Not so long ago insider trading was viewed as a matter best kept away from the courts because of difficulty in meeting the standard of proof required. A more aggressive stance by the Securities and Futures Commission has changed this perception. In the latest example, the SFC sought a court order for compensation from American hedge fund Tiger Asia Management for insider dealing in Hong Kong in shares in China Construction Bank and Bank of China in 2008 and 2009. Tiger challenged the SFC's right to do so without proving the offence in a local court. The Court of First Instance sided with Tiger, ruling that the SFC must first seek a criminal prosecution. But an appeal judge and now the Court of Final Appeal have upheld the SFC's right to seek compensation.
Two things set this case apart. The alleged offence was committed offshore and Tiger has no office in Hong Kong, so prosecution here would have been difficult. But illegal offshore trading is not off limits to US regulators, with whom Tiger Asia and three of its executives reached civil and criminal settlements totalling US$60.5 million. The settlement last December, before our top court handed down its decision, included an admission of guilt.
Chief Justice Geoffrey Ma Tao-li has yet to hand down a written judgment giving the court's reasons for upholding the SFC's right to seek compensation without having to prove guilt.
In any case it strengthens investor protection and Hong Kong's reputation as an international finance centre with a level playing field. Both are compromised if wrongdoers offshore can get away with trading illegally here. The SFC first used its powers under the Securities and Futures Ordinance to seek a court order for compensation last year to recover more than HK$1 billion for 7,700 investors in sports-fabric maker Hontex International who were misled by its listing prospectus.
If profits from insider dealing can be seized and used to compensate those who lost out, this will go a long way towards removing the perception that it is a victimless crime.