Former Morgan Stanley Asia Limited managing director Du Jun was convicted of insider dealing pursuant to section 291 of the Securities and Futures Ordinance (Cap 571) and sentenced to 7 years imprisonment.

What is insider dealing?

Insider dealing in relation to a listed corporation takes place when a person connected with the corporation and having information which he knows is relevant information in relation to the corporation, deals in the listed securities of the corporation or their derivatives or counsels or procures another person to deal in them within the meaning of section 270 of the Securities and Futures Ordinance (Cap 571) (“SFO”).

A person ‘connected with a corporation’

For the purpose of section 270, a person shall be regarded as connected with a corporation if, being an individual:-

(a)   he is a director or employee of the subject corporation;

(b)   he is a substantial shareholder of the subject corporation;

(c)   there is a business relationship between him and the subject corporation or the officer or substantial shareholder of the subject corporation;

(d)   he is a dirctor, employee or partner of the substantial shareholder of the subject corporation; or

(e)   he has actual access to the relevant information.

It should be noted that the definition of “a person connected with a corporation” extends to include persons connected with the subject corporation within 6 months preceding any insider dealing.

Relevant information

Relevant Information, in relation to a corporation, means:-

(a)     specific information;

(b)     which is not generally known to the investing public; and

(c)     the information, if known to them, would be likely to materially affect the price of the listed securities , i.e. price sensitive information.

In this regard, the information is specific if it carries with it such particulars as to a transaction, event or matter so as to allow the transaction, event or matter to be identified, and its nature to be coherently described and understood.

Du Jun’s case

Du purchased a total of HK$26.7 millions shares of CITIC Resources Holdings Limited (“CITIC Resources”) using his own funds and money borrowed from Morgan Stanley while he was advising CITIC Resources on a bond offering. The arguably most controversial aspect of the case is that Du claimed to have received and indeed did receive approval from the compliance department of Morgan Stanley to trade the shares in question. However, it was noted that the approval was granted in relation to the CITIC Pacific Limited shares, instead of the CITIC Resources shares.

In fact it is doubtful whether the approval from the compliance department could constitute a defence even if the subject matter of the approval referred to the CITIC Resources shares accurately.

Du was charged under section 291 of the SFO. Section 291(1)(a) provides that a person connected with a listed corporation and having information which he knows is relevant information in relation to the corporation shall not deal in the listed securities of the corporation. Hence, the fact that an approval was given internally would not take a person out of the scope of section 291, as even with the internal approval, he still knowingly deals with the shares in question with the relevant information in mind. In fact section 291 was drafted in a way to exclude ‘reasonable excuse’ as a defence. Given the above, an internal approval would be of little significance in this context.

Du was sentenced to 7 years imprisonment, the maximum sentence that the District Court could give.

Court’s criticisms

One of the heaviest criticisms made by the judge was that the senior officials of Morgan Stanley had noticed Du’s trading in the CITIC Resources shares much earlier than the compliance department of Morgan Stanley, but there was insufficient internal communication in the matter between the two. The judge criticized that the compliance system at Morgan Stanely was inefficient.

Conclusion

The case will serve as a very stark warning to the financial community in Hong Kong. The consequences of any prosecution, or even investigation, could be serious. Financial institutions should further tighten their internal control and financial personnel should be more alert in their personal dealings of securities related to their clients.