Enforcement of Insider Trading Law in Hong Kong : What Insights Can We Learn from Recent Convictions?

This study analyzes all insider trading cases in Hong Kong since a dual civil and criminal insider trading regime was implemented in 2003. The analysis reveals some significant findings. Firstly, the successful cases prosecuted under the criminal provisions outnumber those brought as civil cases, suggesting that the regulator did not sacrifice the deterrent effect of criminal convictions by using the easier procedures under the civil regime. Secondly, the largest number of insider trading contraventions occurred in 2008 when stock markets around the globe were volatile and had a significant downward adjustment. During this period, many people had significant losses, motivating them to cover their losses by illegal means. Thirdly, the most popular corporate information that triggered insider trading activities came from takeovers, as knowledge of these events before their formal announcements enabled insiders and their tippees to reap handsome profits. Finally, the monetary fines imposed on criminal offenders were generally the same as the actual profits obtained or loss avoided with the purpose of disgorging all their benefits. In contrast, imprisonment was positively related to the notional profit (i.e. the maximum potential profit that the offender could obtain from trading). These findings suggest that regulators need to be more vigilant during economic downturns and to pay particular attention to takeover and share placement activities in listed companies. For senior corporate insiders, and investment bankers and lawyers handling their corporate clients, a clear message emerges from our findings is that it does not pay to get involved in illegal insider trading