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FEATURE |
A Practical Guide to Quantifying Civil Penalties under the Securities and Futures Act
The article explores how civil penalties under the Securities and Futures Act (Cap 289) may be quantified to suitably penalise persons for market misconduct. Besides explaining what the civil penalty regime is about, it also examines the approaches of other jurisdictions in quantifying civil penalties for cases of market misconduct or otherwise. Finally, this paper concludes by offering a possible approach for the Singapore courts to consider adopting when determining the appropriate amount of civil penalty payable.
To a legal practitioner in Singapore, the term ‘civil penalty’ may well be a contradiction in terms. The use of the word ‘civil’ clearly takes away any impression that the penalty to be imposed flows from a criminal proceeding. However, the use of the word ‘penalty’ distinguishes it from damages or compensation usually payable only in a civil proceeding. Indeed, many local practitioners may find the concept of ‘civil penalty’ quite unfamiliar.
Simply put, civil penalties are financial sanctions imposed by a court during civil proceedings initiated by an administrative agency against a person for breach of the laws administered by such administrative agency.1 Civil penalties have been used to complement criminal sanctions in instances where the high standard of proof required for a criminal conviction has frustrated successful prosecutions, thereby rendering the criminal law ineffective in deterring wrongful behaviour. Alternatively, where different levels of mental intent for the same contravening behaviour must be given due consideration, the civil penalty may be imposed for the less culpable mental intent.2
The Jurisprudence of Civil Penalty
It is generally accepted that there is a distinction between mala in se, conduct which is wrongful in itself and hence regarded as ‘criminal’, and mala prohibita, conduct which cannot be so characterised and which is prohibited because it is the subject of specific prohibition.3 The hypothesis of criminal responsibility for traditional crimes involves the notion of culpability or mala in se and thus, social condemnation. In contrast, the characteristic of laws which are aimed at regulating economic and social activity (regulatory law) is that a breach, frequently involving mala prohibita, does not normally attract the same degree of moral condemnation associated with traditional crimes. It is said that regulatory law is primarily concerned with facilitating the attainment of collectivist goals by discouraging behaviour which is considered contrary to those goals and thus detrimental to collective welfare. The punishment of regulatory offences is therefore a means of controlling an activity, without necessarily implying the element of social condemnation which is characteristic of traditional crimes.4
Notwithstanding the above, an element of blame should still be attached to regulatory offences in so far as the commission of such an offence amounts to a failure by the offender to take reasonable care in carrying out the regulated activity. In this connection, civil penalties have found favour as an appropriate sanction for regulatory offences. Criminal convictions which carry real negative stigmas and important practical disabilities such as disqualification from holding public office or acting as company director may be unnecessary and too draconian. On the other hand, civil penalties which carry punitive and deterrent effects without the negative stigma, appear more suitable in dealing with regulatory offences.5
Civil Penalties for Regulatory Breaches
In the last few years, the Singapore government has taken pains to liberalise certain sectors of the economy. For instance, in the telecommunications and financial sectors, policies have been implemented to create a market-driven environment that promotes innovation, entrepreneurship, efficiency and business flexibility. Criminal prosecution for every technical breach of the law will work directly against the creation of such an environment. International players and investors would be deterred by the possible stigma of criminal convictions for technical breaches of the law especially where those convictions have to be disclosed to other foreign regulatory authorities and stock exchanges. In comparison, similar offences would at the very most, attract a civil fine or censure in other jurisdictions. Overall, the draconian imposition of criminal sanctions for even regulatory breaches would surely serve as a disincentive for professionals to base their operations in Singapore.6
Civil Penalties under the SFA
Section 232 of the Securities and Futures Act (‘SFA’) allows the Monetary Authority of Singapore (‘Authority’) to pursue civil penalty actions for contravention of provisions contained in Part XII of the SFA. Part XII prohibits various forms of market misconduct including, market rigging, market manipulation and insider trading.7 The predecessor of the SFA, the Securities Industry Act, similarly provided a civil penalty regime for insider trading but no such action has ever been instituted by the Authority.
Civil penalty actions permit the Authority to pursue those who commit market misconduct, without necessarily exposing such persons to the full brunt of a criminal conviction. In particular, a civil penalty order results in the imposition of a financial penalty on the contravening person, without exposing him to imprisonment. The civil penalty regime is meant to complement the existing criminal regime by providing a calibrated approach of enforcement that punishes and deters market misconduct, but while not impeding the growth of the securities markets in Singapore. Order 94 of the Rules of Court sets out the procedure for civil penalty actions.
Jurisdiction of the Court in Imposing Civil Penalties
The district court has the jurisdiction to hear and determine any action under sections 232, 234 or 236 regardless of the monetary amount.8 Section 232(2) of the SFA provides that if the court is satisfied on a balance of probabilities that the person has contravened a provision under Part XII of the SFA which resulted in his gaining a profit or avoiding a loss, the court may make an order against him for the payment of a civil penalty of a sum:
(a) not exceeding three times:
(i) the amount of the profit that the person gained; or
(ii) the amount of the loss that he avoided,
as a result of the contravention; or
(b) equal to $50,000 if the person is not a corporation, or $100,000 if the person is a corporation,
whichever is the greater.
If the court is satisfied on a balance of probabilities that the person has contravened a provision of Part XII of the SFA which did not result in his gaining a profit or avoiding a loss, the court may make an order against him for the payment of a civil penalty of a sum not less than $50,000 and not more than $2m: s 232(3).
While very clear upper limits of the quantum of civil penalty have been laid down by s 232 of the SFA, the Act does not offer any other form of guidance. The SFA does not set out the relevant factors that ought to be taken into consideration when determining the quantum of the civil penalty to be imposed.
Various Approaches in Quantifying Civil Penalties
In this part of the paper, four approaches will be set out: that of the UK’s Financial Services Authority (‘FSA’) for the imposition of administrative penalties for market misconduct; the legislative and judicial approach taken by the US through or under similar securities laws; the 2001 two-step process adopted by US’s Environmental Protection Agency (‘EPA’) on civil penalties for breaches of environmental protection; and Santow J’s approach in ASIC v Adler [2002] NSWSC 483 on the imposition of pecuniary penalties under New South Wales’ Corporation Act.
Guidelines in the FSA Handbook for quantifying administrative penalties
There are no reported decisions on how courts have arrived at the quantum of civil penalties to be imposed for cases of market misconduct. However, the UK’s FSA Handbook9 contains very useful information on how the FSA quantifies administrative penalties for market misconduct. Administrative financial penalties are imposed by an administrative agency, like the FSA, on a person for breach of laws administered by such administrative agency.10 Though the factors to be taken into consideration in the FSA Handbook relate to the imposition of administrative penalties by the agency, it is suggested that the guidelines therein should be equally relevant for the imposition of civil penalties by the court.
The FSA takes into account all the circumstances of a case when it determines the appropriate level of penalty. Given the wide range of different types of behaviour that may amount to market abuse, the FSA elects not to use a tariff of penalties for market abuse cases.11 However, s 124(2) of the FSA Act (equivalent to the SFA) expressly sets out the Policy Statement governing the determination of the amount of a penalty to be imposed:
• whether the behaviour in respect of which the penalty is to be imposed had an adverse effect on the market in question and, if it did, how serious that effect was;
• the extent to which that behaviour was deliberate or reckless; and
• whether the person on whom the penalty is to be imposed is an individual.
Applying the policy statement above, the FSA enshrines in its Handbook12 the following factors as relevant when it sets the amount of a penalty in market abuse cases. The factors are not exhaustive and in determining the quantum of the penalty, all the relevant circumstances of the case will be taken into consideration by the FSA.13
• Adverse effect on markets and the seriousness of that effect.
A financial penalty must be in proportion to the nature and seriousness of the abuse in the question. The following may be relevant:
(a) the loss or risk of loss caused to consumers or other market users;
(b) the duration and frequency of the behaviour; and
(c) the impact of the behaviour on the orderliness of prescribed markets including whether confidence in those markets has been damaged.
• The extent to which the behaviour was deliberate or reckless.
In determining whether the behaviour was deliberate or reckless, the FSA will take into account all the circumstances of the behaviour which resulted in the market abuse either directly or indirectly. For example, the FSA may have regard to whether the person intended or foresaw the consequences of their behaviour, or gave any consideration to the consequences of their behaviour. If the FSA decides that the behaviour was deliberate or reckless, it would be more likely to impose a higher penalty on a person than would otherwise be the case.
• Whether the person on whom the penalty is to be imposed is an individual.
This will include having regard to the financial resources and other circumstances of the individual and may include whether there is verifiable evidence of serious financial hardship or financial difficulties if the individual were to pay the financial penalty that would, in the absence of this consideration, be imposed.
• The amount of profits accrued or loss avoided.
The FSA may have regard to the amount of profits accrued or loss avoided as a result of the behaviour, for example:
(a) the FSA will propose a penalty that is consistent with the principle that a person should not benefit from behaviour amounting to market abuse or requiring or encouraging; and
(b) the penalty should also act as an incentive to the person and others to comply with required standards of market conduct.
• Conduct following the behaviour of concern.
The FSA may take into account:
(a) the conduct of the person in bringing (or failing to bring) the behaviour to the FSA’s attention (or the attention of other regulatory authorities, where relevant) quickly, effectively and completely;
(b) the degree of cooperation the person showed during the investigation of the behaviour by the FSA or any other regulatory authority allowed to share information with the FSA. Where a person has fully cooperated with an investigation, this will be a factor tending to reduce the level of financial penalty;
(c) any remedial steps taken by the person since the behaviour was identified (whether on their own initiative or that of the FSA or another regulatory authority) including correcting any misleading statement or impression, identifying whether consumers or other market users have suffered loss and compensating them, taking disciplinary action against staff involved (if appropriate), and taking steps to ensure similar problems do not happen in the future; and
(d) whether the person concerned has complied with any requirements or rulings of another regulatory authority relating to his behaviour.
• Disciplinary record and compliance history.
The disciplinary record and general compliance history of the person may be taken into account, including whether the FSA has previously taken any action against the person for behaviour amounting to market abuse or requiring or encouraging which resulted in adverse findings. In assessing the relevance of a person’s compliance history, the age of the previous behaviour will be taken into account, although a long-standing matter may still be relevant. However, in undertaking this assessment, private warnings will not be taken into account.
• Previous action taken by the FSA.
The action the FSA has taken over previous similar behaviour may be taken into account. The FSA will seek to ensure consistency when it determines the appropriate level of penalty. However, the FSA does not intend to set up a tariff system and there may be other relevant factors which could increase or decrease the seriousness of the matter.
• Action taken by other regulatory authorities.
Action taken or to be taken by other regulatory authorities in relation to the behaviour may be relevant. The degree to which any remedial or compensatory steps required by other regulatory authorities have been taken (and whether taken promptly) may also be relevant.
The US legislative and judicial approach
The US has similar provisions to s 232 of the SFA allowing civil penalties for market misconduct. Section 21A of the Securities Exchange Act of 1934, enacted as part of the Insider Trading and Securities Fraud Enforcement Act of 1988 and codified at 15 U S C §78u-1 provides:
§78u-1. Civil penalties for insider trading.
(a) Authority to impose civil penalties.
(1) Judicial actions by Commission authorised. Whenever it shall appear to the Commission that any person has violated any provision of this title or the rules or regulations thereunder by purchasing or selling a security or security-based swap agreement (as defined in s 206B of the Gramm-Leach-Bliley Act) while in possession of material, nonpublic information in, or has violated any such provision by communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardised options or security futures products, the Commission —
(A) may bring an action in a US district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by the person who committed such violation; and
(B) may, subject to subsection (b)(1), bring an action in a US district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by a person who, at the time of the violation, directly or indirectly controlled the person who committed such violation.
(2) Amount of penalty for person who committed violation. The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.
(3) Amount of penalty for controlling person. The amount of the penalty which may be imposed on any person who, at the time of the violation, directly or indirectly controlled the person who committed such violation, shall be determined by the court in light of the facts and circumstances, but shall not exceed the greater of $ 1,000,000, or three times the amount of the profit gained or loss avoided as a result of such controlled person’s violation. If such controlled person’s violation was a violation by communication, the profit gained or loss avoided as a result of the violation shall, for purposes of this paragraph only, be deemed to be limited to the profit gained or loss avoided by the person or persons to whom the controlled person directed such communication.
The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, as codified at 15 U S C §78u(d) provides:
(3) Money penalties in civil actions.
(A) Authority of Commission. Whenever it shall appear to the Commission that any person has violated any provision of this title, the rules or regulations thereunder, or a cease-and-desist order entered by the Commission pursuant to s 21C of this title, other than by committing a violation subject to a penalty pursuant to s 21A, the Commission may bring an action in a US district court to seek, and the court shall have jurisdiction to impose, upon a proper showing, a civil penalty to be paid by the person who committed such violation.
(B) Amount of penalty.
(i) First tier. The amount of the penalty shall be determined by the court in light of the facts and circumstances. For each violation, the amount of the penalty shall not exceed the greater of (I) $ 5,000 for a natural person or $ 50,000 for any other person, or (II) the gross amount of pecuniary gain to such defendant as a result of the violation.
(ii) Second tier. Notwithstanding clause (i), the amount of penalty for each such violation shall not exceed the greater of (I) $ 50,000 for a natural person or $ 250,000 for any other person, or (II) the gross amount of pecuniary gain to such defendant as a result of the violation, if the violation described in subparagraph (A) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.
(iii) Third tier. Notwithstanding clauses (i) and (ii), the amount of penalty for each such violation shall not exceed the greater of (I) $ 100,000 for a natural person or $ 500,000 for any other person, or (II) the gross amount of pecuniary gain to such defendant as a result of the violation, if—
(aa) the violation described in subparagraph (A) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; and
(bb) such violation directly or indirectly resulted in substantial losses or
created a significant risk of substantial losses to other persons.
It is interesting to note that Congress has specifically provided that civil penalties in the sum of multiples of the profit gained or loss avoided will only be awarded for insider trading. The SFA does not have a similar restriction and it should be noted that under the SFA, insider trading attracts the same criminal penalty as other forms of market manipulation. Congress has also, in adopting the three-tier civil penalty system for the remaining forms of market manipulation, clearly indicated that the most relevant factor is whether the defendant’s conduct directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons, and the next most relevant factor is the defendant’s scienter, that is, whether the defendant’s conduct involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement . There is no such tiered approach in the SFA.
In SEC v Lybrand, 200 F Supp 2d 384 (S D N Y, 2002), the US District Court for the Southern District of New York conveniently set out the following factors that the US courts looked to in imposing civil penalties:
• the egregiousness of the violations at issue;
• defendants' scienter;
• the repeated nature of the violations;
• defendants' failure to admit to their wrongdoing;
• whether defendants' conduct created substantial losses or the risk of substantial losses to other persons;
• defendants' lack of cooperation and honesty with authorities, if any; and
• whether the penalty that would otherwise be appropriate should be reduced due to defendants' demonstrated current and future financial condition.
A Framework for Statute-Specific Approaches to Penalty Assessments: Implementing US EPA Policy on Civil Penalties
The EPA has a very structured and comprehensive paper documenting a framework for the computation of civil penalties. Its document, Policy on Civil Penalties,14 establishes a single set of goals for penalty assessment in EPA administrative and judicial enforcement actions. Its goals are deterrence, fair and equitable treatment of the regulated community and swift resolution of environment problems. In order to achieve its policy goals, the EPA stresses that all administratively imposed penalties and settlements of civil penalty actions should, where possible, be consistent with the guidance contained in the framework document. The EPA also resolves to make every effort to urge the administrative law judges to impose civil penalties consistent with its policy goals as follows.15
• Deterrence. The EPA’s first goal of penalty assessment is to deter people from violating the law. Specifically, the penalty should persuade the violator to take precautions against falling into non-compliance again (specific deterrence) and dissuade others from violating the law (general deterrence). It recognises that successful deterrence is important because it provides the best protection for the environment. In addition, it reduces the resources necessary to administer the laws by addressing non-compliance before it occurs.16
• Fair and equitable treatment of the regulated community. The second goal of the EPA’s penalty assessment is the fair and equitable treatment of the regulated community. Fair and equitable treatment requires that the EPA’s penalties must display both consistency and flexibility. The consistent application of a penalty policy is important because otherwise the resulting penalties might be seen as being arbitrarily assessed. Thus, violators would be more inclined to litigate over those penalties. This would consume the EPA’s resources and make swift resolution of environmental problems less likely.17
• Swift resolution of environmental problems. The third goal of penalty assessment is swift resolution of environmental problems. The EPA’s primary mission is to protect the environment. As long as an environmental violation continues, precious natural resources and possibly public health, are at risk. For this reason, swift correction of identified environmental problems must be an important goal of any enforcement action. In addition, swift compliance conserves EPA’s personnel and resources.18
The EPA’s development of a penalty figure is a logical two-step process involving computing the preliminary deterrence amount and adjusting the preliminary deterrence amount to derive the initial penalty target figure.
• Preliminary deterrence amount. First, the case development team must calculate a preliminary deterrence figure. This figure is composed of the economic benefit component (where applicable) and the gravity component. The gravity component takes into consideration the actual or possible harm, importance to the regulatory scheme and the availability of data from other sources. In evaluating the actual or possible harm, the following would be considered: amount of pollutant, toxicity of pollutant, sensitivity of the environment, length of time of a violation and the size of the violator.19
• Adjusting the preliminary deterrence amount to derive the initial penalty target figure. The second step is to adjust the preliminary deterrence figure through a number of factors. The resulting penalty figure is the initial penalty target figure. In administrative actions, this figure generally is the penalty assessed in the complaint, while in judicial actions, the government’s complaint will request the maximum penalty authorised by law. Adjustments (increases or decreases, as appropriate) that can be made to the preliminary deterrence penalty to develop an initial penalty target to use at the outset of negotiation include:20
(a) degree of wilfulness and/or negligence;
(b) cooperation/non-cooperation through pre-settlement action;
(c) history of non-compliance;
(d) ability to pay; and
(e) other unique factors (including strength of case, competing public policy considerations).
Once negotiations have begun, the policy also should permit adjustment of the penalty target to reflect ‘alternative payments’ the violator agrees to make in settlement of the case. Adjustments for alternative payments and pre-settlement corrective action are generally permissible only before litigation has begun. In judicial actions, the EPA will use the initial penalty target figure as its first settlement goal. This settlement goal is an internal target and should not be revealed to the violator unless the case development team feels it is appropriate. In judicial litigation, the government should request the maximum penalty authorised by law in its complaint.
Principles in ASIC v Adler
In ASIC v Adler [2002] NSWSC 483, Santow J of the Supreme Court of New South Wales gave judgment in favour of the Australian Securities and Investments Commission ASIC against the defendants for contraventions of the NSW Corporations Act 2001. The findings were in relation to certain transactions involving one or more of the five defendants.21 The facts of the case are not relevant for our purpose. What is pertinent are the observations made by the court on the imposition of civil penalties against the defendants under the Corporations Act 2001.22
Santow J made two general observations on the quantification of a civil penalty, otherwise known as pecuniary penalty. First, His Honour opined that it is well established that the principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct.23 Santow J cited with approval the case of ASC v Donovan (1998) 28 ACSR 583 and Trade Practices Commission v CSR Limited [1991] ATPR 52-135. In Donovan, the court said that if compliance with the appropriate standards of commercial conduct within the management of corporations by deterrents is the objective, then any penalty should be no greater than is necessary to achieve this objective. The court in Donovan added that otherwise severity above that figure would be oppressive. Second, His Honour noted that there was no simple mechanical process for quantifying the appropriate penalty but some guidance can be derived from the principles and factors to be laid down.24
Having surveyed the relevant cases cited in his judgment, Santow J set out the propositions that guided him in determining the quantum of the penalty in ASIC v Adler.
• Must serve as a general deterrent. The pecuniary penalty has a punitive character, but it is principally a personal and general deterrent to prevent the corporate structure from being used in a manner contrary to commercial standards. The penalty should be no greater than is necessary to achieve this object.
• Hardship to the defendant. To determine whether compensation is to be paid and in what amount it is necessary to consider the prospect of the respondent paying such compensation and the hardship to the defendant from such payment. Compensation has been ordered for an amount less than that lost even though there was little prospect of any of it being recovered.
• Capacity of the defendant. The capacity of the defendant to pay is a relevant consideration in determining a pecuniary penalty.
• Consequences of disqualification. In assessing a pecuniary penalty it is important to consider the consequences of an associated disqualification order for the defendant. If the making of such an order has significant consequences, they may operate as a factor in favour of a lesser penalty. Where the disqualification order does not have significant consequences for the defendant, the prohibition order is likely to be only marginally relevant.
• Whether rehabilitation prejudiced. It is important to assess whether the order will prejudice the rehabilitation of the defendant.
• Size of penalty is discretionary. The size of the penalty is a question of discretion. The circumstances of one case should not dictate the size of the penalty on another case.
• Precision in the amount unnecessary. In ASC v Forem, the penalty awarded was lower than the losses to the company concerned. This amount was ordered, even though it was highly unlikely that the amount would ever be paid as the respondent was bankrupt. In this case it was held that precision in the amount was therefore unnecessary.
• Lack of capacity etc. A fine was not ordered in ASC v Forem. However, the ASC was given liberty to apply at a later stage in relation to this matter. The court held that the personal hardship to the respondent, the unintended punitive consequences of the other orders and the lack of capacity to pay, justified such an order.
• Factors leading to the order of a penalty in the range of $20,000–$40,000 included:
(a) defendant was aware of impropriety of actions;
(b) no intention to deprive company permanently of funds;
(c) amounts in question not large;
(d) no deliberate falsification of accounts; and
(e) cases classed as being serious misconduct, but not worst cases.
• Relevant factors leading to the court to order the lower range penalties in the range of $4,000–$5,000 included:
(a) remorse and contrition shown;
(b) efforts to repay misappropriated funds;
(c) acted upon the advice of professionals;
(d) did not contest the proceedings, or sought to save costs in proceedings;
(e) tended to not involve dishonesty, but negligence or carelessness;
(f) previous unblemished character; and
(g) further contravention unlikely.
A Possible Approach for the Singapore Courts
As pointed out earlier, while s 232 of the SFA expressly sets out the upper limit of the civil penalty payable, there is no other form of statutory guidance provided within the SFA or O 94 on the quantification of the civil penalty payable for cases of market misconduct. This paper seeks to propose an approach for the Singapore courts to adopt.
Supplementing the FSA’s approach
Having set out the factors identified by UK’s FSA and the US Federal District Courts for the imposition of administrative penalties for market misconduct, Santow J’s approach in ASIC v Adler on the imposition of pecuniary penalties under NSW’s Corporation Act 2001 and the two-step process adopted by US’s EPA on civil penalties for breaches of environmental protection, it would appear that the guidelines laid down in the UK’s FSA Handbook, ie the eight factors, are the most helpful in our context. The seven factors set out by the US Federal District Court in SEC v Lybrand are easily subsumed under these eight factors. The eight factors directly relate to market misconduct and are very comprehensive in coverage. In fact, the spirit of the salient considerations in NSW’s ASIC v Adler and US EPA’s civil penalty guidelines are also incorporated in the FSA’s approach. The issue arises whether the eight factors of the FSA per se will be good enough for our purpose and nothing further is required.
It is pertinent to note at this point that FSA is a regulatory body, whereas it is the courts who will impose the civil penalties under the SFA. In this regard, the last three of the FSA’s eight factors are less appropriate to be applied by the courts. Rather, they are better collectively reclassified under the heading of ‘prior conduct’. An additional factor that would be relevant is the difficulty of detecting and/or enforcing the activity in question. FSA’s eight factors should then be modified for our purposes to seven factors, with the last three of the eight being replaced by ‘prior conduct’ and ‘difficulty and enforcement of the activity in question’ (henceforth ‘the seven factors’). The seven factors remain very much ‘operational’ in nature. Depending on the facts and circumstances surrounding each case of market misconduct, there are different points of aggravation and mitigation as the case may be. If the seven factors are to be applied solely with no additional considerations, there would still be insufficient guidance on how one may go about quantifying the civil penalty. To provide a more systematic approach beyond the acceptance of the seven factors it is proposed that firstly, some overriding policy considerations in the imposition of civil penalties ought to be identified. This has also been done for UK’s FSA and US’s EPA. Secondly, bearing in mind the overriding quantification considerations, it is proposed that a starting point for all actions seeking a civil penalty be determined. Depending on the resultant application of the seven factors, the amount of the civil penalties payable will slide between the upper and lower limits set out in s 232 of the SFA. The paper will now consider each proposal in turn.
What overriding quantification considerations could be applied?
As explained earlier, the civil penalty regime is meant to complement the existing criminal regime by providing a calibrated approach to enforcement that punishes and deters market misconduct, but at the same time not impeding the growth of the securities markets in Singapore. That said, the concept of civil penalties under the SFA does not imply that such penalties are meant to be ‘soft’ punishments. Though it is ultimately a financial penalty, for the regime to work effectively, the effect of deterrence must be achieved. As is the case of the US’s EPA, the first goal of civil penalties under the SFA must be to deter people from engaging in market misconduct. Specifically, the civil penalty imposed should persuade the contravening person to take concerted steps to not fall into non-compliance again (specific deterrence) and dissuade others from doing likewise (general deterrence). This policy consideration recognises that effective and successful deterrence is important because it provides the best protection for the financial markets. It is axiomatic that restoring market confidence and building public trust in the industry are critical success factors of the economy. Having regard to the above, it is proposed that this first question be asked when an indicative figure of the civil penalty has been arrived at – ‘Will the civil penalty imposed have a deterrent effect?’
It is also important that the civil penalty to be imposed must not be seen as arbitrary or capricious. While it is true that the determination of the amount of civil penalty is not a mathematical or mechanical process of computation,25 it must not be seen as arbitrary or capricious. Some form of certainty and predictability taking into consideration the facts and circumstances of each case would always be critical. Consistency in the decisions meted out by the courts always increases public confidence in the justice system. In this connection, it is proposed that this second question be asked when an indicative figure of the civil penalty has been arrived at –‘Is the civil penalty imposed arbitrary or capricious?’
In ASIC v Adler, Santow J26 also cited with approval the decision of Finkelstein J27 making a reference to the ‘totality’ principle28 to the effect that, ‘where a penalty is being imposed for a number of offences, it is necessary to ensure that the penalties in aggregate are just and appropriate’29. As per general sentencing considerations, the totality principle is helpful in reminding the court not to mete out a penalty that is unduly crushing especially in actions where there are several contravening acts. Santow J also cited30 with approval Finkelstein J’s reliance on the ‘parity’ principle. In Australian Competition and Consumer Commission v ABB Transmission and Distribution Limited (No 2) ([2002] FCA 559, 3 May 2002, unreported, Finkelstein J invokes the parity principle as the basis for distinguishing between the different corporate respondents where their circumstances, such as their size and scale of operations and therefore the relative impact of a penalty, differ. The parity principle is even more relevant to cases of market misconduct since there can be both contravening corporations and contravening individual persons. Taking both principles above into consideration, it is proposed that this third question be asked when an indicative figure of the civil penalty has been arrived at — ‘Does the civil penalty imposed offend the totality and/or parity principles?’
Determining a starting point in the process of quantifying a civil penalty
Where a person has contravened a provision of the SFA which results in his gaining a profit or avoiding a loss, s 232(a) provides for the civil penalty to be fixed up to three times of the profit made or loss avoided through the market misconduct or equal to $50,000 if the contravening party is an individual and $100,000 where it is a corporation, whichever is the greater. Where the person has contravened a provision of the SFA which did not result in his gaining a profit or avoiding a loss, s 232(b) provides for the penalty to be fixed at not less than $50,000 and not more than $2m. Faced with the statutory limits, in order to usefully apply the seven factors in quantifying the civil penalty payable, it is helpful to determine a standard starting point for all cases regardless of gravity. With that standard starting point, applying the seven factors, depending on whether there is a point of aggravation or mitigation, the amount will move accordingly within the statutory limits set. This approach is not unfamiliar as the US’s EPA also adopts the approach of first setting a ‘Preliminary Deterrence Amount’ and thereafter, the figure may change depending on how the case develops.
Returning to the matter before us, it is proposed for simplicity and convenience, that the standard starting point for cases under s 232(2) be either $50,000 or $100,000, depending on whether the person is an individual or a corporation, or the amount of the profit gained or loss avoided, whichever is higher. This figure will then be the standard starting point for all matters. For cases under s 232(3) of the SFA, in view of the fact that the contravening person has not obtained any financial benefit from the market misconduct, it is proposed that the starting point for quantifying the civil penalty payable be pegged at $50,000. This approach is also more likely to survive the test of the parity principle considering that the contravening party has not obtained any financial benefit from the breach.
A Summary of the Proposal
In quantifying the amount of civil penalty payable, therefore, it is proposed that the following three-step process be used:
1 Compute the starting point. For s 232(2), the starting point is either $50,000 or $100,000, depending on whether the person is an individual or a corporation, or the amount of the profit gained or loss avoided, whichever is higher. For s 232(3), the starting point is $50,000.
2 Apply the seven factors. Once the starting point has been identified, apply the following seven factors to the facts and circumstances of the case. Depending on the aggravating and/or mitigating factors, determine how the figure should be adjusted accordingly.
(a) Adverse effect on markets and the seriousness of that effect.
(b) The extent to which the behaviour was deliberate or reckless.
(c) Whether the person on whom the penalty is to be imposed is an individual.
(d) The amount of the profits accrued or loss avoided.
(e) Conduct following the behaviour of concern.
(f) Difficulty of detecting or enforcing the activity in question.
(g) Prior conduct.
3 Test the adjusted figures. Test the adjusted figure with the following overriding quantification considerations:
(a) Is there a deterrent effect in the civil penalty imposed?
(b) Is the civil penalty imposed arbitrary or capricious?
(c) Does the civil penalty imposed offend the totality and/or parity principles?
The proposed method of quantifying the civil penalties under the SFA regime will provide consistency and transparency in the process. Both these qualities will certainly find favour with the business community in Singapore. On the other hand, the civil penalty regime must retain sufficient bite to deter the economically and socially harmful behaviour determined by legislature. Given that the raison d’être behind the civil penalty regime is to discourage behaviour detrimental to collective welfare due to certain types of economic and social activity, that do not necessarily possess the element of social condemnation reserved for offences that are, by themselves, morally repugnant, the balanced approach proposed should achieve this purpose.
District Judges James Leong, Aedit Abdullah, Tan Boon Heng, Tan Boon Gin and Sharon Lim31
Subordinate Courts
Endnotes:
1 Consultation Paper on ‘Administrative and Civil Sanctions’, page 7, LRRD No 7/2002, Attorney-General’s Chambers, Singapore.
2 Ibid.
3 Anthony Ogus, Regulation: Legal Form and Economic Theory (1994) ch 2 as quoted in K Yeung, ‘Quantifying Regulatory Penalties: Australian Competition Law Penalties in Perspective’ (1999) 23 Melbourne University Law Review 440 at 458.
4 Andrew Ashworth, Principles of Criminal Law (1995) 50-1 as quoted in K Yeung, ‘Quantifying Regulatory Penalties: Australian Competition Law Penalties in Perspective’ (1999) 23 Melbourne University Law Review 440 at 458.
5 Consultation Paper on ‘Administrative And Civil Sanctions’, page17, LRRD No 7/2002, Attorney-General’s Chambers, Singapore.
6 Ibid at page 18.
7 Sections 234 to 236 of the SFA allows persons suffering losses as a result of contraventions of Part XII of the SFA to claim compensation against the contravening persons. These claims are referred to as civil liability actions. Order 93 of the Rules of Court sets out the procedure for civil liability actions.
8 Section 237 of the SFA.
9 Chapter 14.7 of FSA Handbook Release 026, December 2003.
See http://www.fsa.gov.uk/vhb/html/ enf/ENFtoc.html
10 Consultation Paper on ‘Administrative and Civil Sanctions’, page 7, LRRD No 7/2002, Attorney-General’s Chambers, Singapore.
11 Chapter 14.7.1 of FSA Handbook Release 026, December 2003.
12 Ibid, Chapter 14.7 generally.
13 Ibid, Chapter 14.7.5.
14 http://www.wildlaw.org/Eco-Laws/civ-pen.html at page 1.
15 Ibid.
16 Ibid, at page 3.
17 Ibid, at page 4.
18 Ibid at page 5.
19 Ibid, at pages 9–10.
20 Ibid, at pages 11–12.
21 [2002] NSWSC 483 at para 1.
22 The decision was appealed, see Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131, however, the decision on appeal did not disturb the approach adopted by Santow J.
23 [2002] NSWSC 483 at para 125.
24 Ibid, at para 126.
25 [2002] NSWSC 483 at para 126.
26 [2002] NSWSC 483 at para 127.
27 Australian Competition and Consumer Commission v ABB Transmission and Distribution Limited (No 2) ([2002] FCA 559, 3 May 2002, unreported) Finkelstein J dealt with the Trade Practice Act and in particular contraventions involving price-fixing. At para [38] Finkelstein J concluded that it was appropriate to impose a single penalty against each respondent for all contraventions committed by that respondent following ACC v Rural Press Limited [2001] ATPR 41-833. He noted that there were cases which suggest the existence of exceptions to the general rule that a separate penalty should be imposed for each offence.
28 See also the majority judgment of the High Court in Pearce v The Queen (1988) 194 CLR 610.
29 Mill v R (1988) 166 CLR 59, 63.
30 [2002] NSWSC 483 at para 131.
31 The views expressed are the authors and do not necessarily reflect the views of the Subordinate Courts. The law stated is correct as at 15 October 2004.