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InsIder dealIng


									Learning Centre   news Update
PAGE 10           SPrinG 2010

InsIder dealIng
(relevant to paper F4 – Hong Kong)
                                                     Since insider dealing was made a
                                                 criminal offence in Hong Kong in 2003,
                                                 the Securities and Futures Commission
                                                 along with the Department of Justice have
                                                 successfully secured criminal convictions
                                                 in a number of cases including the recent
                                                 high-profile case of HKSAR v Du Jun (DCCC
                                                     The first criminal conviction of insider
                                                 dealing in Hong Kong came about on
                                                 17 July 2008. The defendant, Hung Lai
                                                 Mei, pleaded guilty to a charge of insider
                                                 dealing. The investigation of the Securities
                                                 and Futures Commission revealed that the
                                                defendant who was a finance manager of Sino
                                                Golf Manufacturing Company Limited, held a
                                              total of 180,000 shares in Sino Golf Holdings
                                             Limited, the holding company. In October 2004,
                                            she had in her possession a piece of negative
                                           confidential information which she knew would
                                          materially affect the company’s financial position
                                         and share price. She then sold her shareholdings in
                                        its entirety before the information was made known
                                       to the public. As a result of her timely disposal of the
                                       shares, it was estimated she had avoided a loss of
                                       $63,333. Taking into account of her plea of guilty,
                                       she was sentenced to six months imprisonment,
                                       suspended for two years and was fined $200,000.
                                       She was also ordered to pay costs of $20,523 to the
                                       Securities and Futures Commission.
                                            In the case of Du Jun, the defendant who was
                                      the managing director of the Fixed Income Division of
                                      a reputable global financial services provider pleaded
                                     not guilty to nine counts of insider dealing and one
                                     count of counseling or procuring another person to
                                    deal in the shares of a listed company prior to the
                                    announcement of an acquisition deal, contrary to
                                   sections 291(1)(a) and 291(2)(b) of the Securities and
                                  Futures Ordinance.
                                      The investigation revealed that during the years of
                                 2006 and 2007, whilst the defendant was involved in
                                 a project finance that would facilitate CITIC Resources
                                Holdings Ltd, a Hong Kong listed company, in acquiring 50
                                per cent of an interest in certain oil fields in Kazakhstan,
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he received confidential and price-sensitive      Understanding Insider Dealing
information about CITIC Resources Holdings            So, what is insider dealing? Pursuant to
Ltd’s proposed acquisition of a Chinese oil       sections 270 and 291 of the Securities and
field.                                            Futures Ordinance (Cap 571), insider dealing
     Prior to the making of the official          occurs in the following circumstances:
announcement on the proposed acquisition,             Firstly, insider dealing takes place when           functions as a liquidator, receiver or
the defendant had on nine occasions               a person connected with a listed company                trustee in bankruptcy; or
purchased a total of 26,700,000 shares of         has in his possession information which             (d) did not include, the purpose of securing or
CITIC Resources Holdings Ltd at an average        he knows to be relevant information, either             increasing a profit or avoiding or reducing
purchase price of $3.2625 per share, making       deals or discloses the relevant information to          a loss, whether for himself or another, by
a total cost of $87,109,693. Predictably,         another, knowing or having reasonable cause             using the relevant information.
the share price of CITIC Resources Holdings       to believe that the recipient of the information
Ltd leaped considerably to a re-rated price       would so deal in the listed securities of that      Criminal or Civil?
of $4.151 per share. The defendant then           company or their derivatives.                           The Securities and Futures Ordinance
sold all his shares and as a result, he had, as       Secondly, a person also commits                 contained a dual civil and criminal regime for
held by the court, made a notional profit of      insider dealing when the person who is              insider dealing. This empowers the Securities
$23,324,121.                                      contemplating or has contemplated making            and Futures Commission to either bring civil
     After trial, the defendant was convicted     a take-over offer for a listed corporation,         proceedings against the alleged insider dealer
of all 10 counts of insider dealing. The court    either deals or counsels or procures another        before the Market Misconduct Tribunal or
held that the defendant was a connected           to deal, or discloses information knowing, or       to prosecute the alleged insider dealer in
person of a listed company, that he had in        having reasonable cause to believe, that the        criminal proceedings.
his possession information which he knew to       recipient of the information would so deal in           In deciding whether to commence
be price-sensitive and confidential, and that     the listed securities of the corporation or their   criminal proceedings, the Securities and
he had dealt in the listed securities of the      derivatives.                                        Futures Commission would consult the
company.                                              Thirdly, a person is guilty of insider          Department of Justice to ensure that there
     Taking into account the unprecedented        dealing if he, having received information          exists a reliable basis to believe that there is
scale of operation, the defendant was             which he knows to be relevant information           sufficient evidence to establish a case beyond
sentenced to a total of seven years               from the person connected with a listed             reasonable doubt, the standard of proof
imprisonment and fined a total of                 company or from the person contemplating or         adopted in criminal proceedings. Hence, the
$23,324,121. In addition, the defendant was       has contemplated a take-over offer, deals or        Securities and Futures Commission would
ordered to pay to the Securities and Futures      counsels or procures another person to deal         prosecute the alleged insider if the case is
Commission investigation costs of $933,340;       in the listed securities of that company or         strong enough to justify a criminal proceeding
not to be a director or manager of the            their derivatives.                                  and that it was in the public interest to so
property or business of any listed corporation                                                        prosecute.
or in any way, whether directly or indirectly,    Statutory Defence
be concerned or take part in the management           The Securities and Futures Ordinance          Conclusion
of any listed corporation for a period of five    provides statutory defences to insider dealing.       Insider dealing is an unlawful market
years without the leave of the court; and not     To list some examples, it is a defence if         misconduct which seriously undermines the
to in any way directly or indirectly acquire,     the person charged with insider dealing           integrity of the financial markets in Hong
dispose of or otherwise deal in any securities,   could prove that he dealt in or counseled or      Kong. Given the success of the Securities
futures contracts or leveraged foreign            procured the other person to deal in the listed   and Futures Commission in reducing crime
exchange contract, or an interest in any          securities or derivatives or his disclosure of    and misconduct in our securities and futures
securities or collective investment scheme for    information in the following instances:           markets, it is envisaged that it will continue
a period of five years without the leave of the                                                     to attach the utmost importance to vigorously
court.                                            (a) for the sole purpose of fulfilling the        guard the integrity of the financial markets
     The criminal convictions successfully            qualifying shareholding requirement, that and will not shy away from taking any
secured by the Securities and Futures                 is, acquiring shares required for his being necessary enforcement action to stamp out
Commission serve to send a bold and                   qualified as a director or intending director insider dealing. 
unambiguous message to society that the               of a corporation; or
consequence of committing insider dealing         (b) in the performance in good faith of an
would not only be limited to financial                underwriting agreement for the listed                                          Christine Leung
penalties but also a likely loss of freedom.          securities or derivatives in question; or                                 lecturer of paper F4
                                                  (c) in the performance in good faith of his                     FTMS Training Systems (HK) Ltd

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