What You Need to Know at a Glance
In more detail:
Du Jun, a former managing director at a leading international investment bank, was found guilty in September 2009 of insider dealing in HK$86 million (approx. US$11 million) worth of shares in CITIC while part of a team that was advising CITIC on a corporate transaction. The Court of Appeal upheld Du Jun’s conviction in September 20121, although it significantly reduced the HK$23 million (US$3 million) fine imposed on Du Jun (equal to the notional profit he was found to have made on the insider dealing) to under HK$2 million (US$250,000) so as not to deprive Du Jun’s trading counterparties of amounts which might be available to them in civil proceedings under s.213 of the Securities and Futures Ordinance (“SFO")2.
The principal enforcement regimes under the SFO are civil proceedings before the Market Misconduct Tribunal or criminal court proceedings before the Hong Kong courts. Section 213 of the SFO also authorizes the SFC to apply to the Court of First Instance for various types of injunctive and other forms of relief on the ground that a party has contravened one or more of the prohibitions on market misconduct, including insider dealing.
In this case, a first of its kind in the context of insider dealing, the SFC sought an order under section 213(2)(b) of the SFO to require that steps be taken to “restore the parties to any transaction to the position in which they were before the transaction was entered into”. The SFC has reported that the 297 investors who sold shares in CITIC to Du Jun had no means to detect that they were dealing with Du Jun and that, had they known, they would not have sold their shares to him and certainly not at the price at which they did so. Since Du Jun subsequently sold the relevant CITIC shares he purchased, the practical application of section 213 in this case was to require him to make a monetary payment equivalent to the difference between the value of the CITC shares on the date of the transaction, taking into account all relevant information, including the relevant inside information, and the price of the transactions.
This judgment is the latest in a string of notable wins for the SFC in its aggressive prosecution of insider dealing and other forms of market misconduct. Du Jun was in fact the first individual who, while still under suspicion of insider dealing during the SFC’s investigation in 2007, had assets frozen after the SFC obtained a freezing injunction against him under section 213. More recently, in a landmark decision in April 2013 in a case brought by the SFC under section 213 against Tiger Asia Management LLC, a New York hedge fund with no physical presence in Hong Kong3, Hong Kong’s highest appellate court confirmed that section 213 offered an independent mechanism to remedy market misconduct. A couple of months later, the Court of First Instance made a restoration order against Hontex International Holdings Co., which was forced to offer to repurchase shares worth over HK$1 billion (approx. US$130 million) after accepting that there had been false and misleading information in its IPO prospectus. We expect to see this trend continue in actions against both domestic and offshore parties, and Du Jun appears to signal an intention on the part of the SFC to ensure that section 213 of the SFO is used to benefit individual investors who are considered to have been defrauded by an insider dealer.
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1The Court of Appeal also reduced Du Jun’s term of imprisonment from 7 years to 6.
2Civil proceedings intended to secure such relief had already been instituted by the SFC and stayed pending the outcome of Du Jun’s criminal appeal.
3Securities and Futures Commission v. Tiger Asia Management LLC and Others.
This article was originally published by Bingham McCutchen LLP.