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Regulator gets its Tiger in HK

08 January 2014. Published by David Smyth, Senior Consultant

Overseas hedge fund admits to insider dealing of listed shares in Hong Kong

Readers of my previous blogs (dated 30 April, 23 May and 18 July 2013) will have followed the Securities and Futures Commission's pursuit of insider dealing proceedings against Tiger Asia Management LLC ("Tiger Asia" - a hedge fund based in New York) and some of its principal officers.  The SFC's civil proceedings seeking orders that Tiger Asia give up profit it made, as far back as 2008-9, by using "inside information" to short sell the shares of two listed banks in Hong Kong have now come to a conclusion.

Just before Christmas, the High Court in Hong Kong ordered that Tiger Asia and two of its officers pay approximately HK$45 million by way of restoration to those counterparties said to have been affected by Tiger Asia's market misconduct.  This follows admissions made by Tiger Asia in the SFC's civil proceedings

The restoration is intended to "compensate" counterparties for the difference between the price of the shares sold and their value accounting for the "inside information" known to Tiger Asia.  Given the passage of time and the nature of the share trades, it would be impossible to restore the counterparties to the exact position they were in before the impugned transactions took place. 

However one looks at it, some key points include:

  • the SFC is sounding its intent to take on those who trade listed securities in Hong Kong on the back of inside information, be they in Hong Kong or overseas;
  • section 213 of the Securities and Futures Ordinance is proving a key weapon in the SFC's battle against market misconduct in Hong Kong.  In effect, the regulator is using this section to seek financial redress for classes of investors said to have lost out as a result of insider dealing activities, even though they would not have known of their loss;
  • a similar result emerged a short while earlier in the SFC's section 213 proceedings against a Mr. Du Jun. Those proceedings recently concluded and represented the first time that restoration orders had been made in an insider dealing case pursuant to section 213;
  • matters for Tiger Asia are not quite over as far as the SFC is concerned.  In July 2013, the SFC also initiated proceedings against Tiger Asia in the Market Misconduct Tribunal ("MMT").  Those proceedings are due to be heard on 7 May 2014. Tiger Asia's admissions of wrongdoing are also applicable in the MMT proceedings.  It is anticipated that the SFC will seek orders from the MMT (pursuant to section 257) that Tiger Asia and/or the two principal officers concerned be prohibited from "dealing" in any securities in Hong Kong for up to five years (other than with permission of the court).

Given the nature of section 213 proceedings in Hong Kong, insurers and insureds should be giving careful thought to the coverage position under any available D&O policy.