On 5 August 2013, the Securities and Futures Commission (“the SFC”) successfully prosecuted PME Group Limited (“PME”), a Hong Kong-listed company, in relation to allegations that PME made false or misleading stock exchange announcements in 2008, contravening Section 384 of the Securities and Futures Ordinance (“the SFO”) (Cap 571).
In 2007, the Court, for the first time, convicted To Shu Fai (“To”) and Daido Group Limited (“Daido”) for providing false and misleading information to the Stock Exchange Hong Kong (“SEHK”) under the dual-filing regime introduced by the SFO in 2003. The Court of Final Appeal later dismissed To’s appeal and confirmed that the SFC is empowered to prosecute listed companies and their directors who make false or misleading statements in announcements made to the SEHK. Since then, the SFC has successfully prosecuted a number of listed companies and directors (even company secretaries) for making false and misleading information in announcements.
Under section 384(1) of the SFO, subject to subsection (2), a person commits an offence if: (a) he, in purported compliance with a requirement to provide information imposed by or under any of the relevant provisions, provides to a specified recipient any information which is false or misleading in a material particular; and (b) he knows that, or is reckless as to whether, the information is false or misleading in a material particular. “Specified recipient” is defined in the SFO to include the SFC and SEHK. Under the Securities and Futures (Stock Market Listing) Rules, a company is regarded as having provided information to the SFC if it gives the information to the SEHK and it has authorised SEHK to send the information to the SFC.
A person who commits an offence under section 384(1) is liable on conviction on indictment to a fine of HK$1 million and to imprisonment for two years and, on summary conviction, to a fine of HK$100,000 and to imprisonment for one year.
The events in question happened in 2008 when PME made three announcements respectively in response to the inquiries made by the SEHK in light of the substantial movement in the share price of PME. In each announcement, PME said that it knew of no negotiations or agreements which were disclosable to the market nor were its directors aware of any price sensitive matter. The SFC, however, alleged that these announcements were false and misleading because PME was simultaneously taking steps to acquire control of a private entity holding approximately 50% of ZZNode Technologies Company Ltd (now renamed China Oriental Culture Group Ltd), another Hong Kong-listed company, with a market value of about $145 million. The SFC alleged that was a material acquisition for PME and ought to have been disclosed in the announcements.
Both PME and its director, Ivy Chan Shui Sheung (“Chan”), were prosecuted by the SFC for breaching section 384 of the SFO. PME pleaded guilty and was convicted. PME was ordered to pay a fine of HK$60,000 and the SFC’s costs. Chan pleaded not guilty to the charges and therefore her case will go to trial.
It should be noted that, in addition to criminal prosecution, a new statutory regime on disclosure came into effect on 1 January 2013 under Part XIVA of the SFO. The regime creates a statutory obligation on listed corporations, as well as individual officers, to make price sensitive information (“PSI”) disclosure as soon as reasonably practicable after any inside information has come to their knowledge, unless the information falls within the Safe Harbours. The SFC can institute proceedings before the Market Misconduct Tribunal which can impose a range of civil sanctions against the listed corporations and directors. Facts similar to the PME case might also be caught by the new Part XIVA of the SFO. Accordingly, even without any inquiry made by the SEHK, listed corporations and individual officers should make timely and accurate PSI disclosure where appropriate so as to avoid getting into trouble.