Leung Chi Keung v. Market Misconduct Tribunal and Another
Read the full judgment text of CACV 256/2010 on BabelCite. This Court of Appeal judgment was delivered on 18 April 2012.
1. By two reports dated 8 July and 20 August 2009 (‘the report’) the Market Misconduct Tribunal (‘The Tribunal’) found the appellant, who is referred to as Edmund Leung in the report, culpable of market misconduct by way of insider dealing, contrary to Section 270(1)(e) of the Securities and Futures Ordinance (‘ SFO ’) (Cap. 571). It imposed the following penalties against the appellant :
Cited by 2 cases
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CACV 256/2010 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 256 OF 2010 (ON APPEAL PURSUANT TO S.266 OF THE SECURITIES AND FUTURES ORDINANCE, CAP 571 FROM DETERMINATIONS OF THE MARKET MISCONDUCT TRIBUNAL IN RELATION TO CHINA OVERSEAS LAND AND INVESTMENT LIMITED) __________________________ BETWEEN
__________________________ Before : Hon Cheung, Yuen and Chu JJA in Court Date of Hearing : 27-28 July 2011 Date of Judgment : 18 April 2012 __________________________ J U D G M E N T __________________________ Hon Cheung JA : The decision 1.By two reports dated 8 July and 20 August 2009 (‘the report’) the Market Misconduct Tribunal (‘The Tribunal’) found the appellant, who is referred to as Edmund Leung in the report, culpable of market misconduct by way of insider dealing, contrary to Section 270(1)(e) of the Securities and Futures Ordinance (‘SFO’) (Cap. 571). It imposed the following penalties against the appellant : (1) Eight-month prohibition from participating in the management of Cheetah Investment Management Limited (‘Cheetah’) or its subsidiary; (2) Eight-month prohibition from dealing in securities (a ‘cold-shoulder’ ban); (3) Payment of HK$2,069,582.42 to the Government for its costs and expenses; (4) Payment of HK$361,854.00 to the Securities and Futures Commission (‘SFC’) for its costs and expenses; and (5) A recommendation that the Hong Kong Institute of Certified Public Accountants, CPA Australia, Hong Kong Society of Financial Analysts, Hong Kong Securities Institute and Hong Kong Institute of Directors of which the appellant is a member take disciplinary action against the appellant. 2.Pursuant to leave to appeal out of time granted by this Court, the appellant now appeals against the decision. Under Section 266 of the SFO the appellant may appeal against the finding or determination of the Tribunal on a point of law or with the leave of the Court of Appeal, on a question of fact. Background 3.The appellant was one of the three specified persons in the Tribunal proceedings into dealings in January 2004 of the shares of China Overseas Land and Investment Limited (‘COLI’) a listed company in the Hong Kong Stock Exchange. The appellant was formerly the Director of Asian Equities in ABN AMRO Asset Management (Asia) Limited (‘ABN AMRO’). In that position he managed nine separate funds, one of which was the China Equity Fund (‘CEF’). He had since left ABN AMRO and had at one time joined Cheetah. 4.For the purpose of this appeal the other relevant person was David Tsien. In January 2004 David Tsien held the title of Equity Salesman in the Sales Department of JP Morgan Securities (Asia Pacific) Limited (‘JP Morgan’). 5.Between the end of 2003 and the beginning of January 2004 COLI was contemplating raising money by a top-up placement of its shares. David Tsien who was acquainted with Horace Nip, the Deputy Financial Controller and Executive Director of COLI, arranged a meeting between Nip and his colleagues in the Equity Capital Markets Department of JP Morgan. Eventually, JP Morgan was responsible for the placement of COLI’s shares. COLI announced the placement of its shares on 26 January 2004. 6.Between 2 and 26 January 2004, David Tsien and the appellant had a series of telephone conversations in which the Tribunal found David Tsien had given the appellant price sensitive information relating to COLI shares and the appellant had made use of the information in dealing with COLI shares. 7.The appellant had acquired COLI shares for CEF on five occasions between 2 and 19 January 2004. The total number of COLI shares CEF held on 19 January 2004 was 9,392,000. On 21 and 26 January 2004, the appellant disposed of 2,392,000 and 2,000,000 COLI shares respectively. On 27 January 2004, the appellant acquired 4.5 million COLI shares by placement and on 29 January 2004, he further acquired 1.5 million COLI shares : Particulars
The Financial Secretary’s Notice 8.The Tribunal proceedings were triggered by the Financial Secretary’s Notice (‘FS Notice’) dated 12 September 2007 issued pursuant to Section 252(2) and Schedule 9 of SFO. It averred that in the period between 7 and 26 January 2004 David Tsien and the appellant came into possession of relevant information in respect of COLI namely, ‘specific non-public price sensitive information that COLI would announce and carry out a top-up placement of 850 million shares at a price of HK$1.8 per share on or about 26 January 2004’. 9.The FS Notice (as amended by the Tribunal) stated that David Tsien had on various occasions directly or indirectly disclosed the relevant information to the appellant. The appellant sold a total of 4,392,000 COLI shares on 21 and 26 January 2004 and obtained a profit of about HK$915,173.60 based on the placement price of HK$1.80 for the fund he managed. 10.The FS Notice further stated that : (1) David Tsien was a person connected with COLI by virtue of his occupation of a position which might reasonably be expected to give him access to the relevant information (paragraph 3); (2) David Tsien and the appellant knew that the relevant information was material, non-public, price sensitive and would have a depressing effect on the price of COLI’s shares traded on the Hong Kong Stock Exchange (paragraph 4); (3) In directly or indirectly disclosing the relevant information to the appellant, David Tsien had reasonable cause to believe that he would make use of the relevant information to deal in COLI’s shares and had thereby acted in contravention of Section 270(1)(c) of SFO (paragraph 5); (4) The appellant knew David Tsien was a person connected with COLI and he had obtained the relevant information by reason of his connection in COLI (paragraph 6); (5) Accordingly, in selling the shares of COLI the appellant had acted in contravention of Section 270(1)(e)(i) of SFO (paragraph 7). Finding by the Tribunal 11.In an inquiry that spanned over five months of substantive hearing, the Tribunal found, among other things, that, 1) David Tsien was a person connected with COLI and had relevant information relating to COLI shares; 2) The appellant received the relevant information from David Tsien; 3) The appellant knew that David Tsien was a connected person and the information disclosed to him was relevant information; 4) The appellant dealt with the COLI shares. Insider dealing 12.Market misconduct means, among other things, insider trading (Section 2 SFO). Section 270 makes it unlawful for an insider or a person who obtains inside information from someone whom he knows to be an insider to deal with the shares while in possession of the inside information. The relevant section for the purpose of these proceedings is Section 270(1)(e) which provides that
The four elements 13.As can be seen from Section 270(1)(e) there are four elements for someone to be engaged in insider trading : (1) he has information which he knows is relevant information in relation to a corporation; (2) he received the information (directly or indirectly) from a person whom he knows is connected with the corporation; (3) he knows or has reasonable cause to believe that person held the information as a result of being connected with the corporation; (4) he deals in the listed securities of the corporation. Relevant information 14.Section 245(2) of the SFO provides that:
Connected with the corporation 15.Connected person is defined by Section 247(1) of SFO as follows :
Legislative history of insider trading legislation 16.Mr. Benjamin Yu SC and Mr. Laurence Li, counsel for the appellant traced the legislative history of the Hong Kong insider trading legislation. The history is accepted by Mr. Jonathan Kwan, counsel for the respondent. 17.We will gratefully adopt the summary of the legislative history by the appellant’s counsel. 1) The wording of Section 247 and the policy it embodies can be traced back to the United Kingdom Companies Bill 1973. 2) The White Paper leading to the Companies Bill 1973 stated that ‘directors, employees, major shareholders and professional advisers of the company together with near relations of such persons’ should be regarded as insiders. The Paper explained :
See Rider and French : The Regulation of Insider Trading (1979), at page 197. 3) The 1973 Bill was not passed. But the provisions against insider dealing were reintroduced and became part of the Companies Act 1980 (See Rider and French, at page 198.). Section 68 of the 1980 Act applied the prohibition to any person who was ‘connected with a company’ or who ‘has information which he knowingly obtained ... from an individual who is connected with a particular company’. Section 73 defined connection in these terms:
4) These provisions of the Companies Act 1980later became sections 1 and 9 of the Companies Securities (Insider Dealing) Act 1985. Their wording remained essentially the same. 5) Hong Kong’s first legislative provision dealing with insider dealing was Section 140 of the Securities Ordinance（‘SO’）1974. The section applied to a person who ‘through his association with a corporation, has knowledge of specific information ... [that] has not been generally made available’. 6) The Hong Kong Government deferred the section’s operation to await the UK legislation (See Official Report of Proceedings, Legislative Council, 12 December 1973, at page 281) and in 1979, without ever having brought it into force, replaced it with sections 141A-141L. (See Insider Dealing – Identifying and Tackling It, Kemal Bokhary QC (now Bokhary PJ), 14 HKLJ 11 (1984)). The new sections followed the UK concept of connection. They also established the Tribunal’s predecessor, the Insider Dealing Tribunal (‘IDT’). 7) Section 141E(1) was the definitional section. Like the provisions in the UK, it covered (a) directors; (b) employees; and (c) a person ‘who occupies a position which may reasonably be expected to give him access to relevant information’. 8) The substantive parts of sections 141A-141L later became the Securities (Insider Dealing) Ordinance 1990 (‘S(ID)O’) and, ultimately, parts of the present SFO. Section 141E became Section 4 of the S(ID)O. 9) When the Government proposed, and the legislature responded by re-enacting sections 141E-141L of the SO 1974 as the new S(ID)O in 1990, they were very much aware of the European Directive (see paragraph 18.3) of this judgment) but declined to adopt it (see Official Report of Proceedings, Legislative Council 25 July 1990). 10) From 1999 to 2003, Hong Kong went through a major exercise of ushering in the SFO to update and replace ten ordinances. Section 247 and Section 270 of SFO re-enacted Section 4 and Section 9 of the S(ID)O. 11) Parallel to the market misconduct provisions, section 291 of SFO creates the criminal offence of insider dealing. It is modelled on section 270 and adopts the connected person requirement. Section 287 which defines connected person for the purpose of the criminal offence is also modelled on section 247. Other jurisdictions 18.Counsel for the appellant also referred to the approach towards insider dealing in Australia, United Kingdom and USA. Again, as this is not controversial, we will adopt the summary provided by the appellant’s counsel. Australia 1) Australian legislations had, until 1991, followed the traditional UK approach in requiring as the first step the identification of a person ‘connected with’ the company. The relevant section in the Corporations Law, like those in Hong Kong’s SFO, could be traced back to the Companies Bill 1973. (See Ford’s Principles of Corporations Law, 8th and 14th ed., both at paragraph 9.620.) The authors stated that
2) In 1991, Australia took the controversial step of dropping the person connection requirement principally in the interests of ‘simplicity’ (Ford, 8th and 14th ed., both at paragraph 9.620). In effect, Australia ‘removed the “insider element” from the law of insider trading, which then became a law about ‘trading with informational advantage’. Ford, 8th and 14th ed., both at paragraph 9.600 stated that :
United Kingdom 3) The United Kingdom by its Criminal Justice Act 1993 also significantly loosened the person connection. The reform was part of conformity with the relevant European Directive. Like the new Australian approach, the philosophy of the European Directive was to ‘penalise the exploitation of information advantages, more or less irrespective of the status of the individual concerned’. See Gore-Browne on Companies (45th Ed) Vol 2 at paragraph 42 [29] where the editors commented on the new UK 1993 legislation :
See also Rider, Alexander, Linklater and Bazley : Market Abuse and Insider Dealing, 2nd ed., at paragraph 3.60. 4) This change was apparently a reluctant one. The UK Government at first proposed to retain the person connection requirement, but ultimately, following the European Directive, dropped the concept and expanded the categories of insiders considerably. See Gower’s Principles of Modern Company Law, 5th ed., at pages 629-630; Gower and Davies’ Principles of Modern Company Law, 6th ed., at pages 464-465. United States of America 19.In respect of the position in USA the late Professor Betty Ho in Public Companies and their Equity Securities at page 673 stated that :
20.See also Rider, Alexander, Linklater and Bazley, at paragraph 3.66 : ‘While most legal system now have laws seeking to regulate the misuse of inside information, the US Federal law is undoubtedly the most developed and worthy of mention here.’ 21.In the US, a person may be guilty of insider dealing if he himself is a fiduciary to the company; or if he has received inside information from a person who he knows or should know to be such a fiduciary breaching the fiduciary duty in passing him such information. However, in such a case, it must be shown that the tippee knew or should have known that there has been a breach of fiduciary duty. See Fundamentals of Securities Regulation, 5th ed., page 1002; Dirks v. Securities and Exchange Commission, 463 US 646 (1983). 22.The US Supreme Court has explained the rationale for this. The wrong of insider dealing stems from the insider breaching his duty to the company and shareholders. Any trading on inside information is, by definition, to the disadvantage of counter-party shareholders who do not know the information. An outsider-tippee’s culpability stems from participating in the insider’s breach of duty. Thus he is ‘in the wrong’ only if he knows or should have known the insider to be an insider owing and breaching a duty. See Dirks, at 653-662; Bateman Eichler, Hill Richards, Inc. v. Berner, 472 US 299 (1985), at 311 fn21. Grounds of appeal 23.The appellant relies on two grounds of appeal : (1) The Tribunal erred at law in holding that David Tsien was a person ‘connected with’ COLI in terms of both subsection 247(1)(c) and (d) of the SFO and that the appellant knew David Tsien was a connected person. (2) The Tribunal erred in law in holding that at the time the appellant sold COLI shares on 21 and 26 January 2004, he knew that he had ‘relevant information’ as alleged in the FS Notice. Further the Tribunal did not have any evidence that the information which the appellant possessed at the time of his dealing in COLI shares was price sensitive. The three issues 24.The issues in this appeal are : 1) Whether, under Section 247(1)(c) of SFO, David Tsien as a public-side salesman in JP Morgan was a person ‘connected with’ COLI. 2) Whether the appellant knew David Tsien was a connected person; and 3) Whether the information that the appellant had at the time of his placing of orders was ‘relevant information’ as defined for the purposes of the Tribunal proceedings. 25.I will address the first and second issues while Yuen JA, whose judgment I agree, will address the third issue. Person connected 26.There are two elements in the Hong Kong law prohibiting insider dealing. The first is an information connection namely, the relevant information must be specific information about a listed company or its securities which are non-public and which are price-sensitive. This is reflected in Section 245 of SFO. The second element is a person connection to the listed company namely, the relevant information must come from certain defined insiders : section 247 of SFO. It is clear from the wording of the relevant provisions of the SFO that the mischief of insider dealing involves person connection. A person is guilty of insider dealing not merely because he dealt in shares while in possession of inside information, he also had to be either an insider or knew that the person who gave him the information was an insider. FS Notice based on Section 247(1)(c) 27.The Tribunal referred to the FS Notice where it was stated that David Tsien was a person connected with COLI by virtue of his occupation of a position which might reasonably be expected to give him access to the relevant information. The Tribunal rightly held that this is based on the wording of Section 247(1)(c). The basis of the Tribunal’s conclusion 28.The Tribunal concluded that David Tsien was a connected person. It held that,
The objective approach on connected person 29.As stated earlier, the former section 68 of theUK Companies Act 1980 applied the prohibition to any person who was ‘connected’ with a company or who ‘has information’ which he knowingly obtained from an individual who is connected. The definition of connected person in Section 73(1) of this Act is similar to our section 247(1). 30.There is little judicial authority on the interpretation of our section 247(1) or section 73(1) of Companies Act 1980. But counsel for the appellant referred the Court to the views of textbook authors on this topic. 31.Buckley on the Companies Acts (14th Ed Vol 2) at 1568-1569 stated that :
The footnote to the passage on ‘what other people may reasonably expect’ stated ‘Presumably the man on the Clapham omnibus’. 32.Rider : Insider Trading at page 17 commented on Section 73(1)(b) as follows :
33.Suter : The Regulation of Insider Dealing in Britain (1989) at page 90 commenting on the UK Companies Securities (Insider Dealing) Act 1985 on who is a connected person stated that :
34.Ashe and Counsell : Insider trading The tangled web (1990) at pages 65-67 stated :
The objective test 35.It is apparent from these views that the requisite test in determining whether someone is in a position which may reasonably be expected to give him access to the relevant information is an objective one, namely, what other people may reasonably expect of that person by virtue of his position. When the editors of Buckley used the phrase ‘subjective criteria’ (‘…it is not what actually is, but what other people may reasonably expect’), perhaps they were merely referring to the subjective view of a by-stander. But reliance of a bystander’s perception will in my view put the test in an objective context. Mr. Jonathan Kwan, counsel for the respondent, accepted that the test in section 247(1)(c) is objective. The approach of the Tribunal 36.The Tribunal indicated its approach as follows :
37.The relevant extract of the Insider Dealing Tribunal’s report dated 2 April 2004 of Public International Investments Ltd stated that,
38.I have no doubt that the determination whether someone is in such a position is a question of fact. However, that question must be considered in an objective context and not whether someone had actual access to the relevant information. 39.If the test is objective, then in my view, the Tribunal has erred in its approach to Section 247(1)(c). Reading the relevant parts of the report, the Tribunal has not discussed the issue whether David Tsien occupied a position which may reasonably be expected to give him access to the relevant information. Further there is no indication that the evidence relied upon by the Tribunal in paragraph 878 of its report, namely, David Tsien’s relationship with Horace Nip/COLI and also JP Morgan’s relationship with COLI are matters generally known in the market. Instead it had focused its discussion on David Tsien’s actual access to that information. This course was adopted most probably because the parties had not referred the Tribunal to the objective test. 40.1) At paragraph 869 the Tribunal stated that,
2) Earlier in the same paragraph it stated that,
3) The Tribunal then dealt with the evidence of David Tsien’s relationship with Mr. Horace Nip. (1) David Tsien was introduced to Mr. Horace Nip by Mr. Raymond Ngai, an analyst at JP Morgan who had produced reports on COLI. (2) On 26 November 2003 and 3 December 2003 two blocks of COLI shares of 60 million each were acquired by JFAM with the assistance of David Tsien. (3) David Tsien occupied the role of an active co-ordinator in respect of the lunch meeting between COLI, JFAM and JP Morgan on 5 January 2004. When David Tsien informed the appellant of the meeting he also told him that he had brought a lot of COLI shares for JFAM. (4) On 5 January 2004 Mr. Horace Nip was involved in intimate discussions with David Tsien in respect of the on-going developments of the placing of COLI shares. David Tsien occupied the role of mentor and adviser of COLI in that exercise. (5) At the lunch meeting on 5 January 2004 Mr. Horace Nip told David Tsien that COLI was considering doing a placement of 800 million shares at a price of about $1.7 per share. (6) The Tribunal referred to the telephone conversation between David Tsien and Mr. Horace Nip on 7 January 2004 :
(7) The Tribunal stated that :
(8) The Tribunal further referred to the telephone conversations between Mr. Ian Long and David Tsien :
41.It is plain from the summary the Tribunal considered that David Tsien had actual access to confidential information relating to COLI shares, and not specifically from an objective point of view that the position of David Tsien may reasonably be expected to give him access to the confidential information. 42.Mr. Jonathan Kwan referred to the report of the Insider Dealing Tribunal dated 5 March 1997 in Hong Kong Parkview Group Ltd. The issue there was whether the retired chairman of a listed company was a person who would ‘reasonably be expected to have access to relevant information … by virtue of … a business relationship existing between him and (the listed company)’ as per section 4(1)(c) of the S(ID)O 1990. The Tribunal concluded that he was. Among the matters considered by the Tribunal were the business deals that the person had conducted after his retirement which brought business to the listed company. The Tribunal, however, further stated that,
43.By this passage, the Tribunal was clearly adopting an objective test because it was dealing with the public perception of the position of the retired chairman. This case does not assist Mr. Jonathan Kwan’s argument that the Tribunal in the present case had adopted the correct approach. Section 247(1)(d) 44.While the Tribunal had correctly understood the FS Notice referred to section 247(1)(c) of the SFO, its decision was based on both sections 247(1)(c) and (d). It would appear that the Tribunal had equated David Tsien’s position under section 247(1)(c) with the position of someone having actual access under section 247(1)(d) which provides that,
45.Although both Mr. Jonathan Kwan and the Tribunal had referred to section 247(1)(d), how this section would apply to the facts of the case was not analysed by the Tribunal. Even at this appeal there was a difference in views between the parties on the interpretation of the section. While counsel for the appellant suggested that the first reference to the ‘corporation’ in the section is referable to COLI, the respondent suggested it meant JP Morgan. In respect of ‘another corporation’ in paragraph (d)(i), again there was a difference in views. However, what is more important is that there was no discussion by the Tribunal of what was the relevant information that relates to a transaction (actual or contemplated) involving both those corporations under paragraph (d)(ii). If the transaction was in respect of the placement, there was no finding by the Tribunal on this specific issue. The position of David Tsien 46.This, however, is not the end of the matter. In the course of the appeal, the Court raised the issue, applying the objective test, whether David Tsien was a connected person by reason of his position as an equity salesman who was tasked with matters concerning the placement. This was neither an issue raised in the inquiry nor a point addressed by the Tribunal. 47.To understand this point, I will refer to the evidence considered by the Tribunal. 1) Summary of David Tsien’s role 48.The Tribunal summarised David Tsien’s role as an equity salesman in a placement as follows :
2) Worldwide Rules of Conduct 49.JP Morgan provided its employees with a set of rules on their business conduct entitled ‘Worldwide Rules of Conduct’ (‘the Rules’). It provided for a ‘Chinese Wall Policy’ which prohibited the flow of inside information from the insider area of the firm (such as investment banking) to the public areas such as the departments which trade or sell securities. 50.Paragraph 4.2.2. of the Rules provides that,
51.Paragraph 4.2.4. of the Rules further provided for ‘crossing the wall’ by public areas employees to be informed of inside information.
52.The Tribunal found that David Tsien was aware of the Rules. In the present case, the Equity Capital and Derivative Markets Department of JP Morgan was in the inside area and David Tsien, as a salesman in the Sales Department, was in the public area of JP Morgan. 3) The protocol 53.JP Morgan issued in December 2004 another set of rules entitled Market Sounding Policy. It provided the protocol for an equity salesman being brought over the wall when he is tasked with market sounding. The protocol required, among other things, the equity salesman to inform the recipient that the information he is to disclose is confidential and the recipient must not use the information and must agree to treat the issuer’s securities as restricted (‘the protocol’). Under the Rules, the requirement was for the equity salesman to inform the compliance unit upon his receipt of inside information.
The Appellant’s response 54.1) The response of the appellant to the point raised by the Court is, first, that if the Tribunal had proceeded on an incorrect approach, then its conclusion is arrived at on a mistake of law, and that finding must be set aside. It is not the function of this Court to seek to explore the evidence to come up with its own findings. The respondent has not submitted otherwise. 2) Second, without prejudice to the first point, (1) the position of a public side salesman is not one which would be expected to have access to confidential information. (2) the situation where there may be occasions when a public side salesman may be tasked by Equity Capital and Derivative Markets Department to, say, obtain an anchor, would involve the salesman to be ‘taken over the wall’. (3) there was clear and uncontroverted evidence that JP Morgan did have a Chinese wall in place, and did have a Compliance Department. If David Tsien were to be ‘taken over the wall’, it is likely that the Compliance Department would have advised on the procedure. It does not depend on whether an individual witness remembers reading the Rules. (4) the market would not expect a public side salesman to have access to confidential information. That a public side salesman may be brought over the wall does not detract from the fact that such a person occupied a position that would not reasonably be expected to have access to confidential information concerning a corporation. (5) the exception to this would be if the public side salesman is wall-crossed within a bank for the purposes of assisting in the execution of a private placement, and in turn (as he is required to do) follows wall-crossing procedures when approaching and talking to institutional investors about their interest in taking up shares in the private placement. By following the required procedure, the market (in the form of all of the institutional investors that the salesman approaches and seeks to wall-cross) will know that the ‘position’ of the salesman has changed, and that he has become a connected person for the short period of time between when institutional investors are contacted by the salesman and when the placing is announced publicly. It is this indicator - whether the salesman has told the institutional investors that they are restricted - which signals a change of position to one which may reasonably be expected to give the salesman access to relevant information and himself a be connected person. In those circumstances the institutional investors will have had to agree to be restricted from trading in securities (or listed or unlisted derivatives in the securities). But no such wall-crossing procedure was followed by David Tsien or JP Morgan in this case. (6) A further exception is where there had been public manifestations that David Tsien had previously been known to be involved with placements. (7) Whether a public side salesman is per se a person within section 247(1)(c) because of the possibility that he could be brought over the wall and work for Equity Capital and Derivative Markets Department or by reason of public manifestations, involves questions of fact, which must be for the determination by the Tribunal, not by this Court. 3) Counsel for the appellant further submitted that one needs to bear in mind that a fund manager is under a duty to manage the portfolio of shares that he is managing. A fund manager regularly receives calls from public side salesmen such as David Tsien who may launch into discussion about certain listed securities. If the public side salesman is to impart confidential information to a fund manager, the public side salesman should - and proper practice would expect him to, in advance of disclosure of such information, ask whether the fund manager is prepared to receive the information on a confidential basis. Otherwise, the fund manager would be placed in an invidious position. He has a duty to his ultimate clients (beneficiaries of the fund) to trade in the changing market conditions and according to his best judgment. If the salesman, without giving him a chance, blurts out price-sensitive information, he might be prevented from trading, even if, independently of the information, he would otherwise have done so, and cannot properly discharge his duties to his clients. My view on connected person 55.These are, of course, cogent submissions. I was initially concerned whether it is appropriate for this point to be raised at this stage of the proceedings when the Tribunal had not addressed it. However, after due consideration I come to the view that it is proper for this Court to address the issue provided that in so doing there is no injustice or unfairness to the appellant. 56.In my view the matter can be approached in this manner : 1) In deciding whether someone is a connected person under section 247(1)(c), one does not simply look at his post or office but rather, as the legislation requires, at his position to see whether he may reasonably be expected to have the confidential information. 2) The present case is not a situation of someone, like a tea lady or an office assistant, who comes across confidential information by chance. 3) While the Chinese Wall Policy which segregates the outsiders and the insider is a relevant consideration and generally should be used as a starting point in the analysis, the Court must approach the matter with the factual context of the case in mind. To ignore the factual context will unnecessarily exclude material relevant matters from the Court’s consideration. Further to adopt such a restricted approach will be tantamount to assessing the situation solely by reference to the post or office occupied by the person and not his position. 4) The factual context of the case is that David Tsien was not merely an equity salesman. While an equity salesman without more may not reasonably be expected to have access to confidential information by reason of the Chinese Wall, in this case David Tsien was tasked by the Equity Capital and Derivative Markets Department to sound out potential investors for a placement which it was actively negotiating with COLI to be carried out. 5) In order to perform this task, invariably confidential information relating to COLI’s placement such as the price, size and timing (or their approximations) must be provided to David Tsien. One would have thought that this is a common sense recognition of the reality. In any event the imparting of confidential information in certain situations is expressly recognised by the Chinese Wall Policy. 6) In such circumstances the position of David Tsien as an equity salesman who was tasked to sound out investors on the placement, may reasonably be expected to give him access to relevant information of the COLI placement, such as the price, size and timing. In my view this is what the investment community as an objective bystander would perceive David Tsien’s position. It is also not something that is so extraordinary that a reasonable expectation will not arise. 7) The present situation is unlike the stark ‘black and white’ scenario envisaged by Ashe and Counsell, namely, an equity salesman without more on the one hand and an equity salesman who breached the Chinese Wall by his own accord on the other hand. In those situations he is not reasonably expected to have access to the confidential information. But in the present case David Tsien was not someone who had breached the Chinese Wall by his own accord but rather was actively fed or allowed to be fed with confidential information regarding the placement. 8) This being the case it is irrelevant if David Tsien had not observed the protocol by raising the warning when he approached the appellant. In any event I reject the appellant’s submission that David Tsien would only be regarded as a connected person if the protocol on crossing the wall had been observed. This approach is too formalistic because there may be circumstances when a person is a connected person and yet has not observed the protocol when he imparted the relevant information to the recipient. The suggested approach begs the crucial question of whether a person’s position may give rise to the requisite reasonable expectation. 9) Further, the protocol on crossing the wall was issued in December 2004 which was after the event in question. Under the Rules, the requirement was for the public side equity salesman to inform the compliance unit when he comes across confidential information from the inside. The reference in paragraph 4.2.2. to a pubic side employee identifying his role when meeting a client is to prevent accidental receipt of information and not the reverse situation of him imparting information to the client. 10) The Tribunal had, of course, addressed the issue of David Tsien’s knowledge on the ‘Market Sounding Policy’, however, it did not specifically find that the crossing of wall protocol was generally observed in January 2004.
11) The appellant, in response to the Court’s request for the protocol on crossing the wall, had also referred to the ‘Guide on disclosure of price-sensitive information’ issued by the Hong Kong Exchanges and Clearing Limited in January 2002 where at paragraph 33 it states that,
However, as this document was not before the Tribunal, it is not proper for me to rely on it in this appeal. 12) Even according to the appellant (witness statement dated 19 February 2009, paragraph 117), in January 2004 there was not yet a common practice for warning messages to be used prior to the dissipation of non public price sensitive information. 13) As to public manifestations, there is evidence that the appellant knew David Tsien had previously been involved with placements in relation to, among other things, Asia Aluminium. However I will not rely on this evidence to say that, by way of public manifestation, David Tsien was a connected person in January 2004 because of the lack of specific findings by the Tribunal. In any event, in the light of my approach, it is not necessary to consider public manifestation by way of David Tsien’s previous activities. 14) The approach I have adopted does not usurp the fact finding role of the Tribunal. It also does not cause injustice or unfairness to the appellant. The contextual consideration is readily apparent if the correct approach to the application of section 247(1)(c) has been recognized in the first place. 15) As to the argument of the invidious position faced by a fund manager like the appellant, this must again be considered in the context. To an investment professional, there must be an obvious difference between market rumours and price sensitive information relating to events that are actively being considered such as placement of shares, particularly, as in the present case, the extent of the information on the placement that came from David Tsien. 16) Accordingly in my view David Tsien was a connected person within the ambit of section 247(1)(c). Knowledge of the appellant 57.The next issue is whether the appellant knew David Tsien was a connected person. 58.I will set out the relevant finding of the Tribunal on this issue.
All this is clearly relevant to the question of whether the appellant knew David Tsien to be a connected person. Evidence of the appellant 59.The appellant stated that, 1) he regarded the information provided by David Tsien to be public information, 2) he did not consider that he was being sounded out by David Tsien on the placement, and 3) he did not, in any event, regard the information to be reliable information on the placement. My view on the appellant’s knowledge 60.1) As a starting point the information given to the appellant was clearly related to a possible placement by COLI. As found by the Tribunal, on 12 January 2004, David Tsien had told the appellant about the price and size of the placement, namely, COLI wished to place 800 million shares at $1.80. The information on the price was repeated by David Tsien on 19 and 20 January 2004 respectively. Even though at that time there was no definite indication as to the timing of the placement, considering the context in which David Tsien provided the information to the appellant the information was clearly related to the placement of COLI shares. 2) The Tribunal specifically found that the appellant knew David Tsien had access to relevant information about the COLI placement : the information came from the parties to the negotiations on the placement. This is a finding of fact that the Tribunal is entitled to make. 3) The appellant’s case is that he thought the information given by David Tsien was public information in the sense that if it was not public information it would not have been cleared by the Chinese Wall Policy of JP Morgan. In other words JP Morgan had allowed the information to be used. 4) The Tribunal, however, found that the appellant knew the information was ‘non-public price sensitive information’ that came from the parties. In other words it rejected the appellant’s case that the information was public information. This conclusion is hardly surprising because how could details about the price, size and timing of the placement be public information even before the placement was announced? 5) Although the Tribunal did not specifically address the appellant’s contention that David Tsien in disclosing those information must have been allowed by JP Morgan, it must have by its decision rejected it. The appellant’s perception is self contradictory because he had also said in his witness statement dated 19 February 2009 that when David Tsien discussed with him the COLI shares,
This being the case, his contention that the information must have been cleared by JP Morgan is not sustainable : an equity salesman would only be expected to be brought over the wall if he was required to assist in the placement by, among other things, sounding out potential investors. 6) In my view the Tribunal had correctly found that the appellant knew David Tsien was a connected person by virtue of his position. Hon Yuen JA : 61.Put simply in the context of this case, under s.270 of the Ordinance, the appellant would be culpable of insider dealing if he:
62.There is no dispute on para. 61.1 above, as the appellant sold 2 tranches of COLI shares on 21 January 2004 and 26 January 2004, respectively the last trading day before the Chinese New Year break and the first trading day after the break. 63.Cheung JA has dealt with the issues related to para. 61.3 above, which focuses on the “connected person” aspect. 64.I shall deal with the issues related to para. 61.2 above, which focuses on whether the appellant knew he had “relevant information” within the meaning of the Ordinance. It may be helpful to refer to the “Revised Chronology of Conversations/Voicemails and Edmund Leung’s Purchases/Sales of COLI Shares” (appended to this judgment as Appendix 1) which conveniently sets out in tabular form most, although not all, of the matters to which I will refer in the following passages. (The abbreviation “TT” refers to the Transcript of Telephone recordings). Particulars in Financial Secretary’s Notice 65.To qualify as “relevant information”, the information must be specific, not generally known and price sensitive. The Financial Secretary’s Notice has particularised the “relevant information” in this case as follows:
66.At the hearing of the appeal, we were informed by Mr Yu that he no longer sought to argue that the information the appellant received was not specific (para. 61.2a above), or that it was generally known (para. 61.2b above). Further the Tribunal’s holding that close approximations of the size of the placement and price were acceptable (para. 981) was not challenged on appeal. 67.However Mr Yu argued that the particulars in the Financial Secretary’s Notice referred to a placement in definite terms as being the “relevant information”, but there was no evidence that the appellant knew it, as the information he had at the time of the sales was uncertain. 68.Mr Yu also argued, on the same basis, that the information the appellant had was not price-sensitive (para. 61.2c above) because of its uncertain state. Certainty argument 69.First, Mr Yu argued that as a matter of language, the word “would” in the particulars refers to a definite event (the announcement of the placement with the stated details), and that event was not certain until sometime between 4 and 5 pm on Monday 26 January when terms were agreed between COLI and JP Morgan as placing agent. He referred to evidence from Rupert Fane, then a Vice-President of the Equities and Capital and Derivatives Markets Department of JP Morgan, to the effect that generally an agreement was not certain until the documents were signed. In this placement that happened at about 6 pm. Therefore, he argued, when the appellant sold the shares, it was by no means certain that the placement would take place. 70.In my view the word “would” simply refers to a prospective event. It is in the nature of commercial negotiations that nothing is ever “certain” until both parties sign on the dotted line. Although specified persons in Tribunal proceedings face potentially serious consequences, it is not unfair to them to read the particulars this way, because the degree of likelihood of the event taking place is reflected in the degree of relevance of the information. The less certain that a future event would take place, the less will the respondent be able to prove the relevance of the information about the event. 71.Further, with respect, the Tribunal was right when it held that by referring to the movement of the market price of COLI shares, the appellant would have seen that things were building up to the stage when the event was likely to take place (the “moving tableau” in para. 967).
72.With regard to this sale, Mr Yu pointed to the fact that the day before, David Tsien had told the appellant that there was no agreement from the talks. He focused on David Tsien’s use of the phrase “講唔埋欄”(see TT on 20/1/2004, counter 70). It was argued that the Tribunal had failed to take that remark into account. Therefore, it was argued, if the appellant was told there was to be no agreement, he did not order the sale of the shares with information that a placement was likely to happen.
73.As for the 2nd sale of shares on 26 January, Mr Yu referred to David Tsien’s remark to the appellant, just before the market opened after the Chinese New Year break, that they “guessed” COLI would go ahead with the placement that week (see TT on 26/1/2004, counter 8). It was argued that that showed there was still uncertainty about the placement.
Price-sensitivity 74.Mr Yu’s argument on “price-sensitivity” is based on the same ground of uncertainty. I will not repeat the discussion set out above. It is a matter of fact in each case what information (including the fact that negotiations are taking place) is price-sensitive. The Tribunal found that the information was price-sensitive after considering expert evidence from both sides (para. 965-982). Knowledge that it was relevant information 75.Finally, there is the issue whether the appellant knew the information was “relevant information” within the meaning of the Ordinance. It was argued by Mr Yu that since the appellant knew David Tsien was a “public side” equities salesman, he could assume that whatever information David Tsien gave him could not have been price-sensitive, as the Chinese Wall policy at JP Morgan would have prevented a person in David Tsien’s position from being given relevant information. 76.In my view, that does not follow at all. Taken to its extreme, it is equivalent to saying that since banks have high security, one could assume that a masked man running out with a gun and banknotes in his hands was not a robber.
77.The Tribunal was entitled to find that the appellant knew that the information he was receiving was relevant information (para. 1057, 1058, 1061). His repeated urgings to David Tsien that the market price of COLI be “kicked up” indicated that he knew that that action would bring about the placement, and that the process of raising the market price would enable him to take a profit on a sale before the placement took place. That was why he asked David Tsien to inform him when the placement would take place - so that he could sell the shares before then (see TT on 20/1/2004, counter 53). 78.For these reasons and those set out in Cheung JA’s judgment, I would dismiss the appeal with costs. Hon Chu JA : 79.I agree for the reasons given by Cheung and Yuen JJA that the appeal should be dismissed with costs. Conclusion 80.Accordingly the appeal is dismissed with costs to the 2nd respondent.
Mr Benjamin Yu SC and Mr Laurence Li, instructed by Clifford Chance, for the appellant Mr Jonathan Kwan, instructed by Department of Justice, for the 2nd Respondent
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