HKSAR v. DU JUN

DCCC787/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 787 OF 2008

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Reasons for Sentence

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1.  In R v Christopher McQuoid [2009] EWCA Crim 1301, the Lord Chief Justice of England and Wales, Lord Judge, gave guidance to sentencing judges in England and Wales about considerations which may be relevant to their sentencing decision. These are:

“(1) the nature of the defendant’s employment or retainer, or involvement in the arrangements which enabled him to participate in the insider dealings of which he is guilty;

(2)  the circumstances in which he came into possession of confidential information and the use he made of it;

(3)  whether he behaved recklessly or acted deliberately, and almost inevitably therefore, dishonestly;

(4)  the level of planning and sophistication involved in his activity, as well as the period of trading and the number of individual trades;

(5)  whether he acted alone or with others and, if so, his relative culpability;

(6)  the amount of anticipated or intended financial benefit or (as sometimes happens) loss avoided, as well as the actual benefit (or loss avoided);

(7)  although the absence of any identified victim is not normally a matter giving rise to mitigation, the impact (if any), where proved, on any individual victim; and

(8)  the impact of the offence on overall public confidence in the integrity of the market; because of its impact on public confidence it is likely that an offence committed jointly by more than one person trusted with confidential information will be more damaging to public confidence than an offence committed in isolation by one person acting on his own.”

2.  It was also stated that,

“It must be borne in mind that it will often be the case that it is the individual of good character who has been trusted with information just because he or she is an individual of good character.  By misusing the information, the trust reposed as a result of good character has been breached.

Age and a guilty plea will be relevant.  So, too, will good character.”

3.  Further, it was also suggested that the decision of the English Court of Appeal in R v Clarke [1998] 2 Cr App Rep 157 may provide valuable assistance.

4.  In assessing sentence, full weight will be given to the impact of the appellant and his family as well as the destruction of his professional reputation.

5.  The guideline in R v Clarke has been adopted and modified in Hong Kong under two Court of Appeal decisions, namely HKSAR v Cheung Mee Kiu, CACC99/2006, and HKSAR v Ng Kwok Wing and Others, CACC398/2007.

6.  The guideline as presently stands, is as follows:

below $250,000, less than 2 years’ imprisonment; $250,000 to $1 million, 2 to 3 years’ imprisonment;

$1 million to $3 million, 3 to 5 years’ imprisonment; $3 million to $15 million, 5 to 10 years’ imprisonment; above $15 million, more than 10 years’ imprisonment.

7.  Theft, in breach of trust, of course is different from insider dealing. The perpetrator in insider dealing steals information, in breach of trust, from one person, normally his client or employer, and uses the information to practice a fraud on another person; for example, institutional or small investors.

8.  In that sense, the culpability in insider dealing is slightly less than the perpetrator in committing theft in breach of trust.

9.  Having said that, the insider dealer is still a criminal. The principle of confidentiality and trust which are essential to the operation of the commercial world are betrayed and the public confidence is undermined by market abuse. Insider dealings is an insidious mischief which threatens the integrity of financial markets, the words of Sir Anthony Mason.

10.  Returning to this case, the defendant was convicted of 10 counts of insider dealing, nine of which against section 291(1)(a) of the Securities and Futures Ordinance, the remaining one against 291(2)(b) of the same ordinance.

11.  At all material times, the defendant was Managing Director of Fixed Income Division Morgan Stanley. During 2006 and 2007, he was involved in one project finance that at the end enabled CITIC Resources Holdings Ltd, a Hong Kong listed company, in acquiring 50 per cent of an interest in certain oil fields in Kazakhstan. Details of this project and the defendant’s involvement have been mentioned in my reasons for verdict, to which I shall not repeat.

12.  In essence, during the course of his involvement in the project, the defendant received confidential, valuable insider information from CITIC Resources as well as his parent company, CITIC Group Beijing.

13.  Among these inside information was the information about a proposed acquisition of a Chinese oil field by CITIC Resources. The acquisition, if materialised, would launch CITIC Resources into a different level.

14.  The defendant decided to make the best out of this piece of information. He, between 15 February 2007 and 30 April 2007, on nine occasions purchased a total of 26,700,000 shares at an average purchase price of $3.2625 per share. The total purchase cost amounts to $87,109,693.

15.  On 9 May 2007, after the official announcement made on the proposed acquisition of the Chinese oil field, the share price of CITIC Resources jumped to a close at $4.19 per share. The daily turnover on 9 May 2007 was 207,475,200 shares (the equivalent of HK$846,578,704). The share price continued to climb on the next day to close at $4.30, with a daily turnover of 94,464,000 shares. The share price eased off and fell 0.5 per cent on the day after. Miss Stella Fung worked out in her statement the re-rated price to be $4.151 per share.

16.  The defendant subsequently sold all his shares, roughly in two blocks, in terms of timeframe: one block in July 2007 and the other block in December 2008-January 2009.

17.  In relation to the first block, 30 million shares were sold at an average price of $5.8338 and as a result the defendant made a profit of approximately HK$33.43 million.

18.  In relation to the second block, 13,700,000 shares were sold at an average price of $0.9749. The defendant thus sustained a loss of approximately $31.34 million.

19.  The information in question was imparted to Morgan Stanley in strict confidence. It was given for the sole purpose of facilitating CITIC Resources in securing a financing arrangement for its acquisition. Members of the project team were regarded as insider by PW3, Mr Peter Kwok, chairman of the CITIC Resources. The defendant was treated as an insider by his colleagues too.

20.  The defendant acted deliberately and dishonestly in utilising the information for his own financial benefit. He acted not only in breach of the trust placed on him by his employer, by his colleagues, but also by his client, CITIC Resources. It is a serious breach of trust.

21.  I accept the level of planning and sophistication was not the highest. No hidden account was used. Further, the period of trading was only confined to a period of two months and that only one listed security was involved.

22.  Having said that, the scale was unprecedented. $87 million was used. This is the biggest so far I have come across from cases cited to me. The potential financial benefit but for the financial downturn in 2008 and 2009 would be phenomenal.

23.  The defendant’s unlawful conduct seriously undermined the integrity of the market in Hong Kong as a financial city. The financial services industry is absolutely vital for Hong Kong. It must be guarded vigorously. Investors, whether big or small, must be able to play on the same level playing field. Transparency and free of corrupted practice are key to our growth.

24.  There is no dispute that the defendant managed to obtain “approval” from his designated manager and Morgan Stanley’s Compliance Department. However, as I have outlined in my reasons for verdict, the defendant obtained such dishonestly and fraudulently. It can hardly be used as mitigation.

25.  The defendant is 41 and married. He also obtained a masters degree from Columbia University. After graduation, he has been working at various investment banks. He joined Morgan Stanley in June 2001 and worked his way up to become a managing director. He was described to be an effective hard-worker and had expanded the Fixed Income Division sales many folds by his former superior. His professional reputation is now in ruins. This also will no doubt create a major impact to his wife and to his parents. I am also informed that the defendant has aged parents to look after in Beijing.

26.  In this case, the defendant was in fact given opportunity to walk away. He was given warnings twice by his immediate superior, Mr Liu Jialin, to steer away from further dealings. The defendant decided not to listen to the good advice of Mr Liu. He continued to trade. I still remember vividly the demeanour of Mr Liu Jialin when he recalled in court the day/time when he walked the defendant out of Morgan Stanley and the dialogues he had with the defendant.

27.  I cannot think of any reason but sheer greed that drove the defendant to the present situation.

28.  Let me now turn to the financial penalty I intend to impose.

29.  Having considered submissions from both sides and, in particular, having considered the judgment in The Insider Dealing Tribunal v Shek Mei Ling [1999] 2 HKCFAR 205, I am of the decision that the amount of penalty imposed in a criminal case should be of no difference from the profit gained as calculated in an Insider Dealing inquiry.

30.  The same logic should apply because the purpose in a criminal case of imposing financial penalty is to disgorge a defendant’s unlawful profit. In this case, his profit should be calculated by reference to the formula of notional profit.

31.  Lord Nicholls of Birkenhead, NPJ, states the correct approach in page 211 of the judgment:

“The approach adopted by the tribunal in this type of situation, in my view correctly, is to treat the relevant profit as that gained by the insider dealer when the information was made public and the  market had had a reasonable opportunity to digest the information.

The gain is to be measured by reference to the market value of the shares at that date.  At that date, the amount of the insider dealer’s profit, whether realised or not, is fixed once and for all.  Subsequent changes in market prices are irrelevant for the purpose of section 23 calculations.  They are irrelevant, because such changes are not to be regarded as flowing from the original improper purchase of shares.  Rather they flow from the insider dealer’s decision to retain the shares at a time when the effect of the misuse of the confidential information had become spent and the insider dealer was on an equal footing with other investor.

The matter can be tested in this way.  Had the insider dealer sold the shares when the information became public, his subsequent use of the proceeds would be regarded as irrelevant for the purpose of the section 23 calculation.  Successful investment of the proceeds by the insider dealer would not increase the amount of profit gained as a result of the insider dealing, nor would a disastrous investment decrease the amount……

His position should be no better and no worse.”

32.  In the present case, the notional profit is calculated to be 4.151 minus 3.2625 times 26.7 million, and the result is $23,722,950 minus the transaction cost. The transaction cost works out to be $397,886. As such, the notional profit in this case is $23,324,121, and that works out to be approximately 0.8736 per share.

33.  Having considered the guideline as stipulated in R v Clarke and the Hong Kong cases and having considered all the circumstances and the mitigation put forward by Mr King, in respect of the 1st charge, the defendant is fined $4,367,813, and in view of the matters as I have stated, I am of the view that the appropriate starting point is one of 5 years’ imprisonment.

34.  For the 2nd charge, the defendant will be fined a sum of $621,976 and he is also ordered to serve a term of 2 years’ imprisonment.

35.  In respect of the 3rd charge, he is fined $45,425 and he is also ordered to serve a term of 6 months’ imprisonment.

36.  In respect of the 4th charge, he is fined $3,083,675 and he is also ordered to serve a term of 4 years’ imprisonment.

37.  In respect of the 5th charge, he is fined $616,735 and he is also to be sentenced to a term of 2 years’ imprisonment.

38.  In respect of the 6th charge, he is fined $4,280,456. He is sentenced to a term of 5 years’ imprisonment.

39.  In respect of the 7th charge, he is fined a sum of $87,356. He is also sentenced to a term of 6 months’ imprisonment.

40.  In respect of the 8th charge, the defendant is fined a sum of $6,289,650. He is sentenced to a term of 6 years’ imprisonment.

41.  In respect of the 9th charge, he is fined a sum of $3,931,031. He is sentenced to a term of 5 years’ imprisonment.

42.  The total fine works out to be $23,324,117.

43.  In respect of the 10th charge, in view of the number of shares, a term of 6 months’ imprisonment will be imposed.

44.  Having considered the scale of the operation, the amount of money involved, both in terms of the purchase price, $87 million, and the profit gained, $23 million, the totality principles, it is hereby ordered that 3 months each of Charge 2 to Charge 10 to run consecutively to Charge 1 and to each other. This will make a total of 7 years and 3 months’ imprisonment.

45.  By virtue of section 82 of the District Court Ordinance, the defendant is therefore sentenced to 7 years’ imprisonment and fined a total of $23,324,117.

46.  In addition, it is further ordered that:

(1)  the defendant do pay to the Securities and Futures Commission investigation costs in the sum of $933,340;

(2)  that any body which may take disciplinary action against the defendant as one of its members be recommended to take disciplinary action against the defendant pursuant to section 303(2)(c);

(3)  the defendant shall not, without the leave of the court, be continued to be a director or manager of the property or business of any listed corporation or in any way, whether directly or indirectly, be concerned or take part in the management of any listed corporation for a period of 5 years pursuant to section 303(2)(a); and

(4)  the defendant shall not, without the leave of the court in Hong Kong, directly or indirectly in any way acquire, dispose of or otherwise deal in any securities, futures contracts or leveraged foreign exchange contract, or an interest in any securities, future contracts leveraged foreign exchange contract or collective investment scheme for a period of 5 years pursuant to section 303(2)(b).

47.  There will be no costs order against the defendant.