Jury out on insider oversight
Will new Market Misconduct Tribunal solve case problems or just create more?
In its 15 years of existence, the Insider Dealing Tribunal has heard 21 cases and handed down guilty verdicts in all but three. Before the thribunal was created, insider trading was hardly even considered a crime in Hong Kong.
There are two areas, though, where the tribunal has not been successful: rendering verdicts quickly and collecting fines.
Some cases have taken as long as eight years to decide. And of the HK$571 million in fines the tribunal has levied over the years, HK$393 million remains unpaid and may never be recovered.
Now changes to the adjudication process are under way that could make both problems worse.
The Insider Dealing Tribunal is in the process of clearing up its unfinished business before giving way, perhaps as early as next year, to a new entity to be called the Market Misconduct Tribunal. The successor body will have a broader remit, hearing not just insider trading charges but market manipulation and illegal short-selling charges too.
The problem is that the Market Misconduct Tribunal will have only one panel, compared with the three that sit at the Insider Dealing Tribunal, say sources in the regulatory community.
'With a wider scope but with only one panel, the backlog will be even worse,' said one source. However, the government is said to be determined to make policing the markets more economical.
Some people believe there is a connection between the inability to collect fines and the length of proceedings.
'If you did make money trading on inside information, you should be able to afford to pay the fine one or two years later, but if it takes seven or eight years to convict you, you may well have used it up long before then,' a regulatory source said.
A case in point: an award-winning entrepreneur, Siegfried Lee Siu-fung, former chairman of collapsed Siu-Fung Ceramic Holdings, was convicted in 2004 of trading in the shares of his company in 1996 in full knowledge that the company was about to post a loss.
He was fined HK$218.79 million, the harshest penalty yet assessed by the tribunal.
Although the government will not disclose which violators have paid their fines in whole or in part, collecting from Mr Lee would probably have been difficult since he was declared bankrupt in 2001. He was discharged from bankruptcy last year.
In the 18 cases where insider dealing was proved, 131 financial orders were made against 48 individuals, involving about HK$571 million. Only 92 of these orders have been satisfied in whole or in part and HK$393 million in fines remains outstanding.
A government spokesman said the collection process also could be complicated by the departure from Hong Kong of the convicted person, or his death.
An Insider Dealing Tribunal panel consists of one High Court judge and two lay members drawn from the financial community. When the tribunal was created in 1991, it was assumed it would be able to perform its duties faster. It was allowed to reach its conclusions on the basis of high probability, unlike a criminal case, where the evidence must show beyond a reasonable doubt that a crime has been committed.
The new Securities and Futures Ordinance enacted in 2003 aimed at strengthening enforcement by making insider dealing a criminal offence. Three years on, however, criminal charges of insider dealing still have not been brought, due to evidentiary concerns.
The deputy chairman of the Hong Kong Institute of Directors, Edward Chow Kwong-fai, says the tribunal takes ridiculously long to decide seemingly simple cases.
According to the regulatory source, one big reason it takes so long for cases to be adjudicated is that the Securities and Futures Commission, which investigates complaints of insider trading, lacks the power to order the tribunal to conduct a hearing. It must first refer the case to the Financial Secretary, who usually asks the Department of Justice to conduct a review before deciding if a hearing is needed.
'Sometimes, the Financial Secretary will wait a few months or a year to get the view of the Department of Justice and then call for a hearing,' the source said. 'This is different from other kinds of misconduct, where the SFC can prosecute directly and have the process completed in two or three years.'
If the SFC had the right to go straight to the tribunal, the average insider trading case would be one or two years shorter, he said.
Just finding a time that suits everyone involved in a case can be a major problem, said Peter Wong Shiu-hoi, chief executive of Taifook Securities Group who has served once as a lay member on a panel hearing an insider complaint.
'I was told I would have to sit for two months but it ended up half a year. We had to constantly compare timetables to find a time that would suit the judge, the two lay members, the accused parties, the solicitors and their representatives,' Mr Wong said.
The only solution may be to reach a settlement before the case reaches the tribunal, he said. 'It is better to get them to pay while they still have the money, before they go bankrupt or die.'