Hong Kong Court of Final Appeal Upholds Application of Securities Fraud Ordinance to Insider Dealing in Shares Listed Outside Hong Kong

On October 31, in Lee v. Securities and Futures Commission, the Hong Kong Special Administrative Region Court of Final Appeal decided that Section 300 of the Securities and Futures Ordinance (SFO), which broadly applies to securities fraud, applies to insider dealing in shares that were not listed on the Hong Kong Stock Exchange but were listed on the Taiwan Stock Exchange, provided that substantial activities constituting the crime occurred within Hong Kong.

Section 300 of the SFO states that a person

shall not, directly or indirectly, in a transaction involving securities, futures contracts or leveraged foreign exchange trading—

(a) employ any device, scheme or artifice with intent to defraud or deceive; or

(b) engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.

In 2006, four persons engaged in an insider dealing scheme involving shares of Hsinchu International Bank, whose shares were listed on the Taiwan Stock Exchange and were being acquired by Standard Chartered Bank. “Betty”, a solicitor in an international law firm, “Eric,” a solicitor in another international law firm, and “Patsy” and “Stella,” two sisters of Eric, pooled more than HK$6.3 million to buy Hsinchu shares, before the tender offer was made public, through a Hong Kong-based securities firm account that Patsy had opened for the purpose of trading in shares listed in Taiwan. (All names used are the English names that the Court used in its judgments.)  Once the tender offer was made public, Patsy accepted the tender on their Hsinchu shares, making an aggregate profit of nearly HK$2.7 million.  In a civil proceeding by the Hong Kong Securities and Futures Commission (SFC), a judge found that Betty, Eric, and Patsy had contravened section 300 by engaging in their scheme and that Stella had been involved in the others’ contravention of section 300.

In his judgment, Justice Robert Tang found that the term “transaction” in section 300 “has a wide meaning” and covers the defendants’ scheme.  Although subsection 291(5) of the SFO, which specifically prohibits insider dealing, uses definitions of “listed securities” and “listed corporation” that makes that subsection inapplicable to shares listed on the Taiwan Exchange, Justice Tang wrote, the term “securities” in section 300

is defined in wide terms and . . . is not confined to shares listed in Hong Kong. It can cover shares not listed in a recognized stock exchange.  I think it would be in keeping with the purpose of the SFO and Hong Kong’s position as an international financial center, that provided “substantial activities constituting the crime” occurred within Hong Kong, s[ection] 300 should cover the insider dealing in shares listed in Taiwan. I have no doubt that substantial activities constituting the complaint under s[ection] 300 occurred in Hong Kong. (Footnotes omitted)

Note: While one law firm has opined that the outcome in was “widely anticipated,” the breadth of the Court’s construction of section 300 is certainly greater than the SFC could have expected.  In the light of the holdings on the breadth of key terms in section 300, and on the reach of section 300 beyond shares listed in Hong Kong even to “shares not listed in a recognized stock exchange,” it will not be surprising if the SFC makes increasing use of that section to pursue a broad array of insider dealing cases.  As the Court did not list or describe the types of activities that could constitute “substantial activities . . . “occurr[ing] in Hong Kong,” the SFC will need to proceed cautiously in developing insider-dealing cases involving shares listed outside Hong Kong.

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