Securities and Futures Commission v. Lam King Hung

[English Translation – 英譯本]
HCMA495/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

APPELLATE JURISDICTION

MAGISTRACY APPEAL NO. 495 OF 2009

(ON APPEAL FROM ESS NOS. 34341 & 34342 OF 2008)

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BETWEEN

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Before: Hon D. Pang J

Date of Hearing: 19 November 2009

Date of Judgment: 18 December 2009

JUDGMENT

1.The appellant was convicted after trial of two insider dealing offences, contrary to section 291(1)(a) (in respect of summons ESS34341) and section 291(1)(b) (in respect of summons ESS34342) of the Securities and Futures Ordinance, Cap. 571 of the Laws of Hong Kong respectively. For each offence, he was sentenced to 8 months’ imprisonment, a fine of $80,000 plus compensation of $54,394.50 to the Securities and Futures Commission (“SFC”). The sentences were ordered to run concurrently. The appellant now appeals against the two convictions.

Persons involved and the allegations

2.The appellant was the first defendant at the first instance trial of this case.

3.The said two charges alleged that while being connected with a listed corporation and having information that he knew was relevant information in relation to the corporation, he purchased its securities (summons ESS34341) and under the same circumstances he counselled or procured his wife, Ms. Fung, to do the same act (summons ESS34342)[1]. Both were committed on 7 August 2007.

4.Besides, the appellant was also charged with another set of offences (summonses ESS34338 & ESS34339), which were identical to the two summonses mentioned above with the exception of the date of commission being 6 August 2007.

5.On the other hand, the appellant’s wife (the second defendant at the first instance trial) was also charged with two mirror offences of insider dealing (summonses ESS34340 & ESS34343) on account of the appellant’s counselling or procuring.

6.However, both the appellant and his wife were acquitted on the latter four summonses (ESS34338, ESS34339, ESS34340 & ESS34343) by the magistrate in the end.

Background facts

7.Chinese Estates Holding Limited (“CE”) and Chi Cheung Investment Company Limited (“CCI”) were two listed corporations. The latter was a subsidiary company of the former. Besides, Evergo Holdings Company Limited (“Evergo”), which was not a listed corporation, was also a subsidiary company of CE.

8.The appellant was employed by Evergo as Accounting Manager. He could be regarded as connected with CCI under the Securities and Futures Ordinance. Although his wife, Ms. Fung, was also an accountant, she was unrelated to those companies.

9.In July 2007, CE and CCI made a proposal that there be an asset swap between the two corporations. In the meantime, the appellant, being an employee of Evergo, had done some work pursuant to the instructions of his superior, Mr. Lam, Financial Controller of CE and CCI. For example, he was instructed to negotiate the fee with a specially engaged firm of auditors on 30 July. There was however no evidence to show that the appellant knew the purpose of the audit, or that there would be an asset swap between the two corporations. This was at least the understanding of the trial magistrate.

10.In any event, Mr. Lam had used ‘Project for Asset Swap’ as the subject of the relevant emails after 3 August, the latest. On 6 August, the appellant again attended a meeting that involved many parties and was attended by quite a few people, for instance, people from the banks, lawyers and accountants whom had been engaged by CE and CCI on a long-term basis. The discussion in the meeting was specifically about the technicalities and procedures involved in the asset swap. But the people present at the meeting did not include the members of the Board of Directors of the two listed corporations.

11.Furthermore, as the people at the meeting considered that the said project would be share price sensitive information, it was decided that a joint announcement would be issued to notify the public in accordance with the requirements of SFC. As a result, a draft announcement began to be circulated to the relevant people by way of emails since the morning of 7 August. The appellant’s copy was issued by Mr. Lam.

12.Trading in CCI securities was suspended at 3:46 p.m. on 8 August 2007. The announcement mentioned above was issued at 10:20 p.m. on the same day. Trading in CCI shares resumed on the following day, the 9^th. It turned out that the share price rose from $2.25 before suspension to $3.45 at the time while the trading volume rose from 850,000 shares to 4,813,594 shares.

13.It was found out later that the appellant had purchased 124,000 CCI shares, which were worth $280,940 in total, by several separate orders at a price ranging from $2.23 to $2.32 via his own bank securities account on 6 August. And he had purchased for his wife 76,000 CCI shares, which were worth $175,560 in total, by several separate orders at a price ranging from $2.28 to $2.32 via his wife’s bank securities account.

14.Similarly, on 7 August, the appellant purchased for himself 40,000 CCI shares, which were worth $90,480, at a price ranging from $2.24 to $2.28, and purchased for his wife 26,000 CCI shares, which were worth $58,760, at a price of $2.26 via the said two accounts. Besides, as the purchase orders issued by the appellant on 6 August were not completed yet and there was insufficient fund in the balance of his wife, Ms. Fung’s securities account, the appellant injected $50,000 in cash into that account during lunchtime on the 7^th so that 26,000 CCI securities could be purchased via that account on the same afternoon.

15.All CCI shares that the appellant purchased in his own name and in the name of his wife on 6 August and 7 August as mentioned above were sold at a higher price during the period from 16 August 2007 to 12 September 2007, generating respectively a profit of $325,740 (i.e. a profit margin of 87.7%) and $166,700 (a profit margin of 71.14%).

The prosecution’s stance

16.The prosecution held the view that even before the multi-party meeting on 6 August, the appellant certainly already knew from various channels that there would soon be an asset swap between CE and CCI, that is to say that he knew he had the so-called relevant information of the two corporations, yet he still purchased CCI shares and counselled or procured his wife to purchase CCI shares on the 6^th and the 7^th in breach of the rules. 

The defence case

17.On the contrary, the appellant argued at the first instance trial that what he had obtained in the course of his work was not relevant information as defined in the Ordinance because the asset swap project was just a preliminary concept and there was no participation from any member of the Board of Directors of CE and CCI. On the contrary, the appellant had certain investment experience and after he had done various analyses on 4 and 5 August 2007, he formed the view that it would be worthwhile to invest in CCI. So, after discussion with his wife, he decided to purchase its shares at a cost of about $600,000.

18.Thus, he began to purchase CCI shares on Monday 6 August. However, as the price was not suitable, he found after the market had closed that not all of his orders could be completed, and coupled with the fact that purchase orders could not be completed due to insufficient fund in his wife’s account, he made some arrangements on 7 August in order to complete what could not be completed on the 6^th. Later, he stopped because he sensed that there might be a conflict between what he did and the situation that he got the information because of his work.

The first instance verdict

19.In a nutshell, the magistrate did not believe what the appellant said.

20.The magistrate acquitted the appellant on the two charges in relation to 6 August only because firstly, the magistrate could not be sure that prior to the multi-party meeting on the 6^th, there was any specific information about the said asset swap which could make the appellant being defined as having relevant information in relation to CCI[2]; secondly, those CCI shares that the appellant purchased on 6 August were purchased prior to his attending the meeting.

21.On the contrary, the appellant already got the relevant information defined in the Ordinance when he left the meeting but he continued to purchase CCI shares on 7 August. Therefore, he had broken the law.

22.The appellant’s wife was acquitted on all the charges whether taken place on the 6^th or the 7^th because the magistrate could not be sure that she knew the appellant had relevant information in relation to CCI.

The instant appeal

23.The appellant’s argument before me is simple. They contend that the magistrate failed to consider (adequately) the applicability of the defence to the appellant under section 292(3) of the Securities and Futures Ordinance.

24.Section 292(3) provides as follows:

“(3) Where a person is charged with an offence under section 291(8) in respect of a contravention of section 291 taking place through his dealing in or counselling or procuring another person to deal in listed securities or derivatives or his disclosure of information, it is a defence to the charge for the person to prove that the purpose for which he dealt in or counselled or procured the other person to deal in the listed securities or derivatives in question or disclosed the information in question (as the case may be ) was not, or, where there was more than one purpose, the purposes for which he dealt in or counselled or procured the other person to deal in the listed securities or derivatives in question or disclosed the information in question (as the case may be) did not include, the purpose of securing or increasing a profit or avoiding or reducing a loss, whether for himself or another, by using relevant information.” (Bold italics added by me)  

25.The appellant points out that for the time being there is no available case law from the Hong Kong courts on the interpretation of the so-called ‘the purpose for which he dealt in … was not, or, did not include, the purpose of securing a profit by using relevant information’. But the former Insider Dealing Tribunal had made some interpretation on a similar but repealed provision, namely section 10(3)[3] of the Securities (Insider Dealing) Ordinance, Cap. 395 of the Laws of Hong Kong. The then (June 1994) Chairman of the Tribunal, Mr. Justice Stock stated in the Report on the case of Success Holdings Limited (extracted only as far as relevant):

“8.4.13 The various texts which discuss provisions which are in the same terms of section 10(3) are not agreed about the test to be applied. Indeed, few, if any, go further than remarking how uncertain is the position. That may be why section 3(1) of the Companies Securities (Insider Dealing) Act 1985 has been replaced by section 53(1) of the Criminal Justice Act 1993 which provides a defence to an individual who shows:

‘(a) that he did not at the time expect the dealing to result in a profit attributable to the fact that the information in question was price-sensitive information in relation to the securities, or

(b) that at the time he believed on reasonable grounds that the information had been disclosed widely enough to ensure that none of those taking part in the dealing would be prejudiced by not having the information, or

(c)    that he would have done what he did even if he had not had the information.’

8.4.14 The test in subsection (c) is an echo of an argument in the 4^th edition of Gower’s Principles of Modern Company Law, in relation to another earlier statutory provision similar to section 10(3), that:

‘… this undoubtedly will be defence invoked by directors and other insiders detected in insider dealing. It will, legitimately, protect them if they can show that circumstances compelled them to realize their holdings, and that they would have done so at the time, whether or not they had the price-sensitive information.’

8.4.15 That is the practical interpretation of section 10(3), and is an interpretation which offends neither the words of the subsection nor the scheme of the Ordinance. There is a difference between, on the one hand, selling because one has to – and that, primarily, is what this defence is about – where the fact of a profit is an incidental consequence rather than an aim, and, on the other, selling to gain a profit, though there may be other aims too.” (Bold italics added by me)

26.What the appellant means is that, as a defence, the threshold of the person being ‘compelled’ to do what he did may be too high and this was indeed recognized by the Court of Appeal in an insider dealing appeal case, Henry Tai Hon Leung v Insider Dealing Tribunal, CACV333 & 334/2004[4]. But the other test mentioned above, namely whether the defendant ‘would have done what he did even if he had not had the information’, however, ought to be interpreted as part of the defence under section 10(3) of the Securities (Insider Dealing) Ordinance and its replacement, i.e. the current defence under section 292(3) of the Securities and Futures Ordinance.

27.The appellant further submits that if the above statement was correct, then the appellant could avail himself of the statutory defence in this case because all those CCI shares that he purchased on 7 August 2007 were the remainder of the purchase orders that he issued on 6 August. In other words, the purchase of the shares on 7 August was what the appellant ‘would have done even if he had not had the information’, and therefore ‘the purpose for which he dealt in … was not, or, did not include, the purpose of securing a profit by using relevant information’.

28.However, the magistrate did not deal with this question formally whether in his oral verdict or in his written Statement of Findings. On the contrary, he expressed quite a different opinion when he delivered the oral verdict. Put it simply, he totally negated any availability of the defence to the person having relevant information (Appeal Bundle page 241U to 242D):

“Section 291(1)(a) states that if a person has relevant information, that person shall not deal in the shares. This duty is a very heavy one. But the ordinance is clearly to safeguard fairness in our financial system and to protect the interest of those whom do not have special information or insider information. And it is to place a duty on any person whom is connected that he/she must take great care in exercising his/her position or privilege so that he/she would (not) make illegal profit. To put it simply, if you have relevant information, you cannot deal in the shares involved in the relevant information. I am of the view that even if the piece of information might not have affected the purchase or selling of the shares, the dealing in the shares by that person, the ordinance states that you may not do so. Once you are in possession, have the relevant information, know the relevant information, and know that the information would affect the share price, you may not deal in the shares.” (Bold italics added by me)

29.It did not help although the same point was later (about two months later) amended by the magistrate in his Statement of Findings written in English (see the extract below) because it failed to reflect the thinking of the magistrate when he first decided on the case:

“75.    Section 291(1)(a) states that if a person is in possession of relevant information, that person ‘shall not’ deal in the securities. The duty placed on the person is a stringent one, but it has to be so to protect the integrity of the financial system, the interest of those not in a position to have special information, and to impose on those who are connected person a duty to regulate their own conduct. If you have relevant information, do not deal in the shares. It does not matter whether one was influenced by the information alone or that there were other parallel factors or considerations.” (Bold italics added by me)

30.The above is the complaint of the appellant. They submit that in those circumstances the convictions in this case are unsafe and unsatisfactory.

Discussion

31.In my view, ‘he would have done what he did even if he had not had the information’ is conceptually narrower than ‘the purpose for which he dealt in … was not, or, did not include, the purpose of securing a profit by using relevant information’ but the former is not in conflict with the latter. The former can be fully included in the latter, that is to say in the various circumstances to which section 292(3) of the Securities and Futures Ordinance is applicable. I do not think it is necessarily the case that the defence can only be invoked when the person concerned was ‘compelled’ to do what he did. It depends on the individual factual background.

32.However, the above opinion only has academic but not any substantive meaning in this case. I will explain the reasons.

33.Firstly, the prosecution never accepted at the first instance trial that the conduct of the appellant was a result of the latter’s personal analysis of the market.

34.Similarly, the magistrate did not believe that the appellant relied on his own flair to invest. The magistrate acquitted the appellant on the two summonses related to 6 August only because the information existed before the multi-party meeting might not be ‘specific’ enough and might not constitute relevant information under the Ordinance (see paragraph 20 above for details).

35.This view of the magistrate’s can be seen from three paragraphs in his Statement of Findings. Firstly, paragraph 71 in relation to the 6^th:

“71.    Having found that D1 was only in possession of the relevant information on 6^th August after the all parties meeting, after 5 pm, but latest by 8:32 pm, I have to find that it cannot be proved beyond reasonable doubt that D1 was in possession of the same when he placed the first … orders for the purchase of CCI shares … on 6^th August. D1 may have been suspicious that something was going to happen and therefore acted accordingly and started to purchase CCI shares on 6^th August. It was only after the 6^th August meeting that the evidence suggested he definitely knew that there was going to be a proposal for an asset swap, and that the information had become specific.” (Bold italics added by me)

36.Secondly, paragraph 69 in relation to the 7^th:

“69.    D1 in his 2^nd interview with the SFC explained as to why he kept on placing the purchase order on 7^th August 2007, even after he knew about the asset swap transaction through the 6^th August meeting. He said that since he had a target amount of shares in CCI that he had set before 7^th August, and since he was not able to meet that target amount on 6^th August, he continued to place the order thinking only to make up the target amount. He said he lacked the ‘alertness’ as to the possibility of insider dealing. I find that is not the truth. Any person with D1’s training as an accountant and who has, as his own evidence has shown, a keen interest in securities trading, it would be ridiculous to suggest that he would not realize that the information as disclosed in the 6^th August meeting was not going to affect the price of CCI shares once it was made public.” (Bold italics added by me)

37.Lastly, the first sentence of paragraph 74, a general summary in respect of the appellant:

“74.    It is without doubt that D1 was trying to lie his way out of trouble when he explained in some details how he came to make the decision to purchase the CCI shares on 6^th and 7^th August.”

38.That being the case, I really do not see any factual basis on which the appellant could rely to raise the present argument.

39.To express it in another way, in order to raise this argument successfully, the appellant has to convince me that the purpose for which he purchased CCI shares on the 7^th ‘was not, or, did not include, the purpose of securing a profit by using relevant information’. It is because it can be seen from paragraph 31 above that the suggestion of ‘he would have done what he did even if he had not had the information’ cannot run counter to ‘the purpose for which he dealt in … was not, or, did not include, the purpose of securing a profit by using relevant information’, otherwise it cannot be a defence under section 292(3). However, if the appellant were to convince me of it, it would be no different from having to convince me to override the findings of fact by the magistrate. It is definitely not an easy task to do, all the more so since in my view, there was concrete evidence in this case and all the adverse inferences drawn against the appellant were the only reasonable inferences.

40.Of course, the argument of the appellant might be more ingenious and meticulous than what is stated above. If I have understood correctly, what they are really suggesting is that regardless of whatever reasons that caused the appellant to purchase CCI shares on the 6^th, since his conduct on that day was ruled lawful, then what he did on the 7^th, which, according to the evidence, was to complete what was not completed on the 6^th, should also be regarded as ‘what he would have done even if he had not had the information’.

41.The question is, firstly, the magistrate had already ruled on this point. Although he had not mentioned the relevant law or adopted words like ‘he would have done what he did even if he had not had the information’, the magistrate had certainly, basing on the facts, negated the suggestion that the 7^th was the continuation of the 6^th. This can be seen clearly from part of the Statement of Findings (paragraph 69) cited in paragraph 36 above. 

42.Secondly, as what I have just said, the above conclusion of the magistrate was indeed irresistible under the evidence given in the case. For instance, the appellant knew by 8:30 pm on the 6^th (i.e. after the conclusion of the multi-party meeting) the latest that an announcement would be issued to the public. Therefore, he could not at all say that what he did on the 7^th had absolutely nothing to do with the information that he got on the 6^th. The thinking and the conduct of a human being cannot be cut off and differentiated from one another as such.

43.Thirdly, one must also realize that in order to invoke the defence under section 292(3) successfully, what the person having relevant information did must not be affected by the relevant information, even if it was in the least affected. Only this is the real meaning of ‘the purpose for which he dealt in … was not, or, did not include, the purpose of securing a profit by using relevant information’, and this was the state which the appellant could not possibly have been in on the day of the 7^th.

44.It can be seen from this that no matter how ingenious the appellant’s argument was, it could not depart from the facts of the case and it would be difficult to even get a start.

45.The above is the discussion on the issues of the case which are of core relevance. What remains for discussion is the part of the magistrate’s Statement of Findings at which much criticisms were levelled.

46.I am afraid I have to say that there is indeed problem with that particular paragraph of the magistrate’s oral verdict, especially the following sentence (see the extract in paragraph 28 above for the rest):

“I am of the view that even if the piece of information might not have affected the purchase or selling of the shares, the dealing in the shares by that person, the ordinance states that you may not do so. Once you are in possession, have the relevant information, know the relevant information, and know that the information would affect the share price, you may not deal in the shares.”  

47.Indeed, the meaning of this sentence cannot reconcile with the defence under section 292(3). It has wrongly excluded the possibility that the purpose for which the person having relevant information dealt in … ‘was not, or, did not include, the purpose of securing a profit by using relevant information’.

48.Furthermore, although it was not gone into deeply, the defence did place reliance in its closing submission at the first instance trial on the appellant’s claim that he continued the purchase on the 7^th because the target was not reached on the 6^th, and did attempt to invoke the defence under section 292(3) based on the grounds which were similar to but much more cursory and rough than those raised currently[5], and it was responded to by the prosecution. All these were set out in their written submissions. However, it is somewhat strange and for reasons unknown, the magistrate did not touch upon the subject of section 292(3) again in any subsequent stage of the trial.

49.The question is, no matter whether the magistrate had misunderstood or neglected the position in law of this type of persons, what effect does it have to the present case? My answer is none.

50.The appeal bundle showed that the findings of fact by the magistrate were totally objective and were not in the least affected by his understanding of the statutory provisions. In other words, the error made by the magistrate was independent and its correction or otherwise would not affect the prospects of the appellant at the first instance trial since according to the evidence he could not have successfully invoked section 292(3). The most obvious example is that after the same point was amended in his Statement of Findings (see paragraph 29 above)[6], the rest was still consistent with his oral verdict. This is what I found having read the bundle.

51.The convictions of the appellant are safe. This is my judgment.

Judgment

52.The appeal is dismissed.

Mr. Allen Lam, Counsel, for the Securities and Futures Commission.

Mr. Bernard Chung, instructed by Messrs. Henry Wan & Yeung, for the Defendant.

 Translated by the Judgment Translation Unit of the Judiciary and approved by Mr. P. Y. Lo, Barrister-at-law.

[1] The full text of section 291(1) of the Securities and Futures Ordinance is as follows:

‘(1) A person connected with a listed corporation and having information which he knows is relevant information in relation to the corporation shall not –

(a) deal in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives; or

(b) counsel or procure another person to deal in such listed securities or derivatives, knowing or having reasonable cause to believe that the other person will deal in them.’ 

[2] Under section 245 of the Securities and Futures Ordinance, “relevant information”(有關消息) is defined as:

‘in relation to a corporation, means specific information about –

(a) the corporation;

(b) a shareholder or officer of the corporation; or

(c) the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would if it were generally known to them be likely to materially affect the price of the listed securities.’ (Bold italics added by me)

[3] The repealed section 10(3) of the Securities (Insider Dealing) Ordinance provided as follows  (extracted only as far as relevant):

‘A person who enters into a transaction which is an insider dealing shall not be held to be an insider dealer if he establishes that he entered into the transaction otherwise than with a view to the making of a profit … (whether for himself or another)by the use of relevant information.’ (Bold italics added by me)

[4] The Court of Appeal stated in paragraph 28 of the Judgment:

“28. Of course, if a person can establish that he had no choice but to sell securities he will, no doubt, be in a strong position to establish a defence under section 10(3) on the basis that there was not an intention to make a profit or avoid a loss. However, the subsection is clear. What has to be determined is whether there was any desire or intention to make a profit or avoid a loss by use of the relevant information. The section does not incorporate any test as to whether the person was compelled to or had no choice but to sell securities. In those circumstances it seems to me it would be wrong to interpret the Ordinance as if it incorporated this as part of the statutory defence.” (Bold italics added by me)

[5] For instance, the two cases mentioned above, Success Holdings Limited (1994) and Henry Tai v Insider Dealing Tribunal CACV 333&334/2004, were not placed before the magistrate for consideration.

[6] This amendment is in fact incomplete. It still fails to point out the possibility of a person having relevant information entering into a transaction without breaking the law. However, it has rightly pointed out a fact that even if there were other parallel factors or considerations, this type of persons would have broken the law if they were affected by the relevant information at the same time. In any event, judging from the evidence in this case, the position of the appellant at the most fell within the latter, i.e. the second situation. Therefore, this amendment to a certain extent can be considered as appropriate.