Cross-border Securities Enforcement: The Case of Tiger Asia Management LLC
By: Gong Yiyi
Tiger Asia Management LLC
Tiger Asia Management LLC (Tiger Asia) is a New York-based asset management company specializing in equity investments in China, Japan and Korea. Founded in 2001, it is a spinoff from the former Tiger Management, one of the world’s largest hedge funds built by billionaire Julian Robertson in the late 1990s. Tiger Asia belongs to the group of hedge funds known as “Tiger Cubs,” started by former employees of Tiger Management. Bill Sung Kook Hwang is its founder and portfolio manager [1]. Tiger Asia has no physical presence or employees in Hong Kong.
In 2009, the Hong Kong Securities and Futures Commission (SFC) alleged that Tiger Asia had engaged in insider trading and price manipulation on Chinese bank stocks. The insider trading took place between December 2008 and January 2009. The U.S. Securities and Exchange Commission (SEC) began its investigation in October 2010. Not until December 2013 was the Tiger Asia case finally settled in both Hong Kong and the United States. Tiger Asia pleaded guilty and agreed to pay settlements for illicit gains and law enforcement penalties issued by the SFC, SEC and U.S. Attorney’s Office for the District of New Jersey. The hedge fund, which had returned an average annual gain of around 15 percent since its inception, was given a serious and painful lesson for illicit trading activities by regulatory bodies both at home and abroad [2].
The Long Battle in Hong Kong
The Allegations of Market Misconduct
The Securities and Futures Commission in Hong Kong commenced proceedings in the Court of First Instance (CFI) against Tiger Asia and three of its senior officers, Bill Sung Kook Hwang, Raymond Park and William Tomita, in August 2009 [3]. The allegations were directed at insider trading and price manipulation activities in Tiger Asia’s dealings with China Construction Bank Corporation (CCB) shares on Jan. 6, 2009. According to the SFC, Tiger Asia was entrusted with confidential information in a private placement offering of CCB shares. Tiger Asia then immediately sold short CCB shares ahead of the public announcement and covered its position with shares obtained from the placement at a discount, making a notional profit of HK$29.9 million (US$3.8 million). During the short sale, Tiger Asia was alleged to have manipulated the CCB share price downwards. These actions are prohibited under the Securities and Futures Ordinance of Hong Kong (SFO). Based on these allegations, the SFC sought to freeze the assets of Tiger Asia and restore affected counterparties to their positions before Tiger Asia’s transactions.
In April 2010, the SFC sought to prohibit Tiger Asia from all trading in Hong Kong in light of further insider trading allegations concerning shares of Bank of China Limited (BOC). In two placements of BOC shares dated Dec. 31, 2008 and Jan. 13, 2009, Tiger Asia was given confidential information and signed a “wall-crossing” agreement not to trade on this information. Despite the agreement, Tiger Asia sold short BOC shares before the two placements were announced to the public and made a notional profit of HK$8.6 million (US$1.1 million) in the December insider dealing trade. Therefore, the SFC sought to ban further trading by Tiger Asia and freeze an additional amount of up to HK$8.6 million for restoration purposes.
The Challenge of Jurisdiction
While the SFC invoked Section 213 of the SFO when proceedings commenced in the CFI, Tiger Asia challenged that the CFI has no jurisdiction to determine whether a contravention exists under Section 213 in the first place. In June 2011, the CFI ruled in favor of Tiger Asia, stating that it has no jurisdiction to determine whether a contravention of Hong Kong’s insider dealing and market manipulation laws has occurred. The ruling stated that a prior determination of such contravention has to be made by either a court exercising criminal jurisdiction or the Market Misconduct Tribunal (MMT). The controversy lies in the application of Section 213 of the SFO.
Section 213 of the SFO provides that, where a person has contravened any relevant provision of the SFO, the Court of First Instance has the power to issue injunctions and give orders requiring a party to take court-directed steps to restore parties to their pre-transaction positions. This provision gives the CFI the jurisdiction to make remedial orders when contraventions have been committed; however, it does not explicitly state whether any prior determination of contravention is needed before the CFI can grant injunctions and give orders. Under the SFO, Hong Kong has a dual and mutually exclusive civil/criminal regime to deal with market misconduct [4]. The Market Misconduct Tribunal (MMT) can impose civil liability, ban dealings, give orders concerning the disgorgement of profits and so on. The criminal courts, on the other hand, provide the option for charging market misconduct as a criminal offense. If the CFI has no jurisdiction to decide whether a breach of the relevant SFO provision has occurred, Hong Kong’s securities enforcement can only be carried out via two routes: either through the MMT or a criminal court. However, if the CFI has that jurisdiction and does not need a prior determination of contravention from the MMT or a criminal court before adjudicating, Section 213 can be invoked as a third route of securities enforcement.
The SFC insisted in its June 2011 enforcement news release, “there is nothing in the legislation that requires any pre-existing determination or finding by a criminal court or the MMT to be in place before the court (CFI) can be asked to make remedial orders under Section 213.” On the contrary, the CFI’s ruling in June 2012 upheld that a prior determination of contravention by a criminal court or MMT is the prerequisite for exercising the power of injunctions and orders. The two routes of the MMT and the criminal court are mutually exclusive in Hong Kong’s legal framework, and they also become exhaustive according to the CFI’s ruling.
This outcome is not what the SFC wants. In the case of offshore market participants, prosecution is usually difficult (if not impossible), as it can not get witnesses and suspects to attend the hearings unless, for example, a relevant bilateral extradition agreement is in place. MMT proceedings, on the other hand, are often perceived as slow and cumbersome, although they can bring about orders such as disgorgement of profits earned or losses avoided [5]. If these two routes exhaust the ways to deal with market misconduct, the SFC will have a hard time regulating offshore market participants.
Maintaining their position in relation to Section 213, the SFC appealed against the CFI’s decision in September 2011 and won at the Court of Appeals (CA) in February 2012. The previous ruling at the CFI was overturned, and the SFC was permitted to proceed with the Tiger Asia case. However, Tiger Asia again challenged the CA’s ruling and was granted leave to take their case to the Court of Final Appeal (CFA) in April 2012.
One year later, on April 30, 2013, the landmark ruling by the CFA dismissed Tiger Asia’s appeal.
The Importance of Section 213
This ruling gives final confirmation that Section 213 is freestanding from the dual civil/criminal process, namely that no prior determination of contravention is needed from the MMT or a criminal court. As cited below [6], the reasons given by the CFA clarify the purpose and application of Section 213 and highlight the SFC’s power of enforcement:
- the remedies under Section 213 of the SFO serve a different purpose from the penalties that can be imposed under the criminal and MMT processes;
- in proceedings under Section 213, the SFC acts “not as a prosecutor… but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct;”
- the question of whether a person has committed a criminal offense remains entirely a matter for the criminal court and is not determined in proceedings under Section 213, which are plainly civil proceedings.
With this decision made by the CFA, the SFC may directly seek Section 213 orders from the CFI in addition to initiating criminal or MMT proceedings. Section 213 is civil and remedial in nature. A closer look at Section 213 reveals its wide scope and considerable impact. It relates to cases in which a person contravenes the provisions of the SFO or its subsidiary legislation and certain company ordinances relating, directly or indirectly, to prospectuses, a corporation purchasing its own shares, a corporation giving financial assistance for the acquisition of its own shares, and advertisements concerning prospectuses [7]. The final orders given by the CFI can be as significant as freezing assets worldwide and banning trading in the Hong Kong market.
Therefore, the SFC is now equipped with a practical and efficient tool that is especially important for regulating offshore market participants.
The Success of Enforcement
Starting with the issuance of a subpoena to Tiger Asia in October 2010, the U.S. SEC finally settled the case in December 2012 when Tiger Asia pleaded guilty. Apart from short selling Chinese bank stocks based on confidential information received in private placement offerings, Tiger Asia also manipulated stock prices and fraudulently collected management fees. According to the SEC, on at least four occasions, Hwang, with Park’s assistance, attempted to manipulate the month-end closing prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions. Hwang directed Park to place losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This tactic enabled Hwang and Tiger Asia to inflate the calculation of the management fees by approximately $496,000 [8].
On Dec. 12, 2012, the U.S. SEC and the U.S. Attorney’s Office for the District of New Jersey announced that proceedings had been initiated against Tiger Asia in which Tiger Asia pleaded guilty to criminal offenses under U.S. law. The SEC charged Hwang and Park with civil offenses. The SEC lawsuit required Hwang, Tiger Asia Management and Tiger Asia Partners to collectively pay a settlement of US$19 million in disgorgement and prejudgment interest, including US$16.3 million that Tiger Asia will pay directly to criminal authorities and US$44 million in penalty. In criminal court, Tiger Asia was placed on probation for one year. However, with the exception of Tiger Asia Management, the defendants (Hwang, Park and other Tiger Asia partners) neither admitted nor denied the charges.
Compared to the U.S. progress, it was another year before Hong Kong’s regulatory bodies settled the Tiger Asia case. Following the ruling of the CFA, the SFC commenced a Market Misconduct Tribunal against Tiger Asia in July 2013. Because U.S. proceedings with Tiger Asia are classified as criminal, the SFC sought civil orders on the basis of double jeopardy (a legal principle that protects a person from being criminally prosecuted twice for the same conduct). In December 2013, Tiger Asia and the two senior officers admitted to insider dealing. The SFC exonerated William Tomita, one of the defendants in previous proceedings, as a junior member of staff unknowingly involved in insider dealing and manipulation. However, both Tiger Asia and two of its senior officers, Bill Sung Kook Hwang and Raymond Park, were ordered to pay HK$45.3 million (US$5.8 million) to some 1,800 investors who were affected by insider dealing involving two Hong Kong-listed banking stocks.
Apart from monetary compensation, the SFC has also sought a cease and desist order and an order prohibiting Tiger Asia parties from dealing in Hong Kong without leave of the court for up to five years. In May 2014, the SFC recommended to the MMT that Bill Hwang and Raymond Park be banned from dealing in Hong Kong for as long as five years. The regulator believes the potential still exists for market misconduct. The ban, know as a cold shoulder order, is intended to protect the investing public.
Ethics and Regulation
The Tiger Asia case is concerned with two areas ofmarket misconduct: insider trading and price manipulation. From December 2008 to January 2009, the senior officers of Tiger Asia disregarded “wall-crossing” agreements with other placing agents, manipulating publicly traded stock prices on various occasions and inflating management fees to charge its own investors. Their misconduct threatened the credibility of the market, the interests of Hong Kong Stock Exchange participants and investors in the funds they managed.
The U.S. SEC action against Tiger Asia demonstrates the agency’s reach to trading activities outside the United States. Robert Khuzami, director of the SEC’s Division of Enforcement, comments that“Hwang … learned the painful lesson that illegal offshore trading is not off-limits to U.S. law enforcement, and tomorrow’s would-be securities law violators would be well-advised to heed this warning” [10]
The SFC, Hong Kong’s regulatory body, went through a four-year period of investigation, appeals and proceedings because of the controversial application of Section 213 of the SFO. Offshore market participants pose particular difficulties in the regulation, as they normally cannot be prosecuted. Moreover, the Hong Kong MMT procedures cannot give timely penalties and remedies. The CFA’s ruling in December 2013 sets a precedent in allowing the CFI the powers of injunction and to give orders based on contraventions of the SFO. Section 213 allows the SFC to make allegations of market misconduct, compensate affected parties and ban trading of wrongdoers (even offshore) in an efficient and convenient manner. The offshore wrongdoers can no longer take advantage of the difficulty of cross-country law enforcements.
The Fall of Tiger Asia
In August 2012, Hong Kong’s three-year probe, which was described as the “prolonged legal situation” in Tiger Asia’s letter to investors, had already ordered the fund to start returning investors’ money [9]. In this letter, Hwang also announced that he intended to stop managing Tiger Asia and let this hedge fund continue as “a family office with most employees remaining at the firm” [10]. When the case was resolved in the U.S. in December 2012, Tiger Asia’s attorney, Lawrence Lustberg, stated that all investor capital had been returned. In February 2013, Tiger Asia changed the company name to Archegos Capital Management LLC [11]. However, the MMT proceedings initiated by the SFC imposed further orders to prohibit trading in Hong Kong.
In January 2013, the SEC ordered Hwang and Park to be barred from “association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with the right to apply for reentry after three years to the appropriate self-regulatory organization, or if there is none, to the Commission” [12]
Hwang still assumes the position of CEO in Archegos Capital Management. [13]
Originally a promising hedge fund, Tiger Asia returned capital to investors and paid substantial settlements set by both criminal and civil regulatory bodies at home and abroad.
Editor: Angela Lutz
—–
[1] David Voreacos, “Tiger Asia Admits Guilt in $60 Million Court Settlement”. Bloomberg. Dec 13, 2012. http://www.bloomberg.com/news/2012-12-12/tiger-asia-management-hedge-fund-said-to-plan-guilty-plea.html
[2] Gillian Wee , “Tiger Asia Receives SEC Subpoena After Hong Kong Probe”. Bloomberg. Oct 28, 2010 12:04 PM GMT+0800. http://www.bloomberg.com/news/2010-10-28/tiger-asia-management-gets-sec-subpoena-after-hong-kong-securities-probe.html
[3] All Hong Kong Securities and Futures Commission allegations and actions are obtained from the news releases disseminated by SFC on their website. http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/.
[4] Thomas O. Gorman, David Richardson and Eden McMahon. “How to trap a tiger – regulators’ nets tighten around Tiger Asia on both sides of the Pacific”. August 21, 2013. http://www.lexology.com/library/detail.aspx?g=de6d2753-cfeb-409d-a5f6-f8ac57c1099c
[5] Herbert Smith Freehills Dispute Resolution. “Tiger Asia Management loses final jurisdictional challenge: Hong Kong’s highest court confirms court’s free-standing power to grant orders over contraventions of the Securities and Futures Ordinance under Section 213”. 16 May 2013. http://hsfnotes.com/asiadisputes/2013/05/16/tiger-asia-management-loses-final-jurisdictional-challenge-hong-kongs-highest-court-confirms-courts-free-standing-power-to-grant-orders-over-contraventions-of-the-securities-and-futures-ordinance/
[6] SFC Enforcement News. 10 May 2013.
[7] Cynthia Tang, Bryan Ng and Eric Chan. “HK Market Misconduct Rules after Tiger Asia.” 11 Dec 2013. www.iflr.com.
[8] U.S. Securities and Exchange Commission press release. Washington, D.C., Dec. 12, 2012. https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171486854#.UwIUmNIW0ud
[9] Azam Ahmed. “Amid Insider Trading Inquiry, Tiger Asia Calls It Quits.” The New York Times. August 14, 2012, 12:50 PM. http://dealbook.nytimes.com/2012/08/14/amid-insider-trading-inquiry-tiger-asia-calls-it-quits/?_php=true&_type=blogs&_r=0
[10] Same as [8].
[11] Yung, Chester. “Tiger Asia Ordered to Pay Investors $5.8 Million”. The Wall Street Journal. Dec 21, 2013.
http://blogs.wsj.com/moneybeat/2013/12/21/tiger-asia-ordered-to-pay-investors-5-8-million/
[12] SEC Orders. In the matter of Sung Kook Hwang, https://www.sec.gov/litigation/admin/2013/ia-3535.pdf
In matter of Raymond Y.H. Park, http://www.sec.gov/litigation/admin/2013/ia-3536.pdf
[13] Network of Korean-American Leaders. http://netkal.org/members/bill-hwang/