Introduction

Early this month, the Securities and Futures Commission (“SFC”) commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Mr Augustine Cheong Kai Tjieh (“Cheong”), a former senior executive of an affiliate of Titan Petrochemicals Group Limited (“Titan”), and his mother Ms Gan Ser Soon (“Gan”), for alleged insider dealing in Titan shares in 2012. The SFC alleges that Cheong and Gan knew Titan’s financial position when they sold their Titan shares in January 2012, particularly that Titan and its affiliates would likely default on certain fixed rate senior notes and demands the two to disgorge losses they avoided totalling $2,425,174 as a result of their disposal of Titan shares.

While the facts of the case are of little distinctiveness, the parallel proceedings of s.213 of the Securities and Futures Ordinance (“SFO”) and the MMT draw great significance. This month’s newsletter serves as a recap on the use of s.213 of the SFO and the MMT proceedings, both of which may bring tremendous consequences once the orders under s.213 of the SFO　are granted or once a person is found to have contravened the SFO in the MMT proceedings.

Injunctions and MMT

The power of s.213

Under s.213 of the SFO, upon the application of the Commission but without a finding of misconduct at MMT, the Court of First Instance may make orders such as restraining order, interim order and freezing order, etc., to restore counterparties back to the position prior to the alleged illegal transactions. The use of s.213 of the SFO has been seen in certain previous notable cases, and this is not the first time that such provision is used. Back in 2013, such use was first seen in the case of Securities and Futures Commission v Tiger Asia Management LLC where it was noted that s.213 of the SFO serves “a different purpose” to the criminal court or the MMT, in that the provision is intended to protect “the collective interests of the persons dealing in the market who have been injured by market misconduct”.

As for our present case, not only was there an interim freezing order of up to HK$13,618,203 against Cheong granted in 3 December 2012, the order was also extended up till the hearing on 24 January 2013, which then got discharged after Cheong paid the same amount into the Court. Such payment ensures that the sale proceeds of the share sale are not dissipated pending further orders in the proceedings.  Since then, the SFC has continued its proceedings against Cheong for injunction orders and restoration orders to reverse his alleged insider dealing transactions, while also initiating MMT proceedings.

The function of MMT

The MMT is also governed by the SFO under Part XIII Division 2. Under s.252 of the SFO, the MMT has to determine whether any market misconduct has taken place, the identity of any person who has engaged in the market misconduct, and the amount of any profit gained or loss avoided as a result of the market misconduct. Upon the conclusion of such, the MMT may institute any order under s.257 of the SFO which includes an order to the person identified to as having engaged in market misconduct to pay to the Government of the Hong Kong Special Administrative Region an amount not exceeding the amount of any profit gained or loss avoided by the person as a result of the market misconduct in question, and an order that the person shall not, without leave of the Court of First Instance, be a director, liquidator, or receiver or manager of a corporation or acquire, dispose of or deal in any securities, etc.

How strong are they?

In passing, the combination of both of the above can be seen has a protective measure to the investors and a punitive measure to the offenders. Despite that the former may impose sufficient safeguard and justice to the society, the latter helps to deter others from carrying out the same misconduct and to uphold the integrity of Hong Kong’s market.

A similar remarkable case, where the SFC has simultaneously instituted proceedings in both the Court of First Instance and the MMT, is seen in the case of CITIC Limited. Five former directors and their company, CITIC Limited, are alleged to be liable for issuing the false or misleading statement. What makes the case of CITIC Limited noteworthy is that one of Citic Limited’s former directors challenged the decision by the SFC to initiate the simultaneous proceedings against him in the case of Chang Li Hsien Leslie v Securities and Futures Commission (“Chang Li Hsien Leslie”). The Court of First Instance, however, dismissed the former director’s judicial review application on the ground that the effective remedy sought in the intended judicial review is in fact available to the former director under MMT proceedings themselves. Yet, the former director has not exhausted the available remedy.

Conclusion

Although the potential strength of s.213 of the SFO and the MMT is exemplified above, the result that they have in our present case is yet to be seen as no findings or orders have been made by the MMT. Nonetheless, the SFC has gained confidence in instituting simultaneous proceedings ever since their victory in the case of Chang Li Hsien Leslie. While most of the previous renown cases relied solely on s.213 of the SFO at the initial stage, which is not conditional on the proceedings in the MMT, our present case differs as it has not only made use of s.213 at an initial stage but has also concurrently instituted proceedings under s.213 while commencing proceedings at the MMT – tripling up the impregnable force that begs to protect investors from the very start as well as to catch suspected offenders. It may be safe to surmise that the SFC, with all its previous victories, is likely to be impeccable in our present case as well.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.