Lead market regulator's lawsuit includes professional advisers
In another significant development in the Securities and Futures Commission's (SFC) efforts to combat market misconduct-type activity involving listed shares in Hong Kong, the lead market regulator has commenced civil proceedings under Section 213 of the Securities and Futures Ordinance (Cap 571) in respect of China Forestry Holdings Co Ltd (in official liquidation). What makes the proceedings noteworthy is that besides naming the company and two of its directors as co-defendants, the regulator's civil complaint also names two co-sponsors and the auditor involved with the company's initial public offering (IPO) in 2009.(1)
Section 213 ("Injunctions and other orders") of the ordinance has become a free-standing provision that enables the courts in Hong Kong to make a determination in civil proceedings commenced by the SFC that a person has committed acts that contravene the relevant provisions of the ordinance and, as a result, to grant certain final remedial orders.(2) Such a determination is not dependent on there first being a finding of market misconduct by the Market Misconduct Tribunal or a criminal court. Such was the outcome following the landmark ruling of the Court of Final Appeal in Securities and Futures Commission v Tiger Asia Management LLC.(3)
Since then, the SFC has regularly used Section 213 to pursue those alleged to have been involved in market misconduct-type activity in an attempt to secure restorative orders (and the like) for investors said to have lost out as a result of impugned transactions. One recent example is the high-profile litigation in respect of CITIC Limited.
In the latest development involving Section 213 civil actions, on January 16 2017 the SFC commenced proceedings seeking (among other things) unspecified damages against China Forestry Holdings, two of its executive directors (also co-founders), the co-sponsors and auditors (or one or some of them). At this early stage, the civil complaint does not give details of the alleged transgressions in connection with the company's IPO in 2009.
That IPO and the company's subsequent demise hit the headlines. According to the IPO prospectus of the company in 2009, the principal activities of the group were management of forests and sale of timber logs in China. Substantial funds were raised through the IPO. In 2011 (less than two years after the IPO), the company's auditor identified various audit irregularities, including concerns that some of the accounting documents may have been falsified. As a result, trading in the shares of the company has since been suspended and the company is now in the process of delisting in Hong Kong.
In addition to the civil proceedings commenced by the SFC, the company's liquidators are pursuing claims against a number of parties that are alleged to have contributed to the collapse of the company.
The SFC's civil proceedings mark the first occasion that the regulator has used Section 213 to include both sponsors and auditors as defendants. This is a clear indication that the SFC is widening its regulatory focus beyond principal transgressors (eg, directors) to include professional advisers who are involved with a company's listing.
Given the sparse detail in the SFC's civil complaint, it will be interesting to see how the SFC will seek to substantiate allegations of market misconduct-type activity insofar as the sponsors and auditors are concerned.
As previously noted, Section 213 proceedings have emerged as a robust and increasingly important provision in the SFC's enforcement strategy.(4) In the absence of a formal class or representative action regime in Hong Kong, the SFC has taken upon itself to be the lead protector on behalf of groups of aggrieved investors in some cases and Section 213 has become one of its weapons of choice as it moves between regulatory and civil proceedings.(5)
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(4) For further details please see "Regulator's use of civil proceedings casts a wide net" and "Securities and Futures Ordinance: breach of disclosure requirements and damages claims".
(5) Supra note 3, headnote – "Section 213 provided remedies for the benefit of parties involved in the impugned transactions. The SFC acted not as a prosecutor in the general public interest but as protector of the collective interests of persons dealing in the market who had been injured by market misconduct" (and Lord Hoffmann, at paragraph 16).