Securities and Futures Commission v. Tiffit Securities (Hong Kong) Ltd

HCMP 1479/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1479 OF 2006

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BETWEEN

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Before: Hon Barma J in Chambers

Date of Hearing: 29 September 2006

Date of Decision: 29 September 2006

Date of handing down Reasons for Decision: 4 October 2006

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REASONS   FOR   DECISION

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1.On 24 July 2006, the Securities & Futures Commission (“the SFC”) issued its Originating Summons in these proceedings seeking an order that Mr Jacky Chung Wing Muk (“Mr Muk”) and Mr Edward Middleton (“Mr Middleton”) be appointed Administrators of Tiffit Securities (Hong Kong) Limited (“Tiffit”), a company which is licensed under the Securities and Futures Ordinance (Cap. 571) (“the Ordinance”) to deal in securities and which is an exchange participant under Sch 1 of the Ordinance, pursuant to s213(2)(d) of the Ordinance.

2.On the same day as the Originating Summons was issued, an order appointing Mr Muk and Mr Middleton as Administrators on an interim basis was made on Waung J on the ex parte application of the SFC.  That order was continued following an inter partes hearing before Waung J on 28 July 2006.  Those orders also specified the powers to be conferred on the Administrators.

3.Thereafter, on 25 August 2006, the SFC obtained Mareva relief against the Mr Kwok Wood Yan (“Mr Kwok”) and his wife, Madam Kwok Fong Shik Yee (“Mrs Kwok”), who were the two directors of Tiffit principally responsible for its affairs.

4.This is the first hearing of the Originating Summons, at which directions for the further conduct of the proceedings would ordinarily be given.  However, Mr Chalk, who appears for the SFC, submitted that it would be appropriate for me to deal with the matter summarily on the basis of the evidence now before me, pursuant to RHC Order 28 r 4(1), and make an order granting the SFC the substantive relief which is sought.  That this can be done in an appropriate case is established by International Bank of Asia Ltd v High Gay Co Ltd and others (unreported, HCMP no. 1421 of 1998, CFI, Yuen J, 4 March 1999) and Securities and Futures Commn v Whole Win Securities Ltd (unreported, HCMP 1093 of 2006, CFI, Sakhrani J, 28 June 2006).

5.Having regard to the fact that notice of the proceedings was given to both Tiffit and Mr Kwok, that no notice of intention to defend has been given by Tiffit, notwithstanding that the time for doing so expired more than 3 weeks ago, that there has been no challenge whatsoever to the evidence which has been filed on behalf of the SFC in support of the ex parte and inter partes orders obtained from Waung J, the desirability of dealing with the matter promptly having regard to the public interest and the desirability of minimising costs, I am satisfied that it would be appropriate for me to do so, provided that I am satisfied by the evidence before me that the orders sought should be made.

6.The factual background to these proceedings is set out in four affirmations made by Yvonne Cheung Fong Yee, a director of the Intermediaries and Supervision Department of the Investment Products Division of the SFC.  It can be summarised as follows.

(1)     On 26 June 2006, the SFC notified Tiffit of its intention to conduct an onsite inspection of Tiffit under section 180 of the Ordinance.

(2)     During the course of the inspection, the SFC’s inspection team discovered that the monthly return filed by Tiffit under the Securities and Futures (Financial Resources) Rules for May 2006 was wrong, in that it indicated that Tiffit had, as at 31 May 2006, excess liquid capital of HK$1.59m over the minimum liquid capital that it was required to maintain.  The discrepancy arose because of the incorrect treatment by Tiffit of an amount recorded as being receivable from one of its clients, a Ms Leung Kam Mui, who turned out to be Mr Kwok’s mother in law.  Ms Leung had entered into a series of transactions to buy securities on 25 May 2006, which had been immediately sold.  However, the amount receivable by Tiffit from Ms Leung in settlement for such transactions was included in Tiffit’s liquid assets, when they should not have been, as the securities in question had already been sold, and the sale was therefore not on a cash against delivery basis so as to qualify the receivable from the client as part of Tiffit’s liquid assets.  Similar patterns were also noted in relation to seven other clients’ accounts.  Had the cash client receivables figures been correctly reported, instead of excess liquid capital of HK$1.59m, Tiffit would have had a liquid capital deficit of HK$3.35m.  Further investigations disclosed a similar pattern in respect of Ms Leung’s account dating back some 18 months to January 2005 - in effect, a long term receivable from Ms Leung was wrongly recorded as part of Tiffit’s liquid assets, and the transactions entered into close to the month end appeared to have been put through in order to window dress Tiffit’s liquid capital position.

(3)     Apart from this, the inspection team discovered an unusual statement of account for one of Tiffit’s clients, Ms Yan Shui Lin, which bore no address, and had a minus symbol at the end of the account number.  Further investigations revealed that there was what appeared to be another, legitimate, account for Ms Yan, which bore the same number, without the minus symbol.  Movements of shares between the two accounts suggested that certain shares which Ms Yan had purchased appeared to have been transferred from her account to that of Ms Leung, from which they were ultimately sold for the benefit of Ms Leung.  15 similar accounts were later discovered, leading the SFC to believe that Tiffit was guilty of maintaining false records in contravention of section 151 of the Ordinance and sections 3 and 9 of the Securities and Futures (Keeping of Records) Rules. 

7.These discoveries led to the issue of a Restriction Notice against Tiffit on 18 July 2006, which had the effect of prohibiting Tiffit from continuing to carry on its business.

8.Following enquiries by clients of Tiffit, who were naturally concerned at this development, a comparison of the securities which clients claimed were held by Tiffit for them against securities physically held by Tiffit revealed a shortfall of some HK$18.2 million of missing securities.

9.Since their appointment, the Administrators have continued to look into such discrepancies, and the latest position appears to be that there is a shortfall of some HK$53.7 million.

10.Meanwhile, on 17 July 2006, Mrs Kwok left Hong Kong.  She has not returned, and is believed now to be in Australia.  On 20 July 2006, Mr Frankie Kwok Ho Yin, a son of Mr & Mrs Kwok who was also involved in Tiffit’s business, left Hong Kong as well.

11.Thereafter, the SFC issued these proceedings and obtained the ex parte order from Waung J on 24 July 2006.  A prohibition order to prevent Mr Kwok from leaving Hong Kong was obtained on 28 July 2006.  Mr Kwok is now being held in custody, having been arrested on 14 August 2006.  He has not cooperated with the SFC’s investigations, having invoked his privilege against self-incrimination.  Tiffit’s only two other responsible persons have since resigned.  In the light of these developments, the Administrators have effectively closed Tiffit down, surrendering its lease of office premises and selling off its office equipment.

12.Having briefly summarised the factual background, I turn to the applicable legal principles for the making of the order which is sought.

13.The application is made under section 213(2)(d) of the Ordinance, under which the court has jurisdiction to appoint an administrator where there has been a contravention of:-

(1)     the relevant provisions (by which is meant the provisions of the Ordinance - see Schedule 1 to the Ordinance);

(2)     any notice or requirement given or made pursuant to the relevant provisions (which includes requirements imposed under the subsidiary legislation under the Ordinance);

(3)     the terms and conditions of any licence or registration under the Ordinance; and

(4)     any other condition imposed under or pursuant to the Ordinance.

14.Where the court has jurisdiction, it has a wide discretion to grant one or more of the remedies under section 213 of the Ordinance.  However, before doing so, the court must satisfy itself (so far as it reasonably can) that it is desirable for an order to be made, and that an order will not unfairly prejudice any person (see section 213(4)).

15.The facts which I have referred to above, which are unchallenged, disclose a number of contraventions of the types referred to above.  These are:-

(1)     A contravention of sections 6(1) and 21 of the Securities and Futures (Financial Resources) Rules by reason of Tiffit’s failure to maintain at all times liquid capital which is not less than its required liquid capital, and its inclusion of assets in its liquid assets which should not have been included.

(2)     A contravention of section 146 of the Ordinance by reason of Tiffit’s failure to notify the SFC as soon as reasonably practical of its inability to maintain financial resources in accordance with the specified amounts required of it, and its failure to immediately cease dealing in securities on finding itself unable to do so.

(3)     Dealing with securities of cash clients without written direction or standing authority, contrary to sections 6(1) and 10 of the Securities and Futures (Client Securities) Rules, having regard to the apparently unauthorised transactions discovered in the shadow accounts, and arising from the discrepancy between the securities actually held by Tiffit against those which it should be holding for its clients.

(4)     A contravention of section 151(4) of the Ordinance and sections 3 and 9 of the Securities and Futures (Keeping of Records) Rules, in that Tiffit appears to have entered and maintained false and misleading records, having regard to the same matters as mentioned in sub-paragraph (3) above.

16.The first two of these contraventions have been admitted by Tiffit in meetings with the SFC.  The third and fourth have not, but the uncontradicted evidence which the SFC has adduced clearly establishes that there has been a breach of the provisions which I have mentioned.  That being so, jurisdiction to grant the order sought is established.

17.I am also satisfied that it is highly desirable that an order appointing Administrators should be made.

18.The matters discovered as a result of the inspection give rise to serious concerns as to the fitness of Tiffit to carry on the regulated activities for which it has been licensed, and as to the fitness of Mr & Mrs Kwok to be concerned in such activities.

19.There is also a substantial liquid capital deficiency on Tiffit’s part.

20.More significantly, there would appear to be a serious shortfall in client securities, which suggests that clients securities have been dealt with without their authorisation, a matter which is of obvious concern to Tiffit’s clients - the evidence indicates that some 169 claims have already been lodged with the Investor Compensation Company.

21.Further, Tiffit no longer has any responsible officers or staff, and requires the provision of specialist forensic accounting skills, which are possessed by the Administrators, to reconcile the position in relation to client securities, to trace and determine the ownership of securities still held by Tiffit, and to investigate and take recovery action with a view to returning client securities and assets to their proper owners in an orderly and hopefully expeditious manner.

22.All of these factors make it desirable for the appointment of the Administrations to be substantively confirmed.

23.By contrast, there is no evident prejudice (unfair or otherwise) that would seem likely to be caused to any person by the making of the orders.

24.I shall therefore confirm the appointment of the Administrators as administrators of Tiffit, and make an order substantially in terms of the draft order which has been placed before me.

Mr Richard Chalk, of Messrs Freshfields Bruckhaus Deringer, for the Plaintiff

Defendant, absent