Edmund Kung Chiu Nam v. The Insider Dealing Tribunal

HCAL 120/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 120 OF 2005

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BETWEEN

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Before: Hon Chu J and Hon Reyes J in Court

Dates of Hearing: 29 March 2006

Date of Judgment: 29 March 2006

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J U D G M E N T

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Hon Reyes J:-

I.       Introduction

1.In March 2005 an Insider Dealing Tribunal held that Mr. Kung was not guilty of insider dealing.  Mr. Kung thereupon applied for some of his costs of defending himself before the Tribunal.  The Tribunal refused his application.  Mr. Kung now seeks judicial review of that refusal.  In essence, he says that, in rejecting his application, the Tribunal was wrong in law and wrongly exercised its discretion.

II.      Background

2.In May 1997 Mr. Carlton Poon engaged in insider dealing using Mr. Kung’s discretionary account with Worldsec International Ltd.  Mr. Kung knew nothing of this trading.  Out of friendship, Mr. Kung had simply allowed Mr. Poon to conduct personal trading through the Worldsec account.

3.When the SFC investigated Mr. Poon’s trades in May 1998, Mr. Kung lied to the SFC.  At Mr. Poon’s prompting, Mr. Kung claimed that the relevant trades had been executed on his behalf.

4.In November 2000 Mr. Kung received a letter from the Financial Secretary naming him as a person implicated in insider dealing.  Mr. Kung then consulted a lawyer for the first time.

5.In March 2001, acting on legal advice which he had received, Mr. Kung volunteered a statement admitting that he lied and providing the correct information.  He stated that, contrary to what he had told the SFC in 1998, he had not authorised and had no knowledge of the securities which Mr. Poon had bought and sold using his account.

6.Between 8 December 2003 and 11 October 2004 the Tribunal conducted an inquiry into the case against Mr. Poon, Mr. Kung and others.  In its 1st Report, the Tribunal accepted Mr. Kung’s March 2001 statement.  The Tribunal believed that, although Mr. Poon was guilty of insider dealing, Mr. Kung was not.

7.The Tribunal said of Mr. Kung (at 1st Report, p.41):-

“We have taken particular care in assessing Edmund Kung’s evidence given that, notwithstanding the fact that at end of his two SFC interviews his obligation to tell the truth and to maintain secrecy were clearly spelled out to him, Edmund Kung deliberately chose to defy these obligations.

In favour of his credibility is the fact that on 26 March 2001 at a relatively early stage, albeit after the announcement that there would be an inquiry and that his securities dealings in May 1997 were to [be] part of the subject of the inquiry, he volunteered a statement admitting that he had lied to the SFC in his earlier interviews and claiming that he was now giving a true and full account of his actions.  Mr. Fred Kinmonth, Edmund Kung’s solicitor, informed us that a draft of this statement had been read out to Carlton Poon on 20 March.  According to Mr. Kinmonth, Poon had not challenged the accuracy of the contents of the statement, but had replied to the effect that its contents were ‘substantially correct’.

We were satisfied that Edmund Kung told the truth in his 26 March 2001 statement to the SFC and in evidence before us and that his claim that he had nothing to do with the trades in HKCBH and HKC securities in his Worldsec account over the material time is true.”

8.The Tribunal then concluded (at 1st Report, pp.70):-

“As we accept Edmund Kung’s evidence in substance, the trades carried out in his account were not his and were carried out without any of the information needed to constitute insider dealing on his part.”

9.Securities (Insider Dealing) Ordinance (Cap.395) (SIDO) s.26A regulates the award of costs in an insider dealing inquiry. The section provides:-

“(1)   Subject to subsection (5), at the conclusion of an inquiry or as soon as reasonably practicable thereafter, the Tribunal may award to:-

(a)     ...

(b)     any person whose conduct is, in whole or in part, the subject of the inquiry,

such sum as it thinks fit in respect of the costs reasonably incurred by him in relation to the inquiry.

(2)     Any costs awarded by the Tribunal under subsection (1) shall be charged on the general revenue.

(3)     The Tribunal may order that nay costs awarded under subsection (1) may be taxed on the basis of any one of the scales of costs set out in the Schedules to Order 62 of the Rules of the High Court (Cap.4 sub. leg.).

(4)     Subject to any rules made by the Chief Justice under section 36, Order 62 of the Rules of the Supreme Court (Cap.4 sub. leg.) shall apply to the award and taxation of any costs awarded by the Tribunal under this section.

(5)     This section shall not apply to any person referred to in subsection (1) who is:-

(a)     a person who has been identified as an insider dealer in a determination under section 16(3); 

(b)     an officer of a corporation who has been identified as such officer in a determination under section 16(4);

(c)     a person who and in respect of whom it appears to the Tribunal has by his own acts or omissions caused or brought about (whether wholly or in part) the Tribunal to inquire into his conduct subsequent to the institution of the inquiry under section 16 or during the course of that inquiry; or

(d)     any other person who and in respect of whom it appears to the Tribunal has by his own acts or omissions caused or brought about (whether wholly or in part) the institution of the inquiry under section 16.”

10.Mr. Kung applied for his costs from 1 May 2001 (that is, a date 6 weeks after service of his voluntary statement).  By its 2nd Report dated 9 August 2005 the Tribunal rejected Mr. Kung’s application for costs.

11.In so doing, the Tribunal accepted the argument of Mr. Barlow (Mr. Kung’s counsel) that Mr. Kung was not a person who was barred from recovering his costs by SIDO s.26A(5). 

12.In particular, Mr. Barlow submitted (as recorded at 2nd Report p.11) that:-

“[I]t cannot be said that Edmund Kung did anything to cause the institution of this Inquiry because it cannot reasonably be suggested that it was Edmund Kung’s false statements to the SFC investigators when they interviewed him on 13 May 1998 that he had instructed Carlton Poon to purchase HKCBH and HKC warrants on his behalf in May 1997, [that] did anything to bring it into being.  Even if Edmund Kung had told the truth in that interview, rather than harbour it in his breast until 26 March 2001 once he learnt that he was an implicated person, the Inquiry would still have been instituted because one of the objects of the Inquiry would have been the circumstances under which his Worldsec account was used to trade in those warrants in May 1997.”

13.The Tribunal accepted the logic of this submission at 2nd Report p.265.  But, in the exercise of its discretion, the Tribunal felt that it was inappropriate to award Mr. Kung any costs.

14.As a matter of general principle, the Tribunal held that it could follow the practice in criminal cases.  Thus, costs might be:-

“denied to an acquitted defendant [such as Mr. Kung] where his conduct has brought suspicion on himself and/or misled the investigating authorities into thinking that the case against himself is stronger than it is.”

15.The Tribunal gave 2 specific reasons for its decision.

16.First, Mr. Kung had lied to the SFC.  The Tribunal thought that was “completely unacceptable”.  This was especially so where Mr. Kung:-

“did nothing to rescind [his lies] until they drew him into the Inquiry and that he only did that after legal advice, when his own conscience as market professional should have told him where his duty lay...”

17.The Tribunal felt that “to grant Edmund Kung his costs ... would only be rewarding deceit and mendacity”.

18.Second, Mr. Kung had allowed Mr. Poon to use his Worldsec account without exercising any control over such use.  That (the Tribunal believed) was “grossly negligent”. 

19.Worse, such conduct might be characterised (the Tribunal said) as “condoning or hiding possible inappropriate or illegal transactions on Carlton Poon’s part”.

III.     Discussion

20.In my view, the Tribunal was wrong to apply a principle of criminal law in determining whether to award Mr. Kung costs.

21.The Chief Justice has not made any rules in respect of the award of costs in insider dealing cases.  Consequently, by SIDO s.26A(4), the civil law principles in RHC Order 62 must govern any exercise of the Tribunal’s discretion to award costs to a defendant.  Criminal law cost considerations do not enter the picture.

22.The basic principle in the award of costs under s.26A(1) must be Order 62, Rule 3(2).  That provides that costs should:-

“follow the event, except where it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs”.

23.Indeed, I do not understand Mr. Cooney (who appears for the Financial Secretary as an interested party) to be vigorously contending that criminal law principles apply to the award of costs. 

24.Instead, Mr. Cooney himself strongly relies on guidelines provided by the civil case of Ritter v. Godfrey [1920] 2 KB 47 (CA).  There Atkin LJ suggested (at 60):-

“In the case of a wholly successful defendant, in my opinion the judge must give the defendant his costs unless there is evidence that the defendant (1) brought about the litigation, or (2) has done something connected with the institution or conduct of the suit calculated to occasion unnecessary litigation and expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains.”

25.To the extent then that the Tribunal applied criminal law cost considerations, the Tribunal must have erred in law.

26.However, Mr. Cooney argues that, in any event, the 2 specific reasons which the Tribunal gave for refusing costs were wholly in keeping with Ritter.

27.First, Mr. Kung’s lies (Mr. Cooney submits) fall within the 2nd consideration stated by Atkin LJ.  Mr. Kung’s earlier lies to the SFC (Mr. Cooney argues) were connected with the institution of the inquiry and occasioned unnecessary litigation and expense.

28.My difficulty with this submission is that the Tribunal held that SIDO s.26A(5)(d) was not applicable.  Thus, the Tribunal expressly accepted that Mr. Kung’s lies did not cause or bring about (whether wholly or in part) the institution of the inquiry.  In those premises, I do not see how the Tribunal could also conclude that Mr. Kung’s lies were connected with the institution of the inquiry for the purposes of the test in Ritter.  That would be contradictory.

29.The Tribunal in fact merely said that to award costs would be to “reward mendacity and deceit”. 

30.In so stating, the Tribunal does not seem to have taken into account that Mr. Kung was only asking for costs incurred from a date following his voluntary statement.  The Tribunal does not appear to have addressed the desirability of encouraging a defendant to make a clean breast of his wrong and to tell the truth at the earliest opportunity.  It therefore seems to me that the first limb of the Tribunal’s reasoning was too broad a basis on which to refuse costs.  I do not see how the award of costs from a date 6 weeks following Mr. Kung’s honest confession can be characterised as rewarding mendacity.

31.It is true that Atkin LJ’s 2^nd consideration includes “improper conduct in or connected with the litigation calculated to defeat or delay justice” (Ritter at 61).  But here once the inquiry or “litigation” was commenced, Mr. Kung admitted his lies by a voluntary statement.  Given the making of such statement, I do not think that Mr. Kung can be said to have acted to defeat or delay the progress of the inquiry.

32.Accordingly, even if the Tribunal was purporting to apply Ritter by its first reason, the Tribunal’s decision would still be untenable.

33.Second, Mr. Cooney argues that the Tribunal’s other basis for refusing costs falls within the 3rd category of situations described in Ritter.  Mr. Kung’s conduct in allowing Mr. Poon to use the Worldsec account (Mr. Cooney suggests) constituted a wrongful act in the course of the insider dealing transactions of which complaint is made.

34.The Tribunal in fact merely said that Mr. Kung had been “grossly negligent” in allowing Mr. Poon to use his account without exercising any control.  It is far from clear to me on what basis the Tribunal found Mr. Kung to be negligent, much less grossly negligent.

35.The Tribunal found that Mr. Poon engaged in insider dealing out of Mr Kung’s account on 16 and 23 May 1997.

36.The Worldsec account had been dormant for some time before Mr. Kung noticed that Mr. Poon was using it to execute trades.  Mr. Kung only made the discovery around 15 to 17 May 1997 by his recollection.  He made a note to speak to Mr. Poon about it. 

37.In the event, Mr. Poon called Mr. Kung first and asked whether he could use the account for his own trades.  Mr. Kung said it was “OK” provided any profits or losses would be Mr. Poon’s.  Mr. Kung explained in his voluntary statement that he agreed because Mr. Poon was a long-time friend whom Mr. Kung trusted and whose business relationship he valued.

38.On that evidence (which the Tribunal accepted), I do not think that Mr. Kung can reasonably be said to have been negligent.  There are simply no findings of fact to back the Tribunal’s second reason.  The Tribunal’s assertion of negligence instead raises many unanswered questions: To whom did Mr. Kung owe a duty of care?  When precisely was any such duty breached?  How was any such breach causative of Mr. Poon’s insider dealing?

39.The Tribunal went so far as to say that Mr. Kung’s conduct amounted to “condoning” or “hiding possible inappropriate or illegal transactions” on the part of Mr. Poon.  But this conclusion is unjustified.  As the Tribunal itself found (at 1st Report pp.70-1), there was just no evidence that Mr. Kung had knowledge of relevant information to have enabled him to conclude that there was insider dealing by Mr. Poon.

40.Mr. Cooney submits that the Tribunal might have had in mind evidence of Mr. Kung’s knowledge as to possible insider dealing by Mr. Poon in connection with Agrol Investment Company Limited.  That evidence is said to have emerged from Mr. Kung’s cross-examination.  However, there is no indication in the 1^st or 2^nd Reports that this material is what the Tribunal had in mind when giving its second reason.  On the contrary, the Tribunal does not appear to have made findings in relation to Agrol.  In the absence of cogent findings, Mr. Cooney’s suggestion amounts to pure speculation.

41.Consequently, it seems to me that the Tribunal’s second reason for denying costs was likewise a flawed exercise of discretion.

42.In my judgment, the Tribunal’s refusal to refuse costs was arrived at in error.  I come to this conclusion on 3 grounds.  First, in referring to the criminal law, the Tribunal applied the wrong approach.  Second, on analysis, the Tribunal’s decision on costs cannot be characterised as an exercise of discretion consonant with the principles of civil law in Ritter.  Third, the Tribunal’s express reasons were inconsistent with its acceptance of Mr. Kung’s statement.

IV.     Conclusion

43.The Tribunal’s decision refusing costs to Mr. Kung is quashed.  I think that no reasonable tribunal could arrive at any conclusion other than that, Mr. Kung having effectively prevailed on the allegation of involvement in insider dealing, he should have his costs as from 1 May 2001.  I propose to substitute an Order granting Mr. Kung such costs.

Hon Chu J:-

44.I agree.  I agree too that in the circumstances of this case it is appropriate for this Court to make the Order proposed by Reyes J instead of remitting the matter to the Tribunal for re-consideration.

Mr. Barrie Barlow, instructed by Messrs. Minter Ellison, for the Applicant

Respondent in person - absent

Mr. Nicholas Cooney, instructed by the Department of Justice, for the Interested Party