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SFC v Young Bik Fung clarified the application of s.300 of SFO
It is legislative intent that the word “transaction” in s.300 should be given a wide interpretation to cover the whole scheme, even if it involves securities traded outside Hong Kong.
Section 300 of the Securities and Futures Ordinance criminalizes a person if he or she engages in a deceptive or fraudulent course of business in a transaction involving, inter alia, securities (banking and securities). Although this section came into effect on 1 April 2003, this provision has not been enforced or analyzed frequently by the regulators and law enforcement in Hong Kong. SFC v Young Bik Fung is the first case decided on this section. The Court of Appeal’s decision made on 9 November 2017 for this case might be helpful in interpreting s.300.
In Young, it was alleged that the defendants in Hong Kong had breached s.300 by engaging in a deceptive course of business in transactions involving shares listed on Taiwan stock exchange. One of the issues was whether the alleged fraudulent or deceptive conduct occurred ‘in a transaction involving securities’ for the purpose of s.300. The court held that the actus reus under s.300 is not confined to the purchase of the shares. It is legislative intent that the word “transaction” should be given a wide interpretation. Although s.300 was based on an adaptation of Rule 10b-5 of the US Securities and Exchange Act 1934, there is a material distinction. S.300 refers to fraud or deception “in a transaction involving securities”, while Rule 10b-5 uses the expression “in connection with the purchase or sale of any security”. So, it may be under US law that the purchase of shares has to be considered on its own without regard to the subsequent sale, there is no need to do so in construing s.300. Hence, the court’s view is that the word “transaction” should be construed purposively to cover the whole deceptive scheme or the whole course of dealings. The scope of s.300 is wider than that of Rule 10b-5.
Furthermore, the litigants were also concerned with the extraterritorial application of s.300. The court clarified that the correct approach is whether a substantial measure of the activities constituting the contravention of s.300 took place in Hong Kong. Although s.300 does not have extraterritorial application, conducting securities traded outside Hong Kong does not involve extraterritorial application of the law.
Find out more in:
SFC v Young Bik Fung
Annotated Ordinances of Hong Kong on Securities and Futures Ordinance (Cap 571), s.300
“Section 300 is very similar to s 78q of 15 USC (US) and rule 10b–5 made under the Securities Exchange Act 1934 (US) and the predecessors of s 300 are likely to be derived from these US provisions.
Rule 10b-5, under the Securities Exchange Act 1934 (US), is one of the cornerstones of US regulation of securities fraud. It has been the parent of a large body of case law that criminalises a large range of conduct, much of which has been criminalised by other provisions of this Part in relation to securities and futures contracts. Given the obvious source of s 300 and its predecessors, the provision is curiously underused by Hong Kong’s regulators and law enforcers and under-analysed in Hong Kong. It has a potentially vast scope … Given the provisions’ parentage, it is likely that US Federal case law will be a more valuable source of reference than that of Commonwealth jurisdictions.”