FALSE TRADING
Market activity must reflect genuine trading and price formation
Under the Securities and Futures Ordinance (Cap. 571) (SFO), market manipulation is treated seriously. Section 295 creates the criminal offence of false trading as part of the statutory framework protecting the integrity of Hong Kong's securities and futures markets.
The offence can apply to conduct occurring in Hong Kong and, in the circumstances specified by the legislation, conduct undertaken outside Hong Kong that affects a relevant Hong Kong market. Liability depends on the applicable subsection, the prohibited market appearance, the required mental element and any statutory defence.
STATUTORY FRAMEWORK OF SECTION 295
Two forms of prohibited market appearance
Section 295 of the SFO makes it a criminal offence for any person—whether operating within Hong Kong or from overseas—to intentionally or recklessly engage in conduct that creates a false or misleading appearance in the market. The statute targets two specific outcomes:
Apparent active trading
Conduct which creates, or is likely to create, a false or misleading appearance of active trading in securities or futures contracts.
Artificial pricing
Conduct which creates, or is likely to create, an artificial price for securities or futures contracts, or maintains such an artificial price.
WASH SALES AND MATCHED ORDERS
Transactions which may create apparent rather than genuine activity
Section 295 contains specific deeming provisions directed at wash sales and matched orders. Their purpose is to prevent artificial trading volume from being presented to the market as genuine demand, supply or liquidity.
Wash sales
A transaction in securities that does not involve a change in their beneficial ownership. The statutory provisions address transactions whose apparent market activity does not reflect a genuine transfer of economic ownership.
Matched orders
An offer to sell or purchase securities made when an offer of substantially the same size and price has been, or will be, made by the same person or an associate in the corresponding direction.
Statutory presumption
Sections 295(5) and 295(6) address wash sales and matched orders. If the prosecution proves that the relevant on-market conduct occurred, it is not required to prove separately that the transaction actually distorted the market: the statutory provisions deem the conduct likely to create a false or misleading appearance. The evidential burden then falls on the defendant under section 295(7) to establish the statutory defence.
THE CIVIL PARALLEL: SECTION 274
Parallel civil and criminal provisions
Section 274 provides the civil market-misconduct counterpart to the criminal offence in section 295. It enables substantially the same types of conduct—including wash sales and matched orders—to be addressed through the Market Misconduct Tribunal instead of a criminal trial.
Venue
Civil false-trading proceedings are heard by the Market Misconduct Tribunal under section 274. Criminal liability under section 295 is determined by the Hong Kong courts.
Standard of proof
The MMT applies the civil standard of proof, taking account of the seriousness of the allegation. A criminal prosecution must prove every element of the offence beyond reasonable doubt.
Consequences
The MMT cannot impose imprisonment. Its orders may include disqualification, cold-shoulder, cease-and-desist, profit-disgorgement and costs orders. A criminal conviction can result in a fine and imprisonment.
No double jeopardy
The SFO contains safeguards against the same conduct being pursued to final determination through both the civil market-misconduct regime and criminal prosecution.
LANDMARK COURT OF FINAL APPEAL DECISION
Fu Kor Kuen Patrick and another v HKSAR, FACC 4/2011
The Court of Final Appeal's decision clarified the operation of the statutory defence and the burden borne by a defendant where trading has created a false or misleading appearance of activity.
Case background
The appellants were day traders specialising in derivative warrants listed on the Hong Kong Stock Exchange. Their brokers offered discounted transaction commissions, while the warrant issuer operated a volume-based commission rebate scheme. The traders repeatedly bought and sold derivative warrants with each other in substantially the same quantities and at substantially the same prices.
Their purpose was described as commission farming: generating sufficient trading volume to obtain rebates which exceeded their transaction costs. The trading produced a net profit of approximately HK$1 million and created a false or misleading appearance of active trading.
The District Court convicted the appellants and imposed terms of 33 and 36 months' imprisonment. The Court of Appeal upheld the convictions but reduced the sentences to 20 and 21 months respectively. The case then proceeded to the Court of Final Appeal.
THE SECTION 295(7) STATUTORY DEFENCE
The trader's purpose must be determined from all the evidence
The statutory question was whether the appellants proved that their purpose, or purposes, did not include creating a false or misleading appearance of active trading. The defence carries a persuasive burden, but it does not require the defendant to dispute that the trading objectively produced the prohibited appearance.
Actual purpose
The CFA held that the lower courts had erred in rejecting evidence that the appellants' purpose was commission farming and did not include creating a false or misleading appearance of active trading.
Convictions quashed
The Court of Final Appeal allowed both appeals, quashed the convictions and set aside the sentences. Its decision remains important to the proper analysis of purpose, expert evidence and the burden of proof in false-trading cases.
HOW MCS CAN ASSIST
Experienced representation in false-trading proceedings
MCS partners Eric Seto and Anita Chow were the instructing solicitors for both appellants in Fu Kor Kuen Patrick and another v HKSAR. The Court of Final Appeal quashed their clients' convictions.
We can advise individuals and organisations facing an SFC investigation under section 182, compulsory statutory notices, interviews, Market Misconduct Tribunal proceedings, disciplinary action or criminal prosecution. Our work includes analysing trading data and communications, identifying the alleged market appearance and mental element, preserving privilege, preparing representations and coordinating expert and advocacy teams.