The Securities and Futures Commission v. Young Bik Fung and Others

CACV 33/2016
[2018] HKCA 108

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 33 OF 2016

(ON APPEAL FROM HCMP NO 2575 OF 2010)

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Before: Hon Lam VP, Kwan and McWalters JJA in Court

Dates of Written Submissions:  21 December 2017, 4 & 11 January 2018

Date of Judgment:  6 March 2018

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J U D G M E N T

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Hon Lam VP (giving the Judgment of the Court):

1.We handed down our judgment on 9 November 2017 dismissing the appeal with costs.

2.By a Notice of Motion of 7 December 2017, the 2^nd to 4^th Defendants sought leave to appeal to the Court of Final Appeal.  In the Notice, the following questions were formulated as questions of great, general or public importance:

“1. Does s.300 of the Securities and Futures Ordinance (Cap 571) (“SFO”) apply to insider dealing in respect of purchase and sale in overseas listed securities that took place on overseas exchanges, which would allow s.300 to be used to circumvent the restriction inherent within s.291 of the SFO that restricts the application of the Hong Kong insider dealing provisions to such dealings?  To what extent is the authority of Morrison v National Australian Bank 561 US 247, 130 S Ct 1869 applicable to s.300 of the SFO in this context?

2. Should s.300 be construed in a way so as to apply to allegations of insider dealing, when the same offence is specifically provided for, and carefully prescribed together with specific defences, in ss.291-293 of the SFO?

3. In the context of s.300 of the SFO, how should the word “transaction” be construed?  In particular:

(1) Was the CA correct in giving the word “transaction” a wide interpretation to give effect to s.300 as a “general catchall provision”, giving s.300 an even wider application than Rule 10b-5 of the Securities and Exchanges Act 1934 (from which our s.300 originated) (CA Judgment §§25-34)?

(2) Was the CA correct in construing the word “transaction” independently from how that word is used in other parts of the SFO, such as s.271(8)(a)(ii), 292(8)(a)(ii), 295(3) & (4), and Schedule 5 Part 2 (CA Judgment §30)?

(3) Whether the scope of the phrase “transaction involving securities” should extend to conduct other than the purchase and sale of securities, and the offer or invitation to trade in securities (s.300(3) of the SFO)?  In particular, is the concept of a “transaction involving securities” capable of covering “the whole deceptive scheme or the whole course of dealings”, including acts such as the disclosure of inside information for the purpose of trading in securities, the opening of a securities account for the purpose of trading in securities, the depositing of money for purpose of trading in securities, and the giving of instructions for the purpose of trading in securities (CA Judgment §§25-49)?

4. In the context of s.300 of the SFO, how does one determine whether the alleged fraudulent or deceptive act or scheme occurred “in a transaction involving securities”, particularly where the transaction in issue concerned securities traded on a stock exchange?  Was the CA correct to adopt a “nexus” approach, requiring simply that there be a “real and substantial” connection between the fraud or deception and the transaction (CA Judgment §41)?

5. In light of the answers to paragraphs 1 to 4 above, whether the CA erred in finding that the alleged fraudulent or deceptive conduct in respect to the “Hsinchu Bank transaction” occurred “in a transaction involving securities”.  In particular:

(1) Whether the CA erred in finding that “a substantive measure of activities” constituting the crime took place in Hong Kong;

(2) Whether the CA erred in finding that the deception or fraud occurred “in a transaction involving securities”.”

3.Submissions on the application were lodged by the parties pursuant to Practice Direction 2.1, ending with the Reply Submissions of the Defendants of 11 January 2018.  Having read and considered the submissions, we will grant leave to appeal on Questions 3 and 4 and these questions only.  We refuse leave in respect of the other questions.

4.Questions 1 and 2 can be addressed together. For the reasons already given at [44] to [49] of our judgment of 9 November 2017, we do not see any basis for suggesting that our interpretation of section 300 permits the same to be used to circumvent the restriction in the other provisions in the Securities and Futures Ordinance.  In this connection, we agree with Mr Yu SC’s submission that on the facts of the present case, there is no scope for the operation of section 291 which only applies in respect of securities which are also listed on the Stock Exchange of Hong Kong.  Once this is recognized, there is no basis for suggesting section 291 somehow restricts the operation of section 300 in the present case.

5.At [69] to [75] of the judgment, we addressed the Defendants’ reliance on Morrison v National Australian Bank (2010) 561 US 247.  For the reasons given therein, we do not find the U.S. jurisprudence of assistance to the Defendants in the present case.  As we held, in terms of Hong Kong law, the construction of section 300 should be informed by the approach in HKSAR v Wong Tak Keung (2015) 18 HKCFAR 62 and HKSAR v Krieger [2014] 3 HKLRD 404.

6.Question 5 appears to be a wrap-up question and it adds nothing to Questions 3 and 4.  Insofar as it is intended to be otherwise, it revolves around the specific facts and circumstances of the present case. 

7.We accept that the proper construction of the phrase “in a transaction involving securities” in section 300 raises a question of great, general or public importance though formulation of Questions 3 and 4 can be improved.  The sub-questions in Question 3, with respect, are more in the nature of submissions advanced in the guise of some rhetorical questions.

8.Counsel for the Defendants should be able to reformulate the question relating to the construction of the phrase “in a transaction involving securities” in section 300 in a more precise and focused manner, bearing in mind para 2 of Practice Direction 2.1 and the observations of Fok PJ in Safder Tehseen v Permanent Secretary for Security FAMV 31 of 2014, 10 October 2014.

9.We are not minded to grant leave in respect of the other questions on the “otherwise” limb.  In accordance with the usual practice, we leave such issues to be considered by the Appeal Committee if the Defendants wish to renew their application.

10.In the circumstances, we grant leave in the limited extent as indicated. 

11.On the costs of the motion, though the Defendants succeed to a limited extent, they also fail in respect of the other questions.  To instil a sense of discipline in application for leave to appeal to the Court of Final Appeal, unarguable grounds should attract some costs sanction.  In the present instance, we would make a costs order nisi that half of the costs of the motion shall be costs in the cause of the appeal to the Court of Final Appeal, and the Defendants should pay half of the costs of the SFC.  Having considered the statement of costs of the SFC, we fix their costs at $123,144, half of that would be $61,572, such sum is payable forthwith.

Mr Benjamin Yu SC and Mr Laurence Li, instructed by the Securities and Futures Commission, for the plaintiff

Mr Derek C L Chan and Ms Cherry Xu, instructed by Wellington Legal, for the 2^nd to 4^th defendants