12 December, 2017
Nearly seven years after the Securities and Futures Commission ("SFC") first commenced legal proceedings for insider dealing offences against two former magic circle solicitors (Eric Lee and his girlfriend Betty Young), as well as Eric’s two sisters, the Court of Appeal re-affirmed the decision of the Court of First Instance ("CFI") on the scope of section 300 of the Securities and Futures Ordinance (Cap. 571) ("SFO") in that the section can be used to prosecute fraudulent or deceptive schemes used in transactions involving securities, even if such securities are not listed in Hong Kong.
The SFC's case against Young was that she obtained information on a tender offer on Hsinchu International Bank Company Limited ("Hsinchu Bank"), while working on the offer as a solicitor for a magic circle firm seconded to its client Standard Chartered Bank. She bought Hsinchu Bank shares and tipped off Lee and his two sisters, who also bought Hsinchu Bank shares before the announcement of the tender offer.
The SFC's case against Lee was that he had obtained information about the proposed privatisation of Asia Satellite Telecommunications Holdings Limited ("Asia Satellite") when the magic circle firm he worked for advised on the transaction. He then tipped off Young and his two sisters, who bought Asia Satellite shares before the announcement of the proposed privatisation.
Between Young and Lee, they made a total profit of HK$2.9 million and the SFC sought injunctions and remedial orders against Young, Lee, and Lee's sisters under section 213 of the SFO.
In January 2016, the CFI found Young and Lee guilty of contravening sections 291 and 300 of the SFO. The Court also made restoration orders against one of Lee’s sisters.
The CFI's decision was a landmark ruling on the interpretation of section 300 of the SFO, which prohibits the use of fraudulent or deceptive schemes or engagement in any practice which is fraudulent or deceptive “in a transaction involving securities….” The CFI held that the scope and application of section 300 is not restricted to a transaction involving Hong Kong listed securities and can apply to a transaction taking place in Hong Kong that involves overseas listed securities, and that this does not mean section 300 has an extra-territorial effect; there must still be a nexus to Hong Kong.
The CFI's interpretation of section 300 was the subject of appeal and the Court of Appeal, in upholding the CFI's decision, confirmed that the Hong Kong Court has jurisdiction in this particular case, because the activities constituting the contravention took place in Hong Kong, and that although the fraud was not directed at the counterparties to the trading activities on the Taiwanese Stock Exchange, the fraud or deception and the subsequent trading activities were sufficiently related.
It is now clear that the offences of insider dealing or related conduct may be prosecuted under section 300, even if the dealing is in securities listed overseas, so long as the fraudulent conduct has a nexus with Hong Kong.
