Executive Summary
The legislation of insider dealing in Hong Kong is aimed at prohibiting the misuse of particular information about a listed company’s affairs by persons connected with that company, who are in possession of that information, using it or encouraging others to use it for the purpose of trading in the company’s stock to make a profit or avoid a loss.

The law of insider dealing is comprehensive in proving contravention of ordinance by covering five essential elements, including mental intention, connected persons, relevant information, dealings of securities or derivatives and securities. However, execution is difficult in Hong Kong.

This report aims to investigate the causes for the low effectiveness of the law. It begins by defining the law of insider dealing, followed by analyzing the credits and defects of the existing law. It then focuses on addressing the issue of difficulties in enforcing of the law of insider dealing in practice.

Credits of Existing Law
The existing law is appropriated in terms of independent tribunals, strict penalties, and dual civil and criminal regime for fighting against insider dealing. Details will be discussed in later text.

Defects of Existing Law
Four perspectives of defects of the existing law have been indentified and analyzed in details. Insufficient enforcement of law may be caused by the narrow definition of “Connected Persons”, lack of clear guidelines for civil and criminal proceedings, difficulty in proving mental intention and high dependence of international cooperation.

Recommendations
By adding a reporting system, introducing an out of court settlement, empowering the Insider Dealing Tribunal, introducing a jury system and distinguishing between civil and criminal proceedings, the efficiency of execution of law can be enhanced.

Conclusion
With reference to the similar law systems in different countries, the legislation of insider dealing in Hong Kong deserves credits in its comprehensiveness. It can stills be improved by the suggested five measures to make it more efficient in the enforcement of law.
Definition of Law
The definition of insider dealing is the same under both the civil and criminal regimes. The Securities and Futures Ordinance (SFO) defines insider dealing by listing various situations in which insider dealing occurs: SFO section 270 and section 291.

To prove there is an insider dealing, we need to prove the intention and the following four elements:
1. Connected persons;
2. Relevant information;
3. Dealings of securities or derivatives;
4. Securities and derivatives

1. Connected Persons
A person is connected with a corporation if he is, or has within the previous six months been:
(i) A director or employee of that corporation or a related corporation; or
(ii) A substantial shareholder in the corporation or a related corporation; or
(iii) An occupant of a position which may reasonably be expected to give him access to relevant information in relation to the corporation ; or
(iv) A person who has access, by reason of his being connected with another corporation, to relevant information concerning the corporation which relates to any transaction; or
(v) A person who in his capacity as a public officer or member or employee of, amongst other bodies, the Executive Council, the Legislative Council, the Stock Exchange and anybody corporate established or incorporated by ordinance, has received relevant information concerning a corporation

2. Relevant Information
A person must possess "relevant information" in relation to a corporation. Under SFO section 245, relevant information, in relation to a corporation, means specific information about:
(i) The corporation; or
(ii) A shareholder or officer of the corporation; or
(iii) The listed securities of the corporation or their derivatives

The relevant information should be specific, and is not generally known to those persons who are accustomed or would be likely to deal in the listed securities of that corporation. Also, it is likely to materially affect the price of the listed securities.
3. Dealings
Insider dealing can occur when a person:
(i) Deals (buys, sells, exchanges or subscribes) in listed securities or their derivatives;
(ii) Counsels or procures another to deal in listed securities or their derivatives;
(iii) Discloses that relevant information to another (directly or indirectly) in the knowledge or reasonable belief that the other will use the information to deal

4. Securities and Derivatives
Securities which are listed on the Hong Kong Stock Exchange and their derivatives are the only types of securities in respect of which insider dealing can occur. The definition of listed securities however includes in addition to issued, listed securities, securities which have not been issued and/or listed but which at the time of any insider dealing it is reasonably foreseeable will be, and which in fact subsequently are, issued and listed. It therefore could include, for example, securities which are to be issued pursuant to a subscription placing.

Intention
For insider dealing, a person must have the intention to use the relevant information to deal in the stock market to try to gain a profit or avoid a loss. It must prove that there is a relationship between the relevant information and the decision to deal in the stock market.

Penalties of Insider Dealing
Under SFO section 194(2), for the civil regime, authorities are empowered to impose a financial penalty not exceeding the amount which is the greater of HK$10 million or three times the amount of the profit gained or loss avoided by the insider dealer. Under SFO section 303(1), for the criminal provisions, an insider dealer could be subject to a maximum fine of HK$10 million and 10 years’ imprisonment upon conviction.

Scope of View
The law of insider dealing is already very comprehensive because the Ordinance has considered different aspects concerned with insider dealing carefully. The focus of this report is on the execution of the ordinance, including the ease of enforcement of law and additional suggestions on enhancing the efficiency of the relevant authority bodies in execution.

Credits of Hong Kong Insider Dealing Law
1. Independent Tribunals to Investigate Cases of Insider Dealing
In Hong Kong, there are Insider Dealing Tribunal and Market Misconduct Tribunal to investigate and handle the cases of insider dealing. Some developing countries like China just have the laws to regulate the insider dealing and do not have an independent tribunal specialized in handling the cases. Therefore, Hong Kong has a more centralized system to deal with insider dealing and bring the prosecution against the defendants more efficiently and effectively.

The Insider Dealing Tribunal is an inquisitorial tribunal. It considers all relevant and logically probative evidence. It is empowered to conduct further inquiries to supplement the evidence presented by the parties in order to assist it in determining whether or not the allegation of insider dealing it is concerned with has been proved. Therefore the scope of its responsibilities is clearly defined and it has the power to proceed the investigation and prosecution.

2. Strict Penalties to Avoid Insider Dealing
In Hong Kong, under the criminal regime, the defendants will be subjected to a fine and imprisonment upon conviction2, despite whether the defendants have the knowledge of the insider dealing law. However, in the US, the defendants will be only subjected to a fine if they are convicted for insider dealing for the first time. SEC assumes the defendants do not have the knowledge of insider dealing law and they should not be sent to imprisonment. On the other hand, the maximum penalty of insider dealing in Hong Kong is a fine of HK$10 million and 10 years’ imprisonment upon conviction . Compared to PRC Securities Law, which only imposes a maximum fine of RMB 0.6 million , Hong Kong has a severe penalty system to create a deterrent effect on insiders. Therefore, the law in Hong Kong will inhibit people from committing insider dealing.

3. Dual Civil and Criminal Regime for Insider Dealing
After 2003, insider dealing becomes both civil and criminal offences. The dual civil and criminal regime means that SFC can either bring a civil case before the Market Misconduct Tribunal for compensation or commence criminal proceedings against an alleged insider dealer for punishing them. Now, the defendants are not subjected to fines only, they may also face imprisonment if they are convicted. Therefore, we can punish the defendants because of their misconduct behavior, which create a deterrent effect. At the same time, we can compensate the investors for not knowing the relevant information and are treated unfairly in the stock market. Moreover, it shows that the Hong Kong government has a strong determination to treat the cases of insider dealing very seriously.

Defects of Hong Kong Insider Dealing Law
1. Narrow Definition of “Connected Persons”
There are four essential elements for insider dealing law in Hong Kong. In order to prove that insider dealing has taken place, the element of “connected persons” is the first key to define someone as insider dealers. Connected persons often refer to directors, employees, representatives and substantial shareholders of the listed corporation, counterparties to contracts with that corporation and certain public officers. Such definition is narrow, making the law insufficient for the prohibitions of tipping. A person may accidentally come into possession of some confidential price-sensitive information. But he would not be considered as an insider dealer due to the inability to proof his relationship with the corporation or members of the corporation concerned, even though his actions may fall into the definition of insider dealing, i.e. meet other elements of insider dealing.

When compared with other jurisdictions, countries like United Kingdom and Australia opt for the broader prohibition on insider dealing. Their laws indicate that the insider dealer is anyone who possesses materially price-sensitive information that is not generally available and then trades on the basis of that information, whether there is a relationship between that person and the corporation to which the information belongs or not. Such a definition covers more potential situations of insider dealing.

2. Lack of Clear Guidelines for Civil and Criminal Proceedings
As mentioned before, although concurrent civil and criminal regimes work best in tackling insider dealing, existing law does not provide clear guidelines for distinguishing between civil and criminal proceedings that should be taken; section 270 and section 291 of the Ordinance which both list the relevant insider dealing law are more or less the same. It is thus hard for SFC to decide whether to bring a case against the alleged insider dealer before Market Misconduct Tribunal (civil proceedings) or to prosecute that person in the court (criminal proceedings). The final decision of whether taking civil or criminal proceedings is then likely to depend on the sufficiency of evidence stated in Prosecution Policy and Practice of Department of Justice . This basis of decision may not be appropriate in insider dealing cases as what would be mentioned later is that it is especially difficult to collect information for such cases. The resulted decision of proceedings may not be in public interests.

3. Difficulty in Proving Mental Intention
As defined in law, the plaintiff has to prove that there is mental intention of the defendant to make use of the relevant information to gain a profit or avoid a loss. In other words, one must prove the causation between the decision of stock trade and the holding of the relevant information. However, mental intention is something abstract and difficult to be proved. The court will usually infer this element from the case by his professional judgment. For instance, in the case of the Chongs v Insider Dealing Tribunal , the judge used backward reasoning to draw inferences adverse to those suspected of having contravened the provisions in respect of insider dealing. In the case of Lam Hon Nam v Insider Dealing Tribunal, although there is not any solid evidence to prove he has given the relevant information to Ms Sylvia Chan and the relationship between the information and the dealings of the shares, the judge used the time of telephone calls to draw the inference.

It is observed from many cases that mental intention is usually inferred from the cases by judges. This poses a weakness of the objectivity. Inferences by judges may lead to unfair interpretation of the case. As result, people dissatisfied with the final judgment will usually appeal to a higher court. This leads to tedious procedures and endless filings, which may be wastage of resources.

4. High Dependence of International Cooperation
It is often hard to collect relevant information to charge for the guiltiness of the defendant. A possible reason may be the lack of power of the Insider Dealing Tribunal, which accounts for the difficulty of collecting relevant information due to globalization. Companies can be incorporated and listed in different geographic locations. The challenge is how to apply purely national securities laws and regulations to international securities transactions, which may involve foreign national investors and issuers, foreign national markets as well as those of the regulator's own country. With reference to a report , a company with its principal business in Singapore and listed in the Hong Kong Stock Exchange reveals the complication of such relationship. Suspecting the possible market misconduct behavior of Crownhampton, the SFC faced challenges in invading the foreign jurisdiction during the investigation process. Consequently, the broker agents in Singapore either refused to provide any information or failed to cooperate with SFC by taking an immediate action. This reflects that international cooperation is not mature enough. It often becomes the obstacles for Insider Dealing Tribunal to further investigate the case and as a result hinders the whole process of collecting relevant information.

Suggestions
1. Addition of a Reporting System
According to the US Securities and Exchange Commission (SEC), insider trading has both legal and illegal forms. Legal insider trading occurs when corporate insiders trade in their own securities, which have been reported to the SEC before. Any transactions or changes in stock ownership have not been reported would consider as illegal trading. We suggest Hong Kong can add a reporting system like US. Nowadays, all transactions related to using relevant information are treated as illegal. However, in order to protect the free right to trade of the insiders, we should clearly distinguish between legal and illegal trading. Adding reporting system can help to track the transaction of companies. Moreover, it can help in proving the insiders have the intention of committing illegal insider trading if they do not report to the SFC.

2. Introduction to Out of Court Settlements
The difficulty in evidence collection is usually the major obstacle for the execution of insider dealing law. In Hong Kong, such challenge hinders the efficiency of handling suspicious insider dealing cases that involve local trading accounts and securities listed in Hong Kong, causing cases to be drag on for years. This explains why the first criminal insider dealing prosecution by the SFC did not appear until January 2008, in spite of the fact that insider trading has become a criminal offense in Hong Kong since 2003 . Apart from this, with the robust development of the local financial market, there are more and more overseas companies listing their shares in the HKSE. Dealings of listed securities that involve foreign trading accounts are not uncommon, posing greater obstacles to the execution of SFO. International assistance plays an important role in handling suspicious insider dealing cases relating to these situations. As discussed in the fourth point of the defects of existing law, the process of evidence collection in these cases highly depends on effective international cooperation, which affects the efficiency of handling insider dealing cases. Thus, ineffective evidence collection process greatly prohibits the execution of SFO for insider dealing cases, particularly for cases that require international assistance.

In the US, despite the comprehensive insider dealing laws, proving someone has been participated in an illegal insider dealing is difficult. To tackle this challenge, the SEC allows out of court settlements for insider dealing cases . This enables it to handle a much larger amount of insider dealing cases , with prosecutions over 50 cases each year, and in a more effective manner than Hong Kong. In most of these US cases, offenders accepted the conviction and opt for out of court settlements. With reference to the insider dealing proceedings in the US, it is suggested that SFO can introduce a similar out of court settlement arrangement for mild insider dealing cases. Given the limited resources and challenges to collect evidence for proving the four elements and mental intention, only a small number of cases in the previous years were settled in Hong Kong, which often took years. With the introduction of out of court settlements, the chance for successfully convicting insider dealing offenders will be higher. There will be fewer offenders who can escape from being punished due to insufficient evidence collected by SFC. The time and resources that the Insider Dealing Tribunal and SFC used in dealing with mild offences will also be reduced that they will be able to invest more resources and focus on the more serious offences. Therefore, more cases can be treated by the tribunal and SFC and their efficiency and effectiveness for handling insider dealing cases can be enhanced.

3. Empowerment of the Insider Dealing Tribunal
Although we have an independent tribunal to deal with the problem of insider dealing, the tribunal has little power, causing the investigation of cases always take a long time. One of the reasons why the cases last so long is because the SFO is always questioned by the offenders because of the injunction order and spend much time on appealing. For example, in the case of “A” whose name is suppressed by order of the court (Court reference: HCMP1407/2007) . “A” has been suspected committing insider dealing and SFC applied to freeze the assets of “A” because of fears that the transfer of his assets would frustrate the financial penalty orders if he is really being charged. The injunction order was given on 27 July 2007 and should continue until further order. However, “A” applied an appeal in the injunction order. The examination is still in process. That is quite time consuming and resources wasting. As a result, we suggest power should be added to SFC. For instance, adding a line in the law regarding insider dealing: "Once the person was suspected for insider dealing, SFO has the power to give injunction order to the suspected person." This can help to secure the assets and money for future compensation. Another way to add power to SFC is to set regulations regarding investigation. We can take ICAC as a reference. They have a set of guideline stating the power of obtaining information and document . Besides, one more thing should be mentioned is that if we have to give more power to SFC, we have to at the same time give them more resources and authorities for them to exercise their power.

4. Introduction to Jury System
Collecting sufficient evidence for proving the mental intention of offenders is very difficult that mental intention is usually inferred by the judge instead. Since different judges may come up with different inferences for the same case due to their differences in factors like experiences in handling insider dealing cases, knowledge and point of view, it may appear subjective if mental intention is solely determined by inferences of judges. To promote more objective settlements of cases, it is suggested that jury system can be introduced for inferring mental intention in insider dealing cases.

With reference to an insider dealing case in the US, in which offender Bhagat was convicted of insider dealing as a result of his purchase of listed shares of his employer before the public announcement of the news about a contract won by the company, jury system was adopted to enhance the objectiveness of inference. The jurors concluded that Bhagat had read the company wide email and got access to the information that the company had won the contract before he purchased the shares and that he had the intention to utilize this relevant insider information to make a profit illegally because he did not try to give up the purchased shares nor did he inform his superior about his purchase. Such conclusion from the jurors contributed to the successful conviction of Bhagat for insider dealing .

Hong Kong is suggested to learn from the US and introduce the jury system to insider dealing cases, thereby enhancing the objectiveness of inferences related to mental intention. With a more objective execution of SFO, the number of appeal cases related to insider dealing will be reduced that more resources and time can then be invested by the tribunal and SFC to handle other insider dealing cases.

5. Distinction between Civil and Criminal Proceedings
As mentioned before, the final decision of whether taking civil or criminal proceedings mainly depends on the sufficiency of evidence stated in Prosecution Policy and Practice of Department of Justice which may not be in public interests. In order to improve the problem of confusion between civil and criminal offense, we suggest SFC use some factors to separate two proceedings. We can determine whether a case is a civil one or criminal one depends on the number of alleged conspirators involved in the scheme, the scope of the violation, the amount of profits, the strength of proof and the perceived deterrent value of criminal prosecution. SFC can consider the above measurements in order to have a clear cut between civil and criminal offense.

Conclusion
The law of insider dealing is comprehensive but difficult to enforce in practice. As discussed in the report, by adding reporting system, introducing out of court settlement, empowering the Insider Dealing Tribunal, introducing jury system and distinguishing between civil and criminal proceedings, the execution of law by the Insider Dealing Tribunal can be upgraded to a higher level.

Appendix – US Law of Insider Dealing
The United States is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them. Insider trading is regulated by the U.S. Securities and Exchange Commission, or SEC.

Legal insider trading
According to the US Securities and Exchange Commission (SEC), insider trading has both legal and illegal forms: legal insider trading occurs when corporate insiders: officers, directors, and employees, buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. Reports of transactions by insiders are filed with the SEC on Forms 3, 4 and 5. SEC Form 3 is really the first form that needs to be filled out by any newly appointed corporate insider because this form registers a person as an "insider." This is the form that is used to register the shares of stock held by those required to report insider trading activities. SEC Form 4 is used to report insider trading transactions to the SEC. Any change in stock ownership usually must be reported to the SEC within two business days of a transaction. SEC Form 5 is used to report any transaction that was not reported on Form 4, or a transaction that was eligible for deferred reporting.

Illegal insider trading
Illegal insider trading occurs when a corporate insider buys or sells a security in breach of confidence or trust. Illegal insider trading is also possible when an individual outside of a business receives inside information and trades stock based on that information.

According to the SEC, an insider is anyone who is given access to material corporate information before it is made public. Material information is any information that can move the price of the company's stock when it is made public. This includes information on mergers, acquisitions, earnings and dividend announcements. It is illegal for an insider to trade based on this information before it is released to the public.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider trading issues where the courts have disagreed. Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.
Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.
Penalty
For civil penalties, the person who commits the violation and makes the actual trades can be assessed a maximum penalty of three times the profit gained or loss avoided from illegal activities. The maximum penalty for the controlling person, someone who controlled the person committing the violation, is either $1,000,000, or three times the amount of the profit gained or loss avoided, whichever of the two is more.

For criminal penalties, individuals convicted of willful violation of the U.S. Securities Exchange Act can face up to 20 years in prison and $5 million fines for each violation. If the accused can prove they had no knowledge of insider trading laws, they will only be subject to a maximum of $5 million in fines and no prison time. Corporations can be fined up to $25 million.