How To Trap a Tiger – Regulators’ Nets Tighten Around Tiger Asia on Both Sides of the Pacific

by Dorsey & Whitney LLP
Contact

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.

Conclusion

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)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.