Practical guidance on SFC licensing for hedge fund managers, private equity sponsors and other asset managers as well as brokers, dealers, wealth...
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The Securities and Futures Commission has a broad range of enforcement powers available to it to regulate the securities and futures markets. Its arsenal includes not only civil powers but the power to prosecute securities law offenders in the criminal courts. In this article, we provide an overview of what a person who may have committed a securities offence may expect as he defends himself and provide guidance on how to handle key milestones events.
The Securities and Futures Commission (“SFC”) has a broad range of enforcement powers, including powers to take disciplinary action against persons licensed or registered with the SFC, the power to institute proceedings for market misconduct before the Market Misconduct Tribunal (“MMT”), the power to seek civil remedies (e.g. injunctions, freezing orders and winding-up orders), and the power to prosecute certain securities related crimes before a magistrate on a summary trial basis.
A criminal prosecution is in many ways the most severe enforcement power available to the SFC as, for an individual, a criminal conviction can result in imprisonment as well as a fine and lasting reputational damage. Unfortunately, in some cases, at the investigation stage, it is not possible to know whether, if the SFC intends to seek sanctions, the SFC will pursue criminal prosecution instead of or in addition to exercising other enforcement powers. For example, for persons licensed or registered with the SFC, the SFC may pursue disciplinary action instead of criminal prosecution.
Whilst no one should take SFC enforcement action lightly, the possibility that a person under investigation may be subject to criminal prosecution should place that person in the highest possible state of alert. Such a person should strongly consider how he can manage the SFC investigation process to avoid prosecution if at all possible and to ensure that the record emerging from the SFC investigation is not one which would prejudice any defence that may ultimately need to be argued in court.
SFC investigations being with the appointment of investigators, all of whom typically are employees of the SFC. The SFC has 5 key enforcement programmes, namely for corporate governance of listed companies, insider dealing, market manipulation, unlicensed dealing and intermediary misconduct, and may appoint investigators where it has reasonable cause to believe that there has been a securities related offence or a defalcation, fraud, misfeasance in connection with:
Whilst the SFC’s investigation powers are apt for disciplinary proceedings, in the criminal context, these powers are in many ways draconian.
For example, an SFC investigator may require a person under investigation (as well as any other person whom the investigator has reasonable cause to believe has any record or document which contains information relevant to an investigation or otherwise has such information in his possession):
In this regard, a person under investigation is not excused from answering any question on the basis that the answer might tend to incriminate him. Whilst the person may claim that the answer might tend to incriminate him with the result that the answer cannot be admitted in evidence against the person in criminal proceedings (except for perjury and like offences), any evidence derived from the answer may be used against the person.
In contrast, in a police investigation for a crime, as a general principle, a person under investigation has no legal duty to answer any question from the police, no legal duty to produce records or documents and no legal duty to provide all reasonable assistance to the police in connection with their investigation.
At the same time, in addition to the possibility of an offence in perverting the course of justice, in an SFC investigation, it is an offence for a person to produce a record or document which is false or misleading in a material particular or to answer any question by saying anything which is false or misleading in a material particular.
The SFC can obtain and execute search warrants to search, by force if necessary, premises and seize documents if it can establish to a magistrate that there are reasonable grounds to suspect that there is, or is likely to be, on premises specified any record or document which is or may be relevant to its investigation. Any record or document removed pursuant to a warrant may be retained by the SFC for any period not exceeding 6 months beginning on the day of its removal or, where the record or document is or may be required for criminal proceedings or for any proceedings for such longer period as may be necessary for the purposes of those proceedings.
Because of the special pressure which the SFC can exert on a person under investigation, because statements given in an SFC investigation may be tendered as evidence in the prosecution of any offence and because the results of an investigation will play a critical role in determining whether the SFC proceeds to prosecution, the investigation stage is arguably the single most important time for a person under investigation to seek legal advice to minimize the risk that he will prejudice himself.
Although the general power to prosecute criminal offences lies with the Secretary for Justice, the SFC has the authority to prosecute securities related offences (as well as conspiracies to commit those offences) before a magistrate summarily. The offences (“securities related offences”) within the ambit of the SFC’s prosecutorial jurisdiction include offences under the SFO itself, the prospectus provisions of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (”CWMPO”), the share buy-back and financial assistance provisions of the Companies Ordinance (“CO”) and the customer due diligence provisions of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. The SFC has no authority to prosecute an offence on indictment.
Where the SFC has no authority to prosecute, prosecution authority lies with the Secretary for Justice. In this regard, the Secretary for Justice may prosecute not only securities related offences on indictment but also offences other than securities related offences on both a summary and indictable basis. Most significantly, these latter offences may include theft as well as various fraud related offences which may come to light as part of an SFC investigation.
Historically, in the vast majority of cases, the SFC will prosecute securities related offences through the courts on a summary basis by itself rather than rely upon the Secretary for Justice. Indeed, the SFC has raised concerns that the Department of Justice does not allocate sufficient resources to handle securities related offences and has suggested that securities related offences which it believes merited indictment have not been taken up by the Department of Justice, with the result that they have had to be tried summarily by the SFC. Whilst as a general principle summary trials favour defendants as the penalties on summary conviction are less harsh than those on indictment, against this, it may be that the SFC is more aggressive in bringing cases to the criminal courts where the Department of Justice itself may not have opted to do so.
The SFC has stated that it adheres to the Prosecution Code of the Department of Justice. Under the Prosecution Code, it is the role of the SFC to ensure that justice is dispensed with equal measure and in an even handed manner. A decision to prosecute in the criminal courts should only be taken if:
Significantly, under the Prosecution Code, a prosecutor is obliged to act fairly rather than to secure a conviction. However, the Department of Justice has been critical of the SFC’s role as both investigator and prosecutor on the basis that it lacks appropriate internal regulation and policing to ensure that it prosecutes fairly rather than to secure a conviction.
A decision by the SFC not to prosecute in the criminal courts does not, however, necessarily mean that the SFC will not pursue any penalty. Even where it elects not to prosecute in the criminal courts, if the misconduct may amount to market manipulation or insider dealing, the SFC may, with the consent of the Department of Justice, commence MMT proceedings or, if the misconduct was undertaken by a person licensed by or registered with the SFC, the SFC may take disciplinary proceedings.
Unlike criminal proceedings, MMT proceedings and disciplinary proceedings cannot result in imprisonment. MMT proceedings indeed, cannot even result in fines but they may result in disgorgement orders (i.e. orders to pay a sum equal to the profit gained or loss avoided as a result of the misconduct) and a finding of liability by the MMT will carry adverse reputational consequences and may form the basis for civil liability through the civil courts. Disciplinary proceedings may result in substantial fines which may be as much as HK$10 million or 3 times the amount of profit gained or loss avoided, whichever is the greater, as well as a revocation of license or registration with corresponding loss of livelihood.
In addition to prosecution, the SFC may apply to the civil courts for a variety of orders, including injunctions and remedial orders, even before it begins prosecution. Thus, for example, where a listed company engages in misconduct, the SFC may seek orders to disqualify the individuals involved from being a director of a listed company. Equally, for example, in the case of insider dealing, the SFC may seek to freeze the gains from the insider dealing.
If a decision is taken to prosecute in the criminal courts, the SFC will normally make a complaint or lay information before a magistrate (or an officer of a magistrate’s court). In turn, the magistrate (or the officer) may issue a summons to the person against whom the complaint or information has been laid to appear at a designated time and place before a magistrate to answer the complaint or information. The summons will set out the particulars of the complaint or information, including the time and place where the offence is alleged to have been committed and will identify the offence alleged to have been committed.
At the first hearing before a magistrate, the charge will be read to the defendant. At this time, the defendant may enter a plea or the case may be remanded for further consideration before a plea is taken. There may be a number of appearances before a magistrate before a plea is taken and the charge is set down for trial. Careful consideration must be given to verify the charge is in order (e.g. it refers to an actual offence).
In preparing for trial, the defendant may request a copy of the materials upon which the SFC will rely for their case. This will normally include the interview statements and documents taken by the SFC during the investigation stage.
At the same time, ahead of trial, the SFC may serve written witness statements on the defendant for the purpose of introducing evidence, such as transcripts of audio tapes of interviews, into the trial, and may seek to agree facts. The defendant will have 14 days to object to any written statements tendered by the SFC and if he does not object, the witness may not need to attend court to be cross-examined and the statement will be admissible as evidence. As a result, the defendant should consider carefully whether he wishes to object to the written statements. Equally, the defendant should consider carefully whether to agree any facts as such facts may be prejudicial to him.
At trial, the magistrate will first hear from the SFC, then the defendant and then the SFC in rebuttal. Each side may adduce their own witnesses and evidence. Each witness will provide his evidence through questioning by the side which called him as a witness and then may be cross-examined by the other side. If necessary, following cross-examination, a witness may be re-examined by the side which called him so as to address issues arising in cross-examination. In any area where the evidence of a witness of the SFC contradicts the evidence of the defendant, the witness should be cross-examined. After hearing both sides, the magistrate will then decide whether to acquit or convict the defendant.
Both the SFC and the defendant may appeal a decision of the magistrate by way of case stated but the defendant may also appeal by way of a notice of appeal if he plead not guilty at the trial or did not admit the truth of the information or complaint against him.
An appeal by way of case stated is limited to a point of law or to a question as to the magistrate’s jurisdiction. Accordingly, the SFC cannot appeal on the basis that the magistrate’s findings of fact were unsupported by the evidence. In contrast, an appeal by notice of appeal may include not only points of law and questions of the magistrate’s jurisdiction but also questions of fact.
Both types of appeal must be made within 14 clear days of the magistrate’s decision but it is possible for a defendant to apply for an extension of time in which to lodge the appeal in the case of a notice of appeal. However, extensions of time are granted at the court’s discretion and the right to appeal may be lost if the appeal is not made in time. As a result, it is important that immediately following a conviction, the defendant seek legal advice as to the possibility of an appeal so that a decision as to whether or not to lodge an appeal can be made within the 14 day period. An appeal should only be made where there are reasonable arguments with a real chance of success.
Appeals from a magistrate’s decision are made to the Court of First Instance. However, in rare cases, the Court of First Instance may direct any point in the appeal be heard before the Court of Appeal.
A decision of the Court of First Instance on appeal from a magistrate may be further appealed to the Court of Final Appeal (rather than the Court of Appeal) with leave of the Court of Final Appeal. An application for leave to appeal must be lodged within 28 days of the Court of First Instance’s decision. However, the application for leave to appeal cannot be lodged with the Court of Final Appeal unless (i) there is substantial and grave injustice, meaning normally that there is disadvantage to the defendant as a result of a serious departure from accepted norms, or (ii) there is a question of law of great and general importance.
In an appeal based on the latter, an application must be made to the Court of First Instance to certify that there is a question of law of great and general importance. In the past, appeals to the Court of Final Appeal have been made on the basis of the proper interpretation of market manipulation offences as well as offences relating to investment offers.
An application for certification must be made well before the 28 day deadline for lodging the application for leave to appeal, otherwise, the certification will not be granted in time to meet this deadline. It is critical for a defendant to seek legal advice immediately following a decision of the Court of First Instance so as to ascertain whether there is a basis for an appeal to the Court of Final Appeal and if so, to seek certification to allow the application for leave to appeal to be made in time. Whilst the Court of Final Appeal has the discretion to extend the time in which the application for leave to appeal is made, failure to apply for certification in time may be fatal to the appeal as the Court of Final Appeal may refuse to entertain an application for leave to appeal out of time. If the Court of First Instance refuses certification, the refusal may be appealed to the Court of Final Appeal.
As appeals to the Court of Final Appeal are rare and there is no further recourse from a decision of the Court of Final Appeal, a defendant must exercise particular care to ensure that his legal advisers are well versed not only in the substantive legal issues arising from the securities offence for which he has been convicted but also in appeal procedures for the Court of Final Appeal.
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