25 April 2018

SFC’s recent enforcement trend with s213 – what does this mean for listed companies?

Written by Katherine Cheung

Introduction

The Securities and Futures Commission (SFC) has been proactive in utilising section 213 of the Securities and Futures Ordinance (Cap. 571) (SFO) to bring legal actions against listed companies and their top management in order to obtain compensation for public investors. This recent enforcement trend has reinforced the applicable scope of restorative orders made pursuant to section 213 and emphasised the duties of listed companies and their directors in order to ensure they do not become subject to such proceedings.

Recent cases: SFC v Qunxing Paper Holdings Co Ltd [2018] 1 HKLRD 1060

The SFC successfully brought actions against Qunxing (now delisted) and its former chairman and vice-chairman for making false or misleading statements in its IPO Prospectus in 2007 and various financial results announcements.

The Court also made an order under section 213 of SFO requiring the defendants to make payments to the public investors who subscribed for Qunxing shares in its IPO or purchased them in the secondary market between 2007 and 2011. About 27,000 shareholders were entitled to compensation, and the total sum of payments to be made under the orders was $1.42 billion.

Notably, Qunxing’s former chairman and vice-chairman were held personally liable because they “had directly or indirectly been knowingly involved in, or a party to, the contraventions by Qunxing…or had been involved in the contraventions whether knowingly or otherwise”.

What is Section 213 of SFO?

  • Section 213 confers a right on the SFC to bring an action as a plaintiff on behalf of investors who has sustained the loss in question
  • Section 213 creates a “substantive statutory cause of action which is vested in the Commission”. This statutory regime allows the SFC, as regulator, to take action to obtain civil remedies for the benefit of investors, who may otherwise be deterred by cost and other considerations from instituting legal proceedings individually to obtain redress for their relatively small losses.
  • The persons against which an order for restoration can be made under section 213 are not limited to just parties to the transactions in question; but also to persons who have aided or abetted the contraventions or even just a person who was involved.

Other recent cases involving section 213

In the case of SFC v Sun Min [2017] HKEC 1479, the Market Misconduct Tribunal (MMT) had found the defendant had engaged in insider dealing contrary to the SFO. The SFC successfully sought an ancillary order for payments by the Defendant to all counterparties to the share trades in question to restore them to the pre-transaction positions and/or to compensate them under section 213 of the SFO.

Similarly, in SFC v Tsoi Bun [2014] HKEC 258, the defendant had been convicted of five counts of false trading and price rigging in the futures market under the SFO. The SFC therefore made a successful and uncontested application under section 213 for an order that the defendant pay compensation to his counterparties in the trades.

What does Qunxing and section 213 mean for you?

  • The SFC can and will continue to use section 213 to seek redress for and on behalf of investors of listed companies in Hong Kong;
  • Section 213 itself is a substantive cause of action (meaning that it is not merely procedural in its provision of financial relief);
  • Directors and other top management of listed companies can be personally liable if they are “persons who indirectly or directly, knowingly or otherwise, aided or abetted or who were involved in the wrongdoing in some way”.

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