Hong Kong Court of Final Appeal Affirms Securities and Futures Commission’s Powers Against Foreign Defendants for Market Misconduct Offenses

On October 30, 2023, the Hong Kong Court of Final Appeal (CFA) gave its reasons for dismissing the appeal in the case of the Securities and Futures Commission vs. Isidor Subotic and Others [2023] HKCFA 32. The appeal was lodged by a group of six foreign defendants to challenge the jurisdiction of the Hong Kong court in proceedings brought by the Securities and Futures Commission (SFC) under Sections 213 and 274 of the Securities and Futures Ordinance (SFO). The SFC alleged that the defendants were members of a syndicate conducting a false trading scheme through shares in a newly listed company in Hong Kong. In the landmark judgment, the CFA confirmed that the SFC’s service of proceedings did not require leave of the court as the relevant SFO provisions had already expressly conferred jurisdiction over the foreign defendants.

This case affirms that the SFC may apply for a broad range of orders (including but not limited to restoration orders, damages and compensation orders, restraint orders, and other ancillary orders) under Section 213 of the SFO from the Hong Kong court against foreign defendants without leave under the Hong Kong civil procedural rules provided that the relevant SFO provisions expressly contemplate proceedings being brought against persons who are outside of Hong Kong or where the wrongful act did not take place in Hong Kong. This is expected to further empower the SFC to take decisive enforcement actions against foreign defendants who have engaged in market misconduct.

Background

In recent years, there has been a significant uptick in financial scams in Hong Kong. One of the prevailing types of scams that has attracted close attention from the SFC and other regulators is the ramp and dump schemes. Recent enforcement actions by the SFC, including joint operations undertaken with other regulators and authorities (e.g., the Hong Kong Police, the Accounting & Financial Reporting Council, and the Independent Commission Against Corruption) have shown that these scams may be orchestrated by sophisticated cross-border syndicates and involve strategic manipulation of the share prices and trading volumes of vulnerable companies listed on the Hong Kong Stock Exchange. The syndicates would artificially “ramp” up the price of the targeted shares to a grossly inflated level through spreading favorable news in social media to entice other investors; take out secured loans based on the value of the shares and later default on the loans; and then “dump” all of the shares at once when exiting, which causes the share price to collapse. The loss is then borne by investors and lenders.

In the present case, the SFC commenced proceedings under Sections 213 and 274 of the SFO against 18 defendants, who were alleged to be members of such a syndicate, to seek various orders and relief from the Hong Kong court. As six of the defendants were located outside of Hong Kong (Eastmore Defendants), the SFC applied and obtained leave from the court to serve on the Eastmore Defendants. The Eastmore Defendants applied to set aside the order granting leave and sought a declaration that the court lacks jurisdiction over them, arguing that leave was wrongly granted as the SFC’s claims did not come within any of the “gateways” in Order 11, rule 1(1) of the Rules of the High Court (i.e., the types of claims in which leave to serve outside of Hong Kong would be granted).

Procedural History

Both the Court of First Instance (CFI) and the Court of Appeal (CA) upheld the leave granted to the SFC to serve outside the jurisdiction on the basis that the SFC’s claims were either a claim founded on a tort and the damage was suffered or resulted from an act committed within the jurisdiction (i.e., Order 11, rule 1(1)(f) (Gateway F)) or a claim for an injunction restraining conduct within the jurisdiction (i.e., Order 11, rule 1(1)(b) (Gateway B). The Eastmore Defendants then appealed to the CFA on grounds that the relief sought by the SFC under Section 213 of the SFO cannot be properly characterized as a claim and/or founded in tort for the purpose of establishing Gateway F.

Prior to CFA hearing, the CFA queried whether leave under Order 11, rule 1(1) was necessary in the circumstances and asked the parties to provide submissions on whether Order 11, rule 1(2) should apply. Order 11, rule 1(2) provides that where a legislative provision already confers the CFI with jurisdiction in respect of a claim over a defendant outside of Hong Kong or in respect of a wrongful act committed outside Hong Kong, leave from the court is not required for the purpose of serving the writ to commence the action. The focus of the CFA appeal was therefore reframed to whether Order 11, rule 1(2) applies such that leave of the court was not required by the SFC in serving the writ on the Eastmore Defendants.

The Eastmore Defendants’ Arguments

The Eastmore Defendants contended that Order 11, rule 1(2) should not apply for the following reasons:

1. The court needs to avoid opening the floodgates to an excessively wide jurisdiction over persons outside of Hong Kong under Order 11, rule 1(2), and instead the provision should be read restrictively. The court should consider whether the claim fell within the Order 11, rule 1(1) gateways first (Avoid Floodgates Argument).
2. For Order 11, rule 1(2) to be applicable, there has to be a “claim” made by writ. However, because Section 213(1)(a)(i) of the SFO refers to a “contravention,” and it is not possible to “contravene” Section 274, which simply describes four scenarios that may constitute false trading, the Section 213 application should not be regarded as a “claim.” Furthermore, it is seriously questionable whether it is possible to contravene any of the sections of Part XIII of the SFO, which deal with market misconduct (No Claim Argument).

Decision by the CFA

The CFA dismissed the appeal and held that the SFC did not need to seek leave to serve its claim on the Eastmore Defendants since Order 11, rule 1(2) was applicable on the following grounds:

1. The CFA held that Sections 213 and 274 of the SFO concerned matters that were within the Hong Kong court’s jurisdiction. This was because:
   1. Section 213 of the SFO expressly provided that in respect of a contravention of the SFO provisions, including Section 274, the SFC may apply to the CFI to grant orders as set out in Section 213(2), among which include the orders sought by the SFC in the present matter.
   2. Further, even though an alleged wrongdoer committing false trading was not in Hong Kong or the wrongful acts did not take place within Hong Kong, they would still be captured under Section 274 of the SFO since it provided for an extraterritorial effect by way of the express wording “in Hong Kong or elsewhere.” The CFA also stated that the CFI similarly has extraterritorial jurisdiction over other market misconduct, including price rigging, disclosure of false or misleading information inducing transactions, stock market manipulation and their criminal offense counterparts.
2. In respect of CFI’s extraterritorial jurisdiction, it applies only in situations where the relevant statute “clearly contemplates” such jurisdiction over persons or alleged acts not committed in Hong Kong. The CFA illustrated this by reference to the judgment of Re Sunni International Ltd [2014] 5 HKLRD 558 and indicated that in the context of serving a winding-up petition out of jurisdiction on a foreign company, because the relevant statutory provision refers only to the Hong Kong court’s jurisdiction to wind up unregistered companies, but not foreign companies, Order 11, rule 1(2) would not be applicable.
3. The CFA also specifically rejected the Eastmore Defendants’ arguments. As regards the Avoid Floodgates Argument, the CFA stated that when the service in question falls under Order 11, rule 1(2) and leave is not required with clear statutory basis contemplating for the Hong Kong court’s jurisdiction over foreign defendants, the court is not required to first consider the gateways under Order 11, rule 1(1) and the Avoid Floodgates Argument “makes no sense and is wholly unsustainable.”
4. The CFA also rejected the No Claim Argument as “wholly untenable.” According to the CFA, while Section 274 of the SFO is “definitional” in nature by setting out the scenarios constituting false trading, the provision itself should not be considered in isolation and it should be read in conjunction with other operative provisions in the SFO that lead to possible consequences of the misconduct. The intention is for Sections 213 and 274 of the SFO to work “in tandem,” enabling the SFC to seek the relevant orders.

Commentary

1. The CFA’s decision confirms that going forward, the SFC is able to swiftly apply for various remedial court orders and relief under Section 213 of the SFO against foreign defendants without first seeking leave of the court, provided that the SFC’s claim is premised on a SFO provision that is expressly enforceable against defendants outside of Hong Kong (e.g., where the statute covers offending conduct in Hong Kong or elsewhere).
2. It was established in this case that false trading under Section 274 of the SFO is one such provision, but the principle would equally apply to a number of other types of offenses under the SFO that also have extraterritorial application (including but not limited to price rigging (Sections 275 and 296), stock market manipulation (Sections 278 and 299), disclosure of false or misleading information inducing transactions (Sections 277 and 298), etc.).
3. It is also worth noting that the CFA has expressly rejected the need to consider the application of the gateways under Order 11, rule 1(1) before determining that it is a claim in which leave to serve out of jurisdiction is not required under Order 11, rule 1(2).
4. In the context of Hong Kong court proceedings, it is not uncommon for a service out application to take at least a few weeks to resolve, however, now that it is confirmed that the SFC can potentially sidestep this procedural hurdle when seeking Section 213 relief against foreign defendants, there are potential time savings for the SFC in executing their overall enforcement strategy. This will also enable the SFC to more effectively police contraventions of the SFO in an increasingly complex and cross-border operating environment.