Hong Kong’s Market Misconduct Tribunal (the "MMT") has found U.S.-based Andrew Edward Left culpable of market misconduct in connection with his research report (“Left’s report”), published on June 21, 2012 on a U.S.-based Internet website called Citron Research, with respect to the Hong Kong listed company Evergrande Real Estate Group Limited¹ (“Evergrande”).² This is the first direct action of the Securities and Futures Commission of Hong Kong (the “SFC”) against short-sellers and one of the recent cases of the SFC directed at a person located outside of Hong Kong.

In our previous eUpdate regarding this case, which can be found here, we discussed market misconduct under Hong Kong rules, details of the SFC’s proceedings against Left and the take-away points from the MMT’s first rulings in relation to this case. In this eUpdate, we will look into the MMT’s decision and its significance for the Hong Kong securities market.

Proceedings against Left

In December 2014, the SFC commenced proceedings in the MMT against Left alleging that Left’s report contained false and misleading information about Evergrande and that market misconduct within the meaning of Section 277³ of the Securities and Futures Ordinance (Cap. 571) (the “SFO”) has or may have taken place in relation to the securities of Evergrande.⁴

As noted by the SFC and the MMT, Left’s report stated, among other things, that Evergrande was insolvent and had consistently presented fraudulent information to the investing public, and Left recommended to readers that Evergrande represented “a good short opportunity”.⁵ The share price of Evergrande fell sharply on June 21, 2012 following the publication of Left’s report. The SFC also alleged that prior to publishing Left’s report, Left short sold 4.1 million shares of Evergrande which he subsequently bought back, making a total realized net profit of approximately HK$1.6 million (equivalent to approximately US$206,186).⁶

The MMT issued a report “into dealings in the shares of Evergrande on June 21, 2012”⁷ pursuant to Sections 252(3)(a) and (b) of the SFO (the “MMT Report”). As noted in the MMT Report⁸, Section 277(1) of the SFO (“Section 277(1)”) contains four requisite elements, each of which must be established to prove market misconduct:

• A person, whether in Hong Kong or elsewhere, must publish, i.e., disseminate, information or be concerned in its dissemination;
• The information must be likely to induce another person to buy or sell securities in Hong Kong or must be likely to maintain, increase, reduce or stabilize the price of securities in Hong Kong;
• The information must be false or misleading as to a material fact; and
• The person who has disseminated the information must know, or be reckless, or negligent, as to whether the information is false or misleading as to a material fact.

Under Section 277(1), the SFC can initiate proceedings for the offence of disclosure of false or misleading information inducing transactions against any person [emphasis added] who allegedly committed the offence, regardless of a person’s location or citizenship / country of origin. While it must be the case that the information is likely to have an effect in Hong Kong, the disclosure of information may occur anywhere [emphasis added]. It also is not necessary for the information disclosed to actually have such an effect as it is sufficient if the information is likely [emphasis added] 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 research analysts, market commentators, roadshow participants and communication of information to potential investors in general.

MMT’s findings

The MMT Report revealed some interesting facts. It appears that Left did not publish any commentary on a company listed on the Hong Kong Stock Exchange prior to Left’s report, nor was there any evidence that he had ever traded in Hong Kong stocks, prior to his involvement in the trading of the shares of Evergrande.⁹ Left first found out about Evergrande in March 2012 when he received an anonymous package in the United States containing “analysis” of Evergrande and allegations against Evergrande of insolvency and various forms of accounting fraud, among other things.¹⁰ Left communicated with a representative of the U.S. Securities and Exchange Commission (the “SEC”) about this package and the information contained therein. In his email to the SEC’s representative, Left stated that he believed that “it was a story that should be told”. He also stated that “after eliminating all information that could not be verified, I updated the numbers and released the report”. He further stated that his verification was based on “everything pulled off the Internet and from company filings” and that “everything was public information”.¹¹

The MMT determined that the allegations in the package received by Left had to be carefully scrutinized and that Left had to obtain an expert advice on appropriate regulatory requirements, in particular, on applicable accountancy standards, to which Evergrande would have been subject. Left’s decision not to seek such advice was, in the judgment of the MMT, “a rush one”.¹²

According to the MMT Report, once the market knew about Left’s report, some bulge bracket banks conducted their own analysis of Evergrande’s financial condition and maintained their “buy” rating.¹³ However, even though professional analysts or experts could have understood that the allegations were misconceived, general investors would have found the allegations to be at least “unnerving” and “frightening”.¹⁴

The MMT further determined that:

• Section 277(1) imposes upon all persons [emphasis added] (and not only professionals or licensed persons), who choose to disseminate information that is likely to have an impact on the market, a positive duty to take reasonable care before disseminating information to the market to ensure that such information is not materially false or misleading. Such duty of care under Section 277(1) is created by the statute itself and is owed to the market;¹⁵
• If a person chooses to make severe allegations concerning certain technical issues (such as accounting standards applicable in Hong Kong in Left’s case), such person has an obligation to fully understand such issues, for example, by seeking an advice of an expert or by approaching a subject company for clarification;¹⁶
• “The right of freedom of expression is not an absolute right”.¹⁷ The aim of Section 277(1) and similar legislation is to “maintain the integrity of the market and to protect the public at large from the potentially very damaging effects of false or misleading information. This is a legitimate aim which serves to protect economic order, a subset of the broader principle of ordre public”¹⁸;
• Left used “sensationalist language” in his report “that, of itself, he must have appreciated would cause a degree of consternation among members of the general investing public”;¹⁹
• Left’s allegations that Evergrande had been culpable of "fraudulent accounting" and that in reality it was "insolvent" were false and misleading as to material facts;²⁰
• Left was reckless or, if not reckless, negligent as to whether his allegations against Evergrande were false and/or misleading as to material facts or through the omission of material facts;²¹ and
• For the reasons set out in the MMT Report, Left was “culpable of market misconduct within the meaning of Section 277” of the SFO.²²

The MMT will hear from both the SFC and Left on a date to be agreed as to consequential orders and decide on an appropriate sanction at a later stage.²³ Given the MMT’s wide discretion to impose various types of sanctions, Left may be disqualified from dealing in securities for up to five years and required to pay to the Government of Hong Kong the profit gained by the market misconduct and costs of the investigation.²⁴

Left said that “Citron stands by our journalistic integrity. This court’s opinion simply stifles negative commentary. Our lawyers will consider all options for appeal.”²⁵

The MMT’s decision concurs with the SFC’s position stated in March 2015 by the SFC’s then executive director of enforcement Mark Steward, who has publicly spoken out about the crackdown on misleading research reports targeting locally listed companies and commented on the SFC’s case against Left, among others. “The investing public needs protection from the cynical use of false or misleading publications that drive down share prices for the wrong reasons and there should be accountability for shoddy research, especially when it affects stability in our markets,” said Steward.²⁶

¹ Evergrande is a Mainland Chinese real estate developer listed on the Hong Kong Stock Exchange since November 5, 2009 under stock code 3333. It has since been renamed as “China Evergrande Group”.
² “Market Misconduct Tribunal finds Andrew Left of Citron Research culpable of market misconduct” by the SFC, August 26, 2016.
³ Section 277(1) of the SFO states that “disclosure of false or misleading information inducing transactions takes place when, 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 and 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,
  if:
  • 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.”

⁴ The SFC’s notice to the MMT pursuant to Section 252(2) and Schedule 9 of the SFO and synopsis both titled “In the matter of Evergrande Real Estate Group Limited and its listed securities (stock code: 3333)” and dated December 15, 2014; “SFC commences proceedings in Market Misconduct Tribunal over alleged false research report” by the SFC, December 22, 2014.
⁵ The MMT’s rulings titled “In the matter of dealings in the listed securities of Evergrande Real Estate Group Limited” dated October 27, 2015 and February 23, 2016. See also footnote 4 and paragraphs 15 and 16 of the MMT Report.
⁶ See footnote 5 and paragraph 39 of the MMT Report. In this eUpdate, we used the exchange rate as of October 4, 2016 which was US$1 to HK$7.76.
⁷ The MMT Report is available at: http://www.mmt.gov.hk/eng/reports/Evergrande_Report.pdf.
⁸ Paragraph 82 of the MMT Report.
⁹ Paragraph 21 of the MMT Report.
¹⁰ Paragraph 22 of the MMT Report.
¹¹ Paragraphs 22-23 of the MMT Report.
¹² Paragraph 24 of the MMT Report.
¹³ Paragraph 36 of the MMT Report.
¹⁴ Paragraphs 25, 146 and 208 of the MMT Report.
¹⁵ Paragraphs 98, 105, 112 and 116 of the MMT Report.
¹⁶ Paragraphs 214 and 252 of the MMT Report.
¹⁷ Paragraph 111 of the MMT Report.
¹⁸ Paragraph 114 of the MMT Report.
¹⁹ Paragraphs 146, 249 and 252 of the MMT Report.
²⁰ Paragraphs 218, 241, 245, 249, 252, 253 and 255 of the MMT Report.
²¹ Paragraphs 186, 214, 252, 253, 254 and 255 of the MMT Report.
²² Paragraph 255 of the MMT Report.
²³ Paragraph 256 of the MMT Report.
²⁴ Section 257 of the SFO.
²⁵ “Hong Kong Tribunal says Citron’s Left culpable of misconduct” by Eduard Gismatullin and Benjamin Robertson, Bloomberg, August 26, 2016.
²⁶ “Fighting on the frontline: an update”, 3rd Annual U.S.-China Legal Summit, March 2, 2015.