Cross-border Enforcement of Securities Laws

Buy-side people (such as fund managers and proprietary traders) often receive non-public price-sensitive information from investment banks, i.e. "sounding out" (探盤). If they do not act properly on such information, they would be accused of the offence of insider trading.

SFC has suspended Stephane Hug, a convertible bond proprietary trader and SFC licensee accredited to Credit Suisse (Hong Kong) Ltd, for 4 months.

SFC found that:

• On 28 Nov 2003, a representative of Daiwa Securities SMBC (Europe) Ltd in Geneva told Hug by phone about a potential convertible bond issue by Sumitomo Light Metal Industries Ltd (SLM), a company listed on the Tokyo Stock Exchange. Daiwa was the underwriter of this issue.
• The terms of the potential convertible bonds were disclosed to Hug to “sound out” his views about the attractiveness of the bonds to investors. This is a common market practice.
• On 1 Dec 2003, Hug was informed that the convertible bond issue would be announced after the market closed on 2 Dec 2003 and the issue price would be fixed on 3 Dec 2003.
• On 2 Dec 2003, while in possession of such information, Hug sold SLM shares.

Since the above insider trading occurred on the Tokyo Stock Exchange, Hug’s conduct did not contravene Hong Kong’s securities laws. While the case was referred by Japanese's SESC, SFC could only take the disciplinary action against Hug by using the "last resort" - General Principle 2 of the Code of Conduct (i.e. diligence).

In this case, actually Hug obtained no personal benefit, but his conduct was technically wrong. Therefore Credit Suisse (Hong Kong) had taken the following remedial steps:

• Donated the profits made through the transaction to charity
• Suspended Hug for one month without pay, fined him and denied him US$400,000 of discretionary bonus

This case once again demonstrated the feasibility of cross-border enforcement of securities laws among regulators in different countries.