Introduction

Any person who has been subject to an investigation by the Hong Kong Securities and Futures Commission (“SFC”) should be well aware that he is under a strict duty not to disclose to anyone about the investigation, except to his own legal advisors.  And since the investigation is meant to be conducted “secretly and behind closed doors”, a question arises: is the person who is subject to the investigation free to deny its existence?  After all, if an investigation is not meant to be made known to the public, denying its existence would appear to be consistent with such secrecy policy.

As demonstrated by the “Hanergy saga”, although the investigation is meant to be secretive, a routine denial as a public relations exercise is not a step in the right direction.

It shall be recalled that Hanergy Thin Film Power Group Limited (“Hanergy”) reported losses for the six months to June amounting to HK$59.3 million, due mainly to the termination of connected transactions with its parent firm Hanergy Holding.  Revenues tumbled 34 per cent year on year to HK$2.1 billion.  The SFC has been investigating Hanergy over its sudden share price plunge that rocked the stock market in May. Its valuation was wiped out by almost half in under an hour in a dramatic sell-off by investors.

On 27 May 2015, Li Hejun, the chairman of Hanergy, denied in a CCTV programme that Hanergy had been under any investigation by the Hong Kong regulatory authorities.  On the next day, however, the SFC made a public statement to clarify that Hanergy had been under its investigation, directly contradicting what Li had said.  Certainly it was a massive slap in the face for Mr. Li by the SFC. But a more serious question remains: How should a company respond to media speculation when it is subject to a SFC investigation?

The secrecy provision

Pursuant to section 378 of the Securities and Futures Ordinance (“SFO”), a company and its officers under an investigation are persons assisting the SFC to carry out its function under the SFO. They are obliged to preserve the secrecy of the investigation and cannot disclose the fact that the company is being investigated by the SFC. A breach of the secrecy provision is a criminal offence punishable with a maximum fine of $1,000,000 and 2 years’ imprisonment.

The duty not to make false or misleading statements

On the other hand, when the company is a listed corporation, the issuance of any false or misleading information regarding a material fact which is likely to induce transactions in the company’s shares is also a criminal offence under section 298 of the SFO punishable with a fine of $10,000,000 and 10 years’ imprisonment.

Thus the combined effect of the two provisions is that a company under an investigation by the SFC can neither confirm nor deny rumours on such, or else the company and its officers expose themselves to criminal liability. However, the position is a bit different for the SFC, as it is not bound by the secrecy provisions when it is performing a function under the SFO and may make any statements or disclosure if it so wishes.

The SFC disclosure policy

Although the SFC has a wide power to disclose confidential information in relation to an investigation, it has a published policy statement on disclosure which has prescribed the way it would exercise its power.  While the Policy states that the SFC will not normally make public whether it is conducting an investigation, it has also listed some exceptional circumstances which may justify the SFC to make public statements with regard to ongoing investigations:

1.        to maintain and promote confidence in the securities and futures industry;

2.        to protect members of the investing public;

3.        to minimise widespread misconduct or reduce systemic risks in the securities and futures industry; or

4.        to facilitate the conduct of the inquiry or investigation, for example by bringing forward witnesses.

However, the list is stated to be not exhaustive, which means that there can be other situations or circumstances considered by SFC to be exceptional, justifying a decision of disclosure.

Before the SFC comes to a conclusion of whether to make a public statement, it would balance its function under the SFO with the potential prejudice to the investigation and the person subject to it and also the restrictions in section 378 of the SFO.

In other words, with regard to the public statement on investigation of Hanergy, it is after the consideration of the prejudice that would be caused to Hanergy that the SFC decided that the secrecy and prejudice of the investigation should be overridden by the potential effects of Hanergy’s false public denial of subjection to investigation.

Lesson to learn

The SFC’s statement on investigation of Hanergy was the first time in the past 6 years that the SFC makes public an investigation when it is still undergoing.  What triggered this extraordinary reaction of the SFC was a false and misleading public denial of investigation on the part of Hanergy.  As a routine public relations measure, Hanergy should have simply expressed “no comment” in relation to the “rumour” of it being investigated by the SFC.

What can be made clear from this incident is that the SFC will likely disclose an investigation if a false or misleading public statement about the investigation is made by the subject company.  The SFC would consider the disclosure a matter of public interest in preventing the investing public from being misled.

It is clear that a company and its officers should never confirm nor deny speculations that the company is being investigated by the SFC when such an investigation is ongoing.

However, it is also possible that an influential rumour, not necessarily spread by the investigated company, may trigger clarification from the SFC as regards its investigation.  It is, however, entirely a matter of discretion of the SFC in deciding whether and how the clarification is made.  It is impossible to exhaust the circumstances where the SFC may invoke its power to disclose, but it is clear that specific legal advice is essential in guiding a company through an SFC investigation, especially before making any public statement, or that the company and its officers may attract severe criminal sanctions.