Hong Kong Tiger Asia Case: Are Insider Traders Losing Their Stripes?
I was at the Court of Final Appeal in Hong Kong on 30 April to witness the Securities and Futures Commission (SFC) win over Tiger Asia Management LLC in a landmark ruling. In dismissing Tiger Asia’s appeal, the court upheld the SFC’s right to seek remedial orders and injunctions in relation to the insider dealing case. This decision vindicates SFC’s strategy of combating market misconduct by seeking remedial order to protect the investing public; not long ago the SFC successfully obtained a court order that Hontex International Holdings Company Ltd. pay back more than HK$1 billion raised in its 2009 initial public offering.
Tiger Asia Case in a Nutshell
Tiger Asia, founded in 2001, is a New York-based asset management company with no physical presence or employees in Hong Kong. The SFC alleged that Tiger Asia breached various provisions of the Securities and Futures Ordinance (SFO) and was involved in insider dealing and false trading leading to market manipulation in dealing in securities. The case dates back to December 2008 and January 2009, when Tiger Asia engaged in illegal insider trading in shares of China Construction Bank and Bank of China after receiving confidential and price-sensitive information about impending private placements from its bankers. Based on its investigation, in April 2010 the SFC for the first time sought orders under Section 213 of the Securities and Futures Ordinance to exclude Tiger Asia from trading in the Hong Kong market and to freeze Tiger Asia’s assets equivalent to the notional net profit allegedly made. In addition the SFC sought to unwind the transactions and to restore affected counterparties to their pre-transaction positions.
The SFC faced a setback, however, in June 2011 when the Court of First Instance ruled against the regulator, maintaining that only a court with criminal jurisdiction or Market Misconduct Tribunal (civil) could determine whether Tiger Asia and three of its officers (known collectively the “Tiger Asia Parties”) broke Hong Kong’s insider dealing and market manipulation laws. Based on the ruling, the SFC was unable to seek final remedial orders against Tiger Asia Parties and injunctions to protect Hong Kong investors. The case was further complicated because Tiger Asia Parties were not within the jurisdiction of Hong Kong’s criminal courts and could receive immunity from prosecution if proceedings commenced before the Market Misconduct Tribunal.
SFC argued in the Hong Kong Court of Appeal that Section 213 is a freestanding remedy and that the case against Tiger Asia Parties was in accordance with the legislative intention of Section 213 and the Securities and Futures Ordinance. In February 2012, the Court of Appeal overturned the decision of the Court of First Instance, holding that Section 213 was meant to augment the SFC’s ability to protect the investing public and provide remedies for violations.
The recent Court of Final Appeal ruling brings an end to Tiger Asia’s challenge on the jurisdiction of Hong Kong courts to hear the case without a pre-existing criminal conviction or a Market Misconduct Tribunal finding.
Critics argue that the case exposes a glaring lapse in securities regulation and that revamping domestic securities laws to create an extraterritorial jurisdiction is necessary. They argue that, as a long-term solution, provisions of Section 213 must be amended to support an extensive overarching global reach for securities transactions.
It’s ironic that while Tiger Asia was challenging the SFC in Hong Kong, it entered a guilty plea in U.S. federal court in Newark, New Jersey. It admitted to illegally using inside information to trade and agreed to criminal and civil settlements of more than US$60 million.
Issues relating to insider trading and market manipulation are not exclusive to Hong Kong. Other Asian markets are also feeling the heat. Recent cases of fraud, market manipulation, and front running have prompted Indian regulators to create a high-level committee to review current insider trading rules and invite input from the public. This leaves us with two questions: Is regulation the answer to preventing insider trading and market manipulation? Or is effective enforcement of regulation the answer? If it is the latter, given the success of the Tiger Asia and Hontex cases, Indian regulators can learn plenty from their counterparts in Hong Kong.
Photo credit: iStockphoto.com/craftvision
