Market Misconduct Tribunal needs a review
A recent procession of crooked insiders and traders through the courts could be mistaken for an outbreak of lawlessness in the financial markets. In fact, it marks the effective enforcement, at last, of laws that have been on the books for years. The misconduct is not new. For example, Hong Kong was known for high tolerance of insider dealing until recently, when regulators adopted a zero-tolerance policy instead of seeking civil remedies. The result is a spate of criminal convictions that has seen six people sent to jail, including a seven-year sentence for a former Morgan Stanley Asia managing director. Now they have broken new ground with a prosecution for market manipulation in the biggest case of its kind to date.
There can no longer be any excuse for inside dealers, market manipulators and short-sellers not getting the message that Hong Kong now treats them as common white-collar criminals. This is none too soon for the city's reputation as an international financial hub. Such abhorrent practices undermine market efficiency and transparency - not to mention the perpetration of fraud on the honest investing public.
In the latest case, four investors - a financier and three co-conspirators - ramped up the share price of Asia Stand Hotel Group by 78 per cent by trading among themselves and giving a false impression to the market of keen investor interest. Convicted of conspiracy to carry out false trading, they await sentencing in the District Court, which can impose a jail sentence of up to seven years.
This is the first prosecution since doubts were removed recently over the future of the driving force behind the crackdown, Mark Steward, executive director of enforcement for the Securities and Futures Commission. The government waited until the last minute before renewing his contract, amid concerns about pressure being applied to have his wings clipped. There is no doubt he has ruffled a few feathers with his combative approach, having been at the forefront of a legal challenge that scuppered PCCW's privatisation plan on the grounds of vote-rigging, and a deal with banks to return money to investors in Lehman Brothers minibonds. But he can hardly be expected to do his job properly without such an approach.
It is reassuring to hear him hail the latest convictions as serving notice on 'criminals who think they can take advantage of innocent investors' and that the SFC will fight them all the way.
That said, the latest case raises the question: where does it leave the almost forgotten Market Misconduct Tribunal and civil remedies? Chaired by a judge with two lay members, the tribunal can accept a lesser standard of evidence, which reflects the difficulties of gathering enough to meet the criminal standard of proof beyond reasonable doubt. Like its predecessor, however, the misconduct tribunal takes years over a hearing and has completed very few. When it does, it can only impose bans and limited penalties.
Given enough evidence, bringing suspects before the courts has proved a more effective deterrent, with the threat of jail sentences and fines of up to HK$10 million forcing those tempted to cheat to think twice, and alerting the public that crooked dealing is a serious crime. Moreover, even without enough evidence to prosecute, the SFC still has the option of negotiating a public settlement that includes exposure of questionable conduct.
Meanwhile, the Market Misconduct Tribunal does not seem to have been working effectively. The government should review its role to strengthen protection of investors further.
