CHENG SIU FAI v. SWENSON GLOBAL OPPORTUNITIES FUND SPC AND OTHERS

HCA 2058/2020

[2021] HKCFI 1608

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2058 OF 2020

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DECISION

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A.   INTRODUCTION

1.  The suspension of the IPO of Ant Group Co., Ltd (“Ant Group”) in 2020 was a well-known event.  The ramifications (both financial and otherwise) were also considerable.  The Plaintiff (“P”) claimed to be a victim of a fraud perpetrated by the Defendants in an arrangement concerning the subscription of the new shares under the IPO.   

2.  The 1^st Defendant (“D1”) (a fund company) and the 2^nd Defendant (“D2”) (the investment manager of the fund) are part of the Swenson Financial group of companies (i.e. “Swenson”).  The 3^rd (“D3”) and 4^th Defendants (“D4”) were senior managers of Swenson.

3.  P’s case is that he subscribed for shares in D1’s segregated fund (the “Fund”), on the strength of Ds’ representation that P’s subscription monies (“Subscription Monies”) would be used only to subscribe for New Shares (Ant Group shares that are to be issued following the IPO) through the Fund.  It is said that Ds knew that P intended to sell the New Shares shortly (or even immediately) after the listing of the Ant Group, so as to make a quick profit.  However, Ds never intended to and did not subscribe for the New Shares using P’s Subscription Monies, and worse still refused to refund the Subscription Monies to P after the sudden suspension of the IPO. 

4.  In terms of the procedural history:

  (1)  On 7 December 2020, upon P’s ex parte application, proprietary and Mareva injunctions were granted against D1 to D4 freezing the sum of HK$321,800,000 (“Sum”) (i.e., the amount of the Subscription Monies paid by P to D1) (collectively “Injunctions”).  In the meantime, the accounts of the Fund, and the Dah Sing account of First Fidelity Capital (“FFC”) with which the Fund maintained a securities account (“FFC Account”), were frozen by letters of no consent (“LNCs”) issued by the Joint Financial Intelligence Unit (“JFIU”).

  (2)  On 22 December 2020, upon D1’s undertaking (subject to consent from law enforcement agencies) to pay into Court a sum of HK$315,000,000 from the FFC Account, and to realise the securities held in the same account and pay into Court such sale proceeds up to a sum of HK$6,800,000 (“Undertaking”), the Injunctions were discharged by Order of DHCJ MK Liu.

  (3)  Pursuant to the Undertaking, the sums of HK$315,000,000 and HK$6,800,000 were respectively paid into Court on 29 March 2021 and 8 April 2021, following the withdrawal of the LNCs earlier in March 2021.  Ds are now willing to continue the Undertaking until the trial of this action, conditional upon P’s giving of fortification by payment into Court (which will be dealt with below).

5.  This is the substantive return date of the Injunctions and there are 4 applications before me:

   (1)  P’s Summons dated 10 December 2020 for, inter alia, continuation of the Order made by DHCJ MK Liu on 7 December 2020 (respectively, the “Continuation and Discovery Summons”);

   (2)  P’s Summons also filed on 10 December 2020 for disclosure from DBS Bank Limited, Hong Kong Branch (“DBS Bank”) and Dah Sing Bank, Limited (“Dah Sing Bank”) (“Bankers Books Summons”);

   (3)  Ds’ Summons filed on 8 March 2021 for fortification (“Fortification Summons”); and

   (4)  P’s Summons filed on 7 April 2021 for case management directions (“Case Management Summons”).

6.  Ms Queenie Lau (together with Ms Natalie So) for the Ds indicated that Ds are willing to continue the Undertaking until the trial of this action and the Sum would remain in Court.  Having heard the submissions from Mr Rimsky Yuen SC (together with Mr Jose Maurellet SC, Mr James Man and Mr Keith Chan) for P and some preliminary observations from the Court, Ds also indicated that they are prepared to give further discovery (by D1 and D2) under §2 of the Continuation and Discovery Summons.  Further, Ms Lau also helpfully indicated that Ds are neutral on the Bankers Books Summons and the Case Management Summons (in respect of P’s application for a speedy trial).  The main battle between P and Ds was on the issue of fortification.

B.   P’s CLAIM

7.  Extensive submissions were made by the two sides on the merits of P’s claim.  Whilst detailed analysis and findings are unnecessary at this stage, they are nevertheless relevant in a number of ways.  Briefly stated:

   (1)  P placed considerable reliance on contemporaneous records of communications (such as WeChat text messages and transcripts of WeChat voice messages) evidencing that D4 (on behalf of D1/D2) falsely represented to P that his Subscription Monies were intended only to be used by D1 to subscribe for New Shares of Ant Group under its intended H share IPO (“Subscription Representation”).  It is said that Ds made the Subscription Representation fraudulently, knowing it to be untrue.  Further, the Subscription Representation plainly induced P into subscribing for Redeemable Shares in D1 and paying the Sum of Subscription Monies to D1 (on 28-29 October 2020).

   (2)  P’s primary case is that Ds never intended to and did not in fact use the Subscription Monies to purchase any shares of Ant Group, whether they are New Shares or Old Shares (i.e., pre-existing Ant Group shares prior to the IPO).  Instead, Ds used the monies for their own purposes unknown to P or dissipated the same.  P runs a secondary case alleging that Ds had always intended to and did in fact purchase Old Shares, rather than subscribe for New Shares, using the Subscription Monies.  It is said that on either case, the Subscription Representation was false.  Ds never intended to use P’s Subscription Monies to subscribe for New Shares in Ant Group.

   (4)  In addition, when P sought refund of his Subscription Monies after the suspension of the Ant Group IPO, P was induced into signing certain Redemption Documents (including a Redemption Request Form and Redemption Side Letter) by D3’s representation on 11 November 2020 that, as long as P signed the documents: (i) the Fund would refund HK$230 million of the Subscription Monies to P immediately; (ii) the remainder of the Subscription Monies withheld by the Fund would be refunded to P after Ds had resolved the issue regarding the Old Shares; (iii) no redemption fees would be charged from or payable by P for the aforesaid refunds.  (“Redemption Representation”).

   (5)  The Redemption Representation turned out to be false in that the redemption documents stipulated that a 25% redemption fee would be charged.  The representation was made fraudulently (or negligently), in that Ds knew full well – from a meeting between P and D4 on 9 November 2020 where P expressly made the same clear – that P was unwilling to pay any redemption fee for the refund of his Subscription Monies.

8.  P placed considerable reliance on WeChat messages and a transcript of a meeting dated 9 November 2020 to evidence the representations made.  P’s position is that it has a strong claim even considering that P is alleging, inter alia, that he was defrauded by the Subscription Representation into executing the Subscription Agreement and the corresponding side letter.

9.  It is probably fair to say that Ds took issue with almost every aspect of P’s claim.  The nature and effect of the representations made are hotly contested.  Reliance is also placed on the express terms in various documents signed by P including non-reliance clauses and terms confirming the absolute discretion of the Fund Manager to invest and manage.  Considerable reliance is also placed on the Subscription Agreement signed with China Prospect Securities Limited on 3 November 2020 (“China Prospect Agreement”) tosupport the contention that Ds had all along sought to carry out the investment objective of subscribing for Ant Group shares. 

10.  Despite the detailed submissions made by the parties, I find it unnecessary to form any views on the strength of P’s case.  However, it is important to recognize that P has a proprietary claim for the monies paid. 

C.    FURTHER DISCOVERY AND THE BANKERS BOOKS SUMMONS

C1.   Further Discovery by Ds

11.  The purpose of the discovery application under §2 of the Continuation and Discovery Summons was to ascertain the whereabouts of the monies paid by P.  Evidence was already filed by Ds (Affirmation of D4 – “Sin 1^st”) giving a detailed description of the fund flow in respect of the whereabouts of the Sum since it was paid by P.  The only criticism by P is to do with a sum equivalent to 5% of the Subscription Monies (HK$16,090,000) deducted as subscription fees and transferred to the HSBC account of D2 and then to the BOC account of Swenson Financial Holdings Group Limited (“Swenson Holdings”).  It is said that 2% of the subscription fee (HK$6,436,180) was transferred to a Lau Man Hin (as referral fee) but there is no disclosure or explanation as to the whereabouts of the remaining HK$10,048,695.  Mr Yuen SC made it clear that as a result of the Affirmation of D4, P’s application for discovery is limited to this sum. 

12.  As indicated above, given Ds’ latest position, I make an order in terms of the draft submitted by the parties which is limited to the HK$10,048,695.

C2.    Discovery against Dah Sing Bank

13.  P’s disclosure application against Dah Sing Bank (as per §2 of the Bankers Books Summons) is for the purpose of tracing and preserving his funds.  It is said that disclosure is necessary in order to ascertain what became of HK$305,710,000 of the Subscription Monies which were paid to the FFC Account on 30 October 2020, given the inadequacies of Ds’ disclosure thus far, and in light of the inconsistencies and contradictions in Ds’ version of events.  The monies in the FFC Account are kept in a bank account maintained by FFC with Dah Sing Bank.  The bank has indicated that it takes a neutral stance.

14.  The relevant principles in relation to s.21 of the Evidence Ordinance (Cap 8) and the Bankers Trust jurisdiction are well known.  See for example the summary by DHCJ William Wong SC in Yaron Brown v Lexinta Ltd [2018] HKCFI 2302 §§16-21.

15.  I am satisfied that the discovery sought against Dah Sing Bank is fully justified in the circumstances of the present case.  There is obviously a real prospect that the information to be disclosed would lead to the location or preservation of the Sum.

16.  As submitted by Mr Yuen SC, in §44.4 of Sin 1^st, Ds only disclosed that the sums of HK$17,460,000, HK$107,007.70 and HK$306,000,000 were “withdrawn from the FFC Account for subscription of Ant IPO Shares”.  There is no disclosure as to the destination to which these funds were transferred, nor is there any explanation for such failure to make disclosure.  It is self-evidently necessary for P to know this, in order to trace his funds and in order to ascertain that the proceeds have not been mixed with the monies of innocent contributors.

17.  Further, I also accept that the documents sought to be disclosed have been identified and are specific.  An order for their disclosure in the present circumstances plainly would not amount to a fishing exercise, nor would it be speculative or oppressive.  They are limited in nature and scope (bank documents and records of payment) and they are also limited in temporal scope (for a less than 6 months).

18.  Finally, I have taken into account the duty of confidentiality owed by banks to their customers.  This is a factor that must be weighed in the balance.  But this has to be weighed against the seriousness of Ds’ wrongdoing (i.e. fraud) and the proprietary nature of the claim.  No irreparable harm would be caused to Ds by the disclosure of the documents sought.  In any event, it is trite that confidentiality alone is not a valid ground of objection to discovery, where such discovery is necessary for disposing fairly of the proceedings.

19.  The only point raised by Ds is that the disclosure made in Sin 1^st is already sufficient but by reason of the matters stated above, I am not satisfied that this is a complete answer.  I therefore allow this application.

C3.   Leave to use the disclosed information to report to relevant authorities and commence new proceedings against implicated parties

20.  In relation to the disclosure obtained from Dah Sing Bank, P applies for leave inter alia to use the information to report to law enforcement agencies, or to commence relevant proceedings against other implicated parties (as per §5 of the Bankers Books Summons).  In the event that discovery is ordered under §2 of the Continuation Summons, Ds are neutral to this application. 

21.  I agree that leave should be granted.  The allegation concerns serious fraud and potential criminal wrongdoing, with extra-territorial elements.  Further, I also agree that in the absence of any other factors constituting injustice, the public interest in the investigation or prosecution of serious fraud should take precedence over the general concern of Courts to control the collateral use of compulsorily disclosed documents: Unicredit Bank Austria AG v Dragon Wise Trading Ltd [2013] 2 HKLRD 169, §§6-15 (Au-Yeung J). 

D.   FORTIFICATION

22.  This is the most controversial aspect of the applications before the Court.  The relevant principles are well settled and are not in dispute.  See for example Sun Yan v Superb Jade Limited & Ors (unrep., HCA 831/2014, 23 October 2015) at §11 per To J.  I shall not repeat them.

23.  In §2 of the Dismissal and Fortification Summons, Ds originally asked for fortification of the undertaking as to damages by payment of the sum of HK$338,592,962 into Court.  By a letter from Ds’ solicitors (Messrs. Jones Day) dated 7 April 2021, they offered to reduce the amount of fortification to HK$23,592,962 (being the difference between the amount currently paid into Court and the alleged losses set out in §62 of Sin 1^st).  This is also upon P’s undertaking not to seek to redeem or in any way seek to obtain repayment of the Subscription Monies paid to D1 so that the said monies would remain in Court.

24.  Ms Lau relied on 4 bases of loss set out in Section D of Sin 1^st.  D1 has already suffered various losses since the Injunctions were made on 7 December 2020.  She submitted they demonstrated a sufficient level of risk of further loss.  Such losses include:-

    (1)  Loss by reason of lost opportunities to earn subscription fees as various potential investors decided to terminate or cancel their agreements to invest with D1 after becoming aware of the Injunctions.  It is said that there were 10 investors who cancelled or terminated their agreements with D1 after becoming aware of the Injunctions.  The loss suffered as a result is said to be HK$92,825,000.  There is also an 11^th investor who refused to sign the subscription form after hearing about the Injunctions from the news.

    (2)  Loss by reason of lost opportunities to earn performance and management fees, for the same reason.  Had the investors been willing to subscribe, and kept their monies with D1, it would have gone on to make various investments, and charged performance and management fees for its work.

    (3)  Loss in the form of financing costs amounting to HK$15,750,000.  D1 would not have had to incur such costs had it not been for the Injunctions (and consequent undertaking in lieu provided in the interim).

    (4)  Loss amounting to HK$25,840,000, being the damages payable to China Prospect, which would not have been suffered but for the Injunctions (and the undertakings that followed) because those had the effect of freezing D1’s assets such that it was unable to carry out the China Prospect Agreement as required.

25.  Sin 1^st also referred to a 5^th basis of loss being loss personally suffered by D4 consisting of loss of performance bonus.  However, such loss has not been quantified and no reliance has been placed on that in Ds calculations.    

26.  P opposed the application on the basis that he has shown a strong prima facie case on fraud.  Mr Yuen SC submitted that Ds’ case is riddled with inconsistencies and cannot be believed. In particular, he submitted that it is on the essential aspect of the fraud (i.e. whether the Subscription Monies were used to subscribe for New Shares or merely to purchase Old Shares) that Ds’ evidence is at its most contradictory.  It is of course trite that where P has a strong case, fortification may not be ordered: see e.g.  Seridom Servicios Integrados Idom SAU v Heng Wen Trade Co Ltd [2019] HKCFI 85, §§133-134 (Marlene Ng J).   

27.  In addition, it was also submitted on behalf of P that there is no likelihood of loss to Ds caused by the Injunctions.  Mr Yuen SC attacked the rationale of the bases advanced and also the evidence that Ds sought to rely on. 

28.  In respect of the first heads of loss: all the names and personal details in the subscription forms and notices of termination of the investors who are said to have terminated their investments with D1, are redacted.  P has sought disclosure of the unredacted versions from Ds but they have not been provided.  Thus, there is simply no way for P to verify whether the investments are real.  Further, there is a complete lack of particulars as to how these investments were negotiated. In the circumstances, there is no way for the Court to verify the veracity of the figures in the first two heads of alleged loss.  Moreover, P also pointed to the fact that the letters from the investors are all very similar in form and style.  There is plainly a reason to doubt their genuineness.  It is also said that even if the letters are genuine, they do not show that the alleged losses to Ds (by way of lost opportunities to earn subscription fees, performance fees or management fees) were caused by the Injunctions themselves. Rather, the letters merely state that the investors decided to terminate their investments with D1 due to “the recent situation” or “the current situation” of D1 or the Fund, or “news about Swenson’s account being frozen”, i.e. due to the general stigma caused by litigation.  In other words, the alleged losses were caused by the existence of the litigation itself. That is insufficient.

29.  In relation to the second head of loss, i.e. the lost opportunities to earn performance and management fees, P submitted that such losses cannot be properly quantified without expert evidence.  What Ds did in their quantification was to use another fund (the OX Global Fund SPC – Global Fund IPO Opportunities SP1) as a comparator.  P submits that it is not open to D4 simply to assert in his affirmation that the OX Global Fund is a proper comparator due to “similarities in investment strategy”, or to make calculations based on assumptions of annualised return, investment horizons and annualised gains without proper expert evidence to explain the basis of such assumptions.

30.  Further, it was also pointed out by Mr Yuen SC that on Ds’ own case, D1 can operate segregated portfolios with the benefit of statutory segregation of assets and liabilities between each segregated portfolio: See Sin 1^st §§17 and 19.  There is therefore nothing to stop Ds from using or setting up a different or separate fund to deal with its investors so as to avoid the alleged loss. 

31.  As to the third head of alleged loss, P submitted that there is no reason why P should be liable under the undertaking for a loan that, by Ds’ own admission (see §56 of Sin 1^st), was “for general operation of Swenson Holdings”.  Swenson Holdings is not a party to this action.  Ds have also produced no documents showing the need or existence of the alleged loan.  Indeed, this third head of alleged loss is no more than a mere assertion.

32.  In respect of the fourth head of loss, P relied on their attack on the incredibility of the China Prospect Agreement pointing to various features in the agreement itself and suggesting that it is dubious.  It was also pointed out that by using terms such as “subscribe” (“認購”) in the agreement, it must have been entered into on the basis that the Ant Group would be successfully listed.  Even if the agreement was for the purchase of Old Shares, that must be on the fundamental premise that the Old Shares would become tradable after the stock was listed and the lock-up undertaking had elapsed.  Therefore, the suspension of the IPO must have arguably breached an implied condition precedent of the China Prospect Agreement, or frustrated it.  There are no proper grounds for China Prospect to seek to enforce the agreement or to recover damages for breach, and Ds have not shown otherwise.  In any event, on Ds’ own case, China Prospect had been demanding Ds to complete the transaction, and Ds had all along refused to do so and to pay the purchase price, since 4 November 2020.  This was well before P obtained the Injunctions.  Therefore, any losses arising from breach of the China Prospect Agreement plainly do not flow from the existence of the Injunctions.

33.  Finally, as a fallback, Mr Yuen SC submitted that even assuming that Ds are able to meet the threshold of demonstrating the likelihood of loss, on Ds’ own case, P would in any event be entitled to request the Fund to redeem the Redeemable Shares after the elapse of the lock-up period on 25 April 2021, at the Redemption Price (i.e. the net asset value of the Shares), without payment of any Redemption Fee.  Therefore, Ds prima facie have in their hands (albeit paid into court) a substantial amount of monies to which P would in any event be entitled to recover, regardless of whether P succeeds in its claims herein or not. In such circumstances, Ds are protected at least to the extent of HK$305,710,000 (i.e. the Subscription Monies minus the 5% subscription fee).  Accordingly, even on Ds’ own case, there is absolutely no need for any fortification whether as applied for or at all.

34.  In response, Ms Lau submitted that she only has to show a likelihood of loss and the threshold is not high.  Ds position is that they have already discharged that burden on the basis of the evidence adduced. 

35.  Despite the detail submissions made by the parties on the merits of P’s claim, I do not believe it is necessary for me to form any views at this stage.  I agree with P that there are various features in the case advanced by D so far that call for explanation.  For example, there is a dispute as to whether the person who has been communicating with P was a Chen Zhigang (also called Alex) and not D3.  But up to today, there is no evidence from D3 at all and the Statement of Truth attached to the Defence was not even signed by him.  Matters like this are not just forensic and would certainly affect the credibility of Ds’ case.  There is also force in Mr Yuen SC’s point that the idea that P was dealing with someone relatively junior as opposed to D3 does not sit well with evidence filed so far.

36.  However, I appreciate that the evidence is necessarily incomplete at this stage of the proceedings and a much clearer picture will emerge in due course.  I emphasize that I do see the force in many of the points advanced by P, but it is not necessary for me to rely on them.  What is obvious is that there will be a serious dispute both in terms of liability and quantum.  But considering the quality of the evidence adduced by Ds outlined above and the submissions advanced by P, I do see significant hurdles for Ds to establish that it has suffered significant losses as a result of the Injunctions.  What is also significant is the point made by Mr Yuen SC as a fallback, i.e. Ds are actually protected to a very significant extent in any event given that a very significant portion of the Sum paid in to Court are monies belonging to P in any event.       

37.  Ms Lau raised concerns over the ability of P to make good his cross-undertaking.  However, Ds are already protected to a significant extent given the monies in Court are, on any view, P’s monies.  I therefore decline to make any order for fortification.

E.   ORDER FOR SPEEDY TRIAL

38.  P sought an order for a speedy trial.  I appreciate that there is some urgency given a significant sum has been paid into court.  Mr Yuen SC also invited me to take into account the strength of P’s case.  My attention has been drawn to the decision of DHCJ Keith Yeung (as he then was) in Qianhai Xinhuakang Financial Holdings (Shenzhen) Limited v.  Chen Jiarong [2018] HKCFI 2113 at §§20-26 where the relevant considerations have been summarized.

39.  The essential question is whether there are sufficient justifications for P to “jump the queue” as a matter of fairness and good administration of justice. 

40.  Having considered the circumstances of the parties, I do not believe there is sufficient justification to make an order for speedy trial.  There are however directions I can give to enable P to get to the front of the queue as soon as practicable.  I would like to hear further submissions on those directions and other ancillary matters.