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

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 2

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 3

Framework 4

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) 5

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 6

Investigations: SFC Role 7

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 8

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 9

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) 10

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) 11

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 12 problem

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 13

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 14

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) 15

Others’ investigatory roles  SEHK – breach of listing rules - contractual only – co and officers  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 16

Enforcement Options 17

Enforcement Options SFC Role 18

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) 19

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) 20

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) 21

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) 22

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 or misleading info or not in public interest (s 6 SLR)  Suspend trading in securities if false/misleading info, needed to keep fair and orderly market or in public interest (r 8 SLR) 23

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 24

Enforcement Options DoJ Role 25

Civil IDT/MMT proceedings  DOJ Civil conducts civil proceedings before IDT/MMT once 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 26

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 27  Initial referral decision SFC’s but FS may refer

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 28

Enforcement Options Others’ Roles 29