Securities and Financial Services Regulation

• Published date: 01 December 2017
• Citation: (2017) 18 SAL Ann Rev 680
• Publication year: 2017
• Author: Hans TJIO LLM (Harvard), MA (Cantab); Advocate and Solicitor (Singapore); Barrister (Middle Temple); Professor, Faculty of Law, National University of Singapore; Co-Director, Centre for Banking & Finance Law.
• Date: 01 December 2017

Introduction

25.1 There were a number of significant decisions in 2017 in both the District and High Courts that will be discussed in this Chapter. In January 2017, the Securities and Futures (Amendment) Act 20171 (“SFAA 2017”) was passed, which introduced a number of significant changes which will only come into force in various stages in 2018. These will be highlighted, where relevant, in the analysis of the cases below.

Regulation of intermediaries

Know your client rules and senior management liability

25.2 In Public Prosecutor v Yeo Jiawei,2 Yeo, who was a wealth manager with the Singapore branch of BSI Bank, a Swiss private bank, failed in his appeal against the 30-month sentence imposed on him after he pleaded guilty to the charge of perverting the course of justice in relation to the money-laundering investigation linked to 1MDB.3 This involved, amongst other things, tampering with court witnesses. Subsequently, he was sentenced to a further 54 months' imprisonment, to run concurrently with the remainder of the first 30-month sentence, when he pleaded guilty to one charge each for money laundering and cheating under the Penal Code.4

25.3 In contrast, Jens Sturzeneggar, who was in charge of Falcon Private Bank in Singapore was, in January 2017, sentenced to 28 weeks in jail after pleading guilty to six of 16 charges. This was in relation to the failure to comply with know-your-client rules with respect to 1MDB and also of lying to investigators about his connection

with Jho Low, who was one of the principle actors in the affair.5 In 2016, both BSI Bank and Falcon Bank lost their merchant bank status in Singapore under the Monetary Authority of Singapore Act6 for serious failures in anti-money-laundering controls and improper conduct by senior management both in Singapore as well as their head offices in Switzerland. A number of systemically important financial institutions (including those on the worldwide official list as well as two of the largest local Singapore commercial banks) were fined by the Monetary Authority of Singapore (“MAS”) in connection with these cases.

Derivatives trading

25.4 Over-the-counter derivatives have had a bad press and some of them will increasingly come under exchange and clearing house regulation in addition to trade reporting. This will be implemented in various stages as the SFAA 2017 comes into force. One of them, what are termed accumulators, has been particularly notorious in Singapore and Hong Kong in private wealth circles, even though they are just a form of equity-linked note. The problem is that many investors see the limited upside in a low-interest rate environment without realising the unlimited downside. Steven Chong JA, in First Asia Capital Investments Ltd v Société Générale Bank & Trust,7 acknowledged that they were seen as an “‘I kill you later’ contract”. This is how his Honour described the instrument:8

Pursuant to a share accumulator transaction (henceforth referred to as a ‘share accumulator’), the issuer is obliged to sell shares of a company at a price known as the ‘strike price’ to the investor over an agreed period of time. The strike price is lower than the market price at the beginning of the agreed period. As long as the market price remains above the strike price but below what is known as a ‘knock-out’ price, the investor is obliged to purchase an agreed quantity of shares at the strike price, thus ‘accumulating’ shares in that company, but at a discount. If the market price rises above the knock-out price, the share accumulator is terminated. If it falls below the strike price, the investor is usually required to purchase in multiples of the agreed quantity of shares at set intervals. The knock-out price caps the issuer's loss, and thus the investor's gain, should the market price increase, but there is no corresponding limit to the investor's loss if the market price falls. The huge losses that can be caused by such unlimited downside risk

probably explains why many investors have brought actions against their banks seeking to disclaim such share accumulators.

25.5 Here, the plaintiff British Virgin Islands company claimed that although the 103 share accumulators were entered into from June 2006 to January 2008 with the written approval of one of the stipulated signatories, Lenny, there was an oral collateral agreement that the other signatory, who was her husband, Lucas, was the “main” signatory. The plaintiff, however, failed in its argument that no transaction could be entered into without his approval. Chong JA found that the company failed to prove a collateral contract due to: (a) the vagueness of its pleadings; (b) the inadmissibility of evidence to prove the alleged collateral contract; (c) its failure to provide any credible evidence of the agreement; and (d) that the existence of a collateral agreement was completely at odds with the contemporaneous objective evidence. Importantly, Chong JA reiterated the starting position in Singapore that a “bank does not ordinarily owe fiduciary duties to its customers given that the relationship between a bank and its customer is contractual”.9 His Honour confirmed that this was the case here as the accounts were execution-only accounts10 and that the contractual documentation expressly stated that SocGen would not assume any fiduciary responsibility or liability.11

25.6 The plaintiff also failed in an action based on a similar factual matrix in Asia-American Investments Group, Inc v UBS AG (Singapore Branch).12 Here, the issue was again whether the accumulator transactions in question had been authorised by the plaintiff and whether the defendant bank's relationship manager had represented to the plaintiff, through her words and conduct during the opening of the account, that she would only act upon the prior written approval of the authorised representatives of the plaintiff. The account mandate, on the face of it, authorised the bank to act on oral or telephone instructions, as well as those through the use of electronic mail. It also obliged the

plaintiff to check and verify the correctness of all confirmations and advices in relation to transactions carried out in the account as well as of statements of account, and to inform the bank of discrepancies within 14 days of the date of each confirmation or advice and within 90 days of each statement. Another clause authorised the defendant bank to treat all correspondence placed in the plaintiff's hold mail folder as having been duly delivered to and received by the plaintiff on the date of the relevant correspondence. Quentin Loh J found that one of the actions was in fact time-barred, but if it were not, along with the other transactions, it was in fact authorised by the plaintiff. He did not accept the plaintiff's evidence that the plaintiff had always dealt with the relationship manager on the basis that there had to be written authorisation for every transaction. One reason for this was the time-sensitivity of the transactions – Loh J accepted the defendant's expert evidence that in Singapore, “oral instructions are accepted for the purposes of execution of … accumulator contracts”.13 There was thus no breach of any duty owed to the plaintiffs by the bank or its relationship manager.

Markets and exchange regulation

Cryptocurrency exchanges

25.7 In 2017, the Singapore International Commercial Court14 heard the first cryptocurrency case to come to the courts in Singapore involving its most widely known “Bitcoin”. Bitcoin first started out as an alternative to fiat currency in 2008 as a means of exchange but appears to be traded as a commodity or store of value today with a great deal of speculation in what appears to be of little intrinsic value, which may explain its volatility. Regulations concerning cryptocurrency appear to be moving along the same lines, that is, from it being a form of currency to a kind of security. In B2C2 Ltd v Quoine Pte Ltd15 (“B2C2”), Justice Simon Thorley QC16 dismissed an application for summary judgment pursuant to O 14 of the Rules of Court17 (“RoC”) for breach of contract and breach of trust against a Singapore incorporated company operating a currency exchange platform which enabled third parties to trade

Bitcoin and Ethereum for other virtual currencies or for fiat currencies such as the Singapore or US dollar.

25.8 The plaintiff was an electronic market maker incorporated in England providing liquidity on the exchange platform by buying and selling virtual currencies at the prices it quoted for virtual currency pairs. It agreed to a set of terms and conditions available on the defendant exchange platform's website. On 19 April 2017, the plaintiff placed 12,617 Bitcoin and Ethereum orders of which only 15 were filled. Eight of the orders were buy or sell orders transacted at a price of around 0.04 Bitcoin for one Ethereum. Seven others were sell orders that were effected at an exchange rate of around ten Bitcoin for one Ethereum. These were filled after a technical glitch had hit the defendant exchange and it was unable to perform its market-price updates. All the orders on the relevant order book were not available so that no true market price could be set. However, because of the glitch, the plaintiff's price was the only one available on the defendant's platform and this was matched by the computer system with Bitcoin held by forced sale customers. This meant that the plaintiff was credited with a large number of Bitcoin with the exchanged amount of Ethereum debited. The forced sold customers had their accounts correspondingly debited and credited. The plaintiff stood to gain almost 250 times the amount of Bitcoin that the pre-glitch exchange rate of Bitcoin for Ethereum would have given them. The defendant exchange platform tried to unilaterally reverse the transaction on the following day. They contended that the risk disclosure document contained a term that allowed them...