LCQ5: Enforcement action on section 107 of the Securities and Futures Ordinance

LCQ5: Enforcement action on section 107 of the Securities and Futures Ordinance
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Following is a question by the Hon Leung Kwok-hung and a reply by the Acting Secretary for Financial Services and the Treasury, Ms Julia Leung, in the Legislative Council today (January 5):

Question:

I went with a group of aggrieved investors of Lehman Brothers-related minibonds and structured financial products (Lehman Brothers victims) to the Securities and Futures Commission (SFC) on November 22, 2010 to file a report that the persons concerned of some banks and securities companies had made false or reckless misrepresentation when selling such financial products to their customers, suspectedly breaching section 107 of the Securities and Futures Ordinance (section 107). In response to the appeal from SFC, Lehman Brothers victims took the initiative to provide further information and requested it be filed for action, but this was rejected by SFC. In this connection, will the Government inform this Council:

(a) given that SFC indicated in its reply to me on December 9, 2010 that Lehman Brothers victims had staged their protest persistently outside the building in which SFC was located, and had not co-operated with SFC and provided it with the necessary information, whether the authorities have assessed if the protest actions of Lehman Brothers victims are covered by the rights protected by the Hong Kong Bill of Rights Ordinance; if such an assessment has been made, of the outcome;

(b) given that SFC requires the victims to report information on the case to SFC by post, by fax or by email, and has rejected the victims' request of lodging their complaints by way of reporting in person, but it is clearly stated in SFC's leaflet on "How to Make a Complaint" that members of the public may also "[lodge a complaint] in person" apart from doing so by post, by fax and by email, whether it knows why SFC has deprived Lehman Brothers victims of their freedom to lodge their complaints in person, and whether the Government has assessed if SFC's practice is contrary to the objective of "protecting investors", which is one of the regulatory objectives of SFC under section 4 of the Securities and Futures Ordinance; and

(c) whether it knows under what circumstances SFC, as the statutory authority responsible for enforcing the Securities and Futures Ordinance, may reject the filing of report by a member of the public under section 107 on the criminal offence of a person making a fraudulent or reckless misrepresentation for the purpose of inducing another person to invest, and under such circumstances, which official at the level of Secretary of Department or Director of Bureau can order SFC to discharge this legal responsibility?

Reply:

President,

We understand that a group of investors of Lehman Brothers-related products (hereafter referred as "the Group") approached the Securities and Futures Commission (SFC) on November 1, 2010 and said that an enormous number of witnesses intended to come forward to provide evidence to SFC in relation to the enforcement action on section 107 of the Securities and Futures Ordinance (SFO). Section 107 of SFO creates a criminal offence where a person, through a fraudulent or reckless misrepresentation, induces a person to invest in securities.

(a) Between November 1 and 22, 2010, we understand that SFC and the Group had some ongoing correspondences. SFC has communicated to the Group numerous times to offer and explain to the Group the various existing complaint channels for members of the public to report suspected misconduct to SFC. As of now, only four members of the Group have taken up the offer to come forward with details of these complaints. Since November 22, 2010, members of the Group have been protesting almost daily at the building in which SFC is located.

(b) We have enquired into the process of SFC's complaint handling. Accordingly, SFC provides a range of options for members of the public who wish to report suspected misconduct, including personal appointments with SFC staff, completion of specially designed complaint forms and telephone number to lodge complaints by telephone. These procedures enable complainants to tell their stories in their own words so that SFC can then assess the complaint in light of all relevant evidence and data, and make an effective and expedient decision as to further action. The complaint channels are reasonable, in line with SFC's regulatory objectives and with international best practice. They are designed to handle high volume complaints in an efficient way. They have proved to work, as made evident by SFC's expeditious handling of thousands of complaints since the collapse of Lehman Brothers.

SFC has made these complaint channels available to the Group in the same way as it has for every member of the public. However, the Group had insisted that they did not want to "file complaints" using SFC's complaint channels. Instead, they wanted to make "criminal case reporting" by which it appears that they are requesting SFC to open immediate investigation files with each complainant meeting an investigator and providing a statement with an identified officer in charge of the investigation. SFC has explained that it is unable to commence immediate investigations on request under SFO, and that its normal complaint channels cover "criminal case reporting" as well. SFC has requested members of the Group to provide details of their allegations and concerns so that SFC can make a decision as to whether there is sufficient basis to meet the statutory threshold to commence an investigation. SFC staff has explained these matters in person and in writing to the Group on over ten occasions. In addition, SFC has made strenuous attempts to meet the Group and to listen to their concerns. Unfortunately, most members of the Group have declined SFC's offer to meet with them and refused to follow SFC's established avenues for reporting suspected misconduct.

(c) We have been informed by SFC that in no circumstances has SFC rejected the reporting of a suspected breach of section 107 of SFO by a member of the public. On the contrary, as stated above, SFC has encouraged, and stood ready to listen to, legitimate complaints. As of now, SFC has only received details of four of these complaints.


Ends/Wednesday, January 5, 2011
Issued at HKT 15:22