Under s.213 of Securities and Futures Ordinance (Cap. 571) (“SFO”), the Securities and Futures Commission (“SFC”) may apply to the High Court for a wide range of remedial orders to compensate entities and victims of market misconduct and other violations as prescribed under the SFO.

In two recent cases, Securities and Futures Commission v. DFRF Enterprises LLC and Ors¹ and Securities and Futures Commission v. Maxim Capital Limited and Anor², the SFC successfully obtained compensation under s.213 of the SFO for aggrieved public investors who were victims of investment fraud.

Securities and Futures Commission v. DFRF Enterprises LLC and Ors

DFRF is a limited liability company incorporated in the US. It was founded by Mr Daniel Filho (“Mr Filho”). Starting from mid-2014, Mr Filho began selling membership in DFRF through meetings with prospective investors.

Since about March 2015, DFRF began to carry out marketing activities in Hong Kong. On or about 6 May 2015, DFRF released several promotional videos on its website, Facebook page and YouTube channel. In the videos, Mr Filho represented that DFRF was listed in the US on 5 May 2015 and invited the current members to convert their investments into DFRF’s shares at the price of US$15 per share. Shortly afterwards, DFRF sent emails to its members reminding them to submit their conversion application and stating that the stock value had already gone up to US$64.17. These representations were false as DFRF was never listed in the US.

The court found that DFRF, Mr Filho and others contravened the following provisions of the SFO:

• s.114(1)(a) and (b) of the SFO: Carrying on a business in regulated activities and holding out as carrying on business in regulated activities whilst unlicensed and unregistered;
• s.109(1) of the SFO: Knowingly issuing advertisements in which a person held himself out as being prepared to carry on regulated activities whilst unlicensed and unregistered;
• s.103(1) of the SFO: Knowingly issuing advertisements which contain an invitation to the public to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities whilst unlicensed and unregistered;
• s.107(1) of the SFO: Making fraudulent or reckless misrepresentations for the purpose of inducing another person to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities; and
• “Aiding and abetting” within the meaning of s.213(1)(ii) of the SFO, as the purpose of the remittances into DFRF’s bank accounts were inconsistent with the purposes for which they were opened.

Pursuant to s.213 of the SFO, the court made declarations that the above provisions of the SFO have been contravened, granted various prohibitory injunctions against DFRF, Mr Filho and others, and appointed an administrator to facilitate the recovery, receipt and administration of the proceeds of the fraudulent activities remaining in Hong Kong.

Securities and Futures Commission v. Maxim Capital Limited and Anor

In another case, a company incorporated in the Seychelles called Maxim Capital promoted a purported investment scheme called the “Maxim Fund” on its website, on social media and at certain marketing seminars held in Hong Kong. The SFC’s investigation revealed that the Defendants were never licensed by the SFC to carry on any regulated activity. Further, various representations purportedly made on the website and social media and during the seminars were inaccurate. For example, the Hong Kong contact telephone number and office address are fictitious and the alleged parent company of Maxim Capital Limited is only a shell company incorporated in the US and has never been listed on the New York Stock Exchange.

SFC brought an action against the Defendants under section 213 of the SFO. The court found that the Defendants had breached ss.109 and 114 of the SFO and ordered various injunctions against the Defendants and the appointment of administrators.

Comments

The above two cases show that the SFC is prepared to take enforcement action against fraudsters pursuant to the statutory regime under s.213 of the SFO on behalf of aggrieved investors who may be deterred by cost and other considerations from instituting individual legal proceedings to obtain redress for their losses. The court has a wide discretion under s.213 in granting civil remedies. In doing so, the court will adopt a fairly broad-brush approach. This statutory regime helps fill the gap due to the lack of a class action regime in Hong Kong.

However, there are practical difficulties in enforcing the SFO and the law in general in relation to this type of fraudulent investment scheme. The fraudsters are either unknown or most likely outside the jurisdiction and, therefore, cannot be brought to justice in Hong Kong. Despite the best efforts made by the SFC and the court’s attempts to restore the victims to their position prior to the transactions, the victims will in most cases lose all their investments or, at best, might only be able to recover a small part of their investments.

As pointed out by the court in Securities and Futures Commission v. DFRF Enterprises LLC and Ors, the SFC may consider the education of the general public to equip them with sufficient knowledge to judge whether any particular investment scheme may contain fraudulent elements, and to give timely warnings of any suspected unlawful activities. At the same time, members of the general public must stay vigilant and seek prompt legal advice if necessary. While it is understandable to be attracted by investments that guarantee high returns, when things seem too good to be true, they probably are.

1. [2022] HKCFI 1288.
2. [2022] HKCFI 1518.