Jake's View

MTR's silence on delays offers test of how well the SFC protects investors

PUBLISHED : Sunday, 11 May, 2014, 3:34am
UPDATED : Sunday, 11 May, 2014, 3:34am

SFC seeks 5-year ban in Tiger Asia case

South China Morning Post headline, May 8

The story is simple. An investment banker called up Tiger Asia, a New York-based investment fund, to sound out interest in a placement of China Construction Bank shares.

He informed Tiger Asia of the size and price of the placement and the Tiger Asia man demurred taking an immediate decision, possibly because the circumstances of the offer suggested that CCB was not all that confident in its own immediate future.

Whatever the reason, he called a different broker and placed a sell order.

This was dealing on inside information, says Hong Kong's Securities and Futures Commission.

How so?

If it was indeed inside information, then any dealing on the basis of it would be illegal. But none of the investors who bought the stock on the basis of what they were told by the investment bank have been done for insider dealing.

This is a straightforward case of black or white, yes or no. If it is inside information, then no one may buy or sell on the basis of it. If it is not inside information, then anyone may do so.

But, protests the SFC, Tiger Asia undertook with the investment bank only to buy the stock if it was told of the placement details.

Perhaps, but leaving aside that this would then be a matter of private dispute between Tiger Asia and the investment bank, what business does any broker have telling a client that if he listens to that broker's story he may not sell the stock?

I remember trying something of the sort once as a junior in my first stockbroking job and being rightly and soundly told off by the client.

It's just not on. You don't tie the market's hands that way.

In any case, the SFC took Tiger Asia to one of its kangaroo courts, a Market Misconduct Tribunal, and predictably convicted it there. In a court of law the SFC would have had to prove its case beyond a reasonable doubt but in its kangaroo courts only balance-of-probability standards apply.

And here is the real twist of irony. Once done in an SFC kangaroo court, you can no longer appeal the decision in a court of law, except perhaps in very exceptional circumstances. The two are meant to be mutually exclusive.

But the SFC itself can still go to a court of law and, under what it calls a Section 213, have a wide range of additional penalties imposed on you over and above the penalties that the kangaroo court can impose. The SFC is now doing this to Tiger Asia.

An appeal court judge has said it may do so on the grounds that this Section 213 "provides much-needed ammunition to the commission to protect investors".

It must remain a mystery how a judge with no professional knowledge of the investment business can know what is "much needed" in investment, but the real shame here is that the Court of Final Appeal sided with him.

Both courts shunned any consideration of the SFC's daft, one-sided definition of insider dealing in this case. Judges have a way of deferring to the SFC in matters in which they say the SFC has expertise.

I can understand this, but the SFC's expertise is also law, not financial markets. These regulators are lawyers by profession, not brokers and fund managers. It's a bit like saying that judges should not rule on the merits of charges brought by the police on the grounds that judges are not policemen.

At last, however, we have the test of how valiant a defender of the investing public we have in the SFC.

The secretary for transport, Professor Anthony Cheung Bing-leung, and several other MTR Corp directors have now admitted not telling lawmakers in November that they would miss the completion deadline for the high-speed cross-border railway.

The MTR Corp is a listed company, and listed companies are required by law to disclose in a timely fashion all price-sensitive information, which this delay manifestly is. Will the SFC now drag Cheung into one of its kangaroo courts for breaching the law?

Could happen, you know. Stop laughing.