Civil or criminal?


  • Opinion
  • Saturday, 26 Jul 2014

FORMER corporate wunderkind Kenneth Vun is once again the subject of a court case filed by the Securities Commission (SC). On Tuesday, the regulator said it had taken enforcement action against him and six others at the Kuala Lumpur High Court for the manipulation of DVM Technology Bhd shares.

The SC has alleged that the seven actively transacted in DVM shares among themselves over a week in March 2006, causing the share price to rise from 11 sen on March 14 to a high of 32 sen on March 20.

The aim of this enforcement action, according to the SC, is to seek a disgorgement of all profits earned by the defendants as a result of the manipulation. The money is meant to be used to compensate affected investors. The SC is also claiming a civil penalty of RM1mil from each of the seven.

The commission also wants the defendants to be barred from becoming directors of listed companies and from trading on the stock exchange for five years.

Vun’s first legal battle with the SC began in September 2007, when the regulator filed a civil suit to compel him to restitute RM2.5mil to FTEC Resources Bhd.

The sum represents part of proceeds raised by computer maker FTEC in its initial public offering (IPO). Vun was the company’s founder and CEO. When it was listed on the Mesdaq Market in December 2003, he was just 29.

The SC said its investigations showed that Vun had used some of the IPO proceeds for his own benefit. In November 2009, the High Court ordered him to give back the RM2.5mil. He contested that decision but ran out of avenues in August 2011, when the Federal Court dismissed his application for leave to file an appeal against the decisions of the Court of Appeal and High Court.

The current case against Vun and the six others again brings into focus the SC’s approach to enforcement.

The commission has relied on both criminal prosecution and civil action (including regulatory settlement) to tackle offences such as market manipulation and insider trading.

It appears that the latter option is preferred when the SC is seeking to extract ill-gotten gains so that the victims can get back some money.

This is reflected in a line from the SC’s annual report 2013: “The mainstay of effective investor protection was further pursued through the exercise of our civil powers to recover losses on behalf of aggrieved investors as a result of misconduct, such as mismanagement of clients’ funds and market manipulation.”

However, it should be noted that disgorgement is a remedial measure. It’s meant to ensure that the culprits don’t get to enjoy the “fruits” of their offences. Instead, they have to hand over the money, which will go to those who have incurred losses because of the offences.

Disgorgement and restitution lack a punitive element, other than the name-and-shame factor because the SC usually publicises its enforcement actions. Even then, in cases when disgorgement is secured through regulatory settlement, it isn’t a practice for the regulator to issue a press release.

However, in the DVM case, the SC is also pressing for civil penalties and prohibitions from serving as directors and from trading in the stock market.

Nevertheless, such measures don’t match the weight of the penalties provided under say, the Securities Industry Act.

Under the Act, offences (such as false trading and market rigging transaction; stock market manipulations, giving false or misleading statements; using manipulative and deceptive devices; and dissemination of information about illegal transactions) can lead to a minimum fine of RM1mil and a jail term of up to 10 years.

For example, in 2011, the Sessions Court convicted Datuk Phillip Wong Chee Keong and Francis Bun Lit Chun under section 84 of the Act for creating a misleading appearance of active trading in Suremax Group Bhd shares.

Wong was sentenced to two years in prison and was fined RM3mil, while Bun was a given a three-month jail sentence and a RM2mil fine. In March this year, the High Court dismissed their appeals and affirmed the convictions. However, Bun’s imprisonment was reduced to one day. The SC has filed an appeal against the lighter sentence.

What determines the course of action that the SC takes in enforcing the law? How does it decide whether to take civil action or to pursue criminal prosecution?

Sure, every case is different; there can’t be a cookie-cutter approach for going after the wrongdoers. And yes, regulators can’t afford to reveal too much about how they probe suspected misconduct and how they go about trying to bring offenders to book.

However, the SC can surely be more transparent and articulate about its enforcement efforts. For example, the 100-page Capital Market Masterplan 2, which outlines strategies to grow the capital market up to 2020, doesn’t have a lot to say about the subject.

Here’s the key part: “Regulatory effectiveness is ultimately judged by swift enforcement actions. There will be greater focus on enhancing processes to expedite investigation and prosecution of cases. Towards this end, enforcement capabilities will be strengthened through the development of specialised investigation and prosecution skill sets.

“In addition, strategies will be developed to maximise the deterrent effects of enforcement actions and to enhance public awareness on the consequences of securities fraud. Greater efforts will also be made to encourage members of the public to volunteer information and evidence of possible violations of securities laws.”

In comparison, one of the four strategic goals laid out in the draft of the US Securities and Exchange Commission’s Strategic Plan for 2014 to 2018 is “foster and enforce compliance with the federal securities laws”. The discussion on this goal occupied 10 of the 39 pages of the plan.

On its website, the Australian Securities and Investments Commission has a 12-page information sheet that explains its approach to enforcement.

It’s time that the SC does more than provide updates on its enforcement policy. People ought to have a good idea of what to expect from the regulator on the enforcement front and what guides its actions when responding to violations of the law.

> Executive editor Errol Oh acknowledges that much of the regulators’ work is unseen. However, enforcement actions are strong indicators of vigilance, effectiveness and integrity.


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