Wan Kwok Ling Bonnie and Another v. Hou Tak Securities Ltd and Another

DCCJ 1437/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1437 OF 2004

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BETWEEN

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Coram  :  Her Honour Judge H.C. Wong in Court

Dates of Hearing  :  11^th – 12^th , 14^th September 2006

Date of Handing Down Judgment  :  15^th November 2006

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JUDGMENT

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1.The Plaintiffs claim against the 1^st Defendant Hou Tak Securities Limited (“Hou Tak”) the sum of $722,450.82 as money deposited by the Plaintiffs into the 1^st Defendant’s account as their security broker.

2.The 1^st Defendant, Hou Tak, is and was a company trading and dealing in securities.  It is and was a market participant of the stock exchange of Hong Kong (“SEHK”) registered with the trading number of 1440.

3.The 2^nd Defendant, Miss Chan Hing Fung Katie, was at all material times an employee of the 1^st Defendant (“Hou Tak”).  In or about August 2001, the 2^nd Defendant, Miss Katie Chan (“Miss Chan”), represented to the 1^st Plaintiff (“Miss Wan”) that Hou Tak was offering a special investment plan to its customers.  Miss Chan invited Miss Wan to open an account with Hou Tak so that it would be able to trade on securities under the special investment plan on Miss Wan’s behalf.  The benefits in the special investment plan, according to Miss Chan, was that Hou Tak would purchase shares on behalf of its customers at a discount and the participants of this plan would be entitled to interests on the amount deposited with it at an extremely favourable rate.

4.Miss Wan was tempted by the offer from Miss Chan and agreed to open an account with Hou Tak to take advantage of this special investment plan offered by Miss Chan in August 2001.  Over the period of 5 months between 6^th August to 28^th December 2001, Miss Chan informed Miss Wan that Hou Tak had on Miss Wan’s behalf and instructions conducted security tradings and Miss Chan requested Miss Wan to make a number of deposits into Hou Tak’s bank account.  As a result, Miss Wan took out sums of money from the joint bank account of herself and the 2^nd Plaintiff, her husband, and purchased four cashier orders drawn in favour of Hou Tak between 6^th August and 7^th December 2001 in the total sum of $722,450.82.  These were paid into Hou Tak’s bank account at the Bank of China (Hong Kong) Limited, account number 070-916-0-071602-2.

5.According to the evidence of Miss Wan, Miss Chan would send bought and sold notes issued by Hou Tak to Miss Wan.  These notes showed the appropriate brokerage fee, stamp duty and transaction levy have been duly paid.

6.It is not disputed that a total sum of $113,000 had been paid to Miss Wan as profits from the share transactions purportedly entered into by Hou Tak on her behalf; these were $33,000 on 26^th September 2001, $40,000 on 15^th April 2002 and $40,000 on 8^th May 2002.

7.Judgment against the 2^nd Defendant, Miss Chan, had been entered in default of defence on 18^th February 2004.

Undisputed Facts

8.Hou Tak admitted that in or about January 2001 Miss Wan was introduced to Miss Katie Chan, who was then an Account Executive and Settlement Clerk employed by Hou Tak, by Yu Mei Shan (“Miss Yu”), a mutual friend of Miss Wan and Miss Chan.  Unknown to Hou Tak, Miss Yu held a joint account with Miss Chan at the Bank of China (Hong Kong) Limited.  Through Miss Yu, Miss Wan was told about a “High Interest Share Scheme”.  Miss Chan contacted Miss Wan subsequently and offered her the opportunity to take part in the said scheme that she claimed Hou Tak was offering to its staff as part of an employee bonus scheme.  Miss Chan claimed she was able to offer to her clients this scheme which was based on investments into certain chosen securities promising high yield interests significantly above market rates of investment returns.

9.Attracted by the apparent success in Miss Yu’s investment in this so-called ‘High Interest Share Scheme’, Miss Wan was persuaded to take up this opportunity.  In or about August 2001, Miss Wan sent by fax to Miss Chan her personal particulars including copy of her identity card and details of her home address.  She then at Miss Chan’s request deposited various sums into the bank account of Hou Tak at the Bank of China (Hong Kong) Limited by means of cashier cheques at Miss Chan’s request to enable Miss Chan to take part on her behalf in the ‘High Interest Share Scheme’.  Unknown to Miss Wan, Miss Chan dishonestly misappropriated the sums of money deposited by Miss Wan for her own personal use.  Miss Chan told Miss Wan that the sums she paid into Hou Tak’s account had been applied in the ‘High Interest Share Scheme’ on Miss Wan’s behalf to obtain a certain share, namely stock number 0066 (MTR Corporation Limited).

10.Miss Wan was not asked to complete or to sign any client account opening form, mandate or agreement in favour of Hou Tak nor was she asked to execute any written document addressed to Hou Tak in relation to the opening of the account.  Throughout this period, she communicated constantly with Miss Chan believing that Miss Chan had opened an account on her behalf at Hou Tak and that Miss Chan had been dealing in securities on her behalf.  She received ‘bought notes’ issued by Hou Tak sent to her by Miss Chan, on each occasion she was requested to deposit a sum of money equivalent to the value of the shares purchased into Hou Tak’s bank account by Miss Chan.  On each occasion when payments were made and deposited into Hou Tak’s bank account, Miss Wan was told by Miss Chan that shares in stock number 0066 had been purchased on her behalf.  Miss Chan would ask Miss Wan to collect the bought and sold notes from the office of Hou Tak on each occasion.  These bought and sold notes were produced in Court, they showed the appropriate amount of shares purchased or sold, the brokerage fee, stamp duty and transaction levy paid. 

11.In or about mid July 2002, Miss Wan contacted Miss Chan on the telephone, Miss Chan informed and confessed to her that all the dealings that she purportedly handled for Miss Wan at Hou Tak and the relevant documents were fakes.  A manager of Hou Tak confirmed to Miss Wan what she was told was true.

12.As a result of the discovery of the fraud, the Securities and Futures Commission (“SFC”) was notified.  On the advice of the SFC, Pricewaterhouse Coopers (“PWSC’) was instructed to conduct an investigation and internal control review of Hou Tak, the report of that investigation and internal control review was completed on 18^th October 2002 (“ the PWSC report”).

The Findings of the Investigation and Internal Control Review of the SFC

13.In the Executive Summary, pages 7 and 8 of the summary of findings of the PWSC report states the following:

“4. Summary of findings

4.1 Investigation

Based on our interviews with Chan, she claims to have misappropriated clients’ funds in the following ways:-

(a) Client monies paid to HTSL and subsequently diverted

(b)  Client monies paid into Chan’s personal bank account

(c)  High interest generating scheme

(a) Clients’ monies deposited to HTSL and subsequently diverted

The diagram shown below illustrated how Chan manipulated a client’s buy order so that it was recorded through one of the accounts controlled by Chan (Diagram la):

A detailed description of the process depicted in Diagram 1a is as follows:

(a) Client A calls Chan to place an buy order for a particular stock and deposits monies into HTSL’s bank account for settlement;

(b) Chan records Clients A’s monies as deposits through one of the accounts controlled by her, e.g. Yu Man Shan (“Yu”) so that for the purposes of HTSL records it appears that Yu placed a buy order;

(c) The system of HTSL did not detect a change of client’s identity as HTSL relied on documentation produced by Chan.  Therefore, according to HTSL’s records, Yu deposited monies to her account in respect of a buy order.  No entry relating to Client A was reflected in HTSL’s records;

(d) HTSL then executes a buy transaction for Yu and generates a genuine bought note which was retained by Chan.  Yu was therefore not informed of the buy trade; and

(e) Chan issues a fictitious bought note (and monthly statement) to Client A upon his request which conceals the fact that the buy trade was actually executed for Yu.

As a result Client A’s funds were successfully used for a buy trade in Yu’s account.  Diagram 1b below explains how Client A’s fund are subsequently converted into cash and deposited into Chan’s bank accounts.  (P.8 of report)

We understand from Chan if clients requested a sale trade, she would issue a cheque to clients from her personal current account claiming that she has sold the shares and repaid the sales proceeds to them.  (P.10 of report)”

14.On page 11 of the report, Miss Chan's ‘High Interest Generating Scheme' was described as follows:

“(C)  High Interest Generating Scheme

Chan promoted a high interest share scheme to her clients.  We understand that Chan advised her clients that HTSL was holding certain stocks (i.e. China Light and Power, stock code: 0002; PCCWHKT, stock code: 0008; MTR, stock code 0066) that investment thereon can generate high interest given they held the stocks on hand for a longer period, say 30 to 120 days.  Chan asked the clients who joined the scheme to deposit monies to her personal bank account on the basis the shares had be purchased in Chan’s name as it was under an employee bonus scheme operated by HTSL.  No trades were executed for these clients.  Chan issued fictitious bought notes to clients upon their request.

We have identified five out of 13 clients (Mok Lai Ha  (AMLH), Lo So Lin(ALSL2) and Wan Kwok Ling (AWKL), Yu Man Shan (AYMS) and Lam Man Ting (ALMT) who joined the high interest share scheme.”

15.The report stated at page 12 of the Executive Summary that Miss Wan was confirmed to have lost $722,450.82, the report further estimated the potential maximum claim of Miss Wan to be around $900,000.  She was one of 13 such clients whom Miss Chan defrauded. 

16.The aforesaid conclusions were based on the investigation and review of Miss Wan’s account (AWKL) from records at Hou Tak’s office, on page 50, 52 and 53 are the basis of PWCS’s findings after investigations.

“We have been provided with a copy of a letter from Joseph C.T. Lee & Co., the legal representative of Wan Addressed to HTSL.  The letter demands a total of HK$722,450.82, supported by bank in slips for four deposits into HTSL’s bank:

During the course of our investigation, we have traced the corresponding contract notes being recorded in HTSL from the contract notes or bank in slips provided by Wan.  A summary of our findings is shown in the following table:

We noted from the above table that the deposits made by Wan for buying stock no. 0066 were being recorded in Yu’s account and were used to acquire different stocks.

The table also indicates all bank-in slips (Ref 1, 5, 9 & 13) were matched with contract notes in Yu’s name.  On further investigation, we noted that these shares were subsequently sold under Yu’s account.  Sales proceeds totalling HK$202,947 were used for offsetting with other buy trades and sales proceeds totalling HK$505,025 were settled by cheque payable to Yu.  We agreed all these cheques to the account history transaction listing of joint account of Chan and Yu which was obtained from bank by Katie Chan at our request.  We also found that with the exception of two deposits (Ref 1 & 3) totalling HK$167,728 which were transferred to unknown account(s), all the remaining deposits reflected in the joint account were subsequently transferred to Chan’s personal saving or current account on the same day.”

17.At pages 471 – 473 of the bundle is a letter from the Securities and Futures Commission dated 19^th September 2003 to Miss Wan in relation to her complaint against Miss Chan, the 2^nd Defendant.  She was informed that the SFC had revoked the registration of Miss Chan on 21^st September 2003.  Furthermore, the SFC informed Miss Wan that they had completed a disciplinary proceedings against the 1^st Defendant and its connected persons, the letter enclosed a SFC press release dated 18^th August 2003 for Miss Wan’s reference.  The said press release stated:

“SFC Reprimands Hou Tak Securities Limited and Van Tak Sun, Winston for Internal Control Failings, and Wong Yuet Wah, Cynthia for Inadequate Supervision and Failure to Ensure Proper Account Opening

The SFC has reprimanded Hou Tak Securities Limited, its responsible officer, Mr Van Tak Sun Winston, and one of its licensed representatives, Ms Wong Yet Wah Cynthia (Note 1).

The action stems from inquiries into their conduct under section 56 of the Securities Ordinance (SO) and, in the case of Van, also under section 36 of the Commodities Trading Ordinance (CTO) (Note 2).

Hou Tak and Van

Last year, the SFC investigated certain acts of misappropriation of clients’ assets and deception by Ms Chan Hing Fung Katie, a former dealer’s representative of Hou Tak.  (Note 3)

At the SFC’s request, Hou Tak commissioned an independent accountant firm to comprehensively review its internal control procedures.  The independent accountant identified a number of serious weaknesses in Hou Tak, which facilitated Chan’s dishonest acts.  These included:

·        failure to segregate settlement and dealing functions;

·        absence of written company policies and procedures manual;

·        failure to implement effective internal and compliance systems;

·        failure to monitor the activities of staff members;

·        inadequate procedures for staff dealing and reporting of interests in related accounts;

·        inadequate account opening controls;

·        failure to restrict access to its computer system and to store securely its company stamp, letterhead stationery, blank contract notes, client agreement and official receipts; and

·        inadequate clearing and settlement procedures.

With regard to Van, the SFC found that he had failed to discharge his functions properly in managing and supervising Hou Tak’s operations.

Wong

Wong was found to have inadequately discharged her supervisory duties over Chan.

Wong was also found to have failed to properly check information in account opening forms and to ensure such information was supported by relevant documents.  Wong’s failings contributed to Hou Tak’s failure to detect Chan’s dishonest acts and exposed Hou Tak and its clients to serious financial loss that might otherwise have been avoided.

Mr Alan Linning, SFC’s Executive Director of Enforcement, said: “Weak internal controls in a brokerage put the broker’s clients and the broker itself at risk.  At worst, they allow brokerage employees to defraud clients.  We will take appropriate disciplinary action whenever we discover brokers with inadequate internal controls and internal management systems.  We take into account any remedial action by brokers in our disciplinary action and have taken into account Hou Tak’s follow up actions.  The events in this case pre-dated the SFO which came into effect on 1 April 2003.  Brokers should note that under the new regime the discovery of a catalogue of internal control failings such as occurred in Hou Tak may well attract a fine.”

18.In the SFC’s 21^st October 2003 press release the SFC announced it had revoked the registration of Miss Chan as a securities dealer’s representative for misappropriation and deception.

“SFC Revokes the Registration of Chan Hing Fung Katie for Misappropriation and Deception

The SFC has revoked the registration of Ms Chan Hing Fung Katie, a securities dealer’s representative, for misappropriation and deception.

Over a period of two and a half years, whilst employed by Hou Tak Securities Limited, Chan’s dishonest acts had caused losses to her clients amounting to about $3 million.

Chan abused the trust her clients had placed in her by, for example, inducing her clients to pay settlement monies into her personal bank account, which she then misappropriated.  Further, she also deceived her clients to buy into apparently very favourable, but fictitious, investment schemes allegedly involving blue chip shares.

Being a settlement clerk as well as an account executive, Chan covered up her activities with ease by forging account statements.  Some of the clients also trusted Chan so much that they did not even require Hou Tak to send account statements to them.”

19.And the said SFC press release catalogued Miss Chan’s dishonest acts as follows:

1. Unauthorized trading of clients’ accounts;

2. Misappropriation of proceeds of unauthorised sales;

3. Deceiving clients by failing to carry out clients’ instructions to purchase shares inducing them to deposit payments for unexecuted trades;

4. Falsifying documents by preparing and sending falsified trading notes and statements to clients;

5. Administering and executing a deception scheme.

20.The SFC concluded that Miss Chan’s conduct involved a fundamental breach of trust that made her completely unfit to remain registered.  The SFC revoked Miss Chan’s registration as a result of its findings.

The Issues

21.The issues raised in this case are :

(a) whether Hou Tak was vicariously liable for the fraudulent acts and/or misrepresentation of Miss Chan;

(b) whether the loss of the Plaintiffs was caused and/or contributed by the negligence of Hou Tak.

Vicarious Liability

22.The learned authors of Clerk and Lindsell on Torts 19^th edition, said at para. 6-45:

“Fraud of employee It is often stated that there is “no difference in the liability of a master for wrongs whether for fraud or any other wrong committed by a servant in the course of his employment.  It is a question of fact in each case whether the wrong was committed in the course of the servant’s employment”.  However, the House of Lords in Armagas Ltd v Mundogas (The Ocean Frost) has now accepted a line of authority indicating that vicarious liability for fraud is governed by “a set of principles and a line of authority of peculiar application” so that “it is unnecessary to consider the development of the basis of vicarious liability in relation to torts such as negligence or trespass, which have followed a somewhat different line”.  Of its very nature fraud involves the deception of the victim and by that deception his persuasion to part with his property or do some other act to his own detriment and to the benefit of the person practising the fraud, and for this reason the decision whether an employee committed fraud in the course of his employment can only be made after the authority, actual or ostensible, with which the employee is clothed has been ascertained.  Thus in Uxbridge Permanent Benefit Building Society v Pickard, a case of fraud committed by a solicitor’s clerk, counsel for the defendant solicitor argued that the case should be treated as analogous to those cases in which an employee had been held to be on a frolic of his own, but the argument was rejected.  As Lord Greene M.R. said:

“It appears to me to be drawing an analogy where no analogy exists, because in the case of the servant who goes off on a frolic of his own, no question arises of any actual or ostensible authority upon the faith of which some third person is going to change his position.  The very essence of the present case is that the actual authority and the ostensible authority to [the clerk] were of a kind which, in the ordinary course of an everyday transaction, were going to lead third persons, on the faith of them, to change their position, just as a purchaser from an apparent client or a mortgagee lending money to a client is going to change his position by being brought into contact with that client.  That is within the actual and ostensible authority of the clerk.  It is totally different in the case of a servant driving a motor car or cases of that kind, where there is no question of the action of third parties being affected in the least degree by any apparent authority on the part of the servant”.”

23.In the House of Lords case of Lloyd v Grace Smith & Co. [1912] AC 716 at page 725, Earl Loreburn held:

“If the agent commits the fraud purporting to act in the course of business such as he was authorized, or held out as authorized, to transact on account of his principal, then the latter may be held liable for it.”

24.Mr. Chang, Counsel for Hou Tak relied on the case of Ming An Insurance Co. (HK) Limited v. Ritz-Carton Limited (2002) 5 HKCFAR 569 at page 579 I, the judgment of Bokhary PJ :

“19. By “close connection” is meant a connection between the employee’s unauthorised tortuous act and his employment which is so close as to make it fair and just to hold his employer vicariously liable.  I consider close connection to be an intellectually satisfying and practical criterion for vicarious liability.  It imposes vicarious liability when, but only when, it would be fair and just to do so.  And it provides a workable concept, namely a sufficiently close connection, for determining in each case whether doing so would be fair and just.  The case before us is of negligent driving by an employee.”

25.The case of Ming An involved negligent driving by an employee who had gone to collect food from outside the hotel.  The Hong Kong Court of Final Appeal considered the closeness between the employer’s work and reckless driving of employee.  The hotel was held to be vicariously liable for the employee’s acts.  The Court of Final Appeal in Ming An applied the close connection test involving the consideration of (a) Whether the employee was acting within the scope of his employment; and (b) Whether his negligent driving was so closely connected with his employment and that it was fair and just to hold the employer vicariously liable.

26.Mr. Chang further referred to the case of Armagas Ltd. v. Mundogas S.A. [1986] 1 AC 717 at page 781F, Lord Keith held as follows:

“The essential feature for creating liability in the employer is that the party contracting with the fraudulent servant should have altered his position to his detriment in reliance on the belief that the servant’s activities were within his authority, or, to put it another way, were part of his job, this belief having been induced by the master’s representations by way of words or conduct.”

and at 782H to 783B:-

“At the end of the day the question is whether the circumstances under which a servant had made a fraudulent misrepresentation which has caused loss to an innocent party contracting with him are such as to make it just for the employer to bear the loss.  Such circumstances exist where the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer’s business.  They do not exist where such belief, although it is present, has been brought about through misguided reliance on the servant himself, when the servant is not authorized to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorized to do, and when the employer has done nothing to represent that he is authorized to do it.”

27.It is not disputed that so far as Miss Wan was concerned, she honestly believed she was a client of Hou Tak with an account opened. Evidence produced included the bought and sold notes on Hou Tak ‘s stationery and forms.  Miss Wan had made 4 deposits of money into Hou Tak’s bank account at the Bank of China.  Furthermore, on Hou Tak’s computer record, she was registered as a client although no transactions or deposit of funds were entered on the computer record under Miss Wan’s account.  In the words of Earl Loreburn, Miss Chan committed the fraud purporting to act in the course of business such as she was authorized or held out as authorized to transact on behalf of her principal, consequently, the employer is therefore liable for Miss Chan’s acts.  Actual or ostensible authority was conferred on Miss Chan to conduct the business of an account executive and settlement clerk as an everyday transaction, it led Miss Wan to change her position and trusted Miss Chan with her money.

28.It is not disputed that Miss Chan was acting as a stockbroker agent for Miss Wan.  She held herself out as a servant or agent of her employer, Hou Tak.  So far as Miss Wan was concerned, all the transactions and receipts, bought and sold notes received by Miss Wan were in order, for Hou Tak was recorded to have charged brokerage fees.  Therefore, so far as a third party is concerned, in this case, Miss Wan, Miss Chan was acting on the business of her employer.  Hou Tak could have found out about Miss Chan’s activities such as her using Hou Tak’s bank account, its client’s account, it’s forms, stationery and bought and sold notes etc. to perpetrate the fraud had Hou Tak adopted a proper internal control system and made sure each and everyone of its employees kept proper records of accounts opening applications, maintain a good system of recording of all dealings and tradings in compliance with the rules and regulations of the SFC.  Further, had Hou Tak segregated the work of the settlement clerk and the accounts executive, the fraud and Miss Chan’s deceptions would have been detected a long time ago.  It is, therefore, not opened to Hou Tak to turn round now and say “I have no idea what my employee was doing behind my back, I did not ask her to defraud her clients, I did not gain from it.”  Because Hou Tak had failed to properly supervise its employees and impose a system of internal control, it is tantamount to have installed a system allowing its employees to defraud clients, even though Hou Tak may have nothing to gain from the actions of its employee.

Negligence

29.“A stockbroker owes a duty to his clients to exercise reasonable professional care in executing his commissions…  It seems that his first duty is owed concurrently in tort and in contract”.  (Clerk and Lindsell on Tort 19^th Edition, para. 10-197 at page 685).

30.Mr. Chang submitted that Miss Wan was not a client of Hou Tak because no account was ever validly opened in Miss Wan’s name with Hou Tak.  Further, no account opening form was ever signed by Miss Wan and no proper procedures had been followed.  Mr. Chang further submitted that Hou Tak merely provided a window for Miss Chan to steal.

31.I cannot agree with Mr. Chang’s submission that what Hou Tak did was merely providing a window for Miss Chan to steal.  What Hou Tak did was more than holding a window open.  The SFC had imposed guidelines for all stockbrokers registered with the SFC to follow.  In the PWSC review of Hou Tak’s internal control procedures, it identified a number of serious weaknesses in Hou Tak which facilitated Miss Chan’s dishonest acts.  They were set out in the press release of SFC on 18^th August 2003, they included the following:

1.     Failure to segregated settlement and dealing functions;

2.     Absence of written company policies and procedures manual;

3.     Failure to implement effective internal and compliance system;

4.     Failure to monitor the activities of staff members;

5.     Inadequate procedures for staff dealing and reporting of interest in relating account;

6.     Inadequate account opening controls;

7.     Failure to restrict access to its computer system and to store securely its company stamp, letterhead, stationery, blank contract notes, client agreement and official receipts; and

8.     Inadequate clearing and settlement procedures.

32.As a result, the SFC found that ‘the responsible officer’ of Hou Tak, Mr. Winston Van, had failed to discharge his functions properly in managing and supervising Hou Tak’s operation.   As to Hou Tak’s licence representative, Miss Wong Yuet Wah Cynthia, the Settlement and Accounts Manager of Hou Tak, the SFC stated in its press release: “Wong was found to have inadequately discharged her supervisory duties over Chan.”  The SFC further stated, “Wong was also found to have failed to properly check information and account opening forms and to ensure such information was supported by relevant documents.  Wong’s failings contributed to Hou Tak’s failure to detect Chan’s dishonest acts and exposed Hou Tak and its client to serious financial loss that might otherwise have been avoided.”

33.The findings of the SFC clearly indicated that Hou Tak was negligent in its operation and in the supervision of its staff. Its failure to act and to supervise its staff properly and to ensure a proper system of the internal control was in place had provided Miss Chan an opportunity to defraud Miss Wan.  In other words, Hou Tak had provided a platform which enabled Miss Chan to operate a dishonest scheme to defraud Miss Wan.

34.I further find that because Hou Tak had failed to impose a strict account opening procedure and to conduct regular checks on its account executives to see if they had opened accounts for their clients without following the proper procedures and fill in the account opening forms with supporting documents, it is not opened to Hou Tak to accuse the customer, Miss Wan, to have failed to file a written account opening application form.  Miss Wan had supplied all the information to Miss Chan either by telephone or by fax, it was not her fault that Miss Chan did not ask her to sign an account opening form.  And in spite of the absence of an account opening form, Miss Wan’s name appeared as an account holder in Hou Tak‘s computer record.  This clearly showed Hou Tak did have on its record that Miss Wan had opened an account with Hou Tak even though the record failed to register the numerous sums paid into Hou Tak’s bank account by her for trading purposes and that she had traded in stock no. 0066 a number of times through Hou Tak.  Miss Wan was able to produce a number of bought and sold notes issued by Hou Tak to her quoting her account name ‘AWKL’.  The PWSC report certainly regarded all 13 of Miss Chan’s clients as clients of Hou Tak.  Miss Wan was number 13 on the list.

35.In the words of the SFC’s the Executive Director of Enforcement, Mr. Alan Linning in the SFC press release:  “Weak internal controls in the brokerage put the broker’s clients and the broker itself at risk.  At worst, they allow brokerage employees to defraud clients.”  This was exactly what happened.  Hou Tak’s weak internal control system had allowed Miss Chan to defraud clients.  I have no doubt if Hou Tak’s internal control system with an appropriate and proper accounting system and management of transfer of funds, Hou Tak would have discovered sums deposited by Miss Wan into its bank account had been siphoned off by Miss Chan into a joint account held by herself and her friend Miss Yu, and that these funds deposited was not used to trade on client’s instructions.

Conclusions

36.I am satisfied that Hou Tak is vicariously liable for Miss Chan’s fraudulent acts.  It is further liable vicariously for the failure of Miss Wong to properly check the information in account opening documents and to supervise Miss Chan as the Settlement Manager and Account Manager and the supervisor of Miss Chan.  Hou Tak is also liable under negligence for failing to impose internal control procedure to prevent its employees to defraud its clients.

37.As to the 2^nd Plaintiff’s claim, I agree with Mr. Chang that the 2^nd Plaintiff does not have the right to sue Hou Tak.  There was no evidence that the investment made by Miss Wan was made on the 2^nd Plaintiff’s behalf.  Her evidence was, the money that she used to pay into Hou Tak’s bank account was drawn from a joint bank account of herself and her husband.  The money might have been drawn from a joint account, however, the account opened at Hou Tak was in Miss Wan’s sole name and all the trading that Miss Chan purportedly done was on Miss Wan’s behalf even though these were later found to be bogus tradings; Miss Chan had clearly defrauded Miss Wan but there was no evidence she had defrauded the 2^nd Plaintiff.  I also find Hou Tak not liable to the 2^nd Plaintiff, because the account ‘AWKL’ opened at Hou Tak was in Miss Wan’s name only.  I therefore dismiss the 2^nd Plaintiff’s claim against Hou Tak.

38.I give judgment to the 1^st Plaintiff against the 1^st Defendant in the sum of $(722,450.82 – 113,000) = $609,450.82.

Interest

39.I allow interest on the judgment sum from the date of writ to the date of judgment at half judgment rate; thereafter at full judgment rate until full payment.

Costs

40.Costs to follow the event, I do not see any exception in this case.  The 1^st Defendant shall bear the costs of these proceedings to be taxed if not agreed, with certificate for Counsel.  As the 2^nd Plaintiff did not give evidence nor adduce any evidence, the trial was not prolonged, I am satisfied there was no extra cost wasted.  I therefore make no order as to costs so far as the 2^nd Plaintiff is concerned.  The costs order nisi will be made absolute within 14 days hereof should there be no application made.

Parties

Mr. Meyrick Wong instructed by Messrs. Ivan Tang & Co. for the 1^st and 2^nd Plaintiffs.

Mr. Jonathan Chang instructed by Messrs. Slaughter & May for the 1^st Defendant.

Third Party  :  in person, absent.