SFO s.213 remedy for aggrieved public investors against person(s) unknown in securities fraud

In Securities And Futures Commission v An Unknown Person Or Persons Purporting To Carry On A Securities And/Or Futures Trading Business Known As Cardell Ltd And/Or Cardell Co Ltd And Others ([2018] HKCFI 2814; [2019] HKCU 37), the SFC successfully obtained compensation for aggrieved public investors under section 213 of the Securities and Futures Ordinance (Cap. 571) (SFO) against “person(s) unknown” responsible for a series of “boiler room frauds” across the internet since 2014. 

A “boiler room fraud” is a common securities fraud where the fraudster purports to operate as a licensed securities or futures broker and offers to people, via websites, emails or cold-calls, to trade in securities or futures paid for by the victims but which in fact have not been executed in any recognised exchange. 

Facts

Victims from Europe were solicited to invest in securities or futures contracts by person(s) unknown purporting to be carrying on securities and or/futures trading business under different companies operating in Hong Kong (the fraudsters). Victims then remitted funds into the bank accounts opened in Hong Kong under another set of company names. Victims later discovered that the contracts were a scam, but were unable to contact the fraudsters or recover monies from the fraudsters.  

It transpired that the companies the fraudsters purported to be operating were not registered with the Companies Registry or Business Registration Office of the Inland Revenue Department and did not hold any business registration certificate. However, the companies under whose names the accounts were opened were existing companies incorporated in Hong Kong and the Republic of Seychelles (the Companies).  

The SFC brought three separate actions against each group of people purporting to carry out business under the different company names and corresponding websites together with the Companies. The SFC brought the following claims:

Against person(s) unknown purporting to carry on securities and/or futures trading business under the different trading names concerned and corresponding websites:

• s.109(1) SFO: knowingly issuing advertisements in Hong Kong in which a person held himself out as being prepared to carry on regulated activities whilst unlicensed and unregistered.
• s.114(1)(b) SFO: holding out as carrying on businesses in regulated activities in Hong Kong whilst unlicensed and unregistered and without reasonable excuse.

Against the Companies:     

•  s.114(1)(b) SFO as above, as they allowed access to their bank accounts for settlement of regulated activities.
• “aiding and abetting” within the meaning of s.213(1)(ii), as the purpose of the remittances into their bank accounts was inconsistent with the purposes stated in the account opening documents. The account opening documents stated that the accounts were opened for trading purposes e.g. payment to suppliers.

Decision

Orders granted by the Court include:

1. A restitution order under s.213(2)(b) of the SFO to distribute the amounts frozen in the bank accounts of the Companies to the victims on a pro rata basis i.e. by dividing the amount left in each of the bank accounts amongst the victims in proportion to the amount they respectively remitted into each of them.
2. Order under s.213(2)(d) of the SFO for the appointment of an administrator to facilitate the distribution and consequential directions.
3. Injunction order under s.213(2) against the person(s) unknown for carrying on a business/advertising itself as being prepared to carry on regulated activities including on all internet websites within its control; injunctions against the Companies from disposing of any of the funds in their bank accounts.

Commentary

The judgment reaffirmed the Court’s “broad-brush approach” in granting s.213 civil remedies with the over-arching purpose of allowing the SFC as regulator to take action for the benefit of investors, who may otherwise be deterred by cost considerations from instituting legal proceedings individually to obtain redress for their relatively small losses. This follows the principles referred to in the  preceding CFI case of SFC v Qunxing Paper Holdings Ltd (No 2) [2018] 1 HKLRD 1060 and landmark CFA case Securities and Futures Commission v Tiger Asia Management LLC & Ors [2013] 16 HKCFAR 324. S.213 and helps fill the gap for the lack of a class action regime in Hong Kong and provides more effective relief to investors than criminal proceedings in the Market Misconduct Tribunal. 

Other powers of the SFC under s.213 include making:

• A freezing order
• A declaration that a contract is void/voidable
• Ancillary orders necessary for making of any orders under s.213

SFC v Qunxing Paper Holdings Ltd (No 2) further confirmed that the SFC’s power to make an order to restore parties to a position prior to the transaction under s.213(2)(b) can be construed widely, to include an order against any person knowingly concerned in the contravention of the SFO despite not being a counterparty to the transaction.  

Other occasions on which the SFC has sought s.213 remedies have concerned mostly insider dealing and price rigging.