Hong Kong Court of Final Appeal Confirms Extended Powers of SFC to Prosecute New York Hedge Fund for Insider Trading

What You Need to Know at a Glance

• In a landmark judgment handed down on 10 May 2013, the Hong Kong Court of Final Appeal dismissed an appeal brought by Tiger Asia Management LLC (“Tiger Asia”) contesting the Securities and Futures Commission’s (“SFC”) authority to seek injunctive relief under Section 213 of the Securities and Futures Ordinance (“SFO”).¹
• In so doing, the Court of Final Appeal affirmed the SFC’s authority to seek permanent injunctive and ancillary relief from a civil court for alleged insider trading and market manipulation, without the need for civil proceedings before the Market Misconduct Tribunal (“MMT”) or criminal proceedings brought by the Secretary of Justice.
• This is another notable win for the SFC which is aggressively prosecuting insider trading and market misconduct; and this recent judgment will enhance the SFC’s ability to do so even where the defendants are outside Hong Kong.

In More Detail

Tiger Asia is a New York-based asset management company specializing in equity investments in China, Japan and Korea. In 2009, the SFC and other international securities regulators began investigating Tiger Asia for suspected insider trading of shares listed on the Hong Kong Stock Exchange.² Tiger Asia did not have an office in Hong Kong, although it maintained accounts in Hong Kong to enable it to trade in Hong Kong securities.

The principal enforcement regimes under the SFO are civil proceedings before the MMT or criminal court proceedings. Section 213 of the SFO also authorizes the SFC to seek interim relief, for example injunctions to freeze the local assets of those suspected of insider dealing. Prior to Tiger Asia, however, it was unclear whether Section 213 could also be used by the SFC to obtain permanent remedies for contravention of the SFO without any findings of liability having been reached by the MMT or the criminal court.

In Tiger Asia, the SFC sought a civil court declaration under Section 213 that Tiger Asia had contravened criminal prohibitions under the SFO. The SFC also sought orders unwinding the relevant transactions and restoring affected counterparties to their pre-transaction positions. The Court of First Instance held that the SFC’s approach was not permitted by Section 213. The SFC successfully appealed this decision to the Court of Appeal and Tiger Asia then appealed to the Court of Final Appeal.

On 30 April 2013, almost four years from the SFC’s initial application to the Hong Kong court, the Court of Final Appeal ultimately affirmed the SFC’s authority to proceed under Section 213. Giving the unanimous judgment of the Court, Lord Hoffman rejected Tiger Asia’s argument that MMT and criminal proceedings were the exclusive means of remedying violations of the SFO, and that the use of Section 213 in this way circumvented the protections for defendants which were enshrined in the rules governing those proceedings. Instead, Lord Hoffman held Section 213 offered an independent mechanism to remedy insider trading and market misconduct, through “injunctions, appointment of receivers to secure property with a view to recovery by the victims of market misconduct, orders that particular transactions be unwound, and orders declaring particular transactions to be void or voidable.”

Comment

The SFC has made no secret of the fact that it is looking aggressively to prosecute insider trading and market misconduct. Within the last number of months, the SFC has secured a number of significant decisions in its favour; and the Tiger Asia judgment will provide further support to the SFC’s efforts in this regard, in particular in relation to defendants who have potentially committed offences under the SFO, but who have no presence within Hong Kong. The SFC has publically stated that it has a number of ongoing cases (including the Tiger Asia case itself, in relation to which no findings of fact about the alleged insider trading have yet been made by the Hong Kong courts) in which it has sought to exercise powers under Section 213 and so it is likely that the exact scope of these powers will be tested in the coming months. Moreover, as Section 213 is not limited to insider trading or market misconduct offences, it is also possible that we will see the SFC seeking to expand the areas in which it uses this power.

For more information about the subject matter of this alert, please contact the authors or a Bingham partner with whom you regularly work.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Morgan Lewis.

¹ Securities and Futures Commission v. Tiger Asia Management LLC and Others.

² Tiger Asia reached a settlement with the U.S. Securities and Exchange Commission and U.S. Department of Justice in December 2012, in which Tiger Asia agreed to pay a combined $60 million in disgorgement and penalties.