CFO's tip and late disclosure of inside information
DragonTech Ltd is a HKEX-listed company. On 3 March it learns that its largest customer, representing 40% of revenue, will not renew a contract. The board meets on 10 March and resolves to announce on 15 March. On 5 March, CFO Alan tells his brother-in-law that 'the numbers will be ugly'; the brother-in-law then buys 200,000 DragonTech shares through a nominee account funded by a HK$1 million loan from Alan. On 12 March Alan sells 50,000 of his own shares. The 15 March announcement causes the price to fall 35%. The SFC finds the brother-in-law's account was opened with a copy of Alan's utility bill as correspondence address, and Alan deleted WhatsApp messages after the announcement. DragonTech's inside information policy says disclosure should be made 'as soon as reasonably practicable', but no disclosure officer was appointed and the board did not consider whether an announcement was required before 15 March.
1. Analyse whether Alan, his brother-in-law and DragonTech have breached the SFO.
Read the worked answer
The customer non-renewal is inside information: specific, not generally known, and likely to materially affect price. Alan, as CFO, is a connected person. His disclosure to his brother-in-law is an insider-dealing offence (disclosure), and his 12 March sale is dealing while in possession of inside information. The brother-in-law, as tippee, dealt while possessing the information and is liable even though he was not an officer. DragonTech breached the Part XIVA disclosure obligation: it knew by 3 March and the board resolved on 10 March, but announced only on 15 March; the delay needs a reasonable explanation. Appointing no disclosure officer and not considering an announcement are governance failures, not a defence.
2. What defences or mitigating factors might each party raise, and how strong are they?
Read the worked answer
Alan has no credible defence: the 'not intending to use' defence does not cover deliberate disclosure, and the share sale contradicts any claim. A pre-existing trading plan might help on the sale, but no facts support it. The brother-in-law may argue he did not know the information was inside information, but the loan from Alan, the timing and the nominee account make that difficult; a Chinese wall is irrelevant to him. DragonTech might argue it needed time to verify the information or that negotiations required confidentiality, but a two-week delay after knowledge and the absence of any disclosure process make the reasonable-precautions defence weak. Deleting messages may aggravate the case and invite obstruction allegations.
3. What enforcement outcomes and penalties can the SFC pursue?
Read the worked answer
The SFC can take civil market-misconduct proceedings before the MMT against Alan and the brother-in-law, seeking disgorgement, a fine up to three times the profit gained or loss avoided, disqualification up to five years and a cold-shoulder order. It can also prosecute criminally: insider dealing carries up to 10 years' imprisonment and a HK$10 million fine. For DragonTech's disclosure breach, the MMT can impose a regulatory fine up to HK$8 million, order remedial training and censure directors. The SFC may also seek court injunctions and refer evidence to the police. The company should preserve records and consider internal disciplinary action.