Hong Kong regulatory compliance

INTRODUCTION

The Securities and Futures Ordinance (SFO) creates dual civil and criminal regimes (under Parts XIII and XIV, respectively) in respect of all types of market misconduct. The SFO came into effect on 1 April 2003 and extended the previous law on market manipulation and disclosure of false or misleading information concerning securities and futures. While some of the provisions evolved from legislation replaced by the SFO, the law was modelled largely on Australian law.

“Market misconduct” as regulated under Parts XIII and XIV comprises 6 offences:

• insider dealing
• false trading
• price rigging
• disclosure of information about prohibited transactions
• disclosure of false or misleading information inducing transactions
• stock market manipulation.

Parts XIII and XIV contain virtually identical civil and criminal provisions in relation to the above.

In addition, Part XIV creates 3 criminal offences:

• use of fraudulent or deceptive devices in transactions in securities, futures contracts or leveraged foreign exchange trading
• disclosure of false or misleading information inducing others to enter leveraged foreign exchange contracts
• falsely representing dealings in futures contracts on behalf of others.

The following provides an overview of the provisions of the SFO as they relate to market misconduct (with the exception of insider dealing which is covered in a separate note) and the offences created by Part XIV. The scope of the regime is wide. The market manipulation provisions (i.e. false trading, price rigging and stock market manipulation) apply both to conduct in Hong Kong and elsewhere which affects securities or futures traded on an exchange or through an automated trading system (ATS) in Hong Kong and to conduct in Hong Kong which affects securities or futures traded on an overseas market.

MARKET MISCONDUCT

False Trading (Sections 274 and 295)

False trading occurs when:

1. a person, in Hong Kong or elsewhere, does anything or causes anything to be done, with the intention that, or being reckless as to whether, it creates, or is likely to create, a false or misleading appearance:
   1. of active trading in securities or futures contracts traded on an exchange or through an ATS in Hong Kong; or
   2. with respect to the market for, or the price of, securities or futures contracts traded on an exchange or through an ATS in Hong Kong. Such conduct by a person in Hong Kong which has a similar effect on securities or futures traded on an overseas market may also amount to false trading.
2. a person, in Hong Kong or elsewhere, is involved, directly or indirectly, in one or more transactions (whether or not any of them is a dealing in securities or futures) with the intention that, or being reckless as to whether, they create or maintain, or are likely to create or maintain, an artificial price for securities or futures contracts traded on an exchange or through an ATS in Hong Kong. The same conduct by a person in Hong Kong which has a similar effect on securities or futures traded on an overseas market may also constitute false trading.

It is not necessary for the transaction or transactions concerned to be in securities or futures. These provisions therefore prohibit a range of conduct that occurs off a market that affects prices on a securities or futures market, most importantly cross-market manipulation (i.e. conduct in one market which has a manipulative effect in another market) and cornering (i.e. monopolising or restricting supply of an asset so as to manipulate its price).

A person who engages in an on-market “wash sale” or “matched order” is presumed to have intended, or been reckless as to whether, his conduct creates or is likely to create a false or misleading appearance of active trading, the market for, or price of, the securities (sections 274(5) and 295(5)). He will have a defence if he can establish that the purposes for which he engaged in the transaction did not include the purpose of creating such a false or misleading appearance (sections 274(6) and 295(7)). The presumption applies only to “on-market” wash sales and matched orders – that is they are recorded on the relevant exchange or ATS or have to be reported to the exchange or ATS operator under the rules governing the exchange or ATS. For off-market wash sales and matched orders, the prosecution will need to prove the mental element.

“Wash sales” are trades in which a person buys or sells securities without there being a change of beneficial ownership (sections 274(5)(a) and 295(5)(a)).

A “matched order” is where a person offers to sell or buy securities at a price that is substantially the same as the price at which he has made or proposes to make, or he knows an associate of his has made or proposes to make, an offer to buy or sell the same or substantially the same number of securities (sections 274(5)(b) and (c) and 295(5)(b) and (c)).

Where the offence in question involves conduct in Hong Kong which affects securities or futures traded on an overseas market, the prosecution must prove that such conduct is also unlawful in the country in which the market is situated (sections 282(3) and 306(3)). The same applies to price rigging and stock market manipulation where the conduct in question takes place in Hong Kong but affects securities or futures traded on an overseas market.

An “associate” is defined to include a person’s spouse or reputed spouse, brother, sister, parent, step-parent, natural or adopted child or step-child, any corporation of which a person is a director, any partner or employee of a person and in the case of a corporation, each of its directors and its related corporations and each director or employee of any of its related corporations.

Recent Case of False Trading: China AU Group Holdings Limited

China AU Group Holdings Limited (China AU) was a company listed on the GEM of the Hong Kong Stock Exchange. The SFC commenced proceedings in 2016 for alleged false trading against the former CEO of China AU, Ms. Samantha Keung (Keung), Ms. Wu Hsiu Jung (Wu) and Mr. Chen Kuo-chen (Chen).

Facts

Between 19 August 2009 and 30 March 2010, the following events took place in relation to China AU:

1. On 19 August 2009, China AU announced its intention to place up to 175 million shares at a price of HK$0.80 per share. The maximum placement proceeds would be HK$140 million of which around HK$135.5 million would be used to finance a potential acquisition of a property for a professional beauty training institute in Mainland China and/or for general working capital purposes;
2. On 28 October 2009, China AU announced that the placement period would be extended for an extra month, from to 30 November 2009. It issued a further announcement on 2 December 2009 that only 49.8 million shares were placed, raising around HK$38.3 million;
3. On 16 December 2009, China AU executed a letter of intent to acquire a 70% interest in another asset holding entity for HK$80 million that held a piece of land in Guangzhou (Acquisition). It announced on 24 February 2010 that it entered into a supplemental letter of intent to extend the deadline for the execution of the sale and purchase agreement for the Acquisition to 31 March 2010;
4. On 8 March 2010, China AU announced that it intended to issue convertible bonds of up to HK$114 million to independent placees, with a conversion price of HK$0.19 per share (Share Placement). The placement proceeds would finance the Acquisition, the development of new products and for general working capital purposes. The Share Placement was completed in April 2010; and
5. On 30 March 2010, China AU announced that it had entered into Heads of Agreement for the Acquisition and the deadline for executing the sale and purchase agreement was extended to 28 April 2010.

The SFC alleged that between the fundraising events described above, a substantial amount of China AU shares were traded by two groups of individuals headed by Wu and Chen.

Between 25 August 2009 and 21 April 2010 (the Relevant Period), Wu and others (Wu Group) used 12 securities accounts opened in their names to buy around 48.89 million China AU shares and to sell around 42.33 million China AU shares. Nearly all of the funds to finance the trading within the Wu Group came from Wu’s bank accounts.

Between 3 December 2009 and 5 March 2010, around HK$12 million was withdrawn from Wu’s bank accounts and was deposited into the securities accounts of the Wu Group. Wu was funded by the former CEO of China AU, Keung and the executive director and vice-chairwoman of China AU, Ivy Chan (Chan), and received money from bank accounts held by Keung, Chan and Keung and Chan jointly. Between 24 August 2009 and 25 February 2010, around HK$11.6 million was deposited into Wu’s bank accounts. 28 transactions of China AU shares were conducted via the securities accounts of the Wu Group during the Relevant Period, totalling 8.09 million shares.

During the Relevant Period, Chen via two securities accounts held in his name and in the name of another (Chen Group) bought around 19.31 million China AU shares and sold around 17.71 million China AU shares. Between 24 November 2009 and 12 March 2010, the trading was conducted by funds deposited into the two accounts held by the Chen Group, HK$3.6 million from the bank accounts of Keung and her son and the executive director of China AU, Samson Cheung.

Trading Patterns of the Wu and Chen Group

The trading patterns of the Wu and Chen Groups could be divided into the following three phrases.

During the first phase from around the end of November 2009 to December 2009, the Wu and Chen Groups accumulated more than 23 million China AU shares in their securities accounts. This trading phase coincided with the aftermath of a weak market response to the Share Placement. The expert witness in the MMT proceedings considered that the accumulation of more than 23 million China AU shares during the First Phase would have supported the company’s share price and thus, supported China AU’s further attempts to raise capital.

In the Second Phase from around the end of December 2009 to 2 March 2010, a large number of purchases and sales were conducted via the securities accounts of the Wu and Chen Groups although the overall balance of China AU shares held by the groups remained constant. The expert witness opined that active trading during this period would have created the image of ample liquidity in China AU shares, which would also support China AU’s further attempts to raise funds in the market, particularly if a placing of convertible bonds was being considered. This view was further supported by the significance of the shares’ liquidity to the convertible bond issue. The representative of Yardley Securities Limited who dealt with Keung in arranging the placing of convertible bonds explained that since no interest was payable on the convertible bonds, bondholders only stood to profit from selling the shares following conversion of the bonds. There therefore needed to be a liquid market in the shares for investors to be able to profit from selling shares.

In the third phase from 3 to 5 March 2010, the last three days before China AU’s announcement of the Share Placement, the Wu and Chen Groups aggressively sold China AU shares at the end of each trading day to generate a lower closing price for China AU shares and lower the conversion price for the convertible bonds. On 5 March 2010, the aggressive selling pushed the share price down by 9.3%.

Effects of the Trades

The combined effect of the trading during the first and second Phases by the Wu and Chen Groups (or alternatively, of the Wu Group’s trading), created or was likely to create a false or misleading appearance of active trading in China AU shares. Further fundraising attempts by China AU around that period would benefit from increased liquidity in China AU shares and a positive performance in the share price, or at least a lesser decline.

In the third phase, the Share Placement benefited from a lower price for China AU shares, caused by the aggressive selling of the shares by the Wu and Chen Groups before the convertible bond issue. This may have lowered the conversion price making it appear more attractive to potential investors and increasing the chances of a successful placement.

The SFC alleged that Keung, Chen and Wu engaged in market misconduct contrary to section 274(1) of the SFO on the following basis:

1. The trading was financed from the same source, did not involve any change in beneficial ownership of the shares and had no rational economic justification. During the Relevant Period, 92 transactions were conducted between the securities accounts held by the Wu and Chen Groups for a total of 20.8million China AU shares;
2. Further or alternatively, the manner in which the trade orders were placed and executed required coordination between the counterparties involved in the trades.
3. Further or alternatively, the transactions were regarded as having been conducted with the intention that, or being reckless as to whether they had, or were likely to have, the effect of creating a false or misleading appearance of active trading or with respect to the market for, or the price for dealings, in China AU shares.

MMT Findings

Wash Sales

The MMT considered the analysis of the mechanics of the trading of shares by an expert witness to decide whether false trading had been committed. The expert identified a large number of “wash sales”.

The expert witness identified 28 trades involving more than 8 million China AU shares among the 12 accounts in the Wu Group. The largest number of wash trades took place in the second phase, with 21.1% of the trades being wash sales. None of the trades between the Chen Group’s two accounts constituted wash sales.

However, on the basis that both the Wu Group and the Chen Group were controlled by Keung, Wu and Chen, the expert witness identified 92 wash trades involving 20.8 million China AU shares. Considering the trades of the Wu and Chen Groups, the largest number of wash trades took place in the second phase, being 28.8% of the total volume of China AU shares traded.

Coordination Between Counter-Parties

The expert witness, in analysing the trades, found that there was evidence of pre-arrangements between the counterparties and a number of trades would have required coordination between them. These trades had no economic justification and increased the traded volume of China AU shares without any change to the economic exposure of the Wu and Chen Groups.

The expert witness also observed that:

1. the trading did not result in overall changes for the individuals involved as purchases were followed by sales on the subsequent day (and vice versa); and
2. trades were conducted in one large block or in a sequence of trades in quick succession. As no other market participants were involved, this implies that both orders were entered at a new price level. Given the time-price priority, if one side of the trade joined an existing bid or offer in the market, the existing bid or offer would be executed first. In that case, the traded size of both participants in the “wash sale” would not be equal;
3. The trades appear to have been conducted in a manner that made it unlikely for other market participants to engage in the trading. The economic position would have changed if other market participants had engaged.

The MMT was satisfied that Keung directed the trading and undertook extensive wash trading with Wu and Chen. She also intended to create a false or misleading appearance of active trading, market or price for the China AU shares. The MMT was also satisfied that Wu and Chen, who knowingly and actively worked with Keung in executing a scheme of trading China AU shares, assisted in creating a false or misleading appearance of active share trading and that the manner of their trades also created a false or misleading appearance of the market for the shares and their price.

Orders and Fines

The MMT imposed the following sanctions against the individuals involved in the case, in addition to an order to pay the SFC’s legal and investigation costs and the costs incurred by the Hong Kong Government and the MMT:

1. A disqualification order against Keung a from being a director or from being directly or indirectly concerned or participating in the management of a listed company for four years;
2. Cold shoulder orders against Keung, Wu and Chen for four, three and two years, respectively, preventing them from dealing in any securities, future contracts or leveraged foreign exchange contracts (directly or indirectly), or any interest in these products or a collective investment scheme;
3. Cease and Desist Orders against Keung, Wu and Chen, to prohibit them from engaging in false trading. Future acts of false trading on their part would constitute a criminal offence.

Price Rigging (Sections 275 and 296)

Price rigging occurs when a person in Hong Kong or elsewhere:

1. engages, directly or indirectly, in a wash sale of securities which has the effect of maintaining, increasing, reducing, stabilising, or causing fluctuations in, the price of securities traded on an exchange or through an ATS in Hong Kong; or
2. engages, directly or indirectly, in any fictitious or artificial transaction or device with the intention that, or being reckless as to whether, it has the effect of maintaining, increasing, reducing, stabilising, or causing fluctuations in, the price of securities, or the price for dealings in futures contracts, that are traded on an exchange or through an ATS in Hong Kong.

The same conduct by a person in Hong Kong which affects securities (or, in the case of paragraph 2, securities or futures contracts) traded on an overseas market will also constitute price rigging if such conduct is unlawful in the country in which the relevant market is situated.

A person will have a defence in relation to 1 above (and also where the conduct is in Hong Kong and affects securities traded on an overseas market) if he can establish that the purposes for which the securities were sold or purchased did not include the purpose of creating a false or misleading appearance with respect to the price of securities (Sections 275(4) and 296(5)).

Recent Price Rigging Case

HKSAR v Li Jialin

Mr. Jialin was the controlling shareholder and chairman of Main Board-listed VST Holdings Limited (VST) (now known as VSTECS Holdings Ltd), holding over 40% of VST’s shares. It was alleged that Mr. Jialin had entered into trades that did not involve a change in beneficial ownership of the VST shares, which had the effect of maintaining, increasing, reducing, stabilising or causing fluctuations in the price of the shares in breach of sections 296(1)(a) and (4) of the SFO.

Three securities accounts were involved in the case, one held in Mr. Jialin’s own name, the second account held jointly by Mr. Jialin and his wife and the third account held by an individual named “Li Baolin”.

As the term “price” is not defined in the SFO, the District Court was in favour of the prosecution’s view that price meant “nominal price” i.e. anyone trading in Hong Kong listed companies could find out the price of a particular stock at any given time by looking up the stock price on the Hong Kong Stock Exchange website. Investors would consider the price of a share to be based on the price calculated, recorded and released by the Hong Kong Stock Exchange. The proper way to decide on the effect a transaction had on the price is by way of taking the nominal price immediately before the transaction and then see what effect the transaction had on the nominal price.

The Court rejected the defendant’s argument that the Court should look at other methods of ascertaining the price of the share before analysing the effect a transaction had on the share price. The method used to gauge the effect of a transaction must involve looking at the full range of prices before and after the acquisition and not just the prices immediately before and after a transaction.

Mr. Jialin faced 11 charges of price rigging with each charge related to one particular trading day. The Court held that the transactions were conducted between securities accounts controlled by the defendant and that no change occurred in the beneficial ownership of the shares traded. On 10 out of 11 trading days, there were transactions that increased the VST share price. Mr. Jialin was convicted on 10 of 11 counts of price rigging charges and was sentenced to six months’ imprisonment concurrently for each charge, disqualified from being a director of a listed company for a year and was ordered to pay investigation costs of HK$168,282 to the SFC. He was the first listed company chairman to have been convicted of market manipulation since the SFO took effect.

Stock Market Manipulation (Sections 278 and 299)

These provisions relate only to transactions in securities.

Stock market manipulation occurs when, in Hong Kong or elsewhere, a person enters into or carries out, directly or indirectly, 2 or more transactions in securities of a corporation that by themselves or in conjunction with any other transaction:

1. increase, or are likely to increase, the price of any securities traded on an exchange or through an ATS in Hong Kong, with the intention of inducing another to purchase or subscribe for, or to refrain from selling, securities of the corporation or those of a related corporation;
2. reduce, or are likely to reduce, the price of any securities traded on an exchange or through an ATS in Hong Kong, with the intention of inducing another to sell, or to refrain from purchasing, securities of the corporation or those of a related corporation;
3. maintain or stabilise, or are likely to maintain or stabilise, the price of any securities traded on an exchange or through an ATS in Hong Kong, with the intention of inducing another to sell, purchase or subscribe for, securities of the corporation or those of a related corporation, or to refrain from so doing.

The same conduct in Hong Kong which affects securities traded on an overseas market will also amount to stock market manipulation if the same conduct is unlawful in the country in which the relevant market is situated.

A broker’s failure to question or consider the consequences of a client’s instruction that insinuates a clear intention to manipulate a stock price could result in licence suspension.

Recent Market Manipulation Case

On 23 May 2019, the Eastern Magistrates Court convicted Mr. Tsoi Wan, who held a licence for regulated activity Type 2 (dealing in future contracts), of three charges of manipulating the calculated opening price (COP) of Hang Seng Index futures contracts in the futures market. The COP is calculated during the pre-market opening period and serves as the market opening price for the relevant product. The morning pre-market opening period is the 30-minute period, from 8:45am to 9:15am, before the commencement of the normal trading period of the morning session, for traders to place orders and for those orders to be matched in accordance with the rules of the Hong Kong Futures Exchange.

The SFC found that Mr. Tsoi manipulated the COP of HSI futures contracts by placing various orders during the morning pre-market opening period on 10 June 2013, 21 August 2013 and 4 September 2013, making a profit of HK$70,800.

Mr. Tsoi Wan pleaded guilty to three charges of market manipulation and was fined HK$60,000.

Disclosure of Information about Prohibited Transactions (Sections 276 and 297)

Disclosure of information about prohibited transactions occurs when a person discloses, circulates or disseminates, or authorises or is concerned in the disclosure, circulation or dissemination of, information to the effect that the price of securities of a corporation, or the price for dealings in futures contracts, that are traded on an exchange or through an ATS in Hong Kong, will be affected or is likely to be affected by a prohibited transaction (i.e. any conduct or transaction which constitutes market misconduct or contravenes Part XIV) relating to either the corporation or a related corporation or futures contracts if he, or an associate of his:

1. has entered into, directly or indirectly, the prohibited transaction; or
2. has received, or expects to receive, directly or indirectly, a benefit as a result of the disclosure, circulation or dissemination of the information.

These provisions build upon the previous law in Section 135(5) of the SO and Section 62(2) of the CTO. Their aim is to prevent persons involved in market misconduct, their associates or those they have recruited for reward from spreading information about the effect that market misconduct is going to have on the price of a security or futures contract. Those involved in market misconduct may seek to increase their profits by spreading such rumours hoping that ordinary investors will be encouraged to buy or sell, so pushing the price of the securities or futures further in the direction that those involved in the market misconduct intend.

It is a defence if a person can establish that:

1. the benefit which he or his associate received, or expected to receive, was not from a person involved in the prohibited transaction or an associate of his; or
2. the benefit which he or his associate received, or expected to receive, was from a person involved in the prohibited transaction or an associate of his, but up to (and including) the time of the disclosure, circulation or dissemination of the information, he acted in good faith.

These defences are intended to cover persons such as journalists and research analysts who may innocently report market misconduct and its effect on prices and innocently receive a benefit for such conduct.

A “related corporation” is defined as follows:

1. 2 or more corporations are regarded as related corporations of each other if one of them is:
   1. the holding company of the other;
   2. a subsidiary of the other; or
   3. a subsidiary of the holding company of the other;
2. when an individual:
   1. controls the composition of the board of directors of one or more corporations;
   2. controls more than half of the voting power at general meetings of one or more corporations; or
   3. holds more than half of the issued share capital (excluding any part which carries no right to participate beyond a specified amount on a distribution of either profits or capital) of one or more corporations,

each of the corporations referred to in paragraphs i to iii, and each of their subsidiaries, are regarded as related corporations of each other.

Disclosure of False or Misleading Information Inducing Transactions (Sections 277 and 298)

Disclosure of false or misleading information inducing transactions occurs when, in Hong Kong or elsewhere, a person discloses, circulates or disseminates, or authorises or is concerned in the disclosure, circulation or dissemination of, information that is likely:

1. to induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong;
2. to induce the sale or purchase in Hong Kong of securities by another person; or
3. to maintain, increase, reduce or stabilise the price of securities, or the price for dealing in futures contracts, in Hong Kong, if :
   1. the information is false or misleading as to a material fact or through the omission of a material fact; and
   2. the person knows that, or is reckless or, for civil market misconduct only*, negligent as to whether, the information is false or misleading as to a material fact or through the omission of a material fact.

* Under Section 298, negligence will not suffice to establish criminal liability.

Defences are available for those who unwittingly disseminate false or misleading information in the course of their business, which involves disseminating information received from others and who are not in a position to check the accuracy of that information. In summary these defences are for:

1. persons operating a “conduit” style business of issuing or reproducing information supplied by others, such as publishers and printers;
2. persons whose business involves electronically providing access to third party information, where the information is wholly devised by another person, for example those operating internet websites providing access to third party information; and
3. broadcasters of information devised wholly by another.

These defences may only be relied upon if the person did not know that the information was materially false or misleading at the time of disclosure. They are narrowly drafted and will only be available in very specific circumstances. In particular, they are only available where the information has been devised entirely by someone else and the defendant and his officers and employees did not in any way modify or exercise control over the information. In the case of paragraph b, it must also be made clear that those re-transmitting the information have not devised it, and do not take responsibility for or endorse its accuracy.

These provisions have significant implications for issuers of securities (whether listed or unlisted) and their advisers. While it must be the case that the information is likely to have an effect (i.e. induce a dealing in, or affect the price of, securities or futures contracts) in Hong Kong, the disclosure of information may occur anywhere. Further, it is not necessary for the information disclosed to in fact have such an effect. It is sufficient if the information is likely to have that effect. Given that negligence as to whether the information is materially false or misleading is sufficient to establish civil liability (and recklessness may establish criminal liability), these provisions are of considerable significance for roadshows, research analysts and the imparting of information to potential investors generally.

Recent Case of Disclosure of False or Misleading Information Inducing Transactions

Securities and Futures Commission v Qunxing Paper Holdings Co Ltd & Others

The SFC brought the action against Main Board-listed Qunxing Paper Holdings Co Ltd (Qunxing Paper), its subsidiary, Best Known Group Ltd (Best Known) and the chairman and vice chairman of Qunxing Paper, Mr. Zhu Yuguo and his son, Mr. Zhu Moqun for false or misleading statements in Qunxing Paper’s financial results and seeking compensation for the company’s public investors who had acquired shares or warrants in the listed company.

Qunxing Paper was engaged in the business of manufacturing and selling decorative base paper products and paper products printing in Mainland China. Mr. Zhu Yuguo and Mr. Zhu Moqun resided in Shandong, attended to Qunxing Paper daily business operations and managed its affairs.

Qunxing Paper was listed on the Main Board of the Hong Kong Stock Exchange in October 2007. It made an open offer of new shares on 17 December 2010 at HK$0.66 per share, which was slightly undersubscribed by the public and raised about HK$112.46 million from public investors. Qunxing Paper raised further funds shortly thereafter by way of a subscription agreement with an investor named Victory Asset Management Limited, which subscribed for 206.56 million unlisted warrants of Qunxing Paper at HK$0.05 per warrant. The exercise price was HK$2.95 per share. Victory Asset did not exercise its right to subscribe for any shares within the exercise period of 12 months.

Trading of the company’s shares on the Hong Kong Stock Exchange was suspended on 30 March 2011 due to a disclaimer of opinion by Qunxing Paper’s then auditors, KPMG, regarding its 2010 annual results,. The last trading price before suspension was HK$2.18 per share. The 2010 results were published the next day. KPMG resigned as auditors on 8 June 2011.

False and Misleading Information

Overstated sales

The SFC found that Qunxing Paper’s sales to Shanghai On Hing Paper Co Ltd (Shanghai On Hing) and Changzhou Cuiqiao Cheunguang Paper Co Ltd (Cuiqiao) were materially overstated.

Shanghai On Hing was held out to be a top customer of Shangdong Qunxing Paper Ltd (Shandong Qunxing), a wholly owned subsidiary of Qunxing Paper held via Best Known and the sole operational arm of the group. However, in fact, Shanghai On Hing was not a customer of Shandong Qunxing from 2006 onwards, and had ceased business operations in early 2008. Certain records and documents provided by Qunxing to its then auditors KPMG pertaining to the purported purchases and payments by Shanghai On Hing were later found to be fictitious. The purported employees of Shanghai On Hing made available to the auditors and external reporting accountants also turned out not to be employees of Shanghai On Hing or its group.

Shanghai On Hing, until early 2008, and a sister company called Huidong, after 2007, did place orders with a supplier called Kangmu, which was not part of the Qunxing Paper group but a company owned by Mr. Zhu Yuguo personally. However, since Kangmu occasionally received sales invoices from Shandong Qunxing Paper and made payment accordingly, the Court accepted these were arguably Shandong Qunxing Paper’s sales.

Cuiqiao was held out to be one of the top ten customers of Shandong Qunxing Paper from 2007 to 2010 and the top customer in 2011. In fact, its purchases from Shandong Qunxing were only about half the amount reported. Further, certain bank payment records provided by Qunxing Paper during the investigation were later found to be fictitious. The purported employee of Cuiqiao made available to the auditors and external reporting accountants turned out to be someone who had already left Cuiqiao before the meetings. The Court found that between 2006 and 2011, Qunxing Paper had overstated the amount of turnover in its IPO prospectus, annual reports or results announcements from 2.56% to 19.33%. Therefore, the gross profit, profit from operations, profit before tax, profit for the year and earnings per shares were also overstated.

Undisclosed Bank Loans

Further, Qunxing Paper failed to disclose all the bank borrowings of the group in its annual reports and results announcement for 2009 to 2012, with the undisclosed outstanding bank loans ranging from RMB389.2 million to RMB1,594.2 million. These loans were between 4 times and over 14 times of the recorded liabilities at the end of the relevant periods and were clearly material to the current liabilities and total liabilities of the group.

Restructuring of Qunxing Paper

On 21 February 2014, Shangdong Qunxing applied in Mainland China for restructuring under the Enterprise Bankruptcy Law, based on its inability to pay its debts or the high likelihood that it would lose the capacity to pay off its debts. This implied a sudden deterioration of the financial position of Shandong Qunxing Paper between the date of its interim report as at 30 June 2013, which was published on 27 September 2013, showing cash and cash equivalents of RMB 655.3 million, and February 2014 when it applied to the Mainland Court for restructuring.

The restructuring application was submitted to the Mainland court on 24 February 2014, but it was not disclosed to its public investors in Hong Kong. When the SFC made enquiries about the restructuring application, Qunxing Paper suddenly announced on 21 March 2014 the resignation of all its directors, including Mr. Zhu Yuguo and Mr. Zhu Moqun.

Interim receivers and managers were appointed for Qunxing by the Court of First Instance on 28 March 2014 on the application of the SFC. It has since transpired that Shandong Qunxing Paper was insolvent. At the creditors’ meetings held in November 2014, the auditors of Shandong Qunxing Paper reported that its assets and liabilities were RMB530 million and RMB5.37 billion, respectively. A restructuring proposal for Shandong Qunxing Paper was approved by the Mainland court in December 2014. The prospects of Qunxing Paper and Best Known being able to receive any value for its equity in Shandong Qunxing or for a small inter‑company balance due from Shandong Qunxing were considered negligible.

In 2018, the Court of First Instance granted orders against Qunxin Paper, Mr. Zhu Yuguo, Mr. Zhu Moqun and Best Known to compensate investors who had subscribed for Qunxin shares in its IPO or purchased them in the secondary market between 2007 and 2011, which amounted to HK$1.42 billion. The court also ordered payments to be made to Victory Asset Management Limited, which subscribed for 206.56 million unlisted warrants of Qunxing Paper in January 2011.

ADDITIONAL OFFENCES

Division 4 of Part XIV creates 3 additional offences. These are not within the definition of market misconduct and are therefore not liable to proceedings before the MMT and are instead subject only to criminal proceedings.

Use of Fraudulent or Deceptive Devices in Transactions in Securities, Futures Contracts or Leveraged Foreign Exchange Trading (Section 300)

This offence provides that a person shall not, directly or indirectly, in a transaction involving securities, futures contracts or leveraged foreign exchange trading:

1. employ any device, scheme or artifice with intent to defraud or deceive; or
2. engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.

Disclosure of False or Misleading Information Inducing others to enter Leveraged Foreign Exchange Contracts (Section 301)

A person shall not, in Hong Kong or elsewhere, disclose, circulate or disseminate, or authorise or be concerned in the disclosure, circulation or dissemination of, information that is likely to induce another person to enter into a leveraged foreign exchange contract in Hong Kong, if:

1. the information is false or misleading as to a material fact or through the omission of a material fact; and
2. the person knows that, or is reckless as to whether, the information is false or misleading as to a material fact or through the omission of a material fact.

This prohibits the same conduct in relation to leveraged foreign exchange contracts as is outlawed in respect of securities and futures transactions under Section 298. Section 301 also provides the same narrowly drafted defences as that section for those who passively disseminate information received from others such as printers, internet website operators and broadcasters.

Falsely Representing Dealings in Futures Contracts on behalf of others (Section 302)

A person shall not represent to another person that he has on behalf of the other person dealt in, or facilitated or arranged for any dealing in, a futures contract traded on an exchange or through an ATS in Hong Kong (or a contract or other instrument substantially resembling a futures contract in accordance with the rules of a futures market outside Hong Kong), if he has not in fact done so and he knows that, or is reckless as to whether, he has not done so.

EFFECTS OF MARKET MISCONDUCT

The Market Misconduct Tribunal (MMT)

The civil market misconduct regime under Part XIII of the SFO covers all types of market misconduct. The MMT is chaired by a judge or former judge of the Hong Kong High Court assisted by two members and a presenting officer appointed by the Secretary for Justice conducts proceedings. The members are required to have financial services related experience and are prominent members of the business community and are appointed on a case by case basis by the Financial Secretary. MMT hearings are heard in public, unless the MMT on its own motion or on its determination in the interests of justice, upon the application of any identified person in the hearing or the appointed presenting officer, that the whole or part of the hearing shall be heard privately.

The MMT is inquisitorial and is entitled to direct the SFC to carry out further investigations and report its findings to the MMT. Under the SFO, the presenting officer is a lawyer appointed by the SFC who represents the SFC, presents the SFC’s evidence to the MMT and make submissions to enable the MMT to reach an informed decision as to whether market misconduct has been committed and if so, the nature of such breach. The intention is that he should be more like a prosecuting counsel.

There are detailed provisions in the SFO governing the composition of and procedures to be followed by the MMT.

Proceedings of the MMT

The SFC may, upon receiving the Secretary of Justice’s consent, institute proceedings before the MMT under Section 252 in respect of any suspected market misconduct by giving notice in writing to the MMT setting out the alleged breach of the market misconduct provision(s), brief particulars of the market misconduct and the identity of the persons allegedly involved for the proceedings.

The main purpose of proceedings is to determine:

1. whether any market misconduct has taken place;
2. the identity of every person involved in the market misconduct; and
3. the amount of any profit gained or loss avoided as a result of the market misconduct.

The MMT may identify a person as having engaged in market misconduct if:

1. he has perpetrated any market misconduct;
2. the market misconduct was perpetrated by a corporation of which he is an officer and with his consent or connivance; or
3. another person engaged in market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.

The MMT makes its findings on the civil standard of proof. It needs therefore to be satisfied that a person has engaged in market misconduct on the balance of probabilities (rather than beyond reasonable doubt which is the criminal standard of proof). The SFC does not have to prove its case on the balance of probabilities, but rather to present the available evidence to the MMT to enable it to make an informed decision on the matter.

However, like the IDT, the MMT has powers to receive any evidence, whether or not such evidence would be admissible in civil or criminal proceedings. It also has wide powers to compel the giving of evidence and to prevent the publication of information about the evidence the MMT receives. Significantly, a person is not excused from complying with a requirement of the MMT to give evidence on the ground that to do so might incriminate him (Section 253(4)) and such compelled self-incriminatory evidence may be considered by the MMT.

Orders of the MMT

At the end of any proceedings, the MMT may under Section 257(1) impose one or more of the following sanctions on any person found to have committed market misconduct:

1. 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;
2. 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;
3. a cease and desist order – that the person must not again engage in any specified form of market misconduct;
4. 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;
5. Government costs order – that the person pay to the Government its costs and expenses in relation to the proceedings and any investigation;
6. SFC costs order – that the person pay the SFC’s costs and expenses in relation to the proceedings and any investigation;
7. Financial Reporting Council costs order– that the person pay the Financial Reporting Council’s costs and expenses incurred in relation to any investigation conducted by the council; and
8. 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.

A disgorgement order may, at the discretion of the MMT, be made subject to compound interest from the date of the occurrence of the market misconduct in question (Section 259 of the SFO). The SFC also has the ability to fine regulated persons (see “Disciplinary Proceedings” below).

When making an order, the MMT may, pursuant to Section 257(2), take account of any previous convictions in Hong Kong, any previous findings of market misconduct or breach of disclosure requirement by the MMT and any previous findings of insider dealing under the repealed Securities (Insider Dealing) Ordinance (S(ID)O).

Cold shoulder orders, cease and desist orders, SFC costs orders and disciplinary referral orders were introduced by the SFO. Failure to comply with a disqualification, cold shoulder or cease and desist order is a criminal offence under sub-sections 257(10) and 258(10) punishable by a maximum fine of HK$1 million and/or up to 2 years’ imprisonment.

In addition, Sections 253(2) and 254(6) prescribe a penalty of a maximum fine of HK$1 million and a maximum of 2 years’ imprisonment for failure to comply with various requirements of the MMT or disrupting its proceedings. The conduct referred to in those sections are punishable as contempt under Section 261.

Appeals

The SFC or any person identified as having engaged in market misconduct and who is dissatisfied with a finding or determination of the MMT may appeal to the Court of Appeal:

• on a point of law or;
• with the leave of the Court of Appeal, on a question of fact

Under the SFO, a party who is not satisfied with certain decisions by the SFC (i.e. disciplinary action) may appeal to the Securities & Futures Appeal Tribunal (SFAT).

Recent MMT and SFAT decisions have reiterated that:

• SFC disciplinary proceedings are civil in nature for the purposes of the Hong Kong Bill of Rights; and
• the civil standard of proof in Section 218(7) of the SFO, allowing for flexibility in respect of the seriousness of the issue (a sliding standard of proof), should be used in any SFC disciplinary proceedings and SFAT proceedings, except for charges of contempt. It is possible for the civil threshold to approach or even be identical to the criminal standard if the potential penalty can lead to loss of liberty. However, generally, the standard of proof in disciplinary proceedings of offences that are not generally applicable to the public, but only to a limited group of individuals, such as licensed persons, would not be criminal.

ADDITIONAL OFFENCES

Division 4 of Part XIV creates 3 additional offences. These are not within the definition of market misconduct and are therefore not liable to proceedings before the MMT and are instead subject only to criminal proceedings.

Use of Fraudulent or Deceptive Devices in Transactions in Securities, Futures Contracts or Leveraged Foreign Exchange Trading (Section 300)

This offence provides that a person shall not, directly or indirectly, in a transaction involving securities, futures contracts or leveraged foreign exchange trading:

1. employ any device, scheme or artifice with intent to defraud or deceive; or
2. engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.

Disclosure of False or Misleading Information Inducing others to enter Leveraged Foreign Exchange Contracts (Section 301)

A person shall not, in Hong Kong or elsewhere, disclose, circulate or disseminate, or authorise or be concerned in the disclosure, circulation or dissemination of, information that is likely to induce another person to enter into a leveraged foreign exchange contract in Hong Kong, if:

1. the information is false or misleading as to a material fact or through the omission of a material fact; and
2. the person knows that, or is reckless as to whether, the information is false or misleading as to a material fact or through the omission of a material fact.

This prohibits the same conduct in relation to leveraged foreign exchange contracts as is outlawed in respect of securities and futures transactions under Section 298. Section 301 also provides the same narrowly drafted defences as that section for those who passively disseminate information received from others such as printers, internet website operators and broadcasters.

Falsely Representing Dealings in Futures Contracts on behalf of others (Section 302)

A person shall not represent to another person that he has on behalf of the other person dealt in, or facilitated or arranged for any dealing in, a futures contract traded on an exchange or through an ATS in Hong Kong (or a contract or other instrument substantially resembling a futures contract in accordance with the rules of a futures market outside Hong Kong), if he has not in fact done so and he knows that, or is reckless as to whether, he has not done so.

EFFECTS OF MARKET MISCONDUCT

The Market Misconduct Tribunal (MMT)

The civil market misconduct regime under Part XIII of the SFO covers all types of market misconduct. The MMT is chaired by a judge or former judge of the Hong Kong High Court assisted by two members and a presenting officer appointed by the Secretary for Justice conducts proceedings. The members are required to have financial services related experience and are prominent members of the business community and are appointed on a case by case basis by the Financial Secretary. MMT hearings are heard in public, unless the MMT on its own motion or on its determination in the interests of justice, upon the application of any identified person in the hearing or the appointed presenting officer, that the whole or part of the hearing shall be heard privately.

The MMT is inquisitorial and is entitled to direct the SFC to carry out further investigations and report its findings to the MMT. Under the SFO, the presenting officer is a lawyer appointed by the SFC who represents the SFC, presents the SFC’s evidence to the MMT and make submissions to enable the MMT to reach an informed decision as to whether market misconduct has been committed and if so, the nature of such breach. The intention is that he should be more like a prosecuting counsel.

There are detailed provisions in the SFO governing the composition of and procedures to be followed by the MMT.

Proceedings of the MMT

The SFC may, upon receiving the Secretary of Justice’s consent, institute proceedings before the MMT under Section 252 in respect of any suspected market misconduct by giving notice in writing to the MMT setting out the alleged breach of the market misconduct provision(s), brief particulars of the market misconduct and the identity of the persons allegedly involved for the proceedings.

The main purpose of proceedings is to determine:

1. whether any market misconduct has taken place;
2. the identity of every person involved in the market misconduct; and
3. the amount of any profit gained or loss avoided as a result of the market misconduct.

The MMT may identify a person as having engaged in market misconduct if:

1. he has perpetrated any market misconduct;
2. the market misconduct was perpetrated by a corporation of which he is an officer and with his consent or connivance; or
3. another person engaged in market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.

The MMT makes its findings on the civil standard of proof. It needs therefore to be satisfied that a person has engaged in market misconduct on the balance of probabilities (rather than beyond reasonable doubt which is the criminal standard of proof). The SFC does not have to prove its case on the balance of probabilities, but rather to present the available evidence to the MMT to enable it to make an informed decision on the matter.

However, like the IDT, the MMT has powers to receive any evidence, whether or not such evidence would be admissible in civil or criminal proceedings. It also has wide powers to compel the giving of evidence and to prevent the publication of information about the evidence the MMT receives. Significantly, a person is not excused from complying with a requirement of the MMT to give evidence on the ground that to do so might incriminate him (Section 253(4)) and such compelled self-incriminatory evidence may be considered by the MMT.

Orders of the MMT

At the end of any proceedings, the MMT may under Section 257(1) impose one or more of the following sanctions on any person found to have committed market misconduct:

1. 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;
2. 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;
3. a cease and desist order – that the person must not again engage in any specified form of market misconduct;
4. 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;
5. Government costs order – that the person pay to the Government its costs and expenses in relation to the proceedings and any investigation;
6. SFC costs order – that the person pay the SFC’s costs and expenses in relation to the proceedings and any investigation;
7. Financial Reporting Council costs order– that the person pay the Financial Reporting Council’s costs and expenses incurred in relation to any investigation conducted by the council; and
8. 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.

A disgorgement order may, at the discretion of the MMT, be made subject to compound interest from the date of the occurrence of the market misconduct in question (Section 259 of the SFO). The SFC also has the ability to fine regulated persons (see “Disciplinary Proceedings” below).

When making an order, the MMT may, pursuant to Section 257(2), take account of any previous convictions in Hong Kong, any previous findings of market misconduct or breach of disclosure requirement by the MMT and any previous findings of insider dealing under the repealed Securities (Insider Dealing) Ordinance (S(ID)O).

Cold shoulder orders, cease and desist orders, SFC costs orders and disciplinary referral orders were introduced by the SFO. Failure to comply with a disqualification, cold shoulder or cease and desist order is a criminal offence under sub-sections 257(10) and 258(10) punishable by a maximum fine of HK$1 million and/or up to 2 years’ imprisonment.

In addition, Sections 253(2) and 254(6) prescribe a penalty of a maximum fine of HK$1 million and a maximum of 2 years’ imprisonment for failure to comply with various requirements of the MMT or disrupting its proceedings. The conduct referred to in those sections are punishable as contempt under Section 261.

Appeals

The SFC or any person identified as having engaged in market misconduct and who is dissatisfied with a finding or determination of the MMT may appeal to the Court of Appeal:

• on a point of law or;
• with the leave of the Court of Appeal, on a question of fact

Under the SFO, a party who is not satisfied with certain decisions by the SFC (i.e. disciplinary action) may appeal to the Securities & Futures Appeal Tribunal (SFAT).

Recent MMT and SFAT decisions have reiterated that:

• SFC disciplinary proceedings are civil in nature for the purposes of the Hong Kong Bill of Rights; and
• the civil standard of proof in Section 218(7) of the SFO, allowing for flexibility in respect of the seriousness of the issue (a sliding standard of proof), should be used in any SFC disciplinary proceedings and SFAT proceedings, except for charges of contempt. It is possible for the civil threshold to approach or even be identical to the criminal standard if the potential penalty can lead to loss of liberty. However, generally, the standard of proof in disciplinary proceedings of offences that are not generally applicable to the public, but only to a limited group of individuals, such as licensed persons, would not be criminal.

CRIMINAL LIABILITY

All forms of market misconduct (including insider dealing) and the offences under Division 4 are liable to prosecution as a criminal offence under Part XIV of the SFO.

Penalties

The maximum criminal sanctions under the SFO are a maximum of 10 years’ imprisonment and fines of up to HK$10 million. The court may also impose disqualification, cold shoulder and disciplinary referral orders. Failure to comply with a disqualification or cold shoulder order is an offence liable to a maximum fine of HK$1 million and up to 2 years’ imprisonment.

No double jeopardy

A person will not be subject to the “double jeopardy” of both civil proceedings under Part XIII and criminal proceedings under Part XIV for the same conduct.

Section 283 SFO provides that a person who has been subject to criminal proceedings under Part XIV may not be subject to MMT proceedings if:

• Criminal proceedings have previously been instituted against that person under Part XIV for the same conduct; and
• Those proceedings are still pending; or
• By reason of the previous institution of criminal proceedings, no further criminal prosecution could be brought against that person again under Part XIV in respect of the same conduct.

Likewise, anyone who has been subject to MMT proceedings cannot be subject to criminal proceedings for the same conduct.

The decision whether to bring civil or criminal proceedings in relation to suspected market misconduct is made by the Secretary for Justice. The SFC may also institute summary criminal proceedings before a magistrate for less serious market misconduct offences, although the Secretary for Justice is able to intervene in the SFC’s conduct of any such proceedings. The decision whether to take criminal or civil proceedings is made in accordance with the Department of Justice’s Prosecution Policy which provides two criteria for the institution of criminal proceedings: that there is sufficient evidence for a criminal prosecution and that a criminal prosecution is in the public interest. If these tests are not met, suspected market misconduct will be dealt with through civil proceedings before the MMT.

CIVIL LIABILITY – Private right of action

The SFO creates a private right of civil action in favour of anyone who has suffered financial loss as a result of market misconduct or any offence under Part XIV to seek damages from the person who committed the market misconduct. The perpetrator is liable to pay damages, unless it is fair, just and reasonable that he should not (Sections 281 and 305).

A person will be taken to have committed market misconduct if:

1. he has perpetrated any market misconduct;
2. the market misconduct was perpetrated by a corporation of which he is an officer with his consent or connivance; or
3. any other person committed market misconduct and he assisted or connived with that person in the perpetration of the market misconduct, knowing that such conduct constitutes or might constitute market misconduct.

It is not necessary for there to have been a finding of market misconduct by the MMT or a criminal conviction under Part XIV before bringing civil proceedings. Findings of the MMT are however admissible in the civil proceedings as prima facie evidence that the market misconduct took place or that a person engaged in market misconduct. Further a criminal conviction constitutes conclusive evidence that the person committed the offence. The courts are able to impose injunctions in addition to or in substitution for damages.

Transactions not void or voidable

Sections 280 and 304 provide, as under the previous legislation, that a transaction is not void or voidable by reason only that it constitutes market misconduct or contravenes Part XIV.

LIABILITY OF OFFICERS OF A CORPORATION

Duty of Officers

Section 279 of the SFO imposes a duty on all officers of a corporation to take reasonable measures to ensure that proper safeguards exist to prevent the corporation from acting in a way which would result in the corporation perpetrating any market misconduct. This is an extension of the duty contained in the S(ID)O. Under the SFO the duty applies to all forms of market misconduct and not just insider dealing.

The definition of an “officer of a corporation” is also broader than under the S(ID)O. It includes a director (including a shadow director and any person occupying the position of a director), manager or secretary of, or any other person involved in the management of, the corporation.

Under Section 258, where a corporation has been identified as having been engaged in market misconduct and the market misconduct is directly or indirectly attributable to a breach by any person as an officer of the corporation of the duty imposed on him by Section 279, the MMT may make one or more of the orders detailed above in respect of that person even if that person has not been identified as having engaged in market misconduct himself. However, a breach of the Section 279 duty will not expose a person to civil suits by third parties unless he has been identified as having engaged in market misconduct.

Civil Liability

As described above, the SFO clearly provides that anyone who suffers financial loss as a result of market misconduct or a Part XIV offence has a right of civil action to seek compensation. As noted above, an officer of a corporation which perpetrated market misconduct is taken to have committed market misconduct himself, if the corporation perpetrated the misconduct with his consent or connivance.

Criminal Liability

Under Section 390 of the SFO, where it is proved that an offence committed under Part XIV was aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to the recklessness of, any officer of the corporation, or any person purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and liable to be punished accordingly.

Disciplinary Proceedings

Under Part IX of the SFO, any regulated person who is guilty of misconduct or who, in the opinion of the SFC, is not a fit and proper person to be or to remain the same type of regulated person, is subject to a widened range of disciplinary procedures. “Misconduct” is defined to include any contravention of the SFO or of the terms of any licence issued or registration made under it. The SFC may revoke or suspend a person’s licence in respect of all or any part of the regulated activities for which he is licensed. In addition, or alternatively, the SFC may impose a fine not exceeding the greater of $10 million or 3 times the amount of the profit gained or loss avoided by the regulated person as a result of his misconduct, or such other conduct which led to the SFC’s opinion that he is not fit and proper. The SFC may also impose prohibition orders preventing an offending person from, among other things, applying to be registered or licensed under the SFO. Approvals granted to “responsible officers” may also be suspended or revoked. Persons covered by these provisions include corporations licensed under the SFO, their responsible officers and persons involved in their management. Significantly, authorised financial institutions (now required to be registered with the SFC if carrying out certain regulated activities), their executive officers, persons involved in the management of their regulated business and individuals named in their register as carrying out a regulated activity, are also now subject to the SFC’s disciplinary regime.

MISCELLANEOUS

Safe Harbour Rules

To allow for future business practices, the SFO allows the SFC, where it considers it in the public interest to do so, to make rules creating defences to market misconduct civil and criminal provisions, but subject to prior consultation with the Financial Secretary (Sections 282 and 306). A safe harbour has been established for price stabilisation in public offerings of not less than HK$100 million or its equivalent in foreign currency under the Securities and Futures (Price Stabilising) Rules.

JULY 2020

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.