Hong Kong regulatory enforcement newsflash SFC new enforcement director

Mark Mark II?

Hong Kong bade farewell to the SFC’s former Head of Enforcement, Mark Steward, in September last year. Often referred to as more a bloodhound than a watchdog, Steward aggressively policed the financial markets during his time at the SFC, stretching the limits of the regulatory framework, arguably at the expense of constitutional protections, but all in the good name of curtailing market misconduct.

Finding a replacement for Steward proved no easy task, and after 6 long months, the hunt is finally over. On 23 March, the SFC named Thomas Atkinson, former Director of the Enforcement Branch of Ontario Securities Commission (OSC), as the new Head of Enforcement, with effect from 3 May 2016.

The question on everyone’s lips is: will this mark a change in the SFC’s enforcement approach, or will it be more of the same?

Who is Thomas Atkinson?

Atkinson certainly appears to have the qualifications for the job :

• From 1993 to 1996, Atkinson worked an Assistant Crown Attorney and was involved in the prosecution of the Ken and Barbie killers.
• Atkinson joined the Toronto Stock Exchange (TSX) and served as vice-president of regulation services and director of the Investigations & Enforcement Division.
• In 2002, he founded Market Regulation Services Inc., an independent company regulating equities trading on the TSX.
• He left the industry in 2007 and for the next two years, devoted his time to writing a legal thriller
• Between 2009 and 2015, Atkinson served as the OSC’s Director of Enforcement, and commenced proceedings against the co-CEOs of Research in Motion for backdating stock options.

At the time of Atkinson’s appointment to the OSC in 2009, a former Market Regulation Services Inc. Board member was reported to have described Atkinson as a "bulldog" and having what it takes to be a tough enforcement director.

"That's the background he really comes from - enforcement ... He really is a policeman" was also reported as having been said.

Power to the investigator

In 2013, the OSC set up a Joint Serious Offences Team (JSOT), targeting “the street crime of the financial world - Ponzi schemes and offers involving fake stock that typically ensnare ordinary investors” Atkinson is quoted as having said in an interview.

The JSOT “is allowed to use investigative techniques allowed under the criminal code, such as surveillance, undercover operations, and the use of wiretaps, as they work with police”.

The SFC Enforcement Division currently has wide powers of investigation under the legislation, including the ability to compel documentary and oral evidence, and the power to search and seize. Despite these far reaching powers, the SFC’s investigations have generally taken an inordinately long time to complete.

Given this, it would be no surprise if Atkinson were to lobby for greater investigative powers, such as those enjoyed by the JSOT, when he takes office in May.

Old dog, new tricks

"When we commenced our search, we knew that we would be seeking an individual who is not only an experienced litigator, but also a strategic thinker - a person who has a demonstrated record of effecting change. Tom is that person" OSC chairman David Wilson is reported as having said of Atkinson at the time of his appointment to the OSC in 2009.

In addition to wiretapping and covert surveillance, Atkinson also introduced no-contest settlements to speed up investigations, and levying fines for less serious offences, as well as an incentive-backed whistleblower programme for securities regulation during his time at the OSC.

These are all measures aimed at achieving quick results – cutting investigation time and processing market wrongdoing swiftly.

Similar measures may be floated when Atkinson assumes office at the SFC.  These may be controversial, but as Steward said on his way out, “nothing has ever stopped the SFC doing what it needs to do”.

What does the future hold?

So, in answer to our opening question, whilst it is very early days, we expect the same vigour and energy that we experienced during Steward’s reign, but with some new methods. In particular:

• Insider dealing is likely to remain high on the SFC’s agenda.  This is nothing new, but the interesting question is whether JSOT-type powers will be introduced to facilitate these (and other) criminal misconduct investigations.
• We expect a focus also on equities trading, particularly as this is highly popular amongst retail investors in Hong Kong, and a shift towards agreed sanctions such as suspension and fines.
• Corporate governance and fraud within listed companies will likely be a feature of the new regime, as it was under Steward.  Corporate governance abuse in Hong Kong is of a level far beyond that which Atkinson is used to in Canada, which makes it a probable target.  On these fronts, we expect Atkinson will encourage whistleblowing, particularly by auditors, as Steward advocated during his tenure.
• Following the recent MOU between the SFC and DOJ (see our last Newsflash), more criminal prosecutions are likely.  Having begun his career in the Crown Attorney’s office, Atkinson is likely to have a better working relationship with the DOJ.
• And what about the “culture of compliance” we heard so much about at the SFC’s 2016 Regulatory Forum?  There is no evidence that the tough enforcement and high penalties pursued by his predecessor have changed this.  Here is an opportunity for Atkinson to start with a fresh canvass – will he seize it?

There may yet be room for a few more chapters in his legal thriller.

Notes

1. Ironically, a reference made by Mark Steward to auditors in his speech to the Asian Chief Audit Executives Leadership Forum on 3 July 2014. The full speech can viewed here.
2. The constitutionality of some of the SFC’s enforcement actions has been highly controversial, as fleshed out in cases such as the QPL Inquiry, and the Hontex and Tiger Asia 213 proceedings.
3. The Globe and Mail have reported this to be a mystery novel set in the Crown Attorney’s Office. We have unfortunately not been able to find this title from online sources, and suspect this has yet to be published.
4. The penalty sought by the OSC against RIM – a whopping CAD100mil – was the highest ever claimed by the OSC. The proceedings were quickly settled at CAD77mil in February 2009, and the terms of the settlement can be seen here. 
5. A case in point is the ongoing CITIC Inquiry. The SFC began its investigation into CITIC in October 2008, and the Market Misconduct Proceedings were not commenced until almost 6 years later, on 11 September 2014. Contrast this with the RIM case, which took less than 3 years.
6. In Steward’s 2014 speech, he said of corporate governance and in particular, fraud detection “It is a commonplace that auditors view themselves as watchdogs rather than bloodhounds. This means a key attribute is the bark. But it would be fair to say we see a lot of fraud but we don’t hear a lot of barking” He reminded auditors of the immunity for whistleblowing, and concluded by encouraging auditors to curb fraud by barking more.
7. Sources within the SFC say that Atkinson has been described to them as being a gentle character, and perhaps somewhat less sceptical than Steward, who previously advised his successor to beware of people who are nice. Having been a prosecutor himself Atkinson will be better placed to understand where the DOJ is coming from, and what they are looking for in cases referred to them by the SFC that will help persuade them bring criminal prosecutions in the higher courts.