Tiger Asia case has exposed Hong Kong regulator’s enforcement reach, say lawyers

September 15, 2011

The latest edition of Hong Kong dollar notes during an exhibition in Hong KongBy Ajay Shamdasani

HONG KONG/NEW YORK, Sept. 15 (Thomson Reuters Accelus) – The Hong Kong securities regulator’s legal troubles in bringing disciplinary action against New York-based hedge fund Tiger Asia Management has shown the limitations of its regulatory reach and signalled that funds may be safer operating from offshore, according to a source close to the proceedings. The source, a senior local financial lawyer close to the case, said that his advice for foreign funds that did not need to be licensed and regulated in Hong Kong was to forgo doing so in order to reduce the risk of disciplinary action by the territory’s Securities and Futures Commission.

The SFC is locked in a legal battle over its disciplinary action against Tiger Asia and three of its officers — Bill Sung Kook Hwang, Raymond Park and William Tomita — first taken in August 2009. The SFC alleged the hedge fund and its senior management breached local market misconduct and insider dealing rules during a placing of China Construction Bank shares in Hong Kong in early 2009, earning itself a profit of $29.9 million. 

The regulator subsequently sought to freeze HK$38.5 million ($4.93 million) of the fund’s assets in Hong Kong and impose a trading ban on the fund, but its enforcement progress impeded as the SFC’s legal challenge against the fund ground to a halt in the local courts. At stake was the interpretation of the territory’s Securities and Futures Ordinance (SFO) and its definition of whom could determine whether a breach of the market misconduct provisions contained within section 213 of the ordinance had occurred. In short, the Court of First Instance (CFI) in June 2011 ruled against the regulator, saying only the criminal courts and the Market Misconduct Tribunal (MMT) were able to determine whether a breach of the SFO’s market misconduct rules had taken place. Unhappy with this outcome, the SFC appealed the ruling in early September 2011.

The SFC argued that the purpose and intent of section 213 of the ordinance was to provide the regulator with an independent, self-standing remedy in addition to criminal and MMT proceedings. Moving forward, the SFC stated it would argue that its proceedings against Tiger Asia and its officers comported with the legislative intent and proper construction of section 213 and of the overall ordinance.

According to the legal source, the best advice for compliance officers and in-house counsel at banking and financial institutions — especially hedge funds — was that “if you are offshore, you will be all right [outside of the ambit of Hong Kong’s regulatory reach].” However, he added that a fund whose trading activities impinged on Hong Kong “would have to have a credible reason for not being regulated and licensed” locally. “If you don’t need to be, don’t,” he said.

The lawyer also emphasised that as a general proposition, investment funds preferred not to be licensed in the territory if they did not need to be. “That’s not because they are acting improperly, but just because of the regulatory burden. Most big funds conduct their activities based on … their particular business model’s needs,” he said.

Laurence Li, a barrister with Temple Chambers in Hong Kong and a former director of corporate finance at the SFC, said compliance staff and in-house lawyers at banking and financial institutions need not fret unduly over the case. He added: “There might be a lesson for people doing such [market] manipulation to realise that Hong Kong courts are quite restrained about exercising extraterritorial jurisdiction.”


Yet, Georgia Dawson, a senior associate with law firm Freshfields, Bruckhaus and Deringer’s dispute resolution group in Hong Kong, stressed that the SFC was pursuing the Tiger Asia case rigorously “to send a message that it would pursue companies and individuals outside Hong Kong whose activities have an effect on the markets in Hong Kong.”

Similarly, the legal source was also concerned about offshore operators and said that as the local regulator, the SFC was right to be concerned “when allegations of share manipulation and acting on insider information are raised.”

While he acknowledged that offshore funds may do some good for market efficiency, if they are not based and licensed to carry on business in the city, “there is no ability [for the SFC] to take meaningful action and stop them from trading on our markets when necessary … otherwise, they just can’t be stopped,” he warned. The lawyer added that in such situations, local regulators needed to rely on cooperation from overseas regulators “to bring them [market violators] to heel.”

He also said that the matter of Tiger Asia was significant to the local market — but especially to the regulator itself: “The whole Tiger Asia case is of considerable importance to the SFC and its standing.”


Having only been implemented in 2003, the ordinance is still relatively new legislation, said local corporate governance activist David Webb. “Many of its sections have not yet been tested in court,” he said.

Webb predicted that the Tiger Asia case would “define the boundaries of the SFC’s powers”. Accordingly, he added that it was proper for the SFC to go the Court of Appeal to review whether the CFI was correct.

“In essence, it [the SFC] is seeking to pursue civil action in the court under section 213 rather than going to the MMT. The CFI had said that the SFC must either go to the MMT or seek a criminal prosecution. If the MMT makes a finding of insider dealing, or if criminal prosecution is successful, then the court would allow proceedings under section 213,” said Webb.

Likewise, Freshfields’ Dawson pointed out that looking ahead, the market regulator would continue its efforts to use the courts to test the limits of its powers under the ordinance. “If the Court of Appeal supports the SFC’s interpretation of section 213, then this will have a direct effect on the manner in which the SFC approaches future enforcement activities,” she explained.

Similarly, the legal source added that if the regulator did not prevail in the courts, there might be some movement afoot to amend the ordinance. “If they do not succeed, you will probably hear about proposals to change the rules by statute. What else can they do?” he asked.

It was a perspective that Temple Chambers’ Li did not share: “That is not usually the case in Hong Kong; the law is what it is. If the court interprets the law a certain way then that’s just what the law is.”

As for the timing of the appeal, Li did not think that the SFC was trying to make an example out of Tiger Asia; rather, the regulator was simply giving itself as much time to prepare its appeal before the ultimate deadline for filing an appeal — 28 days after a lower court decision. “If you count the number of days and account for the summer, the SFC will [likely] file their appeal either on or just before the deadline,” he said, adding that at this stage, the Tiger Asia case ultimately raises more questions of civil procedure than substantive points of securities law.

The SFC has also asked the Court of Appeal for an expedited hearing of its appeal.

Following a two-day hearing at the High Court in June, the SFC asserted that under section 213 of the ordinance, it had broad, freestanding powers to deal with market misconduct offences to make final orders freezing Tiger Asia’s assets and to prevent the fund from operating in the territory. Tiger Asia claimed that the SFC did not have such power for market misconduct offences, unless used as an interim step while following either the civil (MMT) or criminal mechanisms delineated in the ordinance. The SFC did not do so.

Moreover, Tiger Asia argued that the High Court, in exercising its powers in civil proceedings — for an injunction — and therefore acting in its civil jurisdiction, had no remit now to determine what was essentially a criminal offence. Therefore, Tiger Asia contended that the High Court had no authority to adjudicate whether it had violated insider trading rules.


Reflecting on the lengthy nature of the case, the legal source stated that it had taken the SFC “a while to get its ducks in a row”. He said that the matter would probably be pushed as far as the Court of Final Appeal.

More broadly, he explained that in his discussions with financial institution clients, the perpetually growing sweep and complexity of global regulations were often one of their top two concerns. “The other is liquidity,” he said, alluding to the impact of the Basel III capital adequacy rules on local banks.


(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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