Securities and Futures Commission v. Tiger Asia Management Llc and Others

HCMP 1502/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1502 OF 2009

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Before: Hon Harris J in Chambers

Dates of Hearing: 1 and 2 June 2011

Date of Decision: 21 June 2011

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D E C I S I O N

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Introduction

1.On 5 August 2009 the Securities and Futures Commission (“Commission”) issued an Originating Summons against the Defendants.  The 1^st Defendant is a New York based asset management company.  The 2^nd to 4^th Defendants work for the 1^st Defendant.  Precisely what their positions are within the 1^st Defendant is unclear from the evidence before me, but nothing turns on this for the purposes of the present application, which I describe later.  Leave was granted to serve the Originating Summons against all the Defendants out of the jurisdiction at the business address of the 1^st Defendant in New York.  It was amended on 23 April 2010.

2.Although it is not clear on the face of the Amended Originating Summons, as it only details the relief that is sought, the Commission seek declarations that the Defendants have contravened section 291(5) of the Securities and Futures Ordinance, Cap. 571 (“Ordinance”).  On 20 September 2010 the Defendants issued a summons seeking an order striking out the Amended Originating Summons alternatively seeking an order that parts of the Commission’s evidence be struck out.  The Defendants invited me to deal with the application to strike out the Amended Originating Summons first.  Despite opposition from Mr Simon Westbrook SC, who appeared for the Commission, I indicated at the commencement of the hearing that I would proceed on this basis.  This judgment addresses only the application made in paragraph 2 of the Defendants’ summons.

3.The grounds for the Defendants’ application are as follows.  The Commission seeks a determination by a judge of the Court of First Instance (“Court”) of whether or not the Defendants have contravened section 291(5) of the Ordinance[1].  The Defendants submit that this matter has to be determined either by the Market Misconduct Tribunal under Part XIII of the Ordinance or by a court of competent criminal jurisdiction under Part XIV of the Ordinance.  The Court does not have jurisdiction to determine this issue and, therefore, the proceedings are an abuse of process.

4.The precise details of the alleged contraventions do not matter for the purposes of this application, which turns on the proper construction of the relevant provisions of the Ordinance and in particular section 213, which is the section under which the Commission’s application is made.  It is, however, helpful to understand in broad terms the Commission’s case and the relief sought in order to understand how it fits within the regime established by the Ordinance for dealing with market misconduct.  There are 3 complaints.

5.The 1^st Defendant is a hedge fund specialising in equity investments in China, Japan and Korea.  As a hedge fund it is able to take short positions in equities.  In January 2009 the 1^st Defendant was approached by UBS AG on behalf of Bank of America with a proposed placement of shares in China Construction Bank Corporation (“CCB”).  Prior to being given details of the placement it agreed to being, what is referred to in the financial services industry, as “wall crossed”.  The Commission says that this means that the 1^st Defendant agreed to receive price sensitive information that was not generally known to the public.  Shortly after being given details of the proposed placement on 6 January the 1^st Defendant net short sold shares in CCB at an average price of HK$4.5005 per share.  Subsequently, the 1^st Defendant was allocated shares in the placement at a price of HK$3.92 per share.  On 7 January 2009, excluding the placed shares, the average traded price of CCB shares was HK$4.1788.  By short selling shares on 6 January 2009 the 1^st Defendant made a notional profit of HK$29,200,000.

6.On 19 December 2008 UBS AG informed the 1^st Defendant that UBS AG wished to sell its entire holding of shares in Bank of China (“BOC”) via a club deal after the expiry of a lock-up period on 31 December 2008.  After obtaining information about the placement the 1^st Defendant agreed to be wall crossed. Between 19 and 30 December 2008 the 1^st Defendant short sold shares in BOC at an average price of HK$2.23 per share.  On 31 December 2008 the 1^st Defendant was allocated shares at a placement price of HK$1.93 per share.  The shares were re-rated following the placement to a price of HK$2.14 per share.  The 1^st Defendant made a notional profit of HK$8,600,000.

7.On 12 January 2009 Morgan Stanley informed the 1^st Defendant, who again agreed to be wall crossed, that RBS intended to sell its entire holding in BOC through a block sale.  The indicative discount was 7 to 11% below the closing price on the day of the sale.  Between 12 January 2009 and 13 January 2009 the 1^st Defendant sold shares in BOC at an average price of HK$1.87 per share.  On 13 January 2009, after the market closed, it was allotted 450 million shares in BOC at the placement price of HK1.71 per share.  Due to the unexpected increase in the share price after the RSB placement the 1^st Defendant made a notional loss of HK$10,300,000 from the sale of BOC shares prior to the RBS placement.

8.The Commission contends that these short and long sales of shares in CCB and BOC constituted insider dealing and false trading in securities.  In the Amended Originating Summons the Commission seeks various orders.  I shall not recite them in full here. They can be divided into a number of groups.  First, orders restraining disposal of assets and providing information (paragraphs 1A and 1B), which are directed at retaining in Hong Kong the notional profit made from the alleged insider dealing.  Secondly, an order for an account of the profit made or gain avoided (paragraphs 1C, 1D and 1G) and payment of such sum to a receiver to be appointed by the court (paragraph 1E), who will distribute it to counterparties to share trades which resulted in the making of a profit or avoidance of a loss (paragraph 1F).  Thirdly, and in the alternative to an account of the profit, an order that if, on the true construction of section 213(2)(b) of the Ordinance, an account of the profits and a class distribution is not available that an inquiry be made in relation to each transaction to identify the counterparties with a view to inviting them to agree to rescission of the share sale contracts, the court to declare them void or voidable and repayment of the sale price.  Fourthly, the Defendants be restrained from trading in listed securities on the Stock Exchange of Hong Kong alternatively trading in contravention of the Ordinance.

Re-Amendment of the Originating Summons

9.Prior to the commencement of the hearing I caused to be written to the Commission a letter asking why the proceedings had been commenced by originating summons rather than by writ and drawing to the Commission’s attention the apparent failure of the Amended Originating Summons to comply with RHC O7 r3 as it did not contain any particulars identifying the cause of action in respect of which the Commission claims the relief sought.

10.It should have been apparent to the Commission when it commenced the proceedings that they gave rise to factual disputes and involved the assertion by the Commission of wrong-doing which made the originating summons procedure unsuitable.  Not only was the wrong choice of originating process made, but the originating summons was in my view defective as it gave no indication of the basis on which the relief was sought.  Particularly when serious allegations of misconduct are involved this is unsatisfactory.  It was only in the evidence that the basis for seeking the relief could be found.  As I indicated to Mr Westbrook during the course of argument if I were to dismiss the application I would direct under RHC O28 r 6 that the proceedings continue as if begun by writ and the case properly pleaded.

11.In the light of the letter from the court the day before the hearing the Commission issued a summons seeking leave to re-amend the Amended Originating Summons to introduce paragraphs setting out the basis on which it seeks relief.  The Defendants did not object to these re-amendments largely because it makes it clear that, for reasons I address later, the Commission relies on alleged contraventions of Part XIV of the Ordinance, which are offences, rather than the equivalent sections in Part XIII of the Ordinance.  Paragraph 1 of Re-Amended Originating Summons seeks declarations that:

(1)  There have been contraventions by the 3^rd Defendant of section 291(5) (insider dealing) and he is a person within sections 213(1)(a)(i)(A) and (2)(b);

(2)  The 1^st, 2^nd and 4^rd Defendants were knowingly involved in, or a party to, the contravention of section 291(5) and are persons within section 213(1)(a)(iv);

(3)  Alternatively, the 1^st, 2^nd and the 4^th Defendants have been involved in the contravention of section 291(5) whether knowingly or otherwise and are persons within section 213(1)(a)(i)(A) and (2)(b);

(4)  The 3^rd and 4^th Defendants have contravened section 295(1)(b) and are persons within section 213(1)(a)(i)(A) and (2)(b);

(5)  The 1^st and 2^nd Defendants have been knowingly involved in, or a party to, the contraventions of section 291(1)(b) and are persons within section 213(1)(a)(iv);

(6)  Alternatively, the 1^st and 2^nd Defendants have been involved in the contravention of section 291(5)(b) whether knowingly or otherwise and are persons within section 213(2)(b);

(7)  The 1^st, 2^nd, 3^rd and 4^th Defendants are not entitled to receive for their own benefit or retain any profits for or in respect of the matters constituting contraventions of sections 291(5) and 295(1)(b).

Defendants’ Case

12.The Defendants’ case can be summarised as follows.  It is apparent from the material produced prior to and during the course of the Securities and Futures Bill through the Legislative Council that Parts XIII and XIV of the Ordinance were intended to introduce a dual civil and criminal regime to deal with misconduct in the financial markets.  The Ordinance clearly reflects this in Part XIII and Part XIV. If following investigations the Commission concludes that there is a potential case of market misconduct it may refer the matter to the Financial Secretary for civil proceedings before the Market Misconduct Tribunal or refer the matter to the Secretary for Justice for criminal prosecution on indictment.  The Commission can prosecute less serious offences itself summarily: section 388(1).  Section 213 provides a mechanism for the Commission to obtain interim relief prior to the determination of civil proceedings before the Market Misconduct Tribunal or criminal proceedings or final relief after the conclusion of such proceedings. What section 213 does not do is provide a third route by which the Commission can seek a determination before the Court of conduct prohibited by Part XIII and Part XIV.  It follows that the Court does not have the jurisdiction to make the declarations sought by the Commission and, therefore, the Re-Amended Originating Summons does not disclose a reasonable cause of action and is an abuse of process and should be struck out.  I agree for reasons which I explain in the remainder of this judgment.

The Ordinance

13.The Ordinance came into force in April 2003.  Parts XIII and XIV introduced a new dual civil and criminal regime for the purposes of dealing with misconduct in the financial markets.  The Ordinance defines various activities as both market misconduct under Part XIII of the Ordinance and a criminal offence under Part XIV.  These activities include insider dealing, which are dealt with in sections 270 and 291 respectively.  In cases in which the evidence is thought sufficiently strong to satisfy the criminal standard of proof an alleged contravention can be prosecuted.  If there is doubt about the strength of the evidence the contravention can be referred to the Financial Secretary, who can instigate an inquiry by the Market Misconduct Tribunal before whom the less onerous civil standard of proof applies.

14.Mr Charles Sussex SC, who appeared for the Defendants, submitted that in order to construe section 213 it was necessary to ascertain the purpose of Parts X, XIII and XIV of the Ordinance.  This was to be done not only by reference to the other provisions of the Ordinance, but also by reference to relevant legislative material.  The use of such material was explained by Li CJ in HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at paragraph 14:

“14. The purpose of a statutory provision may be evident from the provision itself. Where the legislation in question implements the recommendations of a report, such as a Law Reform Commission report, the report may be referred to in order to identify the purpose of the legislation. The purpose of the statutory provision may be ascertained from the Explanatory Memorandum to the bill. Similarly, a statement made by the responsible official of the Government in relation to the bill in the Legislative Council may also be used to this end. See PCCW-HKT Telephone Ltd v Telecommunications Authority (2005) 8 HKCFAR 337 at p.351F-J and Director of Lands v Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1 at p.15A-H.”

15.Mr Sussex argued that the legislative material produced in the course of the enactment of the Ordinance makes it clear that the Legislature intended that Parts XIII and XIV provided 2 methods by which allegations of market misconduct might be determined.  They refer to the Ordinance establishing a “dual civil and criminal regime” and it is clear that the civil regime referred to was the Market Misconduct Tribunal.  For example, during the first reading of the Security and Futures Bill on 29 November 2000, the Secretary for Financial Services stated (Legislative Council Official Record of Proceedings, Wednesday 29 November 2000, page 1384):

“The Bill creates an alternative civil route to the existing criminal route for dealing with certain forms of market misconduct. It will build on the strength of the Insider Dealing Tribunal which already provides a means of dealing with insider dealing, and expand it into a Market Misconduct Tribunal (MMT) to handle, in addition to insider dealing, five other types of market misconduct, including price rigging in securities or futures contracts and stock market manipulation, on the civil standard of proof and using civil procedures. The MMT may, by way of civil sanctions, order payment of the profit gained or loss avoided, restrict a person's access to the markets, and disqualify a person from being a director or other officer of a corporation, and so on.”

16.Mr Sussex referred me to other material to similar affect.  I do not consider it necessary to address this other material as I do not understand it to be in dispute that the purpose of Parts XIII and XIV was to introduce a “dual civil and criminal regime” for dealing with market misconduct.  No material has been put before me that suggests that the purpose of Parts X, XIII and XIV was to introduce a tripartite regime with, in addition to criminal prosecution or an inquiry by the Market Misconduct Tribunal, a third procedure by which the Commission could go to the Court and ask it to determine whether there had been a contravention of Parts XIII or XIV.

17.The Commission argues that this is to take too narrow a view of the purpose of the legislation.  The object of the Ordinance it argues in paragraph 52 of its written submissions “is to assist the SFC in achieving its regulatory objectives as set out in sections 4 and 5 of the Ordinance, especially investor protection, as explained in the Bills Committee”:

“The objective of Part X [which included the provision which became section 213] is to provide the SFC with powers to protect the investing public, by intervening in the business or affairs of a licensed corporation, and by enabling it to apply to the Court for orders and civil remedies. Part X is largely based on existing legislation. A number of changes have been made… These are aimed at allowing the SFC to discharge its functions more effectively, so as to ensure better investor protection.” (transcript of meeting on 24 April 2001).

18.The Commission argues that it has brought the present proceedings under section 213 of Part X as public regulator of the securities market in Hong Kong and for the purpose of enforcing the provisions of the Ordinance contained in Parts XIII and XIV.  This is consistent with the regulatory objectives of the Commission contained in section 4 of the Ordinance and its functions and powers, which are contained in section 5.  It does not seem to me that this tells me much of assistance in determining the purpose and construction of section 213.  It is apparent from the Ordinance that the enforcement of Parts XIII and XIV is intended to involve parties other than the Commission and procedures other than civil proceedings commenced by the Commission in the High Court.  Section 252(8) of the Ordinance provides that the Commission may report to the Financial Secretary the occurrence of any event which the Commission reasonably believes or suspects constitutes market misconduct, which is defined in section 245(1) of Part XIII.  Section 252(1) provides that if it appears to the Financial Secretary, whether or not following a report from the Commission that market misconduct has or may have taken place he may institute proceedings before the Market Misconduct Tribunal concerning the matter.  The decision whether or not to pursue civil proceedings under Part XIII rests with the Financial Secretary not the Commission.  Mr Westbrook submitted that this does not indicate, as the Defendants argue, that the legislature intended the Commission to be subject to oversight by the Financial Secretary as the Commission can prosecute contraventions summarily: section 388(1). This is correct, but is subject to the Department of Justice’s right of intervention.  Mr Westbrook also argued that to the extent that oversight might have been thought necessary in the case of proceedings before the Market Misconduct Tribunal it was unnecessary in the case of civil proceedings before the Court because the proceedings are necessarily conducted under the supervision of a judge of the High Court.  The legislature would not have thought it necessary to provide oversight in such cases.  I see little in this point as the Market Misconduct Tribunal is chaired by a judge.

19.If proceedings are instituted before the Market Misconduct Tribunal the inquiry is conducted with the assistance of a Presenting Officer who presents to the Market Misconduct Tribunal such available evidence as shall enable the Market Misconduct Tribunal to make an informed decision as to whether or not market misconduct has taken place: section 251(4) and (5) and paragraph 21 of schedule 9 to the Ordinance.  The Commission is not in any sense a party to the proceedings.  The Commission’s role is to provide such evidence as it is able to the Presenting Officer, who decides whether or not it should be adduced before the Market Misconduct Tribunal.

20.The Market Misconduct Tribunal consists of a chairman who is a “judge” (sections 251(3) and 245(1)), normally a judge of the Court, and 2 other members: section 251(2) and (6) and schedule 9 to the Ordinance.  The 2 additional members are chosen from persons, who have relevant experience of the securities industry.  They are intended to provide an understanding of the likely subject matter of an inquiry that the chairman may not have.  If the Commission’s case is correct it would result in civil proceedings being conducted by a judge of the Court without the benefit intended by the legislature in Part XIII of input from 2 persons with relevant experience of the subject matter of the proceedings.  The Commission has offered no explanation as to why it might have been intended that the Commission could choose to circumvent the procedure provided by Part XIII.

21.Pursuant to section 284 of the Ordinance, to the extent that the Market Misconduct Tribunal determines that a person has engaged in market misconduct, the person shall be regarded, by reason of the conduct, as having “contravened” the provisions of the Ordinance.  The Commission accepts that as a consequence of section 284 it is arguable that only the Market Misconduct Tribunal can find a contravention of Part XIII.  This is the reason why, despite the Commission appearing to suggest in its initial evidence (paragraphs 5 and 55 of the 1^st affirmation of Cheng Tak Ka) that its case was that there had been contraventions of sections 270, 291 and 295, it now only seeks a declaration of a contravention of section 291.  Although the matter was not argued before me and I do not have to decide the matter, section 284 tends to suggest that only the Market Misconduct Tribunal can decide whether or not a contravention of Part XIII has taken place and that the Court cannot determine it on an application by the Commission pursuant to section 213.  This is consistent with the purpose for requiring the Financial Secretary rather than the Commission to initiate proceedings in the Market Misconduct Tribunal, which was explained as follows in paragraph 108 on page 311 of the Report of the Bills Committee on the Securities and Futures Bill and Banking (Amendment) Bill 2000:

“Some members have questioned the rationale for requiring FS to initiate proceedings in the MMT.  There is concern that the proposed procedures would undermine the independence of the SFC to institute proceedings in respect of civil wrongs.  The Administration points out that the procedures to be followed by MMT are modelled on the modus operandi of IDT which has been adopted since 1993 and has been working effectively.  The proposed procedures in the SFB represent a reasonable allocation of roles in commencing proceedings.  In brief, SFC will conduct an independent investigation and refer cases to FS if it is satisfied that there is “reasonable suspicion”.  The SJ will tender independent legal advice to FS on “chance to win”.  The FS will institute MMT proceedings having regard to the legal advice and broader considerations in relation to the regulation of financial market in Hong Kong. The Administration also points out that it is appropriate for FS to institute the proceedings as the investigation may go beyond SFC’s “regulated class”, for example, persons related to a listed company.”

22.In cases in which the evidence is sufficiently strong the Commission may prosecute summarily (section 388(1)) or refer the matter to the Secretary for Justice for prosecution on indictment.  Proceedings before the Market Misconduct Tribunal and criminal prosecution are mutually exclusive.  The effect of the Financial Secretary instituting proceedings before the Market Misconduct Tribunal is to prevent further criminal proceedings: section 307.  Conversely, if criminal proceedings have been commenced against a person no proceedings may be instituted against him under Part XIII.  There is no reference to the commencement of proceedings under section 213 barring criminal proceedings in the manner of section 307.  It seems to me anomalous that the commencement of civil proceedings before the Market Misconduct Tribunal to determine a contravention under Part XIII should prevent subsequent criminal proceedings, but commencement of civil proceedings in the High Court to determine a contravention of Part XIII or Part XIV should not.  I would note at this juncture that when asked by me why the Commission had not referred the matter to the Financial Secretary but had chosen to commence proceedings under section 213, Mr Westbrook told me that the Commission thought that this was a clear case of insider dealing that should be prosecuted, but as the Defendants are in New York this was not possible.  He suggested that by commencing proceedings in the High Court the Commission left open the option to refer the matter to the Department of Justice if any of the 2^nd to 4^rd Defendants come to Hong Kong.  Mr Westbrook accepted that this is a remote possibility.  I would have thought any prospect of the 3 hedge fund managers passing through Hong Kong and risking prosecution is more than remote.  It is a weak reason for not pursing what in my view is the route that the legislation clearly intends to be the alternative to criminal proceedings and instead taking the more controversial course that it has chosen.  It also invites Mr Sussex’s observation that the reality is that the Commission wishes to avoid what it perceives as the slow and cumbersome procedure under Part XIII, which can result in many years passing before a determination of a contravention is reached.

23.Sections 300 to 302 of Part XIV make various matters offences, which are not market misconduct prohibited by Part XIII.  Mr Westbrook submitted that as the Market Misconduct Tribunal cannot determine such matters the Defendants’ argument has no application to them.  He asks rhetorically whether the Defendants suggest that the Commission cannot apply under section 213 for a declaration that a contravention of sections 300 and 302 has taken place and consequential relief.  This is not a matter I have to decide.  The issue before me is whether the Court has jurisdiction to make declarations of contraventions of prohibitions that appear in both Parts XIII and XIV.

24.In my view the above factors point to Parts XIII or XIV providing the exclusive procedures for determining a contravention of those provisions that appear in the both parts of the Ordinance.  The Commission advances a number of reasons other than those referred to earlier why it says that such a conclusion is wrong.

The language of section 213

25.Section 213 is engaged where a person has contravened a relevant provision of the Ordinance; in the present case section 291(5).  The section does not provide that before section 213(1)(a)(i) is engaged there must have been a determination by any other tribunal as it could have done in cases in which it would be relevant such as cases of alleged contraventions of Part XIV.  The Commission submits that it is difficult to see how such a qualification can be reconciled with section 213(1)(b), which is engaged if it appears to the Commission that a contravention “has occurred is occurring or may occur”.  That does not mean that the court should act on a recital to it by the Commission of its belief.  It points out that Kwan J held in SFC v A [2008] 1 HKC 89 that on an application for an interim injunction in relation to insider dealing the test is that “there must be established a prima facie case of contravention of a relevant provision of the statute and there is an appreciable, not a fanciful risk, that without the injunction, proper compliance under the statute would be frustrated”.  Accordingly, the Court has to assess evidence and determine whether or not there is a prima facie case of a contravention.  This is inconsistent with the Defendants’ case that the Court does not determine contraventions under section 213.

26.I do not accept this argument.  The language of section 213 is broad and the contraventions referred to are not limited to Parts XIII and XIV.  I do not find anything in the language of section 213, which is inconsistent with the argument that contraventions of Parts XIII and XIV are to be determined solely in accordance with those 2 Parts of the Ordinance.  Neither do I find that section 213(1)(b) points to a different conclusion.  Section 213(1)(b) is clearly directed to applications for interim civil orders pending the determination of a substantive complaint.  The Commission can apply for an interim injunction under section 213(1)(b) in respect of matters, which are to be pursued either before the Market Misconduct Tribunal or in criminal proceedings.  Therefore, the fact that an injunction has to be sought from the Court, for example, to prevent the dissipation of the illicit profits made from insider dealing pending the outcome of a criminal trial, as was the case in SFC v A supra, casts no light in my view on which tribunal is to determine the substantive complaint.

Previous Court Decisions

27.In SFC v C [2009] 4 HKLRD 315 Le Pichon JA said in paragraph 38 of her judgment (with which Cheung J agreed) that “relief under section 213(2) is entirely free standing and is not contingent or conditional on there being proceedings in the Market Misconduct Tribunal. Further, while an order under s.213(2)(c) is not an end in itself in that, sooner or later, the assets frozen will have to be dealt with, sub-s(9) enables the court to “reverse, vary or discharge” such an order.  Thus, the relief sought in s213 proceedings is entirely self-contained”.

28.Mr Westbrook submits that this was a finding that the Court does have jurisdiction to find “contravention” of a “relevant provision”: section 213(1)(a)(i)(A).  Although it is not clear that the Judge had precisely this point in mind, I accept for present purposes that this is what was intended.  Mr Westbrook further submitted that this is a binding decision of the Court of Appeal and it is not open to me come to a contrary view.  I disagree.  The above statement was obiter and made without, Mr Westbrook accepted, hearing full argument.  The question of whether or not section 213(1)(a) was free standing, and allowed the Commission to seek declarations from the Court that the defendants had contravened section 291(1), arose as a result of amendments that the Court of Appeal allowed to be made to the originating summons to introduce the claim for the first time before it. On appeal to the Court of Final Appeal (as Kayden Ltd. Securities and Futures Commission [2013] 2 HKC 44) Ribeiro PJ, with whom the other members of the court agreed, declined to express a view on this point for the reasons given in paragraph 72 to 74 of his judgment:

“72.   There can be no doubt that these changes incorporate a profoundly different case from that which had grounded leave for service out of the jurisdiction on Kayden and the other foreign defendants. The Court is being asked for the first time to determine whether Mr Lu did in fact contravene the criminal insider dealing provisions of the Ordinance (in the context of a civil case) and whether the other defendants were involved (knowingly in relation to Clear Excel and Kayden).  The case is no longer being put merely on the “appearance” or “suspicion” basis.  For the first time, there is a claim for relief in the nature of orders requiring the defendants to account for “profit gained or loss avoided” and to pay money found due to a receiver appointed by the court on an improvised class action to benefit investors having individual claims for loss caused by the alleged insider dealing.  There is also an alternative claim for the Court to conduct an inquiry so as to build up from scratch a body of claimants to whom distribution of recovered funds might be made.

73.    Lord Pannick QC, who came into the case with Mr Roger Beresford only at the present stage of the proceedings, sought to justify service out of the jurisdiction on Kayden on the basis of the case as reconstituted by the amendments.  However, as emerged at the hearing, it is a case which is not only new and different, but one which raises numerous difficult questions of law and statutory construction, not least as to whether the court has jurisdiction to adjudicate on alleged contraventions under section 213 and to grant orders of the kind sought in the amendments – questions which have not previously been canvassed or ruled upon in the courts below.  It would be quite inappropriate for this Court to entertain such questions without a proper foundation for their exploration having been laid.

G.     Conclusion

74.    It is plain that the SFC does not now seek to defend its service out of the jurisdiction on Kayden on the original basis but seeks to rely (impermissibly) on its reconstituted case.  This renders moot for present purposes the first of the two questions of law identified at the start of this judgment, namely as to whether the Mareva type orders obtained fall outside the scope of section 213(2)(c).  As to the second question, namely, as to whether the orders originally sought give final or substantive relief and provide a basis for service of process abroad pursuant to Order 11, the SFC now seeks to justify service out on the basis of its reconstituted case which expressly purports to seek final relief.  As indicated above, I consider that the question of whether final relief can validly be sought under section 213 has not properly been brought before the Court and therefore has to be kept open.  However, the position adopted by the SFC renders that second question (which was formulated with the approach of the Court of Appeal based on the un-amended originating summons in mind) also moot in the present context.”

29.In the light of these statements it does not seem to me that the observations of Le Pichon JA require me to accept the Commission’s case that section 213(1)(a) gives the Court jurisdiction to determine whether or not section 291 has been contravened.

30.Mr Westbrook also referred me to a number of other authorities in which the Court found contraventions of the Ordinance on applications under section 213.  However, only 1 of the authorities concerned the Parts XIII or XIV of the Ordinance and all the cases appear to have been uncontested and questions of jurisdiction were not raised.  In SFC v Tsoi Bun (HCMP 1377/2009, Yam J, unreported, 28 August 2009) the court accepted an undertaking from a defendant not to trade in the futures market until judgment or further order.  The proceedings were based on allegations of contraventions of sections 295 and 296.  I do not consider that the authorities relied on by the Commission assist in determining the question before me.

Australian Authorities

31.The Australian Corporations and Securities Legislation has contained for many years provisions regulating various forms of market misconduct.  Mr Westbrook cited a number of Australian authorities to demonstrate that in the Australian context the civil courts accepted jurisdiction to make declarations that there had been contravention of provisions that made particular types of market misconduct a criminal offence. I would say at the outset of this section that a difficulty I have in considering the relevance of the various Australian authorities cited by Mr Westbrook is that it is unclear from the authorities precisely what were the terms of the legislation they were considering and the scheme of the legislation generally at the material time.  The only legislation with which I have been provided is Part 9.4B and a section of Part 9.5 of the Corporations Act 2001 in the form current as at 1 January 2001.

32.In Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114 the plaintiff sought to invoke the court’s power under section 1324 of the Corporations Law to make declarations that the defendant had contravened insider trading, market manipulation and misleading conduct provisions of the Corporations Law: sections 1002G(2)(b), 998(1) and 995(2) respectively.  Section 1324 at the time appears from paragraph 34 of the judgment to have empowered the court on the application of the ASIC to grant an injunction restraining a person from engaging in conduct in contravention of the Law.  The judgment arose from an application to set aside an order for substituted service on various grounds including one that there was no justiciable controversy.  In addressing this ground Austin J held that it was beyond doubt that the court had plenary jurisdiction to make a declaratory order concerning contravention of the Corporations Law (paragraph 30) and that having regard to the statutory functions of the ASIC as regulator it was appropriate for the ASIC to take civil proceedings for declaratory and injunctive relief in respect of past events where the outcome might establish that the conduct complained of was wrongful (paragraphs 32 to 36).

33.Mr Westbrook cited this authority for 2 purposes.  First, to demonstrate that the Defendants’ put their case too high in submitting that in the contemporary regulatory context there remains a principle that the court in its civil jurisdiction should not determine allegations of criminality save in exceptional circumstances.  Mr Sussex had cited Imperial Tobacco Ltd v Attorney-General [1981] AC 718 at page 742 in which Viscount Dilhorne explained the principle as follows: “My Lords, it is not necessary in this case to decide whether a declaration as to the criminality or otherwise of future conduct can ever be properly be made by a civil court. In my opinion it would be a very exceptional case in which it would be right to do so”.  R v DPP Ex. p. Camelot Group Plc (No. 2) (1998) 10 Admin LR 93 Simon Brown LJ said this:

“The Court should adopt an essentially flexible approach to the exercise of its declaratory jurisdiction ….. The only rigid rule is, following Imperial Tobacco, that the once criminal proceedings have begun, the civil courts should not intervene. That said, other things being equal, criminal disputes, even upon pure issues of law, are best decided: (a) in criminal courts, and (b) between the parities most directly affected by their outcome. The civil courts should, moreover, be the warier of embarking on this jurisdiction: … (ii) when it involves existing, and not merely prospective future conduct; (iii) when what is sought is a declaration of criminality rather than non-criminality, and (iv) … when the facts are in issue.”

34.I accept that there is no absolute prohibition against the Court making a declaration of criminality.  However, as the judgments in Imperial Tobacco and Ex. p. Camelot demonstrate it is unlikely that section 213 was intended to give, as Mr Westbrook submits, the Commission the unfettered choice of seeking declarations from the Court that criminality has occurred when the Ordinance had expressly created the civil regime to be found in Part XIII of the Ordinance, which would result in de facto declarations of contravention of the Ordinance.  This takes me to the second reason Mr Westbrook referred me to the Australian authorities, namely, to demonstrate that it was likely that section 213, which is similar to section 1324, was intended to give the Commission the power to do what the ASIC could do and seek declarations of contravention of criminal prohibitions.  The difficulty with this submission is that the Australian legislation, to the extent that I can determine its terms from the material I have been given, is materially different to that in Hong Kong.  Most strikingly the Australian regime does not have an equivalent to the Market Misconduct Tribunal (or its previous incarnation, the Insider Dealing Tribunal).

35.Mr Westbrook cited Australian Securities and Investments Commission v HLP Financial Planning (Aust) Pty Ltd & others 2007 FCA 1868 as another demonstration that the civil court has jurisdiction to make a declaration of criminality, in this case, against one of the defendants, the HLP group of companies.  However, the court held that although it had jurisdiction it would not be appropriate to exercise it in the present case against another defendant, Mr Berlowitz, because a criminal prosecution had been foreshadowed and a declaration might have an adverse impact on any future jury.  I note at this juncture that the reason given by the Commission for not reporting this matter to the Financial Secretary with a view to the commencement of an inquiry before the Market Misconduct Tribunal is that the Commission would like to keep the option open of prosecuting the Defendants should they ever become subject to the criminal courts jurisdiction.  Whilst I accept that any prosecution that might take place would not involve a jury, it still seems to me unsatisfactory that the Defendants could find themselves the subject of a prosecution after they have been found by the Court to have contravened section 291(5).  This is particularly so given the express statutory prohibition against prosecution after the institution of proceedings under section 252: section 307.  As I have already indicated its seems to me unlikely that this is what was intended by the legislature.  Section 252 would also appear to be a material difference between the regimes in Australia considered in HLP and that in Hong Kong and makes the case of limited assistance in construing section 213.

36.The decision in HLP is instructive as it contains in paragraphs 40 to 50 an explanation of the development of the regime in Australia for dealing with market misconduct.  Finkelstein J summarised the regime in 2007 in paragraph 50:

“[50] The current regime of corporate regulation is, as the Cooney Committee’s report observed, at p 190, characterised by a “pyramid of enforcement”. The basic premise is that to deter breaches of the legislation, there should be various levels of enforcement that correspond to the seriousness of the contravention. There are three levels to this pyramid: civil remedies at the base, civil penalties in the middle and criminal sanctions at the top. But it is the court exercising its civil jurisdiction that is the primary means of enforcement. Only the most serious contraventions now end up before a criminal court. Nonetheless, when a criminal proceeding is commenced the criminal court should be given (and in many cases is expressly given) priority over civil litigation.”

37.In paragraph 58 the judge went on to summarise the position in cases in which the civil courts were asked to become involved in criminal conduct:

“[58]  I would sum up the position as I see it as follows.  The English and Australian authorities that warn of the dangers of a civil court becoming involved in criminal conduct continue to apply in an appropriate company case.  The general rule in a company case is that a civil court will usually be the appropriate court to deal with a contravention of the Corporations Act.  But the court should wary of granting relief, including the grant of a declaration or an injunction, if the case is likely to end up before a criminal court.  Ordinarily, a civil court should not intervene in those circumstances unless its failure to do so will result in irreparable injury. That strict rule need not be applied if the case involves undisputed facts and the issue raised gives rise to a question of pure law.  Then a declaration can be a very useful remedy.  As Barwick CJ said in Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 at 305; [1972-73] ALR 23 at 27 that is the kind of case “which contributes enormously to the utility of the jurisdiction”.

38.As I understand the Australian legislation at the time HLP was decided, section 1317E expressly empowered the civil court to make declarations of contraventions of provisions prohibiting various forms of market misconduct as part of a regime for civil penalties.  It is unclear in what circumstances the ASIC would seek a declaration of contravention of a criminal provision.  The explanation may be that certain conduct was only prohibited by a provision which made the conduct a criminal offence rather than conduct which attracted a civil penalty.  It appears from section 1317E that this may have been the case in HLP.  In that case there was an alleged contravention of section 601ED(5), which concerns management of investment schemes.  This section is not referred to in section 1317E.  This uncertainty illustrates that, as I have already said, the Australian statutory regimes appear to be materially different from that in Hong Kong and I derive little assistance from the Australian authorities in determining the case before me.

The wording of section 213

39.The Commission argues that “contravention” is broadly defined in Schedule 1, paragraph 11, to include a failure to comply with “relevant provisions”.  The word “contravention” cannot be construed, it argues, consistently with sections 281 and 305 or with “relevant provisions” not in both Part XIII and Part XIV if it is read as meaning contraventions established under section 284 or criminal convictions.  I disagree.

40.The issue in the present case is how a contravention of a provision in both Parts XIII and XIV is established.  The fact that it is established by the determination of the Market Misconduct Tribunal or a criminal court poses no problems when determining how a contravention of another provision is to be established.  Mr Westbrook argues that there is nothing in section 213 to suggest an intention to restrict the generality of the language of the section.  However, the section must be read in the context of the Ordinance as a whole.  In my view it is apparent from Part XIII in particular that it was intended that the determination of a contravention by civil proceedings should be by way of proceedings before the Market Misconduct Tribunal.

41.The Commission advances 2 other arguments arising from the language of the section.  First, that section 213(2), (6) and (8) has no parallel in the powers of the Market Misconduct Tribunal or the criminal courts.  This, it says, indicates that the Court can make final and substantive orders.  This is in my view to misunderstand the issue.  I am concerned with who is to determine a contravention.  Once a contravention has been determined the question arises of what consequential orders should be made.  In so far as punitive sanctions are concerned this is dealt with by the Market Misconduct Tribunal or the criminal courts.  Section 213(2) allows an application to be made by the Commission to the Court for other types of orders, such as an order that a tainted transaction be rescinded and the prejudiced party put in the position he would have been in but for the contravention: sub-section 213(2)(b).  It does not seem to me to be a sensible construction of section 213 and Part XIII that if the Commission intends to seek an order that cannot be granted by the Market Misconduct Tribunal the procedure established in Part X is avoided altogether with the consequential loss of the Financial Secretary’s role as gate keeper (section 252(1)), the role of the additional members of the Market Misconduct Tribunal and the protection offered to the defendant by section 307.

42.Secondly, the Commission submits that if it had been intended that only the Market Misconduct Tribunal or the criminal courts could determine contraventions section 213 would have provided that their finding were both admissible and conclusive in other proceedings.  Section 281(7) does provide that a report of the Market Misconduct Tribunal is admissible as evidence of misconduct and by virtue of section 62 of the Evidence Ordinance, (Cap. 8) a conviction is admissible.  I find nothing significant in the fact that the determinations are admissible as prima facie evidence rather than determinative of the matters with which they are concerned.  As section 62 demonstrates this is the normal status a judgment of a criminal court.  I would have thought it inherently unlikely that this would provide any practical problems if the Commission were to come to the Court after the report of the Market Misconduct Tribunal or a criminal conviction and ask for an appropriate order under section 213(2).

Adjudication of contraventions required of the Court by other sections

43.Section 281 and 305 provide in similar terms that a person may bring proceedings under sub-section (1) against a person who has committed a relevant act of contravention for compensation by way of damages for any pecuniary loss sustained by him as a result of the act, whether or not the loss arose from him having entered into a transaction or dealing at a price affected by the market misconduct.  Both sections provide (sections 281(5) and 305(4)) that an action may be brought against a person even though no proceedings have been brought against him or there is no determination of contravention by him by either the Market Misconduct Tribunal or a criminal court.  Mr Westbrook argues that in such cases the Court might be required to determine that a contravention of Part XIII or XIV has taken place.  This I accept.  He goes onto argue that this is inconsistent with the Defendant’s case.  I disagree.

44.Section 213 is concerned with proceedings commenced by the Commission.  Sections 281 and 305 are concerned with statutory causes of action brought by persons directly affected by a contravention.  One would expect a person who has a cause of action arising from events that constitute a crime or regulatory infringement to pursue his claim in the civil courts and for the crime or infringement to be the subject of prosecution in such other forum as the legislation specifies. 

Conclusion

45.I have found that the Court does not have jurisdiction to determine whether the Defendants contravened section 295(1) of the Ordinance.  Subsequent to the hearing the Commission wrote to the court asking, depending on my decision, for the opportunity to be addressed on the precise form of order to be made.  The matter should be relisted before me in order that I can hear submissions on the terms of the order.

Mr Simon Westbrook, SC leading Mr Roger Beresford, instructed by Securities and Futures Commission, for the Plaintiff

Mr Charles Sussex, SC, instructed by Messrs Sidley Austin, for the 1^st Defendant

Mr Charles Sussex, SC, instructed by Messrs Reed Smith Richards Butler, for the 2^nd Defendant

Mr Charles Sussex, SC, instructed by Messrs Robertsons, for the 3^rd Defendant

Mr Charles Sussex, SC, instructed by Messrs Allen & Overy, for the 4^th Defendant

Please refer to CACV178/2011 for the relevant appeal(s) to the Court of Appeal.