Although insider dealing has been a criminal offence under section 291 of Chapter 571, Securities and Futures Ordinance (SFO) in Hong Kong since 2003, the Securities and Futures Commission (SFC) was initially slow to prosecute offenders, commencing its first criminal insider dealing prosecution only in January 2008.
Factors to be considered to commence criminal proceedings
In deciding whether to commence criminal proceedings against an alleged insider dealer, the SFC will have regard to the guidelines in the prosecution policy of the Department of Justice, which require two basic factors to be considered:
1. Sufficiency of evidence The burden of proof is greater in criminal proceedings and the SFC will generally only recommend criminal proceedings where there is admissible, substantial and reliable evidence that an offence has been committed and there is a reasonable prospect of a conviction. Where there is a lack of sufficient evidence to meet the criminal burden of proof, the SFC is likely to initiate civil proceedings.
2. Public interest Whether, taking into account the circumstances of a particular case, it is in the public interest to bring a prosecution before the courts.
First Criminal Case of Insider Dealing in Hong Kong
In the case of HKSAR v Ma Hon-yeung (DCCC 229-240/2008) which involved Ma Hon-yeung, former Vice President of BNP Paribas Peregrine Capital Ltd, now known as BNP Paribas Capital (Asia Pacific) Ltd (BNP Paribas), an investment bank.
The case is related to trading in the shares of Egana Jewellery & Pearls Ltd (“Egana”), a listed company in Hong Kong prior to an announcement made to the market on 11 Jul 2006 aboutprivatization of the company.
Ma Hon-yeung learned of a proposed privatization of Egana and tipped off his girlfriend, Ivy Lo Yuk-wah and three other family members, Sammy Ma Hon-kit, Cordelia Tso Kin-wah and Ronald Ma Chun-ho, within days of becoming privy to the proposed deal. All of them bought shares in Egana before the company announced a privatization plan and made a profit as a result.
Between 1 June 2006 and 6 July 2006, trading in Egana’s shares ranged between HK$1.35 and HK$1.61 with average daily turnover of 636,630 shares. Trading in the shares of Egana and EganaGoldpfeil were suspended on 7 July 2006 pending an announcement. On 11 July 2006, Egana and EganaGoldpfeil made a joint announcement about a proposed privatization of Egana. The proposal offered shareholders a choice of receiving HK$1.80 per share or one share of EganaGoldpfeil for every 1.5 Egana shares or a combination of both. Following the announcement on 11 July 2006 the share price closed at HK$1.84 with substantially increased turnover of 25 million shares. The privatization proposal was approved by shareholders and by the court and became effective on 23 October 2006. Egana was delisted on the following day.
Ma acted as a financial consultant for Egana during the privatization move, which he knew was confidential, price sensitive information. Ma had counselled or procured Ivy and Sammy to trade in Egana shares. He was convicted of insider dealing contrary to section 291(1)(b).
Ivy, bought 1.51 million shares in Egana between June 20 and July 6, 2006. She was convicted of insider dealing contrary to section 291(5)(a).
Ma transferred a total HK$1.7 million into Ivy’s account before the privatization announcement. She later sold the shares and transferred the money back to Ma’s account.
Sammy , Cordelia and Ronald bought Egana shares separately from July 6.
Sammy, Ronald and Cordelia traded in Egana shares having information through Ma’s connection to Egana about the proposed privatisation. Owing to their close family relationship between Ma andhis three family members, who received and made profit by utilizing such information, all of them were convicted of insider dealing contrary to section 291(5)(a) and (8) of SFO.
Ma and Ivy were given custodial sentences of 26 months and 12months respectively.
Ma’s three family members were ordered to serve 200 hours of community service.
Fines were also imposed in amounts equivalent to the profits they had made while dealing in Egana shares ahead of the privatization which are HK$230,000, HK$210,000, HK$330,000, HK$110,000 and HK$17,000 respectively.
The Court also ordered them to pay the Securities and Futures Commission (SFC) investigation costs totaling HK$322,742.
This is the first time any person has been sentenced to jail for insider dealing in Hong Kong.
The family members avoided custodial sentences because they were merely opportunistic investors making use of the relevant information divulged by the vice-president. There was no evidence that they assisted him in carrying out his plot for personal gain by using insider information. The conduct of the girlfriend, on the other hand, warranted a custodial sentence as she was the person executing the plot on behalf of the vice-president. She was fully aware of his position of trust in the financial institution and had used her trading account to perpetrate the plot. As such, the court viewed her involvement in the misconduct as being much more serious than that of an opportunistic investor; community service could not adequately reflect her culpability.
However, we continue to see obvious and flagrant breaches of the insider dealing laws, such as insiders and/or their families’ members will exploited the confidential information they obtained to make a gain on disposal of shares. One of the reasons may be that the punishment for insider dealing in Hong Kong is mild for the offenders.