In the recent decision of Securities and Futures Commission v Tiger Asia Management LLC and others CACV 178/2011, the Court of Appeal allowed an appeal by the Securities and Futures Commission (the “SFC”) and held that the SFC can seek relief from the Court of First Instance (“CFI”) under Section 213 of the Securities and Futures Ordinance (the “SFO”), independently of any prior finding of market misconduct by a criminal court or the Market Misconduct Tribunal (“MMT”).
The 1st Defendant, Tiger Asia Management LLC (“Tiger Asia”), is a New York based hedge fund manager. The 2nd to 4th Defendants (“D2-D4”) are employees of Tiger Asia, all residing in New York. The SFC’s case was that the Defendants had committed insider dealing and/or false trading (contrary to sections 291(5) and 295(1) of the SFO), by two short sales and one long sale of shares of China Construction Bank Corporation and the Bank of China, after receiving price sensitive information from its bankers. The SFO issued an Originating Summons against the Defendants under Section 213(1) of the SFO, seeking various relief, including injunctive relief restraining disposal of assets, an account of profits and payment of such sum to a court-appointed receiver and declarations to the effect that the Defendants had contravened the criminal provisions under s.291 (insider dealing) and s.295 (false trading) of the SFO.
The Defendants applied to strike out the Originating Summons. The Defendants argued that Part XIII of the SFO (which concerns market misconduct and established a MMT) and Part XIV of the SFO (which provides for market misconduct offences such as insider dealing and false trading) were intended to introduce a dual civil and criminal regime to deal with misconduct in the financial markets. If, following investigations, the SFC concludes that there is a potential case of market misconduct it may refer it to the Financial Secretary for civil proceedings before the MMT or to the Secretary for Justice for criminal prosecution on indictment. The SFC has to elect whether to bring civil or criminal proceedings. What section 213 did not do, the Defendants argued, was provide a third route by which the SFC could seek determination before the Court of conduct prohibited by Parts XIII and XIV. It followed, the Defendants argued, that where contravention of market misconduct provisions were relied on by the SFC, the Court did not have jurisdiction to make the declarations sought by the SFC before any finding by the MMT or the criminal court. Accordingly, the Originating Summons did not disclose a reasonable cause of action and was an abuse of process and should be struck out.
The CFI’s Decision
The CFI agreed with the Defendants’ argument that there should not be a third regime to determine if there is any contravention of market misconduct provisions. Accordingly, the Judge held that it did not have jurisdiction to grant the orders sought by the SFC.
The Court of Appeal’s Decision
The Court of Appeal allowed the SFC’s appeal. It agreed with the SFC that had the legislature intended to make the finding of contravention by another tribunal (such at the MMT) or the criminal court, a condition precedent to the exercise of the CFI’s jurisdiction under section 213 of the SFO, it would have said so. The Court of Appeal said that section 213 is a broadly drafted provision under which the court may make orders which are essentially remedial, such as the grant of an injunction to restrain recurrence, declaring contracts to be void or voidable and requiring a person to pay damages. Section 213 was not, the Court of Appeal said, concerned solely with contraventions of Parts XIII and XIV. Section 213, was meant to augment the SFC’s ability to protect the investing public and provide remedies for contraventions for the protection of investors and was complementary to the civil liabilities created by sections 281 and 305 of the SFO. Section 213, the Court of Appeal said, provides valuable tools to the SFC to protect the investing public, which is the objective of the SFO. The proceedings were not an abuse of section 213. Rather, they supported the view that section 213 provides much needed ammunition to the SFC to protect investors.
Since 2007, the SFC has been using section 213 to obtain injunctive relief in aid of its investigations. However, section 213 also provides that the SFC can apply for a final order, restoring the parties to a transaction to the position they were in before they entered into the transaction. The SFC can also apply for an order declaring any securities contract to be void or voidable as well as an order that the infringer pay damages to any other person. The Tiger Asia appeal is a very important decision for the SFC, as it confirms the availability to it of relief under section 213. However, since the SFC’s power under section 213 is potentially very wide, each case should be examined carefully by the Court to avoid any unjust result.
It appears that the SFC’s practice is not to pursue a section 213 action to trial unless there is a determination by the MMT or the criminal court of a breach of the market misconduct provisions. However, the Court of Appeal’s decision does allow, in theory, the SFC to obtain an adjudication from the CFI on whether a person has contravened a market misconduct provision, without there being a determination by either the MMT or a criminal court. This is problematic because it is not contemplated under the SFO that there is a third way by which an alleged breach of the SFO can be adjudicated. Until the Court of Final Appeal has had the opportunity to address the relevant issues, the market should note the wide powers the SFC now has to take action against those who have allegedly committed market misconduct.