X v. Securities and Futures Commission

HCAL 71/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO. 71 OF 2011

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J U D G M E N T

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I. INTRODUCTION

1.X sought disclosure of certain documents from the SFC.  X says that without the documents it cannot properly prepare submissions in response to proposed disciplinary action against it by the SFC.

2.The SFC refused disclosure, stating that the documents are irrelevant and (in any case) privileged.

3.X now seeks judicial review of the SFC’s refusal.  X contends that its statutory right to a fair hearing in disciplinary proceedings by the SFC will be compromised if it is denied the documents.

II.  BACKGROUND

4.X is licensed by the Hong Kong Monetary Authority (HKMA) under the Banking Ordinance (Cap.155) (BO).  X is registered with (but not licensed by) the Securities and Futures Commission (SFC) under the Securities and Futures Ordinance (Cap.571) (SFO).

5.Thus, X falls within 2 regulatory regimes, that of the BO and that of the SFO.  The primary regulator of X’s affairs is the HKMA, not the SFC.  The HKMA investigates any failure by X to comply with its obligations under codes, guidelines or rules promulgated by the SFC.  But the SFC decides whether to prosecute X for misconduct in relation to those codes, guidelines and rules.

6.The HKMA and the SFC are obliged to coordinate with each other in their regulation of persons like X.  By SFO s.198(1), for example, the SFC may not discipline a registered institution “unless it has first consulted the [HKMA]”.  Both regulators have entered into a Memorandum of Understanding setting out their functions in the regulation of entities such as X.

7.X’s client having made a complaint, the HKMA investigated X’s handling of a transaction.  The investigation took several years.  Following the investigation, the HKMA referred its findings to the SFC.

8.The SFC conducted further investigation.  It then issued a Letter of Mindedness (also known as a Notice of Proposed Disciplinary Action) to X.  The Letter notified X of the SFC’s intention to impose certain disciplinary penalties on X pursuant to SFO s.196.  The Letter invited X to make representations as to why penalties should not be imposed. Attached to the Letter was a list of relevant documents, including those upon which the SFC was relying in support of its proposal to impose penalties on X. Copies of the listed documents have been supplied to X.

9.X replied that the SFC needed to disclose other documents before X could fairly respond to the Letter.  The additional documents which X required the SFC to disclose included:-

(1)  The document whereby the HKMA referred X’s case to the SFC.

(2)  The document setting out the HKMA’s findings and all supporting documents not already provided to X with the Letter.

(3)  All correspondence between the SFC and the HKMA in relation to X’s case.

(4)  All materials (referred to in these proceedings as “the unused materials”) which the SFC had available to it, but which the SFC opted not to make use of in support of its proposal to impose sanctions on X.

10.The SFC refused X’s request for disclosure of the 4 categories of documents enumerated above.  The SFC took the view that the documents were irrelevant to the disciplinary proceedings against X.  The SFC further asserted that many of the documents were privileged from disclosure by reason of public interest immunity (PII).

11.The SFC’s claim for PII is a class (as opposed to contents) claim.  The SFC contends that categories (1), (2) and (3) of the requested documents “contain the honest and forthright preliminary opinions, views and recommendations of staff members of the HKMA”.  Disclosure of those documents “would have a strong inhibiting effect on the future preparation of such [documents]”.  Such inhibition (the SFC argues) would be detrimental to the public interest and so the Court should not order their disclosure in any circumstance.

12.Since the start of X’s judicial review, the SFC has issued a Supplemental Letter of Mindedness clarifying certain paragraphs in the original Letter and disclosing a few other documents.  The SFC has also said that it has disclosed all relevant documents.  By “relevant”, the SFC means that it has disclosed all documents which in its view might either undermine the rationale of the SFC’s case or assist the defence of X’s case.

13.X had initially also asked for disclosure of an HKMA survey.  That request has since been dealt with by the parties.  It is no longer at issue.

II.  DISCUSSION

A.  X’s Main Contention

14.I see no reason to go behind the SFC’s statement on affidavit that it has disclosed all relevant documents.  Unused materials falling in category (4) now appear to consist largely of cover letters passing between the HKMA and the SFC.  The underlying documents attached to those cover sheets have been disclosed to X.  The cover letters themselves are of little value to anyone and I do not understand X to be pressing for their disclosure.

15.What X is ultimately seeking then by these proceedings are documents provided by the HKMA to the SFC setting out the thoughts of various HKMA officers on X’s case.  Those are documents falling within categories (1), (2) and (3).

16.X’s challenge against the SFC’s refusal to disclose essentially relies on SFO s.198(1).  SFO s.196 (under which the SFC is proposing to discipline X) is expressly subject to s.198.

17.By s.198(1) the SFC may not take disciplinary action “without first giving the person in respect of whom the power [under s.196] is to be exercised a reasonable opportunity of being heard”.

18.X says that, if it is to have “a reasonable opportunity of being heard”, it must be allowed to respond to potentially prejudicial material (in particular, opinions expressed by HKMA officers) in the documents sought.  Of course, X will not be able to assess whether or not there is potentially damaging material until it sees the documents.

19.X accepts that the documents sought may not contain evidence in a strict sense.  Thus, opinions expressed by an HKMA officer in a document would not constitute evidence of the facts and matters stated in the opinions.  But X stresses that this judicial review is not about the discovery of evidence.

20.Instead, X’s point is that, where disciplinary proceedings are concerned, the SFC acts both as prosecutor and judge.  The SFC discharges a “quasi-judicial function” (Ng Chiu Mui v. Shum Lik Keung [2011] HKLRD 88, at para.33 (Sakhrani J)).  The SFC is prosecutor in the sense that it is prosecuting X for alleged misconduct.  The SFC is judge in the sense that the SFC will be hearing submissions as to why X should not be punished as indicated in the Letter and the SFC will be deciding whether to accept or reject those submissions.

21.The SFC (X argues) cannot fairly perform its function of judge if the SFC:-

(1)  has received unilateral communications from the HKMA which are likely to contain opinions prejudicial to X, and,

(2)  has not given X a reasonable opportunity to respond to those possibly adverse observations.

22.Prejudicial views expressed by an HKMA officer in a document may (X posits) have influenced the SFC to take a negative view of X’s conduct.  The prejudice to X may take effect at a subconscious level.  The SFC may not itself be conscious of the fact that its decision to prosecute was (and continues to be) influenced by some opinion stated in a document provided to the SFC by the HKMA.

23.X says that, unless it is given all of the material which the HKMA provided to the SFC (especially material setting out views of HKMA officers), X will not be in a position to evaluate what might possibly have adversely influenced the SFC’s mind against X.  X would not then be able to adduce evidence or make representations to counteract the potentially pejorative views.  X would be deprived of a reasonable opportunity to make submissions on material which could have serious detrimental repercussions on its future.

24.The situation is akin (X says) to that where a third party unilaterally writes to a judge about a case being considered by the Court.  The actual parties to the case would be entitled to see the unilateral communication, if only to afford them with a chance to rebut any potentially adverse influence which the document might have exerted on the judge’s mind. Such entitlement (X argues) is an attribute of a party’s right to a fair hearing and of the Court’s duty to hear the other party’s side in a dispute.

25.Since the SFC is performing a “quasi-judicial” role, it is analogous (X contends) to the judge in the example just given.  The HKMA is analogous to the third party.  There is no dispute that the HKMA has communicated unilaterally with the SFC.  It was duty-bound to do so.  In those circumstances, the SFC (X concludes) must divulge all communications between it and the HKMA, so as to give X a chance to deal with any possibly detrimental observations made by the HKMA.

26.In support, X cites Kanda v. Government of the Federation of Malaya [1962] AC 322 (PC).

27.There a board of inquiry had prepared a report as to why a prosecution failed.  That report was highly critical of Inspector Kanda.  The Commissioner of Police therefore decided to bring disciplinary proceedings against Kanda.  The adjudicating officer for the disciplinary proceedings was provided with a copy of the report.  But Kanda was not.  Kanda did not even know of the report until too late.  Kanda thus had no opportunity at the disciplinary hearing to address any adverse impressions which the adjudicating officer may have formed as a result of reading the report.

28.The adjudicating officer found Kanda guilty. Kanda challenged that result, complaining (among other matters) that he had not been given a fair hearing.

29.The Privy Council held that there had been unfairness.  Lord Denning delivering the Privy Council’s opinion said (at 337-8):-

“…. The rule against bias is one thing. The right to be heard is another. Those two rules are the essential characteristics of what is often called natural justice. They are the twin pillars supporting it. The Romans put them in the two maxims: Nemo iudex in causa sua and Audi alteram partem. They have recently been put in the two words, Impartiality and Fairness. But they are separate concepts and are governed by separate considerations. In the present case inspector Kanda complained of a breach of the second. He had been dismissed without being given a reasonable opportunity of being heard.

If the right to be heard is to be a real right which is worth anything, it must carry with it a right in the accused man to know the case which is made against him. He must know what evidence has been given and what statements have been made affecting him: and then he must be given a fair opportunity to correct or contradict them…. It follows, of course, that the judge or whoever has to adjudicate must not hear evidence or receive representations from one side behind the back of the other. The court will not inquire whether the evidence or representations did work to his prejudice. Sufficient that they might do so. The court will not go into the likelihood of prejudice. The risk of it is enough. No one who has lost a case will believe he has been fairly treated if the other side has had access to the judge without his knowing….

Applying these principles, their Lordships are of opinion that inspector Kanda was not in this case given a reasonable opportunity of being heard….  It was quite proper to let the adjudicating officer have the statements of the witnesses.  The Regulations show that it is necessary for him to have them.  He will then read those out in the presence of the accused.  But their Lordships do not think it was correct to let him have the report of the board of inquiry unless the accused also had it so as to be able to correct or contradict the statements in it to his prejudice.”

30.I am not persuaded by X’s argument.

31.As Mr. Benjamin Yu SC (appearing for the SFC) points out, what is “fair” or “reasonable” depends on the circumstances or context of a situation.  It is not possible to decide whether something is “fair” or “reasonable” in the abstract, by reference only to some absolute set of criteria applicable in any situation.  One must instead assess whether a person can have a “fair hearing” or be afforded a “reasonable opportunity to be heard” by looking at the entire scheme or process of the disciplinary proceedings to which the person is subject.  See Lam Siu Po v. Commissioner of Police (2009) HKCFAR 267, at para.109 (Ribeiro PJ).

32.The inevitable starting point is the reality that by the statute the SFC is required to perform a dual role.  It has to act as prosecutor and adjudicator.  One cannot get around that.

33.Characterising what the SFC does as “quasi-judicial” does not get one far.  The label, while convenient as description, says nothing about how this Court should draw the line between “fair” and “unfair” in the conduct of the SFC’s dual function.  If one wishes to make a prescriptive statement about what is fair or what constitutes a reasonable opportunity to present a case, one needs to analyse of the whole of the disciplinary proceedings to which X is subject.

34.It would be wrong then to treat the SFC’s role as analogous to that of judge and conclude from this that what is true of a judge must be true of the SFC.  That can never be so, because a common law judge does not and cannot also act as prosecutor.

35.In this case, Mr. Yu invited me to focus on 2 aspects of the disciplinary regime to which X is subject.

36.The first aspect is the Letter (as now clarified by the Supplemental Letter).

37.There (as Mr. Yu observes) the SFC has pinned itself to a specific case.  It has identified the nature of the charge which X is facing.  It has identified the reasons why it proposes to impose a penalty. It has identified the evidence (statements and documents) upon which it will rely in support of its reasons.  It has identified the penalty which it is minded to impose.  The SFC cannot stray beyond the reasons and evidence which it has identified in its Letter.  More particularly, it cannot come up with other reasons, not already articulated in the Letter, for imposing the stipulated penalties.

38.In that context, it is difficult to see how adverse views (if any) expressed by HKMA officers can have any bearing on X’s being afforded a fair hearing or a reasonable opportunity to be heard.  If the adverse view has not already been incorporated as a reason in the Letter, the SFC cannot subsequently rely on it as a basis for imposing sanctions on X.  SFC is bound by what has been stated in the Letter.  On the other hand, if the adverse view has been incorporated in the Letter, X gains nothing by seeing a similar view stated in a communication between the HKMA and the SFC.  X has to deal with the substance of an adverse view as articulated in the Letter, not anywhere else.

39.The second aspect is the availability of appeal to the Securities and Futures Appeals Tribunal (SFAT) against an adverse decision by the SFC.

40.In determining whether to impose penalties, the SFC must carefully consider X’s representations.  If the SFC decides that those representations do not invalidate the reasons identified by the Letter, the SFC must explain in detail in its Notice of Decision why it has found X’s case unconvincing.  If the SFC’s reasons are logically flawed or if the reasons stray beyond the parameters delineated by the Letter, the SFC’s decision may be challenged before the SFAT.

41.But what happens (it might be asked) if an adverse view only subconsciously influences the SFC and leads it to interpret the evidence in some unwarranted manner?  In that case, the SFAT (which sits with a judge as chairman) can readily set the record straight.

42.The SFAT sits only as tribunal, not as prosecutor.  It would not be influenced in any way, conscious or unconscious, by a unilateral communication from the HKMA.  If the SFC has not treated the evidence in a valid manner, the SFAT will presumably do so after having heard submissions from all sides.  On the other hand, if the SFC has dealt with the evidence in a proper way (whether or not unconsciously influenced by something the HKMA has said), it is difficult to see how X can complain.

43.Mr. Charles Sussex SC (appearing for X) responds that SFO s.198(1) enshrines the right to a fair hearing before the SFC.  Mr. Sussex argues that X should not have to wait before it appears in front of the SFAT to obtain a fair hearing.  X is entitled (Mr. Sussex submits) to 2 chances: a fair hearing before the SFC and a fair hearing before the SFAT.

44.I am unable to accept that.

45.SFO s.198(1) entitles X to “a reasonable opportunity of being heard” by the SFC.  What is “reasonable” before the SFC must also depend in no small measure on the availability of recourse before the SFAT against an errant decision by the SFC.

46.Mr. Sussex suggests that, if the SFC comes to a wrong decision because influenced by an adverse view of the HKMA, X would be facing an uphill struggle before the SFAT.  The SFC’s wrong decision against X would be publicised to the world at large.  X must defend itself in the public glare before the SFAT.

47.But I do not think that is right.

48.The SFC having come to a decision, X may apply within the time stipulated in the SFO for a review by the SFAT.  If X so applies, the SFC’s decision will not become final and operative until the SFAT has come to its determination.  The hearing before the SFAT is a full merits review as if the SFAT were the original decision-maker.  If X is concerned about the confidentiality of the proceedings before the SFAT, X can apply to that tribunal to conduct its review in camera.

49.Thus, looking at the disciplinary process in the round, I do not think that any views (whether adverse or otherwise) expressed by the HKMA in the documents requested by X can realistically have a bearing on outcome.

50.In summary, the SFC is constrained by what it has put down in its Letter.  In the theoretical situation where the SFC is negatively acted upon by some comment of the HKMA, this limitation on how the SFC can act should adequately safeguard X’s interests and ensure that it has a fair hearing on the materials presently available.

51.Further, the limitation distinguishes this case from Kanda.  In the latter, the adjudicating officer did not afford Kanda a chance to deal with the report which Kanda did not even know the officer had seen.  Here X knows precisely what the SFC has in mind because the SFC has restricted itself to the facts and matters summarised in the Letter. It is that alone and not some unknown material that X needs to address.

52.But just in case the Letter is not enough protection for some reason, there is an additional safeguard.  There is the possibility of review by the SFAT sitting as an independent tribunal chaired by a judge.

53.I therefore conclude that there is nothing wrongful in the SFC’s refusal to disclose the requested documents.

54.Before leaving this issue, I should comment on 2 matters.

55.First, there is the question of exhaustion of remedies.

56.Mr. Yu submitted that X’s judicial review is premature.  That is because X has not exhausted all available remedies.  Rather than going for judicial review, X (Mr. Yu says) should simply have responded to the Letter.  If X’s submissions to the SFC were rejected by the SFC and if the latter sought to impose penalties, X could then apply for a review by the SFAT.  At that stage, in light of the SFC’s Notice of Decision, X could seek such further discovery as X thought might be appropriate.

57.In light of my conclusion upholding the SFC’s refusal, it is unnecessary for me to deal with Mr. Yu’s submission of a lack of ripeness.  The submission is in essence a corollary of Mr. Yu’s point (already discussed) that the possibility of recourse to the SFAT means that (even without the requested documents) X is afforded a reasonable opportunity to be heard.

58.Second, there is the question of PII.

59.In light of my conclusion upholding the SFC’s refusal as a matter of general principle, one does not arrive at the stage of considering whether PII is applicable.  The materials sought (in particular, the views of the HKMA communicated to the SFC) simply have no bearing on that which the SFC and the SFAT have to decide.  In such circumstance, prima facie the public interest asserted (namely, the need to ensure that HKMA officers express their opinions candidly and fully to the SFC) militates against disclosure of the materials.

B.  X’s Minor Contentions

60.X also makes a number of minor complaints.  I deal with them in this section.

61.In the Letter, the SFC suggests that there was misconduct by X in n of q sample transactions examined.  But, over the period covered by the SFC’s investigation, X handled several thousand similar transactions.  The Letter proposed to impose a penalty on the basis that those several thousand transactions had been mishandled by X.

62.In these proceedings, X seeks an Order compelling the SFC to explain how the n transactions came to be selected out of the sample of q transactions and to identify the several thousand transactions allegedly mishandled.

63.The SFC has since identified the several thousand transactions.  So that is no longer an issue.

64.In relation to the n transactions, I do not see how it furthers anything to understand how they were initially selected from the sample of q transactions. Either there was misconduct in the n transactions as alleged by the SFC or there was not.  That is the charge that X must answer by its representations.  How or why the n transactions were picked out in the first place would not be relevant or helpful to X’s task.

65.In any case, I do not think that it is the function of the Court in a judicial review to micro-manage the SFC’s conduct of disciplinary proceedings.  It is not apparent how ordering the particulars of n sought by X falls within the limited collateral jurisdiction which the Court exercises in a judicial review.  I would be in danger of telling the SFC how to do what it (not the Court) is tasked by statute to do.  That would be to usurp the SFC’s functions.

66.X has also asked for an Order that, whatever the result of these proceedings, X should be given a reasonable time (X asks for at least 3 months) to respond to the Letter.  The SFC has not yet decided how much more time (if any) X should have to respond to the Letter in light of this Judgment.  There has accordingly been no determination of reasonable time which I can judicially review.  It would be unwarranted meddling for the Court now to order that the SFC afford X any particular period of time to respond to the Letter.

67.All that I can do is state the obvious.  In principle, X should have a reasonable time to respond to the Letter.  No one would disagree with that.  What is a reasonable must depend on all the circumstances, including matters which have transpired before the handing down of this Judgment.  It is for the SFC in the first instance (not the Court) to determine what is reasonable in all the circumstances.

68.The minor reliefs sought by X are therefore refused.

IV.  CONCLUSION

69.X’s judicial review is dismissed.

70.There shall be an Order Nisi that X pay the SFC’s costs with certificate for 2 counsel and that the HKMA bear its own costs of these proceedings.  Costs are to be taxed if not agreed.

71.By consent of the parties, the HKMA was allowed to make submissions in this judicial review for the purpose of assisting the Court.  While I found the HKMA’s submissions helpful, I do not think that it would be right to saddle X with two sets of costs.  It is for this reason that I have proposed that the HKMA bear its own costs.

72.The hearing of this judicial review took place in chambers (not open to the public). Notwithstanding this, unless the Court hears otherwise in writing from any of the parties within 14 days, this Judgment will be made public.

Mr Charles Sussex SC and Mr Douglas Lam, instructed by Reed Smith Richard Butler, for the Applicant

Mr Benjamin Yu SC and Mr Laurence Li, instructed by the Securities and Futures Commission, Respondent in person

Mr Simon Westbrook SC, instructed by the Hong Kong Monetary Authority, Interested Party in person