Transcript Slide 1

Enforcement Trends and
Recent Developments
Part 1: Insider Dealing and
Market Misconduct
Simon Clarke, Litigation, Partner
Angus Ross, Litigation, Partner
James Comber, Litigation, Senior Associate
April 2012
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Introduction
Insider Dealing
Intermediary
Misconduct
Market
Misconduct
SFC
Enforcement
Trends
Unlicensed
Dealing
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Corporate
Governance
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Securities and Futures Commission
Insider Dealing
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Insider Dealing – Hot Issues
FACTS
Wall-crossing
Cross-border trades
Hot Issues
Law
SFO s.213 / 214
-jurisdiction
- new provisions
Application
Changed
enforcement
strategy
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Insider Dealing – View in Hong Kong
“Seventy percent of all equity trading in the world takes
place in London, New York and Hong Kong. It is not
surprising to see all three jurisdictions take [insider dealing]
seriously.”
– Mark Steward, SFC, October 2011
"Before [Pre-2003] potential penalties were merely a fine
and could be considered a cost of doing business. Now
they are a loss of freedom"
– Martin Wheatley on SFC's result in Koon Wing Yee
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Aggressive Enforcement of Insider Dealing in Hong Kong
– 12 criminal convictions against insider dealers
commencing from 2008
– 7 insider dealers given custodial sentences
– 7 years imprisonment sentence handed down in the Du
Jun case
– Contrast the above with 5 completed Market Misconduct
Tribunal proceedings
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Who is an insider? – Expanding the Scope
• Insider (definition):
– Any person who may reasonably be expected to have access to inside
information given their position or relationship with a company
– Directors, employees, substantial shareholders, etc.
– Objective test
– Court of Appeal - Leung Chi Keung (April 2012):
David Tsien, a “public side” equity salesman tasked with sounding out
potential investors for a proposed placement (had relationship with offeror
company), was an insider to fund manager recipient (Leung)
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What is inside information? Expanding the Application
– Insider information:
– Specific, Non-public, Price-sensitive
– In essence - "lack of parity of information between parties to trade”
– Court of Appeal – Leung Chi Keung (April 2012):
Clients cannot rely on other party's Chinese wall policy and assume
that information imparted by “public side” equity salesman is not price
sensitive
- Recipient must make own assessment of whether its MNPI
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Observations on Recent Hong Kong Enforcement
– Increased prosecution on new facts and pushing
boundaries of the jurisdiction
• Use of s213 – High Court
• Use of s214 – Broad remedial measures
• Willingness to prosecute criminally
– Arguably a broadening of targets;
– International investment banks and brokerages are not
immune to SFC scrutiny
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Jurisdiction Over Insider Dealing – Use of s213 in Tiger Asia
Interpretation 1- Def’s & CFI
MMT/CRIMINAL COURT
DETERMINATON
A person has contravened the SFO
Interpretation – SFC & C/A
It appears to the SFC that a
contravention of the SFO has
occurred
INTERIM ORDERS
Mareva Injunction
ANCILLARY ORDERS
 Injunction
 Damages
MMT/CRIMINAL COURT
DETERMINATON
 Order declaring securities contract
void
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Tiger Asia – The issues raised (from Def’s perspective)
– Can the High Court determine a contravention of the SFO to grant final
remedies under s 213?
– CFI: No. SFO created a dual-enforcement regime.
– (obiter) potential abuse of process; gatekeeper argument.
– CA: Yes. S 213 is complimentary to civil liabilities created by Part XIV.
– (obiter) not an abuse of process; investor-protection.
– (obiter) did not rule on court's jurisdiction to make declarations of
contravention under Part XIV.
– CA has granted defendants leave to appeal to the Court of Final Appeal.
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Long Term Trends in Hong Kong
– Increasing use of the criminal courts
– Increasing International cooperation - especially on
criminal matters
– Cross border factual scenarios
– Drivers for behavioural change in large institutions:
– The use of media/press for enforcement outcome
– Increased pressure for large institutions to conduct internal
investigation (as defacto regulatory investigation) and self
report
– Size and cost of regulatory investigation is penalty itself
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International context
Recent US and UK examples, general trends
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View from the United States – Raj Rajaratnam
– “Modern face of insider dealing”: Galleon hedge fund
manager convicted of using tips from a network of insiders to
make over USD 60 million
– Generous use of cooperating witnesses and phone taps
– “Mosaic defence” that trading following meticulous research
of numerous public sources failed in the face of direct
contradictory evidence
– Sentenced to 11 years imprisonment and US$10 million fine.
Longest sentence for insider dealing in the US.
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View from the United Kingdom – David Einhorn
– Einhorn and his US hedge fund Greenlight Capital fined £7.2 million for
trading on inside information in Punch Taverns Plc
– Call with Punch’s corporate broker in which he was told of a forthcoming
equity fundraising by Punch
– Einhorn specifically asked not to be wall-crossed at the start of the call
– Minutes after the call, Einhorn caused the sale of Greenlight’s shares in
Punch
– FSA: Asking not to be wall crossed not a complete defence; with his
experience, Einhorn should have known the information was price
sensitive
– Comparison with US regime – Mark Cuban case
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International enforcement trends
– Global crackdown by authorities
– cross border cooperation increasing
– A desire to achieve “credible deterrence”
– Criminal sanctions for individuals, fines for companies
– More and more aggressive enforcement
– More intrusive procedural and investigative techniques
– Led by the US
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Securities and Futures Commission
Market Misconduct
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Dual Enforcement Regime
SECURITIES AND FUTURES
ORDINANCE (SFO)
Criminal Prosecution (Part XIV SFO)
Civil Proceedings (Part XIII SFO)
(District Court)
(Market Misconduct Tribunal)
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Types of Market Misconduct
Civil
Criminal
Insider Dealing
s270
s291
False Trading
s274
s295
Price Rigging
s275
s296
Disclosure of Information
about Prohibited Transactions
Disclosure of False or
Misleading Information
Stock Market Manipulation
s276
s297
s277
s298
s278
s299
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False trading – Warrants case
– Fu and Lee prosecution for Macquarie warrants trading. Traders buying
and selling warrants from each other to earn rebate commissions
– Trading accounted for over 75% of volume in those warrants each day
– Court found this was creating a false impression of active trading
– 20 and 21 months imprisonment
– Pending appeal to the CFA
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False trading – recent prosecutions
– Pan Ming – client requesting assistance in fixing higher
closing price
– Chan Wing Fai – alleged to have purchased shares to drive
up price. Acquittal due to insufficient evidence to prove
manipulative intent
– Liang Jiang – fund manager buying shares on last day for 6
consecutive months. Acquittal as trading may have been
portfolio rebalancing. SFC has appealed
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False and misleading information – Vong
– First criminal prosecution on charges of disclosure of false and misleading
information
– SFC alleged failure to disclose side agreements was misleading
– District Court acquitted Vong in March 2012
– Insufficient evidence to show Vong’s involvement in the announcement or press release
– Delegation = a shield from market misconduct liability for directors?
– SFC has asked Department of Justice to consider appeal
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False and misleading information - Hontex
– Alleged to have over-stated turnover in prospectus for IPO
– Disclosure of false and misleading information likely to
induce transactions in shares – s 298
– Proceedings commenced via s 213
– Disciplinary action against sponsor – loss of licence and
$42 million fine
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Market Misconduct and Algorithmic Trading
– Trend towards closer scrutiny of algorithmic trading platforms and
impact they have on the market
– Fitness and properness/adequacy of systems and controls are key
issues
– Price rigging and false trading could also be used against algorithmic
traders
– Optiver case in US
– Alleged to have used algos to impact price of energy futures on
NYMEX
– US$14 million settlement, no admission of wrong-doing
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Summary of SFC's enforcement actions 2012
Cases
Charges
Outcome
Leung Chi Keung (COLI)
(18 April 2012)
Chiu Wing Nin Simon
(29 February 2012)
Lam Kwong Yu (HAECO)
(27 February 2012)
Tiger Asia
(18 April 2012)
Pan Ming (IRICO Group
Electronics)
(3 February 2012)
Symon Wong Yu-wing
(26 January 2012)
Chan Wing Fai
(13 January 2012)
Liang Jiang
(8 December 2011)
Vong Tat Leong
(15 March 2012)
Insider Dealing
Convicted
Insider Dealing
Trial postponed
Insider Dealing
Convicted
No
Insider Dealing and False
Trading
Trial pending
S213 ruling – leave to
appeal to CFA granted.
False Trading
Acquitted
TBD
False Trading
Trial pending
False Trading
Acquitted
TBD
False Trading
Acquitted
Disclosure of False and
Misleading Information
Acquitted
Yes
(6 Jan 2012)
TBD
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Appeal?
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Lessons learned – insider dealing, market misconduct
– Regulators in key markets are focusing on this conduct
– More and more rigorous investigation and enforcement
– More cross border cooperation
– Criminal sanctions and use of criminal process – Domestic and Int’l
– Time to review risk management and compliance
– Global Trading / Global Risk / Global Compliance
– Ensure decision makers and those executing trades know the rules
of the market traded
– Importance of principles based culture and training
– Importance of maintaining vigorous internal systems and monitoring
auditing behavior
– Spot audit for unacceptable behavior (email and Bloomberg)
– Ensure adequate policies are in place and that they are monitored
and enforced. Focus on actual behavior.
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Contacts
Simon Clarke
Partner - Hong Kong
Tel +852 2974 7202
[email protected]
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Angus Ross
Partner - Hong Kong
Tel +852 2974 7299
[email protected]
James Comber
Senior Associate - Hong Kong
Tel +852 2974 7140
[email protected]
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Questions?
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