INTRODUCTION
The Securities and Futures Ordinance ('SFO') which came
into effect on 1 April 2003 establishes dual civil and
criminal regimes under Parts XIII and XIV respectively
in relation to all types of market misconduct. 'Market
misconduct' includes 6 offences: insider dealing, false
trading, price rigging, disclosure of information about
prohibited transactions, disclosure of false or misleading
information inducing transactions and stock market manipulation.
In addition, Part XIV creates 3 new criminal offences.
The new market misconduct provisions represent a considerable
extension of the previous law on market manipulation and
disclosure of false and misleading information concerning
securities and futures. The following is intended as a
brief overview of the principal provisions of the SFO
as they relate to market misconduct (with the exception
of insider dealing which is covered in a separate note)
and the new Part XIV offences. The text in blue can be
clicked through to view further information on a selected
subject. To see a more detailed note in full,
please
click here.
Parts XIII and XIV create virtually
identical civil and criminal provisions in respect of
the following:
FALSE
TRADING
In summary, false trading prohibits:
- intentionally or recklessly creating (or doing
anything likely to create) a false or misleading appearance
of active trading in, or as to the market for, or
price of, securities or futures; and
- transactions (which need not be in securities or
futures) entered into with the intention that, or
being reckless as to whether, they create or maintain
an artificial price for securities or futures.
In the case of on-market 'wash sales' (ie. trades involving
no change in beneficial ownership) and 'matched orders'
(ie. offers to sell or buy matched by offers to buy or
sell substantially the same number of securities at substantially
the same price), there is a rebuttable presumption that
the person who entered into it intended, or was reckless
as to whether, his conduct created the appearance at i
above.
PRICE
RIGGING
Price rigging prohibits:
- engaging in wash sales which affect the price of
securities (unless the defendant can show that his
purposes did not include the purpose of creating a
false or misleading appearance as to the price of
securities); and
- engaging in a fictitious or artificial transaction
intending that, or being reckless as to whether, it
will affect the price of securities or futures.
STOCK
MARKET MANIPULATION –
Securities only
These provisions prohibit engaging in transactions in
securities of a corporation that affect the price of any
securities, intending to induce investment decisions relating
to the securities of the corporation or to those of a
related corporation.
DISCLOSURE
OF INFORMATION ABOUT PROHIBITED TRANSACTIONS
This offence prohibits a person from disclosing information
that the price of securities or futures traded on an exchange
or through an automated trading system ('ATS') in Hong
Kong will be affected by a transaction in contravention
of the market misconduct provisions or Part XIV, if he
or his associate entered into the transaction or will
benefit from the disclosure. Defences are available to
those who innocently report market misconduct and its
effect on price (eg. journalists and research analysts).
DISCLOSURE
OF FALSE OR MISLEADING INFORMATION INDUCING TRANSACTIONS
This offence prohibits the disclosure of information about
securities or futures which is materially false or misleading
that is likely to induce investment decisions or affect
prices in Hong Kong, if the defendant knows that, or is
reckless or,
for civil liability only, negligent
as to whether, the information is materially false or
misleading. There are a number of narrowly drafted defences
available to businesses who passively disseminate information
provided by others.
SCOPE OF OFFENCES
The new regime is far-reaching. In the case of the market
manipulation offences (ie. false trading, price rigging
and stock market manipulation) the offences cover both
conduct in Hong Kong or elsewhere which affects securities
(or futures) traded on an exchange or through an ATS in
Hong Kong and conduct in Hong Kong which has the same
effect on securities (or futures) traded on an overseas
market. Where the conduct affects an overseas market,
the prosecution must prove that the conduct is also unlawful
in the country in which the market is situated.
THE
MARKET MISCONDUCT TRIBUNAL
The remit of the MMT extends to all types of civil market
misconduct, not just insider dealing as was the case with
the Insider Dealing Tribunal which it replaces.
Proceedings
of the MMT
Orders
of the MMT
Appeals
CRIMINAL LIABILITY
All forms of market misconduct (including insider dealing,
previously subject to civil proceedings only) and the
new Part XIV offences are liable to prosecution as a criminal
offence under Part XIV SFO.
Penalties
The maximum penalties have been increased to a
maximum of 10 years' imprisonment and/or fines of up to
$10 million.
No
double jeopardy
CIVIL
LIABILITY – Private right of action
The SFO creates a civil right of action in favour of any
person who has suffered financial loss as a result of
market misconduct or any offence under Part XIV to seek
damages from the person who committed the market misconduct
or Part XIV offence. The perpetrator will be liable to
pay damages, unless it is fair, just and reasonable that
he should not.
Transactions
not void or voidable
LIABILITY OF OFFICERS OF A CORPORATION
The SFO imposes a duty on all officers of a corporation
to take reasonable measures to prevent a corporation from
perpetrating market misconduct. The definition of 'officers'
is wide and includes 'any person occupying the position
of director' and 'persons involved in management' of the
corporation.
Duty
of Officers
Civil
Liability
Criminal
Liability
Disciplinary
Proceedings
Safe
Harbour Rules
To accommodate future business practices, the SFO allows
the SFC to make rules creating defences to the market
misconduct civil and criminal provisions. A safe harbour
has been established for price stabilisation in public
offerings over $100 million.
This note is intended as a summary of the provisions
of the SFO as they relate to market misconduct. Specific
legal advice should be sought in relation to any particular
situation.
