The Hong Kong special regime for market misconduct
When a company or its executives are suspected of market misconduct in Hong Kong, the Securities and Futures Commission (the “SFC”) generally takes the leads of actions seeking to hold them accountable. The SFC has been granted broad powers under local regulations for this purpose.
1. Notion of Market Misconduct
Market misconduct is defined by the Securities and Futures Ordinance (Cap. 571) (the “SFO”), which came into effect in April 2003. There are 6 different types:
- 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 particular, section 277 of the SFO defines disclosure of false or misleading information as where, “in Hong Kong or elsewhere, a person discloses, circulates or disseminates, or authorizes or is concerned in the disclosure, circulation or dissemination of, information that is likely:
- to induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong;
- to induce the sale or purchase in Hong Kong of securities by another person; or
- to maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts, in Hong Kong”
2. Civil or criminal liability
Under the SFO, any type of market misconduct can lead to civil or criminal liability. They are mutually exclusive, i.e., a person that has been subject to a criminal proceeding may not thereafter be pursued for civil sanctions and vice versa.
The decision to institute criminal proceedings in Hong Kong lies with the Secretary of Justice who will, when reviewing a market misconduct claim, determine if (i) there is sufficient evidence to prosecute and (ii) if it is in the public interest to do so. If those criteria are not met, criminal proceedings will not be instituted, and it will be up to the SFC to decide whether or not the suspected market misconduct should be the subject of civil proceedings.
In practice, the SFC will first conduct an investigation of the suspected market misconduct. If the investigation is conclusive, several options are available to the SFC: (i) to file a claim before the Market Misconduct Tribunal (see below section III), (ii) to file a claim before the Tribunal of First Instance (see below under section IV), or (iii) to do both at the same time.
In the particular case of disclosure of false or misleading information, if the SFC decides to file a claim against the suspected wrongdoers, two conditions have to be established to create civil liability:
- “the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact; and
- the person knows that, or is reckless or negligent  as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact”
The defendants have defences available under and prescribed by the SFO, but those are generally narrowly interpreted.
3. The Market Misconduct Tribunal
Until 2003, the SFC had only one option for pursuing civil liability for insider trading - an application before the Insider Trading Tribunal. Since the entry into force of the SFO, the powers of the SFC have been extended with, among other things, the creation of a special Market Misconduct Tribunal (the “MMT”) where the SFC may institute civil proceedings if it believes that one of the defined types of market misconduct may have taken place.
The objective of a proceeding before the MMT is to determine if such market misconduct has taken place or not, to identify the wrongdoers and to determine the amount of profits gained or loss avoided as a result of the misconduct.
Pursuant to section 257 of the SFO, at the end of the proceedings, the MMT may, upon the application of the SFC, issue different types of orders against the wrongdoers:
- “a disqualification order – that a person shall not, without the leave of the Court of First Instance, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed corporation or any other specified corporation or in any way, whether directly or indirectly, be concerned or take part in the management of a listed corporation or other specified corporation for up to 5 years;
- a cold shoulder order – that a person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any of them or a collective investment scheme for up to 5 years;
- a cease and desist order – that the person must not again engage in any specified form of market misconduct;
- a disgorgement order – that the person pay to the Government an amount up to the amount of any profit gained or loss avoided as a result of the market misconduct;
- Government costs order – that the person pay to the Government its costs and expenses in relation to the proceedings and any investigation;
- SFC costs order – that the person pay the SFC's costs and expenses in relation to any investigation; and
- disciplinary referral order – that any body which may take disciplinary action against the person as one of its members be recommended to take such action against him” .
Decisions from the MMT may be appealed before the Court of Appeal regarding a point of law. To appeal a question of fact, prior consent of the Court of Appeal is necessary.
4. Investor’s protection powers of the SFC
The powers of the SFC are not limited to those highlighted above. Pursuant to Section 213 of the SFO, the regulator may also apply for different types of orders from the Court of First Instance:
- restoration orders to restore investors or any victims of wrongdoing to the situation they would have been in if the wrongdoing had not occurred;
- freezing orders to freeze assets until the outcome of other proceedings; and
- winding up orders.
Pursuant to this provision, the SFC has the power to act for and on behalf of investors that have suffered due to market misconduct. Because of the lack of a class action regime in Hong Kong, the powers granted to the regulator are, in effect, the only protection for investors, who generally do not initiate individual actions on their own because of costs considerations and the risks of litigation .
The SFC has used these powers various times, including in a famous case in 2013 against US asset management company Tiger Asia Management LLC, where the SFC filed a claim against the company for suspected insider trading . This was the first time the Court of Final Appeal confirmed that the Court of First Instance has the power to issue orders under section 213 of the SFO based on corporate misconduct upon the application of the SFC totally independent from any criminal or civil proceeding in front of the criminal court or the MMT.
The SFC again made use of this provision recently. In September 2020, the SFC announced that it was seeking orders before the Court of First Instance “to restore all public shareholders of the company to the position before their subscriptions or purchases of Tianhe’s shares”. Tianhe and one of its executives are suspected of having inflated the company’s revenues by more than 50% prior to a contemplated IPO in 2014. As a result, the SFC applied for an order that the company compensate the investors a total of USD 454M. Litigation is pending.
5. Private right of action
In addition to the rights granted to the regulator above, technically investors (and anyone having suffered from market misconduct) also have private rights of action.
Under Section 108 of the SFO, “if a person makes any fraudulent, reckless or negligent misrepresentation that induces another person to enter into or offer to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities, the person who makes the misrepresentation shall be liable to pay compensation to the person who suffers pecuniary loss as a result of the misrepresentation”. Further, pursuant to Sections 281 and 305 of the SFO, “if a person has engaged in or committed a market misconduct, he or she shall be liable to pay compensation by way of damages to any other person for any pecuniary loss sustained by the other person as a result of the market misconduct”.
Investors, however, do not use the powers granted to them under those sections in practice, but instead generally rely on the actions taken by the SFC on their behalf.
 Negligence alone is sufficient to establish civil liability. If criminal proceedings are instituted, recklessness on the part of the wrongdoer will have to be proven.
 Group litigation financed by external litigation funding is not possible yet in Hong Kong, as litigation funding is prohibited for commercial litigation because of the champerty and maintenance doctrines.