History has recorded numerous accounts of companies who have taken a downward spiral as a result of engaging in dishonest and unscrupulous activities in the market. However, before their acts are uncovered, significant damage has accrued to both investors and the rest of the market. Funds are lost and investments vanish. Names of multinational companies like Enron have become unholy references on the outcomes of such misconduct in the market. This is the reason why states have enacted policies that protects the trading and market in their jurisdiction. This paper will be examining this regime made in the UK setting and its counterpart in Hong Kong. More specifically, the study will look on the legal framework implemented of both countries relating to market abuse and market misconduct in order to present the current conditions surrounding the implementation of these policies. The main sources that this paper will employ are Hong Kong’s Securities and Futures Ordinance (SFO) and the provisions given by the Financial Services Authority (FSA). It is in this manner that a proper analysis of both legislations and policies will be possible. In the same regard, articles and journals will be used to support the claims and arguments provided in this research paper.
Market Abuse and Market Misconduct
The modern market is not limited to its own domestic boundaries. Nowadays, every industry is dominated by multinational companies and corporations making competition rather intense and war-like for organisations. The temptation to acquire a greater share of the market, regardless of whether the means are ethical or otherwise, is apparent. (Board 2002, 3) Thus, for the past decades, buzzwords like corporate governance and transparency has been used incessantly to ensure that corporations and other companies will not take that less ethical path of trade. The issue in this process is that, for some reason, companies and corporations tend to find ways to bend these ethical standards and accepted principles of fair trade to improve their position in the market. At some point, these companies bend these principles so far that they tend to cross the line that separates what is ethical and what is not. It is at this point that states have to step in and take the reins in keeping the competition fair in terms of trade in their market. The more basic policies that the state imposes to the corporations that operate in their market include the equal treatment of their shareholders. This means that corporations, in order to veer away from any types of market abuse or misconduct, have to adhere to the principle of shareholder primacy. (Mitchell 1995, 1) The executive decisions made by the leadership of the corporations should essentially be far from triggering the downfall of the company and effectively for the best interest of the shareholders. Aside from the responsibilities of the corporation to their shareholders, these institutions also have to perform their duties to society. (Chard-Charron 2007, 1) These duties could be directly related to their consumers or the government of the market they operate. In any case, there are laws that pertain to these exact duties. More importantly, these duties and responsibilities maintained for a corporation to carry out are expected to be realised in an ethical manner. (Burns and Lanasa 1990, 33) In this paper, a close consideration on the context of duty of care will be provided as the foundation of the consequent discussions relating to the legal frameworks of Hong Kong and UK on market abuse.
The Concept of Duty of Care
The seminal case of Donoghue v Stevenson  has ingrained in legal theory the concept of duty of care. Basically, this legal concept refers to the legal responsibilities of a person to another in instances like damage to property or financial loss takes place. Basically, the case manifests that in the presence of duty between parties, one is legally responsible to the other. This concept has been implemented in numerous regimes all over the world. To illustrate, laws in Australia prohibits an individual to spread out false information that could bring about shifts in the price level of certain stocks. (Miller, Harvey and Parry 1998, 567) In essence, these types of disputes are often regarded similarly as with tort cases. This is similarly true in cases in UK where the false statement appeared to be the key in inducing the person to bestow a particular investment. In both cases, those aggrieved could find solace on the fact that the civil courts of their states will hear their suits. In addition, these mentioned states are among the forerunners in giving the private person the chance to seek help from the government in the instance where there were market misconduct and duty of care was abused.
The Legal Framework of Market Abuse Legislation in UK
The legal foundation of the conditions surrounding market abuse in the United Kingdom is the Financial Services and Markets Act 2000.Possibly one of the greatest contributions of the ratification of the said legislation is the creation of the Financial Services Authority (FSA). This body is the one supervising and monitoring the trading practices of corporations and companies operating in the UK market. As stated in s2 of the Financial Services and Markets Act 2000, the FSA is bent on establishing market confidence, public awareness, protection of consumers, and reduction of financial crime. Essentially, this sums up that the legal framework in UK is centred on protecting the investors and the public from any unscrupulous doings of the corporations.
Being the sole statutory regulator of the financial services industry, the FSA has numerous duties and responsibilities in UK. Aside from the authorisation and supervision initiatives noted above, the FSA is also sanctioned by the Financial Services and Markets Act 2000 to enforce the said act along with the independent investigatory and disciplinary powers they have. This means that this part of the government exude both regulatory and a quasi-judicial visage. In addition, the Act has also given the FSA the authority to appoint the ombudsman board that will make dispute resolution quicker, more flexible, and efficient.
The Legal Framework of Market Abuse Legislation in Hong Kong
Following the trend toward the imposition of a more proficient framework for corporate governance, policies and other legal manoeuvrings were carried out in the Hong Kong setting. This part of the paper will be discussing the Securities and Futures Ordinance (SFO) in Hong Kong as well as the existing conditions surrounding the types of market misconduct as applied in the said administrative region.
Securities and Futures Ordinance (SFO)
Ratified in 2002 and implemented in 2003, the SFO is composed of seventeen parts and ten schedules. To some extent, this legal framework is a composite of the past laws and regulations implemented in Hong Kong covering the areas of securities and investments. Essentially, the ratification of the said ordinance has made certain steps to institute a single set of licensing laws. This is seen in Part V of the ordinance. It establishes the registration requirements and set up an efficient process.
The Ordinance also created and developed certain bodies that will take charge on the proper implantation of the applicable laws in Hong Kong. For instance, the SFO is instrumental in the empowerment of the Securities and Futures Commission (SFC) in terms of improving its investigatory powers in instances of market misconduct. On the other hand, the creation of the SFO similarly allowed the establishment of the quasi-judicial element of state in terms of dealing with market misconduct cases: the Market Misconduct Tribunal.
To boot, the SFO generally reinforces the transparency initiatives of the state with reference to its market. This is manifested in Part XV of the ordinance. All in all, the legal framework of Hong Kong in terms of handling market misconduct tends to apply measures with the ends of establishing a more transparent market. Thus, it rests on the assumption that the trading that transpires in the market will be fair and orderly provided that good corporate governance is observed among the organisations. With the ratification of the ordinance, it is expected that market misconduct will ultimately be averted even before it affects the entire market as seen in previous high profile corporate scandals abroad.
Market Misconduct as a Civil and Criminal Offence
In Part XIII and XIV of the SFO, market misconduct is intimated as both a criminal and civil offence. To a certain extent, this treatment of market misconduct and market abuse tends to reflect what is implemented in other major economies of the world. For instance, the Australian Securities and Investments Commission (ASIC) is given ascendancy by commonwealth laws to deal with the consequences held with reference to market abuse. The said body is allowed to provide orders to certain organisations so as to remedy the effects of market abuse. This is an apparent alternative for criminal prosecution for those alleged to have taken actions falling on legally defined areas of market misconduct. In a sense, this is adopted by the SFC in Hong Kong with particular reference to the application of civil remedies in curing market abuse.
In the United States, the legal framework also applies both civil and criminal consideration of market abuse. The Securities and Exchange Commission of the United States takes care of the civil treatment of these actions while the Department of Justice takes on the task of dealing with the reckless infringement of the established laws in the land: US Securities Act 1933, US Securities Exchange Act 1934, and Sarbanes Oxley Act 2002.
Noted Market Misconduct in UK and Hong Kong
The following part of the paper will be looking into the individual market abuse legislations manifested in both the UK and HKSAR. Specifically, this set of market misconduct is taken from the definition acquired from the SFO of Hong Kong. Consequently, its counterpart from UK will also be taken into consideration. Basically, this part will be comparing and contrasting the laws relevant to market abuse in both UK and Hong Kong.
One of the several categories of market abuse is insider dealing. Basically, this act is covered in the 13th and 14th parts of the SFO. Before the ratification of the SFO, Hong Kong implements the Securities (Insider Dealing) Ordinance to deal with this type of market abuse. With the ratification of the SFO, the most recognisable reform provided in the framework is the criminalisation of insider dealing. As intimated in Part XIV of the ordinance, ten years of incarceration along with ten million Hong Kong dollars are given to those who have been convicted of the said act. Aside from this, the legal framework surrounding this category of market misconduct as become more severe as the concept of “listed securities” has included unlisted and/or unissued securities (provided that there is foreseeable that the said securities will be consequently listed). In the same regard, sharing insider information has now been broadened provided that it has an effect on the price of the securities of the company listed in the market. Similarly, those who have interests of 5% in the company are now considered as a substantial shareholder. This means that companies are now obligated to provide disclosure to a wider part of their shareholders, making transparency accessible to the majority. In the case of UK, insider dealing is right away manifested as a criminal act. This category of market misconduct is seen in s52 of the Criminal Justice Act 1993. An accused of insider trading is likely to be found guilty if “he deals in securities that are price-affected securities in relation to the information” or if “he encourages another person to deal in securities” and consequently affect the price of these securities. This means that anyone caught and subsequently found guilty of these charges tends to suffer the criminal sanctions right away with limited alternative of civil sanctions as per the good graces of the FSA.
The terms and provisions provided in the false trading regime in the SFO are largely based on the laws of Australia, particularly with reference to the Australian Corporations Law (ACL). Basically, the Hong Kong version indicates that the creation of a false market is considered a breach of the ordinance regardless whether it is with intention or if it was caused by being reckless. More specifically, the law indicates that creation or maintenance of an artificial price is answerable to established terms of the ordinance (s274). The concepts of wash sales as well as matched orders establish the fact that false trading did take place. In the case of UK, this type of misconduct or abuse falls directly on the category of fraud. This is reflected in the Fraud Act 2006, particularly of s2 of the said legislation indicating fraud by false representation. The key ingredient in this part is the “misleading” nature of the action. Thus, in UK false trading is essentially a criminal offence. Another piece of legislation that deals with false trading falls under s118 of the Financial Services and Markets Act 2000. Collectively, this part of the Act dictates the definition of market abuse. Nonetheless, false trading as interpreted in the Hong Kong legislation appears as a set of behaviours that is tantamount to those intimated in s118 of the FSMA.
Another category of market misconduct manifested in the SFO is the concept of price rigging (s275). It is a composite of the provisions in a previous HK legislation (Hong Kong Securities Ordinance) and the ACL. This policy intimates that no person is permitted to take on actions tantamount to wash sales of securities especially if the act will essentially affect the price of securities in the market. More specifically, the ordinance maintains that the sale should not amount to any fluctuation of securities in the market. The SFO also maintains that an organisation’s only recourse in such allegations of price rigging is to establish that the selling of the securities is not intended to create any deceptive manifestation on the price of the said securities. In the case of UK, it has been established in the recent case of Norris v Government of the United States of America  that price fixing has yet to be considered a common law offence. In the said case, the judges have intimated that the factor of deceit is an aggravating factor that makes their interpretation of price fixing as a crime under UK law.
Disclosure of Information
Normally, disclosure of information tends to show good faith in any transaction. However, there have been accounts where the disclosure of certain information has led to significantly affecting the price of securities. In this regard, the state tends to regulate the disclosure of information in the market. The following parts cover what types of information that the SFO attempts to control.
In the case of Hong Kong, the Hong Kong Securities Ordinance has established the prohibition of disclosing false information even before the SFO has been ratified. Essentially, this regulation intends to protect the public from unscrupulous traders who discloses bogus information to induce people into buying or selling shares (s277). Like the other categories of market misconduct, some parts of the provisions in the SFO are a composite of the ACL and the repealed Hong Kong Securities Ordinance. Moreover, the provisions in the SFO also maintain that even the omission of a material fact is deemed as a contravention of the law.
At first glance, the law appears to be a clear threat to the welfare of financial journalists whose jobs are essentially to disburse information to the public and to some extent induce them to buying or selling securities. In this context, certain defences are presented to keep this part of the population from constant scrutiny of the state. Such defences include the exoneration of people who reproduces information acquired from a source; internet service providers; and broadcast journalists duly licensed in Hong Kong. In UK, the applicable law would be the Fraud Act 2006. Specifically, s2 and s3 of the said act is applicable for this misconduct. Once again, the provision of false information is covered by fraud by false representation and to some extent fraud by failing to disclose information (s3). Like the previous misconducts, this essentially falls as a criminal offence.
Part XIII of the SFO indicates that the disclosure of information about prohibited transactions is considered a category of market misconduct. The said act is detailed in s276 of the ordinance maintaining that stating the implications of certain breaches of the provisions in the SFO which may affect the price of securities is prohibited. This is especially true for those who intend to reap certain benefits for disbursing such information. Thus, it is important to establish this state of mind on the part of the accused to ensure a conviction. Similar to the previous category of market misconduct, journalists and other analysts are exempted from any liability and exonerated from any type of breach related to the said law.
Macey and O’Hara (2005, 563) indicated in their study that markets which are susceptible to stock manipulation “increases the risks and the transaction costs associated with trading.” This is the reason why states tend to find ways to eliminate any possibility of market manipulation from transpiring. In the case of Hong Kong, the SFO indicated in s278 that any person is prohibited to “engage in, or assisting, counselling or procuring another person to engage in, any of the conduct” categorised by the said law as a category of market misconduct. Looking closely to the said legislation, it appears that the law attempts to cover market manipulation even those carried out overseas. A good explanation would be because the state is trying to avoid any possibilities of HK being a place where unscrupulous individuals would base its market to exploit other markets.
In UK, s397 and s118 of the FSMA governs the overall offences in the manipulation of the market. The breach of both areas of the Act tends to trigger an investigation coming from the FSA. In s397, the details on the offences of dishonest and reckless market manipulation are indicated. In s118, the behaviour underlying the intent of market abuse is given close consideration. In this regard, the actual actions as well as the underlying intentions and premeditated nature of the breach are established.
Duties of Directors
Possibly one of the more permanent elements of corporate law is the concept of director’s duties. In general, the directors of a corporation have to fulfil one thing, to effectively carry out proper corporate governance in the organisation. In this regard, they are tasked to place equal treatment to all those involved in the corporation especially with reference to the shareholders. This duty is powered by the concept of shareholder primacy. (Mitchell 1995, 1) Though the directors are given the authority to make executive decisions on the overall direction of the organisation, it is imperative that the shareholders are properly informed of these actions. In the same regard, despite the duty to realise the goals of the corporation and looking out for the welfare of the shareholders, they have to operate within the limits of ethics and the law. (Burns and Lanasa 1990, 33) In a consequent manner, these directors also keep the corporation from taking on any form of market abuse or any action categorised as market misconduct. The following discussions cover the indicated duties of directors as indicated by the laws in UK and Hong Kong.
The UK Experience
Traditionally, the duties of directors are found in a series of previous cases and in common law. Recently, these common law principles are now codified into a set of general duties as indicated in theCompanies Act 2006. In the said legislation, it is indicated that directors have a duty to act within their powers (s171). This means that the directors are bound by the ratified memorandum of association of the corporation as well as the decisions held by the shareholders of the organisation. Basically, their powers are tantamount to what the constitution of the company intimates, nothing more and nothing less. The directors also have the duty to promote the success of the company (s172). This reinforces what has been noted in the introduction above. However, in the UK setting, the director has to base his/her decision to six factors manifested in the Companies Act 2006. It must be emphasised that the said six factors serves merely as guidelines for decision making in order to realise the second duty.
Similarly, s173 intimated that directors the duty to exercise independent judgment. This means that personal interests are done away in exercising judgement with reference to the company. Connected to this duty is s174 of the Companies Act 2006 indicating the responsibility to exercise reasonable care, skill and diligence. Looking closely at this duty, it is apparently created with reference with s214 of UK’s Insolvency Act 1986. This emphasises what was earlier discussed as the duty of care within the organisation and with the market.
The following duties of directors are to be implemented in UK on October of 2008. These duties include the duty to avoid any conflict of interest. This duty is present in a proposed transaction (s177) or an existing one (s182). It is intimated in the said Act that any interest, either direct or indirect, should be declared by the directors. However, s177(6) pointed out that the directors may avoid declaring such an interest if one could reasonably regard it as not likely to spawn any type of conflict of interest. Failure to comply may place criminal sections for the directors as intimated in s183 of the Act.
The Hong Kong Counterpart
In the case of Hong Kong, the concept of duty of care is ingrained strictly in the SFO. This is shown in the concept of management responsibility. According to the said legislation, the directors are responsible not only of their action but also with the action of their employees such that it would not be tantamount to any form of market misconduct. It is left in their judgment what is deemed as reasonable. Unlike those mentioned in UK, a set of established guidelines or standards regarding the exact duties and responsibilities of directors of an organisation is quite lacking. Nonetheless, directors in Hong Kong are still subject to both criminal and civil liability if they fail to avert any form of market misconduct.
Implementation of the Law
The following part of the paper will be covering the implementation of the regime surrounding market abuse in both UK and Hong Kong. Specifically, the discussions will cover the power of the state to investigate market abuse. Added to this presentation is a discussion on the criminal and civil sanctions available to those who have been found guilty of market abuse.
The following discussions will be focusing on the powers given by the applicable laws in the regulatory bodies in UK and Hong Kong. Specifically, a look on the capacity of information gathering will be presented on account of the FSA and SFC.
The UK Experience
The governing authority in the area of market abuse in UK is the Financial Services Authority (FSA). Its main task is to implement the terms, conditions, and principles intimated in the Financial Services and Markets Act 2000. Based on the said legislation, the FSA is tasked to maintain a level of confidence in the financial system of UK (s3). Aside from making the public understand the existing system (s4), the FSA is also tasked to secure the consumers (s5) and trim down the occurrence of financial crime (s6).
In s167 and s168 of the Act, the investigative powers of the FSA are detailed. In its simplest sense, the FSA has the power to ask any firm under their jurisdiction to provide documents and other information needed for an investigation. In area of market abuse, the FSA is required to impose investigations falling under s198(2) of the Act. Specifically, breaches of s21, s397, s19, s21, s238, and s118 of the FSMA along with the offence as indicated in s52 of the Criminal Justice Act 1993 permits the FSA to conduct investigations so as to realise their mandate as intimated in s3-s6 of the FSMA.
The Hong Kong Counterpart
The SFO grants power to the SFC to produce any information relevant to their investigation. This means that the state warrants the said body to issue warrants on certain documents to build a case surrounding a particular company accused of market abuse. On the other hand, the MMT is sanctioned by the said legislation to acquire evidence and even testimonies under oath to determine whether a person is liable for the criminal and civil sanctions of market abuse. Those individuals who are requested by these governing bodies has no other choice but to cooperate. For instance, the SFC has the ability to suspend a licence if they sense any fraud or malfeasance is in existence. On the other hand, the MMT has the capacity to fine an uncooperative individual to a maximum of a million Hong Kong Dollars and two years imprisonment.
Crime and Punishment
The UK Experience
In UK, claims that fall under the breach of s52 of the Criminal Justice Act 1993, or insider trading, are the ones that promptly regarded as criminal offence. The other breaches under the FSMA are first subjected to the inquiry of the FSA and the FSA Tribunal before being forwarded to the criminal courts. In this regard, the FSA tends to be the claimant of such cases against the private entity.
The Hong Kong Counterpart
The enforcement of powers of the SFC is not limited to seeking civil remedies on the parties involved. The SFC is mandated by the SFO to file a case before the courts so as to seek criminal sanctions for the accused. In this regard, the Department of Justice is expected to intercede as the state takes on a case against a particular entity. They pose as the claimants of the case. However, in cases where the parties involved as considerably high profile, the Secretary of Finance has the option to refer any case to the Secretary of Justice. This means that instead of having to go through the MMT, the case directly goes to major courts for criminal proceedings.
In the case of UK, the sanctions available at the disposal of the FSA are primarily administrative in nature. They are able to issue public statements and censures as intimated in s205 of the FSMA along with a set of financial penalties (s206). It is only when a case is forwarded to the Tribunal, a body independent of the FSA (s132), that criminal procedures could commence. However, it is imperative to indicate that the investigations and data acquisition capability of the FSA builds the criminal case against the accused parties of market abuse.
On the part of the HKSAR, the SFO provides civil remedies for the investors who have been subjected to market abuse. More specifically, s281 of the SFO claims that those who suffered any pecuniary loss on account of the breach of the terms of SFO and consequent market misconduct are permitted to forward civil claims against the accused. In this regard, common law principles of duty of care come into the picture as a part of claims in tort from these claimants. In any case, the SFC and the MMT are the ones that take care of the civil proceedings in the area of market abuse in Hong Kong. In the same manner, these bodies are also in charge in determining whether the offence is worthy of a hearing in front of the Court of First Instance as a criminal case.
Lies and omissions of certain facts offer no simple outcome. In the case of market abuse, it rattles the very foundation of a state’s economy. In the case of UK, anyone who dares compromise the welfare of the state and the rest of society will, inescapably, have to pay dearly. The discussions above have provided a clear indication of the UK and HK regime on market abuse. It appears that UK laws of market abuse seem to be more effective in terms deterrence. This may be because of the fact that UK laws have limited recourse on the accused with reference to civil remedies. As seen in the discussions above, majority if not all parts of the HK categories of market misconduct are classified solely as criminal offence in the UK setting. This indicates that the state is aggressively taking a strong stand in its fight with market abuse and protection of the common shareholder.
UK has been the vanguard in the context of market protection for decades. Compared with the HKSAR government, its UK counterpart has been implementing a single governing law with reference to its securities. In the area of sanctions, UK has apparently been among those who do not believe in fines as sole equivalent for the wrongdoings of the well-to-do. The judiciary still clings on to the long-standing tradition of fairness and justice regardless of one’s bank account. The discussions above have pointed out that the aggravating element in the case of market abuse is essentially deceit. This is essentially why the UK regime is more developed than its HK counterpart, the interpretation of the laws are given to courts and not some government organisation with quasi-judicial authority. This ensures that the treatment of the law as well as the interpretation is based on precise legal estimation.
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