Insider Dealing – A Tightening of the Noose
It is frequently asserted that Hong Kong has one of the most robustly regulated financial markets in Asia. The introduction of dual civil and criminal liability in 2003 for offences of insider trading was certainly a step towards reinforcing this perception. This article considers how matters have evolved over the course of the last few years.
It is worth remembering that the maximum criminal penalty available is a fine of HK$10million and 10 years’ imprisonment. Civil penalties include a power given to the SFC to seek an order to appoint an administrator where a company has contravened any of the provisions. The SFC also has the power to seek interim injunctions to prevent the disposition of any property obtained through insider dealing. Finally, and unusually, the civil penalties include a right of action for individual investors to claim for damages suffered as the result of another’s breach of the insider trading regulations.
In deciding whether to prosecute or pursue a civil sanction, the SFC will have regard to the guidelines in the prosecution policy of the Department of Justice. The initial referral for civil or criminal prosecution will be subject to review by the SFC with a final decision made by the Secretary of State for Justice. It appears that a criminal prosecution will only be brought in the most serious of cases, as measured by the notional gain (avoidance of loss) made.
Between 2004 and 2008 no criminal prosecutions were brought for insider dealing offences. However, despite the fact that the first criminal prosecution was not brought until 2008, between 2008 and 2013 more people were convicted of criminal insider dealing offences than those against whom the facts were found proven in civil/regulatory proceedings. .
The first custodial sentence for insider trading was passed in 2009 when Ma Hon Yeung, a former investment banker for BNP Paribas Peregrine Capital, and three family members were convicted. Mr. Ma was jailed for 26 months and ordered to pay a fine of HK$230,000.
In 2009, in the landmark case of Du Jun, Mr. Du, a former Morgan Stanley managing director, was convicted of insider trading for buying shares in Citic Resources whilst in possession of inside information of their imminent purchase of an oilfield in Kazakhstan. He made a notional profit of HK$23million. He was sentenced to 7 years imprisonment reduced on appeal to 6 years. He was also ordered to compensate those from whom he had purchased the shares in the sum of the full notional profit of HK$23million. Contrast this sentence with that imposed on Mr. Martyn Dodgson who was sentenced to 4 and a half years in prison in the United Kingdom in 2016 after an investigation which the UK Financial Conduct Authority described as their largest insider dealing prosecution to date.
The rather tortuous history of the case of Pablo Chan Pak Hoe provided some guidance from the courts on sentencing those convicted of insider dealing. Initially, the Eastern Magistracy passed a sentence of 240 hours of community service. The SFC appealed this sentence and Mr. Chan was sentenced to 4 months imprisonment and ordered to pay a fine of HK$120,000 which represented his profits made. Mr. Chan appealed this to the Court of First Instance, which provided useful guidance by indicating that the starting point for any insider dealing offence was a custodial sentence of 6 months. For technical reasons they however re-imposed the original community order, thus precipitating an appeal to the Court of Final Appeal. In considering the appeal, the Hon Mr. Justice Ribeiro stated that, save for exceptional circumstances, the appropriate sentence for insider dealing should be an immediate custodial sentence and a fine which, at the very least, disgorges all of the profits made.
Other sentences of imprisonment passed by the courts since 2009 include 12 months’ imprisonment for Allen Lam Kar Fai with a fine of HK$1,372,218, and 15 months’ imprisonment for Mr. Simon Chui Wing-nin (coupled with a fine of HK$1018855 representing the notional loss avoided by him).
An analysis of the financial penalties imposed since 2008 indicates that the penalty is almost always equal to the profits made (or loss avoided) and as such it is clear that the courts view it as a disgorgement of the profits, whilst the custodial sentence is the punishment. Furthermore, it seems that judges use the notional profit as a benchmark to assess the level of criminality in each case. This is made plain by the Court of Appeal in the case of Mr. Du, which specified that the amount of theoretical profit gained by offenders is more relevant when considering the duration of a sentence of imprisonment than actual profits, because actual profits can be affected by external factors not related to the offender’s behaviour, such as unexpected market movements.
Looking at the court’s approach to the sentencing of insider traders, it may be tempting to think that matters recently have all gone in favour of the authorities. This notion was recently reinforced by the decision in SFC v Young Bik Fung and Ors HCMP2575/2010, a case in which dealing in overseas listed securities from Hong Kong on the basis of inside information obtained in Hong Kong, was deemed to contravene section 300 of the Securities and Future ordinance because the fraudulent or deceptive conduct took place in Hong Kong.
Equally, however there have in the recent past also been reminders that a robust approach to insider trading is not all encompassing. In 2008, for example, an appeals court removed the Market Misconduct Tribunal’s right to compel evidence and the power to impose fines greater than the culprit’s ill-gotten profits. Whilst that was unquestionably a significant blow for the authorities, more contemporary events have tended to confirm that the upper hand is very much with the SFC at present, a position consistent with its avowed intention to regulate the market place more assertively (see article in this edition of the newsletter by Paul Renteurs).