The SFC had commenced proceedings against a group of syndicate members complaining that they had orchestrated a so-called “ramp and dump” scheme in which they artificially inflated the price of a newly listed company on the Hong Kong stock exchange, cashed in by borrowing against the shares and then dumping the shares, leading to huge losses for both the investors and lenders. Of the 18 members of the syndicate, six were located outside of Hong Kong.

The SFC obtained leave from the court to serve these six defendants with a writ claiming they had engaged in false trading contrary to sections 213 and 274 of the Securities and Futures Ordinance (SFO) (Cap. 571), amongst others, and requiring them to restore the market participants and lenders to their previous positions and pay damages.

An open door

The Court of First Instance and Court of Appeal had granted an order allowing the SFC permission to serve proceedings out of the jurisdiction on the basis that the supposed wrongful act had taken place within Hong Kong and so came within one of the so-called “jurisdictional gateways” set down in Order 11 of the Rules of the High Court. These gateways empower the court to permit service of a writ on a defendant who is out of the jurisdiction in particular circumstances.

The defendants appealed against the order, seeking a declaration that the court lacked jurisdiction over them and that the leave for service had been wrongly granted.

The Court of Final Appeal in Securities and Futures Commission v Isidor Subotic [2023] HKCFA 32, whilst ready to hear the arguments, questioned whether the permission of the court was required at all in this context, since the relevant rule states that “service of a writ out of the jurisdiction is permissible without the leave of the Court provided that each claim made by the Court is…a claim which by virtue of any written law the Court of First Instance has power to hear and determine notwithstanding that the person against whom the claim is made is not within the jurisdiction of the Court or that the wrongful act, neglect or default giving rise to the claim did not take place within its jurisdiction.”1

The Honourable Mr Justice Ribeiro, GBM, sitting with the Chief Justice, two other permanent judges and an overseas non-permanent judge, giving judgment, said it was clear that the sections in question, 213 and 274, should be read together and that they prohibited acts of false trading and provided for a range of consequences if such conduct was established. It was therefore clear that the claims advanced by the SFC in the writ served on the appellants were claims which the Court of First Instance had the power to hear and determine despite the wrongful act being committed outside of Hong Kong, “by virtue of a written law”.

This was still the case even though the persons against whom the claims were made were not in Hong Kong and the allegedly wrongful acts did not take place in Hong Kong. Ribeiro PJ said “trading on the HKEx is global and making sanctions legally available against offshore fraudulent parties who cause losses to investors or other participants in the local market is obviously justified”.

The CFA expressed incredulity at a suggestion by counsel for the appellants that an application under section 213 was not a “claim” at all and that it was impossible to contravene section 274 because it simply described “situations”. The relevant sections of the SFO were designed to operate in conjunction with other SFO provisions, carrying different consequences where the prohibited conduct was established.

Section 274 provided the definition of “false trading” which can then take effect in conjunction with the other provisions of the SFO, possibly leading to Market Misconduct Tribunal proceedings and sanctions, to a civil claim for damages, to criminal proceedings, or to proceedings by the SFC seeking orders on behalf of injured market participants. It was therefore “wholly untenable” to suggest that the SFC’s writ contained no claim at all or that it was not possible to contravene section 274.

Long arm jurisdiction of the SFC? Not quite

Since the judgment in SFC v Tiger Asia Management LLC (2013) 16 HKCFAR 324, the SFC has had success in obtaining civil relief against wrongdoers who have lost money investing in overseas-listed shares through fraud and deception using section 213 SFO (see Hogan Lovells alert All the Better to Eat You With – Court of Final Appeal gives SFC bigger teeth with third route of enforcement in Tiger Asia).

As a matter of Hong Kong jurisprudence, there is a presumption against the extraterritorial effect of Hong Kong ordinances. Unless a provision in an ordinance is said expressly to apply extraterritorially, the provision applies within Hong Kong only.

Section 274 of the SFO provides that false trading may be committed by a person "in Hong Kong or elsewhere". The phrase "in Hong Kong or elsewhere" allows the SFC to target individuals who may have dealt with securities outside of Hong Kong amounting to false trading.

The SFC says it is committed to expanding the territorial scope of the insider dealing provisions under the SFO through further legislative amendments but that it will not for the moment proceed with plans to extend the reach of section 213 to allow it to apply for injunctions in respect of breaches of SFC codes of conduct and guidelines, following concerns raised during a public consultation (see Consultation Conclusions on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance, SFC, August 2023). 

There are few laws in Hong Kong that target acts of commercial crime and misconduct committed outside the jurisdiction. For example, bribery offences in the private sector do not have extraterritorial effect under the Prevention of Bribery Ordinance, although bribery offences committed in connection with Hong Kong public servants do have extraterritorial effect.

The Competition Ordinance, a relatively new Ordinance, also extends to anti-competition conduct engaged outside of Hong Kong. On the other hand, money laundering provisions under the Organised and Serious Crimes Ordinance, which tends to be very global in nature, do not appear to extend to the act of 'dealing' outside of Hong Kong (although the property in question can be situated outside of Hong Kong). 

What judgment in Isidor Subotic shows clearly is that a regulator who wishes to pursue misconduct against foreign defendants in the Hong Kong court may do so without the leave of the court as long as it is contemplated in the provision that it  targets acts committed outside of Hong Kong.

However, this does not necessarily go so far to extend a regulator's powers of investigation, including the power to compel information,  beyond Hong Kong if the relevant provisions giving them their powers of investigation do not contain any extraterritorial language. Investigations conducted outside Hong Kong would still need the aid of mutual assistance from their counterpart in the foreign country.

Regardless, this judgment will be welcomed by the SFC and regulators across Hong Kong as it removes one hurdle in prosecuting misconduct committed by foreign defendants, thereby doing away with technicalities that risk hindering the effectiveness of the SFC's enforcement capabilities.