George William Stairs v. Market Misconduct Tribunal and Another

HCMP 1187/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1187 OF 2012

(On an intended appeal pursuant to s. 266 of the Securities and Futures
Ordinance, Cap. 571 from determinations of the Market Misconduct
Tribunal into whether any market misconduct had taken place in relation
to dealings in the listed securities of Chaoda Modern Agriculture
(Holdings) Limited (stock Code 0682) and on other related questions)

________________________

BETWEEN

________________________

Before: Hon Yuen and Fok JJA

Date of Judgment: 19 September 2012

________________________

J U D G M E N T

________________________

Hon Fok JA (giving the Judgment of the Court):

1.By a report pursuant to s. 252(3)(a) and (b) of the Securities and Futures Ordinance (Cap. 571) dated 26 April 2012, the Market Misconduct Tribunal (“the Tribunal”) made a determination that the Applicant was culpable of insider dealing and, by a further report dated 22 May 2012, the Tribunal made a cold shoulder order against the Applicant and ordered him to pay one third of the costs and expenses of the SFC and the Government.  The Tribunal’s various orders under s. 257 of the Ordinance were contained in an Order dated 28 May 2012.

2.By summons dated 11 June 2012, the Applicant seeks leave to appeal pursuant to s. 266 of the Ordinance from the findings and determinations of the Tribunal in those two reports and the orders made by the Tribunal against the Applicant under s. 257 of the Ordinance on 28 May 2012.

3.Under s. 266 of the Ordinance, a person identified as having engaged in market misconduct who is dissatisfied with the finding or determination of the Tribunal may appeal to the Court of Appeal against the finding or determination on a point of law or, with the leave of the Court of Appeal, on a question of fact.  In order for leave to be granted, the proposed appeal must be one which has “a reasonable prospect of success” (see Leung Chi Keung v Market Misconduct Tribunal & Anor. HCMP 2539/2009, 16.11.10, unrep., at §8), i.e. a real, or a sensible, as opposed to fanciful prospect of success.

4.The summons annexes a draft notice of appeal and the Applicant has served skeleton submissions also dated 11 June 2012 in support of the application for leave.  On behalf of the 2^nd Respondent to the summons, a statement in opposition to the application dated 26 June 2012 has been served.  In answer to this, the Applicant has served a reply statement dated 9 July 2012 which helpfully identifies the basis on which, notwithstanding the 2^nd Respondent’s statement in opposition, it is contended that the threshold for leave is met.

5.In summary, the market misconduct alleged against the Applicant was that, in a telephone conference call on 15 June 2009, the Applicant received relevant information about Chaoda Modern Agriculture (Holdings) Limited (“Chaoda”) that was likely to adversely affect the share price.  The Applicant, being in possession of what it is alleged he knew to be relevant information, dealt with the shares of Chaoda on 16 June 2009 by selling 374,000 shares of Chaoda at HK$5.30 per share and then subsequently took part in Chaoda’s placing exercise on 17 June 2009 by buying 630,000 shares at HK$4.60 per share.

6.The Tribunal found that Chaoda’s chairman and its Chief Financial Officer informed the Applicant and his colleague in that telephone conference call (Ms Larrabee) that Chaoda was going to undertake a placement of its shares in the size range of US$200 - 250 million and at a price around HK$5 per share (Report §277).  The Tribunal was satisfied that the information that Chaoda was to make a placement of its shares at HK$5 per share with an overall size of US$200 - 250 million was specific information (Report §288), that the information supplied to the Applicant in the telephone conference call of the fact of Chaoda’s decision to make a placement, its size and price was non-public information (Report §301) and that it was price sensitive information (Report §302).

7.As regards the critical question of the Applicant’s state of knowledge, the Tribunal was satisfied that the Applicant knew that he was in possession of relevant information in respect of Chaoda as a result of the telephone conference call (Report §320) and that his purpose in selling the Chaoda shares was to avoid a loss in the fund of which he was a manager which would flow from a drop in the market price following the announcement of the placement of Chaoda shares at a substantial discount (Report §§326, 327).  The Tribunal therefore concluded the Applicant was culpable of market misconduct contrary to s. 270(1)(e) of the Ordinance (Report §328).

8.Turning to the proposed grounds of appeal, these may be divided into those which attack the Tribunal’s findings of facts that the price, size of the placement and its timing were non-public price sensitive information (Grounds 3, 4 and 5) and its findings of fact relating to the Applicant’s state of knowledge (Grounds 1, 2, 6, 7, 8, 9 and 10).

9.In the Applicant’s skeleton submissions dated 11 June 2012, each of the proposed grounds of appeal, save for Ground 7, are characterised as raising errors of law or of mixed law and fact.  Despite this characterisation, it is clear that the findings of the Tribunal at which these grounds are directed are findings of fact and not law, so that leave to appeal is required under s. 266(1)(b) of the Ordinance.  In any event, it is not suggested by the Applicant that any of the grounds of appeal raise an appeal on a point of law such that an appeal lies as of right and leave is not required.

10.Despite the detailed submissions that have been advanced on behalf of the Applicant, we do not consider that any of the proposed grounds of appeal give rise to an appeal which satisfies the reasonable prospect of success threshold.  We shall state briefly the reasons which lead us to this conclusion by reference to the grounds of appeal as grouped together by reference to the principles of law identified in the Applicant’s skeleton submissions.

11.First, it is said that the Tribunal erred by relying on reasons for rejecting the evidence of the Applicant which he was not given the opportunity of addressing.  It was said that this was unfair and constituted an unacceptable irregularity in the conduct of the hearing.  Grounds 1 and 8 are relied upon in this regard.

12.The gravamen of the complaint in Ground 1 is that the Tribunal sought to diminish and neutralise the effect of the evidence that the Applicant knew that his colleague Ms Larrabee, who was party to the telephone conference call, had circulated a QuickNote message throughout their company containing a summary of the information imparted to them in the telephone conference call.  It is said that the Tribunal missed the point that the circulation of the QuickNote indicated to the Applicant that Ms Larrabee shared his understanding that the information was public.  The Applicant complains that he was not given the opportunity of dealing with the reasoning in §323 of the Report and this was unfair and an irregularity in the conduct of the hearing.

13.Ms Larrabee had submitted a written statement to the Tribunal in which she confirmed she did not think there was any non-public information discussed in the telephone conference call and that, had she thought there was, she would not have distributed the QuickNote.  However, as the Tribunal rightly pointed out, she declined to be interviewed by the SFC or to give testimony to the Tribunal by video link and it properly took these matters into account in determining what weight to give to the material it had received from her.  It was for the Tribunal to attach such weight to her assertion that she did not believe the information discussed in the telephone conference call was non-public.

14.In §323 of the Report, the Tribunal analysed why it considered that the publication of the QuickNote was not inconsistent with the information being non-public price-sensitive information by reference to her and the Applicant’s firm’s protocols, by which the firm reserved the right to publish non-public price sensitive information that was provided to it outside its protocols.  In other words, the fact that it published any particular material did not mean that it was not non-public price sensitive information.  Those protocols were in evidence before the Tribunal and the Applicant had the opportunity of addressing them.  The Tribunal’s analysis in §323 is its reasoning for reaching the conclusion that the mere fact Ms Larrabee published the information in the QuickNote did not mean it was not non-public price sensitive information.  She was a research analyst and presumably was acting in that capacity when she produced the QuickNote.  The proposition that her publishing the information meant it could not be non-price sensitive information would seem to be a non-sequitur.  The nature of the information would not change.  The publication just meant other employees would be restricted from acting on the information.  So even assuming the Applicant knew the information about the telephone conference call was being widely circulated about the firm, it does not follow that this meant it was not non-public price sensitive information.  We do not consider that the complaint that the Tribunal’s reasoning based on the evidence before it was not put to the Applicant discloses any unfairness or irregularity in the conduct of the hearing.

15.Ground 8 complains that the Tribunal did not give the Applicant an opportunity to address the reasoning in §320 of the Report.  It is said that he was not given the opportunity to say that it never occurred to him at the time that what he had described to Ms Larrabee as a “surprising” absence of a drop in the market price indicated to him that there had been no public announcement.  However, the note to his manager (Mr Wetlaufer) recording that remark he made to Ms Larrabee was drawn to his attention in the course of his testimony and the Tribunal noted that he offered no explanation for it (Report §319).  It is therefore not correct that he was not given the opportunity to say that it never occurred to him that his remark to Ms Larrabee indicated to him that there had been no public announcement.

16.A further complaint raised in Ground 8 concerns the Tribunal’s treatment of the Applicant’s evidence that there was an ‘overhang’ to the shares and that the Tribunal did not address the point that the relief of that overhang on the stock by a placement might well have prevented any drop in the price of the stock as a result of any public announcement.  However, the Tribunal was aware of his evidence of the overhang but, notwithstanding that evidence, came to the conclusion on the basis of its assessment of other cogent evidence that the Applicant knew the information he had received was non-public price sensitive information.  In our view, this complaint is fanciful.

17.A further two points under Ground 8 are raised.  The Applicant complains that the Tribunal’s reasoning in §324 of the Report was unfair and irregular.  However, we do not regard this criticism as valid.  The Tribunal was there addressing the fact that the Applicant did not give the order to sell the Chaoda shares at the earliest opportunity of trading following the telephone conference call.  The Tribunal was entitled to take the view that the evidence of the Applicant demonstrated that he must have been aware that the shares were not suspended and that their price had not fallen sharply.

18.Finally, it is said that it was wrong to draw any adverse inference from the Applicant’s inability to recall why he made the observation to Ms Larrabee which was recorded in the note to Mr Wetlaufer since the observation was made more than three years ago and, if that note reflected guilty knowledge that the information was non-public, it would be unlikely he would have disclosed the note to the Tribunal.  We do not accept the validity of this criticism.  The lapse of time was not so long that it explained the Applicant’s inability of recollection and the suggestion that he would not have disclosed it if it reflected guilty knowledge simply goes to the weight of the evidence which was a matter for the Tribunal.

19.Next, it is said that the Tribunal erred by failing to take account of relevant considerations which were highly significant in the context of the Applicant’s defence to the allegation of insider dealing.  Grounds 2, 5, 6, 9 and 10 are relied upon in this regard.

20.Ground 2 first complains that the Tribunal failed to take account of relevant evidence, namely evidence to show that the Applicant’s sworn understanding that the information he received in the telephone conference call was public was reasonable.  It is said that the reasonableness of his belief was a highly relevant factor in determining whether he genuinely held that belief.  However, the evidence in question (concerning the simultaneous group teleconference call on 29 April 2009, the size and price of the aborted April placement, the 90-day ‘lock-up’ provision in the February 2009 placement, and market expectations) was considered and analysed by the Tribunal and self-evidently formed part of the totality of the evidence on which it based its decision rejecting the Applicant’s evidence that he genuinely believed the information was public.  We do not consider this gives rise to an appeal with a reasonable prospect of success.  The second complaint under Ground 2 is unfairness in the Tribunal proceeding on the basis that, since there had been no public announcement of the June placement, therefore what the Applicant was told in the telephone conference call was not in the public domain and he could not have believed that it was.  We agree with the 2^nd Respondent’s contention, by reference to the paragraphs in the Report in which the Tribunal dealt with the evidence in question and its analysis of that evidence, that the Tribunal did not equate the information in the public domain with what had been the subject of a formal public announcement.

21.Ground 5 complains that, in relation to the timing of the placement, the Tribunal failed to appreciate the significance of the evidence of a general market expectation that the likely date of the placement would be shortly after the expiry of the ‘lock-up’ and that this was material to the reasonableness of the Applicant’s belief in this regard.  However, we are satisfied that the Tribunal took account of market anticipation of the possibility of a share placement and that, notwithstanding that, there was sufficient evidence for its conclusion that it was sure the timing of the placement of shares by Chaoda was not public information (Report §299).

22.Ground 6 complains that the Tribunal drew unjustified inferences as to the understanding of the Applicant by reference to the understanding of Ms Angela Yu of Blackrock and Mr Matt Sigel of Alliance Bernstein.  First, it is said that the Tribunal did so in relation to Ms Yu of Blackrock in §318 of the Report.  We do not agree that this shows the Tribunal used Ms Yu’s evidence to support an inference that the Applicant must have had the same understanding. The Tribunal took care to direct itself properly as to the drawing of inferences (Report §§23-24) and we do not read §318 in the way the Applicant contends it is to be read.  Read in context, the reference in that paragraph to Ms Yu explains what the Applicant should have done “if he knew it to be ‘relevant information’”, i.e. the manner in which he “was constrained in dealing in Chaoda shares”. We are also satisfied that the Tribunal did not draw any unfair or unwarranted inference as to the Applicant’s state of mind by reference to that of Ms Yu or Mr Sigel.  It was, however, proper for the Tribunal to comment on the evidence of Mr Sigel by way of “contrast” with that of the Applicant (Report §285) in analysing whether it accepted the Applicant’s oral evidence.  As to the further complaints under Ground 6, the Tribunal summarised the evidence of Ms Yu and Mr Sigel carefully (Report §§101-102, 155-163 and 171-181) and we do not therefore think there is merit in the suggestion that the Tribunal ignored any material difference between their positions and that of the Applicant.

23.Ground 9 complains that the Tribunal failed to take account of the point as to why the Applicant sold the shares on the date after the telephone conference call and not on some date prior to that call.  It is suggested that the Tribunal wrongly attributed to the Applicant that he was suggesting it was a coincidence.  We do not read §326 of the Report as doing so.  The Tribunal was there stating its conclusion that the timing of the sale by the Applicant was not a coincidence but was, instead, a deliberate decision on his part to avoid a loss.  The Tribunal duly considered but rejected the Applicant’s explanation for his decision to sell at that time (Report §325).

24.Ground 10 complains that, in reaching its decision of what the Applicant actually did know, the Tribunal reasoned by reference to what he should have known.  We do not accept the contention that the process of reasoning was unsound as contended.  The Tribunal was clearly aware that the relevant test for knowledge was subjective (Report §6).  So far as the Tribunal reasoned as to what he actually did know, contrary to the Applicant’s claim in his evidence of what he knew, it was open to the Tribunal to refer to objective matters which undermined his denial of knowledge.  As to the complaints concerning inferences drawn by reference to Ms Yu and Mr Sigel’s states of mind, these have been addressed above.  We accept the 2^nd Respondent’s submission that there is nothing to suggest the Tribunal blurred the distinction between “should” and “did” know.  Finally, we do not accept that there was a glaring inconsistency between the approach of the Tribunal to the position of the Chaoda executives who gave the Applicant the non-public price sensitive information and its approach to that of the Applicant.  The Tribunal acknowledged the Applicant had no personal interest in the fund holding the shares but nevertheless was satisfied he sold the shares to avoid a loss for that fund (Report §326).  In this respect, his position was different to that of the Chaoda executives who obviously were averse to any activities (such as the selling of shares) which might lead to a drop in the market price of the shares.

25.Next, it is said that the Tribunal erred by failing to identify any reason or rational basis for particular findings of fact and Grounds 3 and 4 are relied upon in this regard.

26.Ground 3 complains that the Tribunal failed to address the issue of whether the only price mentioned to the Applicant in the telephone conference call was within general market expectations before reaching its conclusion that the information he received as to price was non-public (Report §301) and that the Tribunal gave no reason for determining that the fact the placement price was lower than the indicative price given to the Applicant did not alter the fact that the information was price sensitive information (Report §302).  The Tribunal took into account the evidence concerning market expectations (Report §§295-299) and we do not therefore consider there is any substance in the first complaint.  As to the second complaint, the fact that the Applicant was not told that the actual placement price would be $4.60 per share or less than $5 per share does not mean that the price he was told of $5 per share was not non-public price sensitive information. There is no error in §302 of the Report, which is addressing the question of whether the information supplied by the Chaoda executives, if known to those accustomed or likely to deal in Chaoda shares, would be likely to materially affect its share price.  The Tribunal was not suggesting that the Applicant was told the price would be $4.60 or less than $5.

27.Ground 4 complains that it is not clear whether the Tribunal found that the information about the size of the placement was material and, if so, why.  We do not consider there is any substance in this point.  The Tribunal concluded that the decision to make the placement, its size and price was non-public information (Report §301) not that it was material in any particular respect.  It had already concluded the information was specific information (Report §288).

28.Next, it is said that the Tribunal erred by making a finding on the basis of manifestly flawed reasoning and Grounds 6 and 10 are relied upon in this regard.

29.We have already addressed those Grounds above and we are satisfied that they do not give rise to an appeal with a reasonable prospect of success.

30.Finally, it is said that the Tribunal erred by misstating and misdirecting itself as to the Applicant’s evidence and Ground 7 is relied upon in this regard.

31.Ground 7 complains that the Tribunal misdirected itself in §222 of the Report in finding that the Applicant denied that following the telephone conference call he believed the placement was “imminent”.  We accept the 2^nd Respondent’s submission that, on a fair reading of the report, the Tribunal did not misdirect itself as alleged.  It is apparent that the Applicant used the word imminent in a different sense to that used by the Tribunal but the material point was that the Tribunal rejected his evidence that the placement would come “in the coming weeks” and not “in the next day or two” (Report §287).  In that sense, there was no misdirection by the Tribunal: the Applicant did deny the placement would be “in the next day or two”, which was the sense in which the Tribunal used the word “imminent”.

32.For the reasons stated above, we do not consider that the Applicant has demonstrated that the proposed appeal is one with a reasonable prospect of success and we would therefore dismiss his application for leave to appeal.

33.We are also of the view that the application is totally without merit such that it is appropriate to make an order, pursuant to RHC Order 59 rule 2A(8), that no party may request the determination to be reconsidered at an oral hearing inter partes.

34.Finally, as to the costs of the application, these should be borne by the Applicant.  The 2^nd respondent’s costs in respect of the application will be assessed on a gross sum basis and, to this end, we therefore direct the 2^nd respondent’s solicitors to submit a bill of costs within seven days hereof and give leave to the Applicant’s solicitors to submit a response within seven days thereafter.

Written submissions by Mr Adrian Huggins SC, instructed by Reed Smith Richards Butler, for the Plaintiff/Applicant

Written submissions by Mr Jonathan Kwan, instructed by the Department of Justice and Mr Gordon Chung GC, for the 2^nd Defendant/ 2^nd Respondent