Listed company crime, misconduct and the SFC Mr Andrew Sheng - - PowerPoint PPT Presentation

Listed company crime, misconduct and the SFC

Mr Andrew Sheng Chairman

Securities & Futures Commission

17 January 2003

2

Introduction

 SFC traditionally a market, not listed co regulator  Had some investigation & prosecution powers (eg

prospectus breaches) which underused – no public or political mandate, insufficient focus and resources

 Now greater public and political demand and support for

exercise of powers

 SFO and “dual filing” give extra impetus and some extra

powers

 SFC will be more active in future, but only one part of

regulator jigsaw and still limited powers and geographical problems, yet some clear solutions for SFC action

3

Structure of presentation

 Framework of listed company crime and misconduct

regulation: – SFC and other actors – investigations:

 SFC role  others’ roles

– enforcement options

 Species of crime and misconduct  Observations on SFC role

4

Framework

5

Many actors

 SFC – market regulator, limited but growing listed co role  SEHK – front line regulator – permits listing, vets

documents, administers listing rules

 CCB – fraud investigations  ICAC – corruption investigations  FS appointed Co Ord inspectors – co misconduct or

crime investigations

 DoJ – criminal prosecutions (DPP), civil market

misconduct (Civil)

6

Many actors

 Official Receiver – director disqualification  Companies Registrar – co filings and prosecutes

summary breach of Co.s Ord

 Takeovers Executive (SFC) & Panel – Takeovers Code

breaches

 FS – initiates IDT/MMT, residual Co.s Ord regulatory

powers

 Shareholders – private and derivative actions  SFC seen as key lynch pin

7

Investigations:

SFC Role

8

Source of referrals to SFC

 SFC surveillance – suspected unusual trading on SEHK  SFC review of listed co announcements, press and

market rumours

 Referrals from SEHK Listing Division through review of

announcements and filings

 Referrals from CSRC  Public complaints  Under SFO:

– “dual filing” – SFC vetting of listed co filings – auditor reports

9

Crime & misconduct within SFC’s jurisdiction

 Fraud etc and other misconduct in relation to the

formation or management of a listed co

 Breach of securities and futures law, fraud etc or other

misconduct in relation to dealing in listed co securities

 False and misleading filings  Breach of Takeovers Code  Sponsor, financial adviser misconduct  Listed co ownership

10

Fraud etc in listed co formation or management

 SFC listed co investigation (s 29A SFCO/179 SFO)

– s 29A limited power to get documents and explanations from listed co and group co.s – limited scope means inconclusive investigation results sometimes – s 179 improves by extending to third parties (auditors, banks, transaction counterparties) – s 179 – means more able to conduct meaningful investigation – search warrant powers (s 36 SFCO/191 SFO)

11

Securities law breach and fraud etc involving listed co securities

 SFC market investigation (s 33 SFCO/182-3 SFO)

– s 33 wider powers – document production and explanation, compulsory interviews, any other reasonable assistance and exercisable against any person – ss 182-3 – re-enactment – search warrants as well

 If can characterise listed co matter as market matter,

SFC can investigate more effectively (eg insider dealing, market manipulation, false or misleading prospectus or info affecting securities)

12

False/misleading filings

 SFC investigation:

– can use s 29A/179 or s 33/182-3 – s 29A/179 – co not disclosed all info shareholder expect – s 33/182-3 – false/misleading prospectus or info affecting securities

 “Dual filing” (SFO):

– listing applicants must file all listing documents with SFC as well as SEHK (r 5 Stockmarket Listing Rules (SLR) and disclosure documents (r 7) – dual vetting by SEHK/SFC – SEHK remains front line regulator (under review) – SFC acts if sufficient grounds to suspect disclosure problem

13

Takeover Code breaches

 Code purpose to ensure fair treatment of shareholders in

takeover or merger

 Code doesn’t have legal force  SFC investigation:

– “Executive” (SFC) investigates under Code (GP 10) – s 33/182-3 investigation – action contrary to public interest involving securities

14

Sponsor/financial adviser misconduct

 SFC licences listed co sponsors/fin advisers  Sponsor/fin adviser misconduct SFC priority at present  SFC investigations:

– can use s 56 SO, s 29A/179 or s 33/182-3 – s 56 SO disciplinary inquiry, no compulsory powers – s 29A/179 if listed co fraud or misconduct – s 33 if parallel securities investigation (often is) – under SFO, ss 182-3 gives compulsory investigation power

15

Listed co ownership

 SFC investigation:

– can use s 29A/179, 33/182-3 & s 33 SDIO/341 SFO – s 29A/179: if involves fraud, misconduct or inadequate disclosure – s 33/182-3 – breach of securities disclosure laws – s 33 SDIO/341 SFO – generally (FS must appoint inspector but usually appoint SFC staff)

 (Oxford Properties shows hidden ownership can be

mixed with abuse of minority shareholders)

16

Others’ investigatory roles

 SEHK – breach of listing rules - contractual only – co and

• fficers

 CCB – general fraud  ICAC – corruption  FS appointed Co.s Ord inspectors (ss 142–3)

– on application of shareholders, co, court order or grounds similar to s 29A SFCO – full investigatory powers like SFC – public appointment (raises expectations) and expensive – reports to FS

17

Enforcement Options

18

Enforcement Options

SFC Role

19

Civil

Fraud etc & misconduct in listed co

 Unfair prejudice in listed co (s 37A SFCO)

– SFC can apply to CFI for order to:

 restrain acts  require derivative action by co  appoint receiver/manager  ban people from management  require compulsory share acquisition etc  Grounds very limited at present  s 214 SFO widens grounds for application to grounds for

s 179 investigation, application at any time

 Winding up if just, equitable & in public interest (s 45

SFCO/212 SFO)

20

Civil

Securities law breach & fraud etc in listed securities

 Injunctive relief (s 55 SFCO/213 SFO)

– very limited under SFCO – SFO – much broader power – especially useful re Co.s Ord prospectus provisions and SFO false & misleading info market misconduct provisions

 Refer suspected market misconduct to FS (s 252(8) SFO)

21

Criminal (summary)

Prospectus breaches

 Misstatements in prospectuses (ss 40A & 342F

CO) but also more minor matters

 12 mths’ gaol &/or $150k fine max

Market misconduct

 False/misleading info about securities, insider

dealing, market manipulation (Pts XIV and s 303 SFO)

 3 yrs’ gaol &/or $1m fine max  Court can order civil MMT orders too (see below)

22

Criminal (summary)

false/misleading filing with SFC

 Giving false or misleading info to SFC (s 384 SFO)

 1 yrs’ gaol &/or lvl 6 fine max

Disciplinary action

sponsors/fin advisers

 Anything that reflects on their fitness and properness  Reprimands, suspensions and revocations (s 56 SO)  SFO – adds fines up to $10m/3 x profit or loss, partial

suspensions or revocations (ss 194 & 196)

23

Other action

false/misleading info disclosures

 Require listing applicant to give more info (r

6 SLR)

 Stop listing if listing applicant doesn’t comply

with securities law, listing requirements, false

• r misleading info or not in public interest (s 6

SLR)

 Suspend trading in securities if

false/misleading info, needed to keep fair and

• rderly market or in public interest (r 8 SLR)

24

Referrals

 To FS to appoint Co.s Ord inspector - fraud or

misconduct – further investigation

 To CCB - fraud – further investigation  To ICAC – corruption – further investigation  To DOJ Criminal - prosecution on indictment  To DoJ Civil - IDT/MMT proceedings  To Executive – Takeovers Code proceedings

25

Enforcement Options

DoJ Role

26

Civil

IDT/MMT proceedings

 DOJ Civil conducts civil proceedings before IDT/MMT

• nce FS appointed tribunal (SIDO/Pt XIII SFO)

 SFO:

– wider range of conduct (insider dealing, market manipulation, false/misleading info) – fines no longer available – market bans, cease and desist orders and SFC costs orders instead – in context of listed companies, civil false and misleading info very useful – negligence standard

 Initial referral decision SFC’s but FS may refer

27

Criminal (indictable)

Prospectus misstatement

 3yrs’s gaol &/or $700k fine max

Market misconduct

 Now:

– market manipulation (s 135 SO) (false/misleading info provisions inadequate) – 2yrs’ gaol &/or $50k fine max

 SFO:

– wider range of conduct (insider dealing, market manipulation, false/misleading info) – 10 yrs’ gaol &/or $10m fine

 Initial referral decision SFC’s but FS may refer

28

Criminal (indictable)

False/misleading filings with SFC

 2 yrs’ gaol &/or $1m fine max

Also DoJ’s prosecution of fraud and corruption crimes referred by CCB or ICAC

29

Enforcement Options

Others’ Roles

30

Takeovers Panel

Takeovers Code breaches

 Referral by Executive (SFC) to Panel  Public co.s, their directors, takeover offerors and

• fferees, advisers, securities market participants

 Reprimands, censures, banning dealers/advisers

acting in takeovers, securities market bans (para 12.1 Code Intro)

31

SEHK

Listing Rule breaches

 Listed co.s, subsidiaries, directors, substantial

shareholders, senior management, advisers

 Self-initiated or SFC referral  Reprimands, critical public statements, censures,

ban on advisers acting, directions to fix breaches, trading suspensions, directing that

• fficer step down, delisting

32

Official Receiver

Civil action

 Apply to court to ban director if guilty of

indictable offence, persistently in breach of Co.s Ord, fraud in relation to the co, breach of duty, fraudulent trading

 15 yrs’ ban max

33

FS

Civil action

 Apply for just & equitable winding up (s 147 CO)  Apply for unfair prejudice order – orders similar to s

37A SFCO (ss 147 & 168A CO)

 Take derivative action in co.’s name (s 147 CO)  Apply to court to ban unfit directors (s 168J)

34

Shareholders

Civil action

 Private right of action for market misconduct

– now: market manipulation, fraud involving securities (s 147 SO) – SFO: broader market misconduct (insider dealing, false/misleading info too) and MMT finding prima facie evidence (ss 281 & 305 SFO)

35

Species of crime and misconduct

36

Initial listing

 Business doesn’t exist, complete scam, can have

corruption angle

 Inflation of revenue etc, accounts related problems, can

have corruption angle

 Non-disclosure of material info, wide range of circs  Fake subscribers/float rigging  Fake fundraising  Often small cap co.s, persuaded to list by dubious

sponsor, realise no demand for shares leading to fake subscribers and float rigging – post listing manipulation

• ften required to keep share price up

 SFC usually detects this aspect as market regulator via

market investigation

37

Initial listing

 Others usually general fraud from start and if SFC

discovers, usually too late in that already problem unless whistleblower

 If so, usually CCB/ICAC matter and s 29A/179 often little

use unless CCB/ICAC would benefit

 Pressure on small cap co. for fake subscribers/float

rigging after lured to list may suggest scope for other types of listing misconduct and give incentive

 Initial listing misconduct often generates subsequent

misconduct

38

Annual and periodic reports

 Inflation of revenue, etc, accounts-related

problems

 Late accounts  Qualified accounts  Non-disclosure of material info, wide range of

circs

39

Connected and discloseable transactions

 Valuation (self-dealing, unfair prejudice, etc)  Suspicious voting (nominees disguised as

independent voters)

 Non-disclosure of material info, wide range of

circs

 Accounting problems if circulars and contain

accounts

40

Secondary fund raising

eg rights issues

 Suspicious voting  Lot of disclosure needed (chance to pin

problems with vetting and surveillance)

Use of proceeds

 Suspicious investments, esp’y Mainland  Connected transactions to siphon off funds

41

Ongoing disclosure

 Leaks, market rumours (insider dealing and

market manipulation issues)

 Late, incomplete, uninformative or misleading

info

42

Observations

• n SFC role

43

Factors pulling SFC into listed co regulator role

 Market misconduct (directors, major shareholders)  Listed co interest disclosure breaches  Takeovers responsibility  General investor protection role  s 29A role – unfair prejudice or winding up application or

referral to other body

New factors

 “Dual filing”  Wider SFO powers – s 179/214/market misconduct  Increased public disquiet over corporate governance

44

Limitations on SFC’s abilities

 Geography – Mainland co.s and operations and

international openness of HK (people movement and high no of overseas co.s)

 s 29A (powers) and 33 (market focus) limitations  s 37A effectiveness (limited grounds)  Fraud is a Police matter and after the event  False/misleading info is hard to prove

45

Solutions for SFC action

 Better domestic coordination required – front line

regulator role to be clarified, relations with CCB and ICAC to be improved

 Tougher on sponsors and advisers  More action on disclosure matters (prospectus

misstatements, false/misleading info – dual filing & new market misconduct regime will help – resources, focus & new civil option)

 Zero tolerance of market matters – eg disclosure

breaches to create better compliance culture – often also symptom of underlying problems

 Better Mainland liaison

Q & A