for a number of possible reasons, the SFC will pursue this case in the civil courts to obtain declaratory relief and final orders.
Should the SFC succeed in the civil proceedings, that would help establish precedent for the use of section 213 powers. It might also send out a message to the market, particularly to those that trade locally listed shares from overseas.
In contrast, Market Misconduct Tribunal proceedings can sometimes appear rather pedestrian and criminal proceedings are of limited use with respect to those that trade locally listed shares from offshore. One can expect the SFC to make more use of civil proceedings in this context, now being touted as "the third way".
If the SFC succeeds in the civil proceedings and obtains judgment, it could seek to enforce it or try to secure a tidy settlement on the back of it. Tiger Asia has already settled related "insider dealing" claims brought by the Securities and Exchange Commission in the United States.
While there may be difficulties in quantifying any compensation due to "others" had the transactions under investigation not happened (not to mention trying to identify those others), this is unlikely to hold the SFC back in its pursuit of this case.
The senior echelons of the SFC driving this case forward may have their hands rather full at present, but they tend not to be known for "shrinking violet" qualities. They also have the lawyers and the resources to boot. In some respects, the parties in the case may be alike.
Who is right?
The appeal court's judgment comes as no surprise. Of the nine judges who heard the Tiger Asia case, eight found for the SFC on the issue of statutory construction and decisively so. Those that disagree are not necessarily wrong. However, they have a different perspective and a principled one, too.
There are certainly concerns. Adverse findings in a civil court might not hold up in a criminal court (with its greater defendant protections and higher standard of proof). However, as Lord Hoffmann states in giving the unanimous judgment of the appeal court: "These things happen."
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