Government securities enforcement agencies in Hong Kong and the United States have been pursuing Tiger Asia Management and its affiliates for four years with claims of insider trading and market manipulation on the Hong Kong Stock Exchange. In Hong Kong, that pursuit has resulted in an important legal precedent regarding the arsenal of weapons available to the Hong Kong Securities and Futures Commission. In the United States, it has demonstrated the ability of the US Securities and Exchange Commission working in tandem with the Department of Justice to exact significant enforcement remedies relating to overseas transactions even after the US Supreme Court’s decision in Morrison v. National Bank of Australia (2010).
Tiger Asia: A New York Hedge Fund Trading in Hong Kong
Tiger Asia is a Delaware limited liability company with its principal place of business in New York City specializing in equity investments in China, Japan and Korea. It has no physical presence or employees in Hong Kong, but maintained accounts in Hong Kong to enable it to trade in Hong Kong securities. All of Tiger Asia’s employees are in New York.
As a hedge fund, Tiger Asia is able to take short positions in equities. Between 2008 and 2009, Tiger Asia participated in three private placements for the securities of two Chinese banks. In each instance the placing agents approached Mr. Raymond Park, the head trader for the Funds, about participating in a private placement of bank shares. Mr. Park agreed in his New York office. Prior to being given details of the placement, he agreed to Tiger Asia being “wall crossed," a term used in the financial services industry to mean it agreed to receive price sensitive information that was not generally known to the public, as part of selective pre-marketing of an offering to potential investors.
After entering into the wall-crossing agreements, under which Tiger Asia agreed not to trade shares of the banks, Mr. Bill Hwang ordered Mr. Park to short sell the relevant stock on the Hong Kong Stock Exchange in the days prior to each placement. Mr. Park did not inform the placement agent in either instance that their agreement had been breached.
As a result of the trading, Tiger Asia had net trading profits of about HK$16.2 million.
Hong Kong Securities Enforcement Legal Framework
Hong Kong has a dual civil/criminal regime to deal with misconduct in the financial markets under the Securities and Futures Ordinance (SFO). There is the Market Misconduct Tribunal (MMT), on the one hand, which imposes civil liability for market misconduct and can make orders barring a person from being a director or manager of a corporation, or from dealing in securities and can order disgorgement of any profits made or losses avoided to the Hong Kong government. On the other hand, the SFO creates criminal offences for various types of market misconduct. The two regimes are mutually exclusive and proceedings brought by the Securities and Futures Commission of Hong Kong (HK SFC) under one means there can be no further proceedings under the other.
The question under consideration in the Hong Kong courts to date was essentially whether or not section 213 of the SFO, under which the courts have wide-ranging power to make a number of injunctions and orders on the application of the HK SFC, provides a “third route” for final orders, or if a prosecution under Part XIV or proceedings before the MMT under Part XIII was a prerequisite.
Proceedings in the Hong Kong Courts
The HK SFC applied for various orders against Tiger Asia. The HK SFC based their action on section 213(1), which states that where a person has contravened any of the relevant provisions (including the prohibition on insider dealing), the Court of First Instance (CFI) may make orders on the application of the HK SFC.
In HK SFC v. Tiger Asia, Mr. Hwang, Mr. Park and Mr. Tomita, the CFI1 held that the court did not have the jurisdiction to make the declarations sought by the HK SFC because the criminal court or the MMT had not yet determined whether there had been a contravention of the relevant market misconduct provisions; the CFI had no jurisdiction to itself decide whether or not there had been a contravention. The HK SFC appealed. The Court of Appeal2 (CA) allowed the appeal and ruled that section 213 procedures are free-standing from the dual civil/criminal market misconduct process.
On April 30, 2013, the Court of Final Appeal3 (CFA), in a unanimous decision, confirmed the decision in the CA and held that the CFI does have independent jurisdiction to make orders under section 213 without any prior finding by a criminal court or the MMT in respect of any contravention of the relevant provisions of the SFO. Part of the reasoning of the court is that section 213 is concerned with providing remedies for the benefit of parties involved in the impugned transactions, and serves a different purpose from the penalties which can be imposed by a criminal court or the MMT. As we will see below, the HK SFC is keen to act as both a prosecutor in the general public interest and protector of the collective interests of the persons dealing in the market who have been injured by market misconduct.
Civil and Criminal Enforcement in the United States
SEC v. Tiger Asia Management, LLC (D. N.J. Filed Dec. 12, 2012) is an action of the US Securities and Exchange Commission (US SEC) against the firm.
The complaint of the US SEC centers on two sets of transactions. First, the short and long sales of shares in the two banks as noted above. Second, the complaint focuses on an attempted manipulation on the Hong Kong Stock Exchange. In four instances Tiger Asia attempted to manipulate the month-end closing prices of certain stocks listed on the Hong Kong Stock Exchange. The stocks were among its largest short holdings. In each instance Tiger Asia placed trades which were intended to depress the price of the stock thereby increasing the value of its short position. Since the management of Tiger Asia was paid a fixed annual management fee equal to 1.5% of the value of the net assets of the fund, calculated at the end of the month, this action increased the fees by US$496,000. US SEC’s complaint alleges violations of section 10(b) of the Securities Exchange Act of 19344, section 17(a) of the Securities Act of 19335, and sections 206(1), 206(2) and 206(4) of the Investment Advisers Act.6
The defendants settled the action, consenting to the entry of permanent injunctions prohibiting future violations of the sections cited in the complaint. In addition, defendants Mr. Hwang and Tiger Asia will collectively pay disgorgement and prejudgment interest of US$19,048,787. Each also agreed to pay a penalty of US$8,294,348. Mr. Park agreed to pay US$39,819 in disgorgement and prejudgment interest and a penalty of US$34,897.
The US Attorney’s Office for the District of New Jersey announced a parallel criminal action against Tiger Asia. The disgorgement and prejudgment interest paid by defendants Mr. Hwang and Tiger Asia will be paid to the criminal authorities.
The availability of section 213 relief is of particular importance to the HK SFC in the context of combatting market misconduct perpetrated by offshore market participants. A reason why the HK SFC opted for section 213 in pursuing its action against Tiger Asia was to avoid what it perceives as the slow and cumbersome procedure under the MMT regime, which can result in many years passing before a determination of a contravention is reached. In the absence of a relevant bilateral extradition agreement, it will often be difficult (if not impossible) for prosecutions to be made against the offshore wrongdoer7.
Moreover, section 213 is not limited to insider trading or market misconduct offences, but also applies to alleged contraventions of any SFO provisions as well as certain provisions of the Companies Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing (Financing Institutions) Ordinance8.
The response of the HK SFC should also be taken as a solemn reminder for offshore wrongdoers who wish to take advantage of the difficulty of cross-country law enforcement: the HK SFC has instituted MMT civil proceedings (as criminal proceedings have been instituted in the United States) recently against Tiger Asia. This is the first time the HK SFC has instituted proceedings in the MMT directly. Meanwhile, proceedings under section 213 are expected to continue.
Across the Pacific, the US SEC action against Tiger Asia illustrates the reach of the agency. Despite the clear ruling by the Supreme Court in Morrison v. National Australia Bank, Ltd.9 that section 10(b) of the Securities Exchange Act does not reach transactions where the purchase or sale did not occur in the United States, the action brought here by the US SEC relied in part on that provision. Other courts have held that the Morrison limitation also applies to section 17(a) of the Securities Act, a second statute relied on by the US SEC to bring this action. In contrast, at least one court has held that Morrison does not apply to sections 206(1) and (2) of the Investment Advisers Act. Whether the US SEC would have been able to sustain this action in view of Morrison if the defendants had not elected to settle is at best problematic. Since the US wire fraud statute on which the criminal case is based is not limited by Morrison, the US Attorney did not face the same limitation in filing its charges.
1 HCMP 1502/2009
2 CACV 178/2011
3 FACV Nos 10, 11, 12 and 13 of 2012
4 This is the principal statutory weapon against fraud.
5 This is a key anti-fraud provision in the Securities Act. It provides for liability for fraudulent sales of securities. Section 17(a) makes it unlawful to "employ any device, scheme, or artifice to defraud", "obtain money or property" by using material misstatements or omissions, or to "engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser." This provision is closely tracked by section 10(b) of the Securities Exchange Act.
6 The sections laid down the prohibited transactions by registered investment advisers.
7 The primary legislation governing the surrender of fugitive offenders between Hong Kong and the United States is the Fugitive Offenders Ordinance (Cap. 503) and the Fugitive Offenders (United States of America) Order (Cap. 503F), which contains the full text of the Agreement between Hong Kong and the United States for the Surrender of Fugitive Offenders signed in 1996. Another related legislation is the Mutual Legal Assistance in Criminal Matters Ordinance (Cap. 525) and the Mutual Legal Assistance in Criminal Matters (United States of America) Order (Cap. 525F), which implements the Agreement between the Government of Hong Kong and the Government of the United States of America on Mutual Legal Assistance in Criminal Matters signed in 1997.
8 Please see section 213 and Schedule 1 of the SFO.
9 130 S.Ct. 869 (2010)