By Trond Vagen

Hong Kong's securities regulator has faced much criticism from the legal and financial industry for its controversial use of Section 213 of the territory's securities law to obtain court injunctions against perceived market misconduct. The provision under the Securities and Futures Ordinance (SFO) was recently used by the Securities and Futures Commission (SFC) to obtain redress for investors who had bought into the initial public offering of Chinese sportswear maker Hontex, but some have said the SFC's use of it goes against the intention of the SFO.

Speaking in a panel debate at the third annual Thomson Reuters Pan-Asian Regulatory Summit in Hong Kong on Wednesday, Mark Steward, the SFC's head of enforcement, said it was extraordinary that the city's legal community had not seen the regulator's use of this section coming.

"This is a very important provision," Steward said. "Section 213 is in many ways like having a time machine that allows the court to wind the time back to before a contravention occurred and try to put everyone back in that position they were in as if the contravention did not occur. It is quite extraordinary that lawyers in Hong Kong somehow missed that this provision existed."

Section 213 under the SFO provides that where a person has contravened any relevant provision of the SFO, the Court of First Instance has power to "make a number of orders, including injunctions and orders requiring the person to take such steps as the court directs to restore the parties to any transaction to the position in which they were before the transaction was entered into".

Some of the legal community have criticised the SFC's use of the section to go after wrongdoers, and some have complained that it conflicts with the two available prosecution routes for the SFC — through the Market Misconduct Tribunal (MMT) or through criminal proceedings.

Steward said the Hontex case provided a powerful narrative of what Section 213 was designed to do. "It is very unclear exactly what the defence lawyers are complaining about. It is a process that lawyers should be familiar with," he said.

He said the effect of MMT proceedings is that a person who is subject to them is immunized from criminal proceedings in relation to the same matter. "That's really what the heat about section 213 is about. We are not granting these alleged wrongdoers the immediate automatic immunity from criminal proceedings," Steward said.

Speaking on the same panel as Steward, Simon Clarke, partner at Allen & Overy in Hong Kong, said the SFC's use of the ordinance was out of line with its original design.

"When we brought in the ordinance in 2003 there was a much-touted dual regime for prosecution, so some of us were quite surprised to realise there were in fact three prosecution options under the dual regime," Clarke said.

"What we are complaining about is that after 10 years of consultation on the ordinance and umpteen legislative meetings, it takes someone flying in from Australia five years later to tell us that there is actually a third way that no-one ever saw before, and that dual does not mean two, but three options to prosecute market misconduct," he said.

Clarke added however that it was positive that the SFC was pursuing cases through the courts, as this would provide some case law.

Section 213 — a controversial provision

The issue of whether the SFC can initiate action under Section 213 without an existing criminal conviction or ruling by the MMT has not yet been fully decided by the courts. This is likely to be addressed by the Court of Final Appeal when it hears an appeal case by New York-based hedge fund Tiger Asia and three of its directors. The hedge fund had funds frozen under Section 213 by the SFC in 2009 after the regulator said Tiger Asia had traded on inside information on several occasions. The Hontex settlement is expected to weaken Tiger Asia's prospects before the top appeals court.

The Tiger Asia and Hontex cases have been seen as a major test of the regulator's ability to bring to book investors or companies based outside Hong Kong without resorting to a criminal prosecution or going through the sometimes cumbersome process of taking a case to the MMT.

Steward said that the SFC's use of Section 213 was only to be expected as the regulator was doing "everything it can to use this provision in tandem with normal deterrence remedies in order to fulfil our mandate".

Trond Vagen is North Asia editor for Compliance Complete. He is based in Hong Kong.