Court Of First Instance Upholds SFC's Authority To Issue Restriction Notices Freezing Assets In Share Trading Accounts

• Published date: 21 October 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Securities
• Law Firm: Mayer Brown
• Author: Mr Alan Linning, Wilson Fung and Charlene Wong

Overview

On 26 September 2022, the Hong Kong Court of First Instance (CFI) issued its judgment in Tam Sze Leung & Ors (Applicants) v Secretary for Justice and Securities and Futures Commission HCAL 177/2022 [2022] HKCFI 2330.

The judgment upheld the statutory power of the Securities and Futures Commission (SFC) to issue Restriction Notices (RNs) under sections 204 and 205 of the Securities and Futures Ordinance (Cap. 571) (SFO) (the RN Regime) to freeze assets in various share trading accounts held by the Applicants with certain SFC licensed corporations on the basis of section 207(e) of the SFO.

The Applicants had previously successfully challenged the constitutionality of the Joint Financial Intelligence Unit's (JFIU) letter of no consent (LNC) Regime in Tam Sze Leung and others v Commissioner of Police [2021] HKCFI 3118 (Tam Sze Leung (No.1)), where the CFI found the JFIU LNC Regime as operated in that case to be beyond the powers conferred on it by the Organised Serious Crimes Ordinance (Cap. 455) (OSCO). Please refer to our previous Legal Update for a summary of Tam Sze Leung (No.1).

Brief Facts

The Applicants are family members. The SFC began investigating the Applicants and other suspects for a large-scale "Ramp and Dump Scheme". A "Ramp and Dump Scheme" is a form of unlawful market manipulation where suspected perpetrators use different dishonest means to ramp up the share price of a listed company and subsequently dump the shares onto retail investors at an inflated price.

On 15 March 2021, the SFC issued a number of RNs under sections 204(1)(a) and 205(1) on the basis of section 207(e) of the SFO to 15 SFC licenced corporations (LCs) in relation to share trading accounts held by 26 individuals, including the three Applicants (Accounts).

Section 207(e) of the SFO provides that the SFC may impose a prohibition or requirement under section 204, 205 or 206 in respect of any LC if it appears to the SFC that the imposition of the prohibition or requirement is desirable in the interest of the investing public or in the public interest. This ground is especially important to the SFC since it is the only ground which allows the SFC to issue RNs to target clients of LCs.

Sections 204 to 206 relate to the SFC's power to impose the following prohibitions or requirements on LCs:

• restriction of business (section 204)
• restriction on dealing with property (section 205)
• maintenance of property (section 206)

As a result of the RNs, more than HK$35 million of...