Aa and Another v. The Securities and Futures Commission
Read the full judgment text of HCAL 41/2016 on BabelCite. This High Court CFI judgment was delivered on 5 May 2016.
1. The 1 st and 2 nd applicants are a licensed corporation pursuant to section 116 of the Securities and Futures Ordinance, Cap 571, (SFO) and its responsible officer pursuant to section 126 of the SFO, respectively. The 2 nd applicant is also the majority shareholder of the 1 st applicant holding 95% of its issued shares.
Cites 6 cases
|
HCAL 41/2016 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 41 OF 2016 ___________________
___________________
_______________ D E C I S I O N _______________ Introduction 1.The 1st and 2nd applicants are a licensed corporation pursuant to section 116 of the Securities and Futures Ordinance, Cap 571, (SFO) and its responsible officer pursuant to section 126 of the SFO, respectively. The 2nd applicant is also the majority shareholder of the 1st applicant holding 95% of its issued shares. 2.On 12 February 2016, an anonymity order was granted to the applicants by Au J. As a result, the 1st and 2nd applicants are referred to as “AA” and “EA” respectively. 3.Certain trading transactions of the 1st applicant have been the subject of an investigation conducted by the Securities and Futures Commission (the Commission). The applicants claim that in the course of this investigation they provided information and materials to the Commission under compulsion purportedly pursuant to its statutory powers. They also claim that the Commission has transmitted information and materials obtained from them to the Japanese Financial Services Agency and Securities and Exchange Surveillance Commission (the Japanese regulators) contrary to its statutory powers. 4.The applicants say that they are aggrieved by (1) the unconstitutional demands for information from them under section 181 of the SFO; (2) the Commission’s provision of materials, documents and testimony given to it by the applicants under compulsion to the Japanese regulators without any or any proper protection against the use in criminal proceedings; and (3) the wanton leaking and breaches of secrecy in the course of the investigation and the Commission’s failure to ensure appropriate secrecy and due process by the Japanese regulators before making disclosure to them of confidential materials. 5.The decision in respect of which relief is sought is the decision by the Commission to transmit compelled answers, testimony and documents to the Japanese regulators. 6.The relief sought by the applicants includes (1) a declaration that the Commission acted unlawfully in transmitting compelled answers, testimony and documents to the Japanese regulators absent a binding prohibition against their use in criminal proceedings and/or proper assurance against their (or their contents) being leaked to the media and otherwise made public; and (2) a declaration that section 181 of the SFO contravenes Article 10 of the Hong Kong Bill of Rights Ordinance, Cap383, (BOR) and is unconstitutional. The legal context 7.Under the SFO, any person carrying on regulated activities has to be licensed or registered with the Commission unless specific exemption is provided. It is a criminal offence to carry out regulated activity in Hong Kong or actively market to the investing public of Hong Kong any services which constitutes a regulated activity without the required licence or registration. 8.The SFO establishes a single licensing regime where a person only needs one licence or registration to carry on different types of regulated activities as defined in Schedule 5 to the SFO provided that he is fit and proper to do so. 9.The Commission has issued “fit and proper” guidelines where it explains that a fit and proper person is someone who is financially sound, competent, honest, reputable and reliable. Consequently, if a person is found to be guilty of market misconduct, either by a relevant regulatory body in Hong Kong or overseas, that person is likely to be regarded by the Commission as not a fit and proper person to be so licensed or registered. 10.The regulatory objectives of the Commission are set out in section 4 of the SFO and includes to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry. 11.The statutory functions and duties of the Commission are set out in sections 5 and 6 of the SFO respectively. A key part of its functions is to cooperate with and provide assistance to regulatory authorities or organisations, whether formed or established in Hong Kong or elsewhere. A key part of its duties is to have regard to the international character of the securities and futures industry and the desirability of maintaining the status of Hong Kong as a competitive international financial centre as well as the importance of acting in a transparent manner, having regard to its obligations of preserving secrecy and confidentiality. 12.It therefore falls on the Commission to investigate allegations of misconduct of a regulated person or entity and if a case is made out to take appropriate civil or criminal action. (a) Commission’s investigative powers 13.The Commission’s powers of supervision and investigations are contained in Part VIII of the SFO. 14.Within Division 2 of this Part are sections 179 to 181 which delineate the Commission’s powers in relation to the disclosure of information and materials. Section 181 gives the Commission the power, in the exercise of its functions under the SFO, to require and compel disclosure of information about a client, details of a transaction and instructions relating to the transaction from a licensed person or registered institution through whom a financial product the Commission regulates was traded, or a person who holds an interest in such a financial product, or a person who has traded in such a financial product. 15.The Commission may seek the information in relation to securities, futures contracts or leverage foreign exchange contracts, or in relation to any interest in any of these products or any interest in a collective investment scheme. Such information that the Commission may require includes particulars of the product involved and the consideration paid and instructions given in relation to the holding or transaction. The Commission may require verification of the information furnished or of the inability to comply in furnishing any of the information required. It is an offence to fail to comply with a requirement imposed under the section or to knowingly or recklessly give false or misleading information. 16.Within Division 3 of this Part are sections 182 to 184 which set out the Commission’s powers of investigations. 17.In general terms, section 182 empowers the Commission to direct any of its employees or appoint any person to investigate a matter in connection with any offence or misconduct which the Commission has reasonable cause to believe may have been committed. 18.Under section 183, the Commission may compel a person to provide information or produce documents or records. A person who is served with a section 183 notice has a statutory obligation to answer every question asked by the Commission investigator and to provide any document or information as requested. Failure to do so may result in criminal prosecution as provided by section 184. 19.A person’s statutory obligation to give an explanation or further particulars or to give an answer to any questions under section 183 overrides his privilege against self-incrimination. Although by virtue of section 187(2) where a person makes a claim of the privilege then such explanation or further particulars or the question and answer shall not be admissible in evidence against the person in criminal proceedings. 20.In their application, the applicants acknowledge that the privilege against self-incrimination is not absolute and therefore can be restricted by statute. They refer to the case of A v The Commissioner of the Independent Commission Against Corruption (2002) 15 HKCFAR 362 at §§109 to 113 per Ribeiro PJ. They argue that the principle of legality requires that any abrogation of a fundamental right has to be effective expressly or by necessary implication. 21.The applicants submit that where a statute abrogates the privilege against self-incrimination and the person concerned is required to provide the information sought even though it may have a tendency to incriminate him if such information should later be used against him as a defendant in criminal proceedings, provision is usually made to regulate the admissibility in relation to the use that can be made of the compelled information. This they argue would normally be a question of construction of the provision under challenge, but a question may arise as to whether any constitutional rights had been encroached upon by it as well. 22.In the present case, the applicants have invoked Articles 10(equality before the courts and the right to a fair and public hearing) and 11(2)(g)(rights of persons charged with or convicted of criminal offence) of the BOR. These rights have been given constitutional protection by Article 39 of the Basic Law. The privilege against self-incrimination is also found under the common law. See R v Director of Serious Fraud Office, ex p Smith [1993] AC 1. 23.One of the issues in the present application is whether Articles 10 and 11(2)(g) of the BOR are engaged and whether there are inroads on such rights which are disproportionate and unconstitutional. It is on this basis that the applicants seek to challenge the constitutional validity of section 181 of the SFO. 24.In order to appreciate the wording of the main statutory provisions that feature in this challenge, I have set them out in full below. 25.Section 181 reads:
26.Section 186 reads:
27.Section 187 reads:
(b) Secrecy provisions 28.Another aspect of the applicants’ challenge is the secrecy obligations under the SFO. An investigation by the Commission is subject to the secrecy provisions set out in section 378. The section defines the scope of the secrecy obligations, the exceptions and the consequences for breaching it. Under subsections 378(6) and (7) it provides as follows:
29.The applicants point out that the section provides that, except in the performance of a function, carrying into effect, or doing anything required or authorised under the “relevant provisions”, a “specified person” must: preserve and aid in preserving the secrecy of any matter coming into his knowledge as a result of his being appointed to, performing a function, or assisting a person under a relevant provision, not communicate any such matter to any other person and not permit any other person to have access to any record or document coming into his possession as provided under a relevant provision. 30.The Commission has issued guidelines in relation to the secrecy obligations under section 378. (c) International cooperation 31.There is as one would expect the need for international cooperation and mutual assistance between market regulators and the Commission has entered into a number of collaborative arrangements with other regulators or relevant bodies. The applicants refer to the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding. They make reference to the provisions that concern the exchange of information and materials, in particular from third parties, and the stipulated permissible uses of information exchanged among regulators and the obligations of confidentiality. 32.Section 186 of the SFO provides a legislative framework for the Commission to cooperate with foreign regulators and law enforcement agencies. Under subsections (1) and (2) the Commission may accede to requests for investigatory assistance from authorities, regulatory agencies or companies inspectors from outside Hong Kong regarding a person who has contravened or is contravening legal or regulatory requirements that the body or person administers or enforces. The investigation must relate to transactions involving the financial products that the Commission regulates or similar transactions that the body or person regulates. Under subsection (3) for the Commission to accept such a request from an outside body or person, it is a condition that “(a) it is desirable or expedient that the assistance requested under subsection (1) or (2) (as the case may be) should be provided in the interest of the investing public or in the public interest; or (b) the assistance will enable or assist the recipient of the assistance to perform its or his functions and it is not contrary to the interest of the investing public or to the public interest that the assistance should be provided.” 33.In deciding whether the condition in subsection (3) is satisfied, by virtue of subsection (4), the Commission must consider whether the body or person will meet the costs and expenses of giving the assistance and whether reciprocal assistance will be provided in that other jurisdiction to a similar request from Hong Kong. 34.The applicants argue that section 186 must be considered together with the provisions of section 378 which govern the disclosure of information to outside regulators or law enforcement agencies. Under section 378(6) the Commission may assist an authority, regulatory agency or company inspector from outside Hong Kong if the body or person performs a function similar to a function of the Commission or any corporate or financial regulatory body and is subject to adequate secrecy arrangements. The Commission upon being satisfied that these requirements are met is obliged to publish the name of the body or person in the Gazette as soon as reasonably practicable. 35.The applicants argue that the Commission is required to comply with the relevant statutory obligations and requirements when rendering investigative assistance or providing information gathered under its legislative powers to an outside body or person. The applicants refer to in particular to the condition under section 186 and to the requirement that the matter in relation to which the outside body or person seeks investigatory assistance must, in the Commission’s opinion, be a matter that is similar to one of the matter is that the commission may investigate under section 179 or 182. They also refer to the statutory secrecy obligations imposed by section 378. Background facts 36.The factual background to this application has been described in detail by the applicants. Put briefly, it is claimed that in September 2013, it was announced that a Japanese company would become a constituent member of the Nikkei Index the 1st applicant performed an “index rebalancing” exercise by conducting a series of trades of the securities in the company. There followed a series of inquiries by the Commission of the 1st and 2nd applicants in relation to this share trading activity where it invoked its investigative powers for the provision or disclosure of information and material. 37.At some stage, an interview notice was served on the 2nd applicant stating that the Commission had received a request for assistance from the Japanese regulators in relation to this matter and that it was of the opinion that the requirements referred to in section 186(1) and 5(a) and (b) were satisfied. An interview was then conducted of the 2nd applicant. Soon after the Japanese regulator made an announcement and took action in relation to this matter. The 1st applicant in turn has commenced civil proceedings against the Japanese regulator for damages as a result of the announcement. 38.There has been an exchange of communications between the solicitors for the applicants and the Commission concerning the events that had transpired and the exercise of Commissions statutory investigative powers and compliance with the necessary requirements and obligations. 39.Critical in addressing this application is the factual context in which the events alleged have taken place. No doubt the Commission would want to add its account as to what has taken place in order for the matters that have been raised to be considered in their full and proper context. Delay 40.This application for leave to apply for judicial review was filed on 12 February 2016. The applicants claim that they did not know exactly when the transmission of the compelled materials took place, although they say from available information it may have been on one or more occasions between 22 October and 2 December 2014. 41.This application therefore falls outside the three month time limit set down in Order 53, rule 4(1) of the Rules of the High Court, Cap 4A. However, it is submitted by the applicants that it was not until the transmission of the materials was expressly confirmed by the Commission in its letter dated 17 November 2015, that the applicants did know for certain that this had occurred. It is argued on this basis that the present application was brought within three months of the applicants learning that the transmission of the materials had taken place, even though it occurred earlier. 42.It is also submitted by the applicants that this application for judicial review raises important questions of law in relation to the constitutionality of section 181 of the SFO and the circumstances in which the Commission may properly share privileged and/or confidential material with a foreign regulator. 43.On 21 April 2016, the Court gave the applicants leave to file an amended Form 86 which they did on 27 April 2016 in order to incorporate in the application recent information and materials arising from action being taken against them by the Japanese regulators. Grounds for judicial review 44.The applicants advance three grounds for judicial review. 45.Ground 1 is that the Commission erred in law in making disclosure to the Japanese regulators of compelled materials without any, or any adequate, protection to preserve confidentiality and prevent their use in any intended criminal proceedings. 46.The applicants rely on section 186(6) which they say that if certain conditions are met, prohibited the supplying of compelled testimony or documents to a foreign regulator for use in criminal proceedings. They argue that in order to guarantee the constitutional right against self-incrimination there must be strict observance of this provision and section 187, and in the circumstances of this case there has been a violation of the applicants’ constitutional right against self-incrimination enshrined in Articles 10 and 11(2)(g) of the BOR. 47.They advance a number of arguments where they complain that the statutory procedures and requirements were not adhered to in the provision of the compelled materials to the Japanese regulators. They submit that notwithstanding the domestic classification of proceedings under Japanese law as administrative, they were in fact criminal within the meaning of section 186 and Articles 10 and 11(2)(g) of the BOR. They submit that the Commission acted unlawfully in supplying the contents of the interview of the 2nd applicant to the Japanese regulators without an embargo upon its use in criminal proceedings. 48.Although this ground will depend upon the full facts and circumstances of the events raised by the applicants, I am satisfied that this ground for review is reasonably arguable. 49.Ground 2 is that the Commission erred in law in making disclosures to the Japanese regulators without taking adequate steps to ensure the confidentiality of the disclosed matters. 50.The applicants rely on the secrecy provision under section 378(1) and argue that the exception under subsection (2) is expressly limited to disclosure of information for the purpose of criminal proceedings in Hong Kong. It is further argued that under subsection (3)(g)(i) disclosure is permitted to gazetted foreign regulators, which includes the Japanese regulators, if the conditions set out in subsection (5) are met, but even if they are, it can only be made if it is subject to adequate secrecy provisions. 51.The applicants complain that the Commission failed to properly ensure that secrecy would be observed by the Japanese regulators when transmitting to them confidential materials relating to the applicants and that in consequence the applicants have suffered substantial financial loss and damage. It is on this basis that the applicants submit that the Commission erred in law in making disclosures to an overseas regulator without taking adequate steps to ensure the confidentiality of the matters so disclosed. 52.This ground too will also depend on the full facts and circumstances of the matter, in particular the dealings between the Commission and the Japanese regulators. I am satisfied that the ground is reasonably arguable. 53.Ground 3 is that section 181 compels production of potentially self-incriminatory materials and information without supplying any protection against their use in criminal proceedings. In this regard it is submitted that, section 181 is anomalous, as other sections in the SFO with powers for the compulsion of materials are subject to a prohibition against their use by virtue of section 187 which provides direct use immunity. 54.On the protection of the privilege against self-incrimination, the applicants refer to HKSAR v Lee Ming Tee (2001) 4 HKCFAR 133 at 175A-C; Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170 at 199I to 201D. 55.The applicants argue that Article 10 of the BOR is engaged by the measure contained in section 181, and that the inroad into the right is disproportionate. They refer to Leung Kwok Hung v HKSAR (2005) 8 HKCFAR 229 at §34, 126-131, 164-170; HKSAR v Lam Kwong Wai (2006) 9 HKCFAR 574 at §21; Huang v Secretary of State for the Department [2007] 2 AC 167 at §19 per Lord Bingham, followed in R (Quila) v Secretary of State for the Home Department [2012] 1 AC 621 (UKSC) at §45. 56.The applicants rely on the provisions of section 181 compelling the production of information with the imposition of a criminal sanction for failing to do so. The applicants submit that the measure in section 181, although in law and adopted in pursuit of a legitimate aim, goes further than is necessary to accomplish that aim, and is disproportionate. They refer to Koon Wing Yee at 198C to 201D; Secretary for Justice v Richard Ethan Latker, HCMA 521/2008, 29 January 2009 (CA), unreported. 57.The applicants argue that section 181 contravenes Article 10 of the BOR and is unconstitutional. 58.This ground mounts a legal challenge on the constitutional validity of section 181 which is reasonably arguable. Conclusion 59.On the information and material before me, I am satisfied that leave should be granted to the applicants to apply for judicial review on the grounds advanced by them but without prejudice to the right of the Commission to oppose the application at the substantive hearing on the ground that no time extension ought to be granted to the applicants. 60.The original Form 86 has been amended and I further grant leave for the amendments to be made. I also direct that the parties, when ready, shall write to the Court to apply to fix the date of the substantive hearing of the judicial review.
Mr Gerard McCoy, SC, and Mr Timothy Parker, instructed by Norton Rose Fulbright Hong Kong, for the 1st and 2nd applicants |
Cases cited in this judgment
Further hearings and rulings under HCAL 41/2016