TULLETT & TOKYO INTERNATIONAL SECURITIES LTD. v. APC SECURITIES CO. LTD.

HCA 12467 of 1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12467 OF 1997

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J U D G M E N T

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1. This Action concerns the enforcement of two oral agreements made on the 9th of October 1997 between Mr. Raymond Sim ("Raymond") of the Defendant company ("Dharmala") and Mr. Stephen Thompson ("Stephen") of the Plaintiff company ("Tullett") whereby Dharmala agreed to purchase 1 million China Telecom shares ("the Shares") from Tullett at the price of $18.10 per share. Dharmala denied any liability for such purchase and Tullett is now suing for the loss suffered as result of Dharmala refusing to take up the Shares. A very large number of defences were raised by Dharmala in this Action but many of them have fallen away. What remain to be resolved are some 9 issues which can be divided into three Groups:-

(1) The first Group being the authority of Raymond to purchase these Shares;

(2) The second Group on the contention that the agreements are not binding on Dharmala because of the custom and practice of the market and

(3) The third Group based on the defence that the agreements are not enforceable being in breach of various provisions of the Securities Ordinance.

HISTORY LEADING TO THE 2 PURCHASE AGREEMENTS

2. 1997 was a booming year in Hong Kong specially for the local securities market. The euphoria surrounding the hand-over of sovereignty to China generated a huge amount of business with the Hong Kong stock market being very buoyant. Many private companies took advantage of the buoyant market and went public by means of Initial Public Offerings ("IPO") and the trading of these shares before they were officially listed and traded on the Hong Kong Stock Exchange ("Exchange") is called the Grey Market. That Grey Market was a very active market in 1997 when something like 80 companies went public. The Plaintiff, Tullett was one of those securities houses or brokers which actively took part in the trading of Grey Market shares.

3. The Plaintiff, Tullett is a British broker company based in London regulated by the British Securities & Futures Authority. It is a well established London broker. In April 1997 Tullett with the intention of opening up a branch in Hong Kong wrote to the Securities and Futures Commission ("SFC") to seek clarification as to whether it was necessary for it to be registered with the SFC to conduct the proposed business. In its letter dated 28th April 1997, the Plaintiff wrote that the product it would be trading would be secondly, Far Eastern Convertible Bonds, Global Depository Deposits and IPO. Trading in IPO is trading in the Grey Market. The letter then went on to say that the clients of the Hong Kong branch will be market professionals operating in the equities market and at no point would the client base consists of individuals. The letter ended by asking for guidance as to the regulatory requirements for the branch's proposed business. SFC wrote back to Tullett by letter dated 9th May 1997 and said that SFC's view was that dealing as principal with professionals would bring Tullett within the exclusion provisions of the Securities Ordinance ("Ordinance") and therefore SFC would not require Tullett to be registered as a dealer under the Ordinance. Relying on the SFC's confirmation, Tullett began trading in Grey Market shares. Tullett did not register as a dealer under section 48 of the Ordinance nor did it register its dealers as dealer's representatives under the Ordinance. Tullett was and is not a member of the Exchange.

4. The trading of Tullett in Grey Market shares in 1997 was very substantial as can be seen from the records of Tullett in relation to its trading of China Telecom shares from the end of September 1997 to 21st of October 1997. All these trades were with fellow professionals, including the two trades on the 9th of October 1997 with Dharmala.

5. Dharmala is a Hong Kong broker which was also at the material time a member of the Exchange. The Defendant Dharmala was a subsidiary of Dharmala Capital (Asia) Ltd. which itself was a subsidiary of Dharmala Holdings Ltd., a public company. Kenneth Lam was the top man of the Dharmala Group and under him there were dealing directors in Dharmala such as Timmy Lai and a number of sales representatives who were also dealers representatives. Paul Leung ("Paul") and Raymond were two such dealer's representatives of Dharmala. Both Paul and Raymond were registered under the Ordinance as Dealer's Representatives of Dharmala and Dharmala itself was registered under the Ordinance as a Dealer.

6. Raymond was first employed by Dharmala in 1996 pursuant to a letter of appointment dated 21st June 1996 whereby he was employed as a dealer. Raymond was registered as a Dealer's Representative of Dharmala from 16th August 1996 until he left Dharmala and ceased to be so registered on 28th October 1997. Raymond was also registered by the Exchange as a Sales Representative of Dharmala. Paul was a colleague of Raymond and they were working together at the material time under the team leader Sam Wong.

7. Paul joined Dharmala in 1994 and he was a registered Dealer's Representative of Dharmala under the Ordinance. Paul was also registered by the Exchange as a Sales Representative of Dharama. Paul on behalf of the Dhamala had traded with Derek Wong ("Derek") of Tullett. Derek was a former colleague of Stephen working together on the same dealing desk of Tullett. Derek had previously traded with Paul and as result of such trading, Paul knew that Tullett dealt in Grey Market shares and in particular dealt in China Telecom shares. Derek had prepared a contact or client list ("Client List") (see Bundle 3/page 1) and the name of Dharmala with its telephone number and fax number were shown in that Client List together with similar particulars of large number of other professionals. It was in these circumstances, that when Paul of Dharmala telephoned Tullett asking for Derek that Stephen, following the discussion about Derek having left Tullett, talked to Paul about Dharmala buying China Telecom shares.

8. The first telephone call was on Thursday the 9th of October 1999 when China Telecom was a hot item on the Grey Market. China Telecom had not yet been formally listed for trading on the Exchange but there was a great deal of trading of China Telecom on the Grey Market. The call came from Paul directly to the dealing room of Tullett. Stephen answered the phone and upon Paul being informed by Stephen that Derek had left Tullett, Paul said in answer to three questions from Stephen that the call was about China Telecom and the call was from "Dharmala Securities". Paul and Stephen exchanged their names and then Paul gave his telephone number at Dharmala as 28472239 which was a direct number of the dealing room of Dharmala. Paul then indicated an interest in buying China Telecom shares. There was then discussion about possible price when Paul informed Stephen that Dharmala had just purchased some China Telecom shares at Seventeen dollars something through somewhere else. Stephen asked for the size of the purchase that Paul of Dharmala was looking for and after holding the phone for 8 seconds, Paul told Stephen that he was looking for about one million China Telecom shares. Stephen then gave an indication of offer to sell at $18.50 and offer to buy at $17.00 and the conversation ended with Paul asking Stephen to give him a call when Stephen could make a firm offer to sell one million China Telecom shares. This was the first telephone conversation ("1st Call") between Tullett and Dharmala and the taped conversation took place between 16.46:33 and 16.51:08.

9. A minute and half after the 1st Call, Stephen telephoned Paul direct to the dealing room of Dharmala at the direct line of the dealing room (28472239) given by Paul in the 1st Call. This second telephone call ("2nd Call") lasted from 16.52:46 to 16.56:25. Stephen told Paul that Tullett could give an offer to sell one million China Telecom shares at $18.00 per share. Paul asked Stephen to hold the phone and then after 54 seconds said he would pass the phone to his colleague Raymond. Raymond then said to Stephen that he would purchase half a million shares at $18.00 whereupon the exchange between Stephen and Raymond was as follows:-

"ST: .. I have to charge you brokerage because I've got to cover my stamp duty.

RS: Yep that's fine.

ST: OK., so I can sell, I can sell, you 500,000 at 18.10.

RS: Right."

This first purchase of 500,000 shares of China Telecom at $18.10 is the first purchase from Tullett by Dharmala ("1st Trade"). This 2nd Call then ended with Raymond of Dharmala indicating that he was still interested in another 500,000 million shares but at a price of 17.50.

10. About 5 or 6 minutes after the 2nd Call, Stephen called Dharmala at 17.02:07 which telephone conversation lasted until 17.05 ("3rd Call"). It was Paul who first answered the call when Stephen told him that for the China Telecom shares Dharmala was interested in, the market price was seller asking $18 and buyer offering $17.75. Paul then passed the call to Raymond who was told by Stephen that the buyer asking in the market had gone up to $17.75 and the seller offer was $18.00. Raymond then asked whether the price of China Telecom the day before, namely on the 8th October was $20 something and upon being told by Stephen that it was $20, $21 Raymond said he would buy another 500,000 at $18 whereupon following the earlier purchase of adding on the 10 cents to $18.00, Stephen confirmed to Raymond that another 500,000 China Telecom shares had been sold by Tullett to Dharmala at $18.10 with Raymond acknowledging that this made a total purchase of 1 million shares of China Telecom by Dharmala from Tullett at $18.10. This second purchase of another 500,000 shares of China Telecom at $18.10 is the second purchase from Tullett by Dharmala ("2nd Trade"). I will refer hereinafter to the 1st and 2nd Trade collectively as the "2 Trades".

11. Twenty minutes after the 3rd Call, Stephen telephoned Dharmala at 17.24 ("4th Call") and in this 4th Call, Stephen told Paul that the market of China Telecom had moved up to seller offering at 18.25. Paul indicated he understood the new market position.

12. After the 4th Call, Stephen started to prepare the trade confirmation of the 2 trades of 500,000 shares each of China Telecom Tullett sold to Dharmala and he looked for the details of Dharmala but failed to find the Customer Registration Form ("CRF") of Dharmala. Therefore Stephen found it necessary at 17.34 to call Dharmala the last time that day ("5th Call"). Stephen informed Paul that the registration form for settlement procedure with things like Central Clearing and Settlement System (CCASS) was required to be filled in by Dharmala and that he was faxing it over to Paul and asked Paul to fill it in and fax back to him. Paul immediately understood and gave the Dharmala fax number as 28451935 or 25301822. Stephen ended that 5th Call by asking Paul to give Stephen a call if there was any problem. Paul agreed and also agreed to fax his name card.

13. Immediately after the 5th Call, Stephen set about to fax to Paul the CRF and the 2 Trades confirmation which he did at about 17.55. But in the rush to send the faxes and in trying to be helpful, Stephen made a few mistakes. The fax which was sent by Stephen consisted of 3 pages being the first page (Bundle 3/page 31A) addressed to Paul Leung of Dharmala Capital (Asia) Ltd. asking Paul to complete the attached CRF Form (page 32A) and referring to an attached trade confirmation (page 33A). Stephen wrongly put down in the CRF Form and in the trade confirmation fax the name of Dharmala Capital (Asia) Ltd. instead of Dharmala. The trade confirmation fax ("Confirmation Fax") also contained the mistake of addressing the trade confirmation, with correct details of quantity and price, to Raymond Ho instead of Raymond Sim. At that time Stephen did not know the surname of Raymond. These wrong details came from Stephen looking up the Handbook. It is finally to be noted that Stephen also used the wrong letter head (not that of Tullett but the one of Tullett & Tokyo Forex International Ltd.) to send out the Fax. What is also relevant is that the Confirmation Fax contained a vital term of the 2 Trades, namely that the settlement day was to be 2 working days after the listing day of China Telecom. This term was there because at that time, the China Telecom shares had not be yet been listed on the Exchange and there was at that time not even a date fixed when these shares would be first listed and traded.

14. After all that flurry of activities, everyone went home for the long weekend as Friday the 10th of October was a public holiday and business in Hong Kong did not resume until the following Monday the 13th of October. On Monday the 13th when the market reopened, the Hong Kong market apparently started falling and the fall continued the whole week. The Grey Market was badly hit and China Telecom shares fell from about $18 on the 9th to about $14 on the 16th October. 10 days earlier on the 3rd of October, the China Telecom shares were trading high in the Grey market at about $23.

15. When no completed CRF Form was received by Stephen on Monday the 13th of October, he telephoned Stephen that morning to chase up. He talked first to Paul to ask whether the Confirmation Fax and the CRF Form had been received and Paul confirmed that they had been received. When Stephen asked that the CRF be filled up and returned, Paul said he would pass the line to Raymond and after Stephen was put on hold the line was cut off. Stephen then called again and spoke with Raymond who confirmed that he had received Stephen's fax and that he was seeking confirmation from client as to whether the shares under the 2 Trades were to be transferred to Dharmala or to the client's company. Stephen also informed Raymond that the China Telecom shares was then trading at $16.25 dropping to $15 asked by buyer and $17.75 offered by seller. It was plain in that telephone conversation to Raymond that Raymond understood that China Telecom shares have started to fall from the price purchased from Tullett on the 9th of October.

16. A week had gone by with nothing coming from Dharmala, so on the 20th October (Monday) Stephen again telephoned in the morning to chase for the completed form with settlement details for the 2 Trades and Raymond promised to send this. The next day (21st) Stephen telephoned Raymond again to say no settlement details had been received by Tullett and Raymond said that he was having trouble with his client but he was trying to work it out with his client. That afternoon Raymond requested a meeting with Stephen to talk about the problem and a meeting at 5 p.m. was arranged at the Furama Hotel coffee shop and Raymond also told Stephen on the phone, for the first time that Sim was his surname.

17. The meeting at 5 o'clock in the Furama Coffee Shop was attended by Raymond of Dharmala and Stephen and Colin Heck of Tullett, Colin Heck being the boss of Stephen. Raymond said that the client of Dharmala who bought the 1 million China Telecom shares had gone back to China and as the price had dropped so much he feared that that this client might not want the shares. He said his company Dharmala was disowning responsibility for the purchase of the Shares. Colin Heck said that the 2 Trades were between Dharmala and Tullett and he expected Dharmala to honour the 2 Trades and asked Raymond to ring his boss to join the meeting. Raymond's boss did not come because apparently he was not free.

18. The events the next day moved quickly. Colin Heck went in the afternoon of the 22nd to the office of Dharmala and spoke with David Tsoi, the Chief Financial Officer and Samuel Wong. After the 2 Trades were explained by Colin Heck, the response was negative and they could not even confirm to Colin Heck whether Raymond was employed by Dharmala or whether they knew about these 2 Trades. The same afternoon Tullett's solicitors wrote to Dharmala claiming the money due on the sale of the Share. A letter from Dharmala's solicitors was sent back to Tullett's Solicitors the same day (22nd October) denying liability for such purchase.

19. When all attempts to make an appointment to see Dharmala to talk about this problem failed, on 24th October Colin Heck accompanied by Benny Luk, the Managing Director of Tullett went up to the office of Dharmala and asked to see either Mr. Raymond Sim or Mr. Paul Leung or Mr. David Tsoi or Mr. Sam Wong and were told they were all out or busy. Eventually a passing Adrian Bradbury of Dharmala managed for the visitors to talk to David Tsoi. Both Adrian Bradbury, who was said to be the company secretary of Dharmala and David Tsoi kept repeating that Mr. Sim did not work for Dharmala and when told that the 2 Trades had been taped, Adrian Bradbury asked for the tapes which were sent to him same day but still Dharmala refused to acknowledge responsibility for the purchase of the Shares.

20. In these circumstances, on the 24th October Tullett sold (through Bear Stearn) 1 million China Telecom shares which Tullet had purchased on the 9th of October (from Peregrine and New China) on the back of the sale on the 9th October to Dharmala. The loss to Tullet on such re-sale to cut its loss was $7,569,572.38 ("the Loss"). In this Action, the Plaintiff is seeking to recover the Loss from the Defendant which has denied all liability for the purchase of the Shares.

ISSUES AT THE TRIAL

21. At the conclusion of the Trial, some 9 Issues remained to be resolved and they are the following:-

(A) AUTHORITY

1. Did Raymond have actual express authority to purchase the Shares on behalf of Dharmala;

2. Did Raymond have actual implied authority to purchase the Shares on behalf of Dharmala;

3. Did Raymond have ostensible or apparent authority to purchase the Shares on behalf of Dharmala;

(B) CUSTOM & PRACTICE LIMITING 2 TRADES

4. Was there a requirement of prior written agreement;

5. Was there a requirement of subsequent written confirmation;

(C) STATUTORY DEFENCES

6. Are the 2 Trades not enforceable because the Plaintiff was in breach of Section 48 of the Ordinance by carrying on a business of dealing in securities or holding itself out as carrying on such business without registration;

7. Are the 2 Trades not enforceable because the Plaintiff was in breach of Section 20 of the Ordinance by operating a secondary stock market;

8. Are the 2 Trades not enforceable because the Plaintiff was in breach of Section 76 of the Ordinance by transacting with delayed settlement;

9. Are the 2 Trades not enforceable because the Plaintiff was in breach of Section 80 by short selling.

CREDIBILITY OF WITNESSES

22. The trial took some 12 days and the following witnesses of facts gave evidence at the Trial:-

(1) Stephen Thompson, (2) Colin Heck and (3) Andrew Hadley of Tullett;

(4) Kenneth Lam, (5) Paul Leung and (6) Alex Yu of Dharmala.

Richard Witts ("Mr. Witts") and Lau Wai Kit ("Mr. Lau") were the respective experts who gave evidence on behalf of Tullett and Dharmala .

23. So far as the factual witnesses are concerned, apart from Alex Yu who gave very brief and technical evidence on the taping arrangement at Dharmala, whose evidence I accept, there was substantial disagreement between the factual evidence from witnesses for Tullett and that from witnesses for Dharmala. Although both Stephen (a young man) and Colin Heck (a much more mature professional) gave their evidence very differently, I have no doubt that they were both honest witnesses who gave their evidence truthfully. On all material aspects, I accept their evidence. The opposite is however the case with Kenneth Lam and Paul Leung. I found time and again their evidence to be so incredible that I was left with the clearest impression that truth was meaningless to these witnesses and if it suited their purposes they were prepared to say anything to the court to advance their objectives or interests. In all material respects where their evidence was challenged by the Plaintiff, I reject their evidence. As for Andrew Hadley of Tullet, his evidence was not seriously challenged and I accept his evidence.

24. Of the expert witnesses, Richard Witts and Lau Wai Kit presented a most unusual picture of contrasts in style and contents. In the ordinary course of civil litigation where two experts give evidence to the Court on the same subject matter, there is little to choose from between the experts in terms of backgrounds, experience, expertise and even presentation. The difficult choice for the court is often limited to the different reasons advanced by the experts. This is not such a case. Whereas Mr. Witts is exceptionally qualified, experienced and is such a top professional in the Hong Kong securities industry (Secretary, General Manager and Council of the Exchange) that he could be described as a doyen, Mr. Lau lacks in every respect the depth, width, length and quality of knowledge and experience of Mr. Witts. Too often Mr. Lau showed by his evidence and the manner of his giving of evidence that he was really a legal professional rather than a securities professional and that he was far from being independent or unbiased. I have no doubt that on every count where he differed from Mr. Witts, I prefer the evidence of Mr. Witts, who gave his evidence in a mild, measured, independent and responsible manner.

ACTUAL AUTHORITY

25. The case of Dharmala is that Raymond did not have either actual express authority or actual implied authority to enter into the 2 Trades. The contention of Dharmala as expressed in the evidence of Kenneth Lam ("Kenneth") is simple and it is that neither Raymond nor Paul who were sales representatives (albeit also registered as Dealer's Representatives of Dharmala) had any actual authority to deal in any Hong Kong shares (whether Grey Market shares or not) at any time. The way Kenneth puts it is that sales representatives of Dharmala such as Raymond and Paul could only take orders from the customers of Dharmala and that it was for the authorised clerks or the dealing director of the Dharmala either in the dealing room of Dharamala or at the Exchange Hall to execute or deal with other brokers in respect of such orders from Dharmala's customers. It was not the business of Raymond or Paul to talk to other brokers let alone carry out transactions with them. Therefore, the question which the Court has to determine is whether employees of Dharmala such as Raymond and Paul who were registered dealing representatives and who were also sales representatives have actual express authority to buy or sell:-

(1) Hong Kong listed shares;

(2) Grey Market shares.

Fundamental however to the consideration of these questions is the factual background of the Hong Kong securities scene.

Hong Kong Securities Scene

26. The Hong Kong Securities scene stands out by the dual presence of the Exchange and the wider securities industry. The Exchange covers the securities listed on the Exchange and governs the relationship between members of the Exchange who trade on the Exchange. The wider securities industry covers all aspect of the securities industry and in particular all trading of securities done off the Exchange. So far as dealing of Hong Kong listed shares during the Exchange hours is concerned, such dealing is governed by the Exchange Rules which bind all members of the Exchange, such as Dharmala. The usual form of such trading would be through the AMS terminal machines (either at the Exchange Hall or in the Members own dealing rooms) where trades were done between one member with another member in a non-oral form with the appropriate inputs into the respective terminals. The trades can be immediately seen and has the merit of transparency and immediate certainty. All disputes of such trades come under the auspices of the Exchange, with the advantage conferred by the Exchange Rules e.g. in a case of default. The persons permitted under the Exchange Rules to input into the AMS terminals were authorised clerks, a terminology only known to the Exchange and not to the Securities Ordinance. The other type of persons who have a status under the Exchange and recognised by the Exchange are sales representatives who deal primarily with customers but who are not authorised to go into the trading Hall of the Exchange or to input the AMS terminals. Sales representatives are not persons or positions known to the Securities Ordinance.

27. Securities trading in Hong Kong however is not limited to trading in Hong Kong listed shares during the Exchange hours ("Exchange Trading"). So far as shares are concerned, there are at least two other types of trading activities which are not Exchange Trading and for convenience I will call these share trading outside the Exchange Trading as "Off Exchange Trading". The first Off Exchange Trading is the trading of Hong Kong listed shares outside the Exchange hours and a prominent example of this would be placements which are usually done by professionals with professionals. The second type of Off Exchange Trading is the Grey Market buying and selling of IPO shares. This could be done during or after Exchange hours and the timing of such trading has no significance because by definition, since the Grey Market shares were not listed, they could not be traded on the Exchange. The notable feature of Off Exchange Trading is that it is not governed by the Exchange Rules and not done under the auspices of the Exchange and it is the Securities Ordinance which has an impact on these Off Exchange Trading.

28. The Ordinance provides for the statutory framework to regulate the securities industry and it provides for a system of registration of dealers and dealer's representatives. The persons who handle these Off Exchange Trading are said by the Plaintiff to be sales representatives who are often also registered as Dealer's Representatives and again according to the Plaintiff, Raymond and Paul are such examples whereas Stephen is not because he was not a registered Dealer's Representative. Dharmala disputes this and contends that sales representatives have no business doing any Off Exchange Trading. This is the primary dispute on the actual authority of Raymond.

Scope of Activities of Sales Representatives

29. The heart of Dharmala's defence on lack of actual authority is its contention (forcefully put forward at the time of final submission) that both Paul and Raymond were employed as sales representatives and as such their functions were limited to taking orders from customers of Dharmala and did not extend to talking to or entering trades with other brokers. The Defendant contends that the talking to other brokers to make deals is the function of authorised clerks and the Defendant made extensive references to the distinction between authorised clerks and sales representatives in the context of the Exchange and in the trading Hall of the Exchange. The Plaintiff did not deny for Exchange Trading, that authorised clerks primarily performed a different job from that of a sales representative but asked the court to look at all the reliable evidence which showed that in respect of securities trading generally, sales representatives are not confined to communicating only with their own customers and their work extends to also talking to and making deals with other brokers who are counterparties. The difference between the parties therefore comes down to whether sales representatives such as Paul and Raymond performed a double function of talking not only to their own customers but also to other brokers and concluding deals with them and for such purposes of dealing, own customers and other brokers are to be treated both as counter-parties. If I accept the Defendant's case, then clearly there would be no actual express authority for Raymond to enter into the 2 Trades whereas if I accept the Plaintiff's case on this, then I will have to consider the full implication arising from this including in particular the evidence adduced at the Trial.

30. This case of the Defendant that Raymond as sales representative had no business talking to another broker let alone making trades with them was not pleaded by the Defendant in the Amended Defence nor was it set out in any of the original factual witness statements (June 1998) of David Tsoi, Adrian Bradbury and Kenneth Lam. This contention of the Defendant first surfaced in the September 1999 Expert Report of Mr. Lau ("Lau Report") and was actively pursued at the Trial in the form of the January 2000 Witness Statement of Paul Leung and by the oral evidence of Paul, Kenneth and Mr. Lau. If the function of sales representatives of a broker is as clearly confined to talking only with their employer's customers and to no one else and certainly not to other brokers, then I would expect that both the Defendant's pleadings as well as its June 1998 Witness Statements would put that aspect in the forefront of the Defendant's case. Authority to enter into Grey Market trade in respect of these 1 million shares would really be of secondary significance if the primary fact of the Defendant was that the normal function of sales representatives such as Raymond and Paul was confined to only communications with own customers. So far as there was evidence against actual authority on basis that the usual function of sales representatives such as Raymond and Paul was narrowly confined to talking to own customers and did not extend to talking to or making deals with other brokers, I reject such evidence because:-

(1) I find Paul, Kenneth and Mr. Lau to be unreliable witnesses.

(2) Even in terms of the Exchange Rules, this is not consistent with Rule 332 which provides for liability of a Exchange Member for transaction made on its behalf by its Sales Representatives.

(3) I find such to be inherently improbable in the light of all the evidence adduced before me.

31. The positive evidence on the usual function of a sales representatives such as Paul and Raymond came from many sources, including in particular the following.

(1) The first and crucial evidence is the letter of appointment of Raymond dated 21st June 1996 which stated that Raymond was employed by Dharmala as a Dealer. Raymond was therefore expressly employed and authorised to deal in securities.

(2) The second and equally crucial evidence is the registration by Dharmala of Raymond as a Dealer's Representative of Dharmala, thereby expressly stating to the securities industry and in particular to the SFC that Raymond was validly appointed and authorised to carry out the dealing functions of Dharmala.

(3) The third and in some ways the most revealing evidence is the behaviour of the three key players before and after the making of the 2 Trades. Paul, Raymond and Steven throughout the relevant period behaved on the basis that it was the normal function of sales representative to enter into binding trades. Paul as sales representative of Dharmala initiated the trades, Raymond as sales representative of Dharmala made the trade twice. Stephen of Tullett entered into the trade twice without inquiring into whether Raymond and Paul were dealing directors or authorised clerks of Dharmala. The behaviour of Paul and Raymond after the 2 Trades was on the basis they had carried out normal trades on behalf of Dharmala and then the necessary documentation would have to be done. Putting aside the question that the 2 Trades were in respect of Grey Market shares, it is inconceivable that if it was the common understanding in the securities industry that sales representatives were confined to only talking to their own customers, that Paul, Raymond and Steven would have behaved the way they did. Indeed I would go further and say that if it was the case that Paul and Raymond had no business talking to other brokers and making trades, then I would expect that fact to be the first and decisive thing to be said by David Tsoi, Sam Wong and Adrian Bradbury during the meetings in October. Nothing of the kind was said.

(4) The fourth positive evidence in favour of the Plaintiff's case on this aspect is the highly valuable evidence of Mr. Witts, who I find to be an excellent witness. It is his evidence that sales representatives do deals and that specially for Off Exchange Trading, they rather than the authorised clerks are the ones who do the trading.

(5) The fifth positive evidence on this is the admission by the Defendant in its own separate High Court Action No. 11682 of 1997 against Raymond where it was said by Dharmala that Raymond was employed as securities dealer and had dealt in various securities, in other words that he had authority to deal in securities.

(6) The sixth positive evidence is the general arrangement of Dharmala whereby sales representatives were housed in a dealing room and the dealing room telephone lines were connected to the taping machines. The letter dated 22nd of October 1997 from Dharmala to Raymond suspending him from work and prohibiting him any access to the dealing room is strong evidence that the normal function of Raymond as a sales representative was to deal and trade and that is why it was part of his job to have access to the dealing room where he could deal and trade. Kenneth in his evidence tried to explain away the significance of Raymond's general access to the dealing room where he worked and wanted to paint a picture of physical separation of the authorised clerks from the sales representatives. I do not believe the evidence of Kenneth and I have no doubt that Raymond and Paul worked in the dealing room of Dharmala where deals were made by sales representatives such as Raymond and Paul and these deals were recorded by the taping machines.

(7) The seventh positive evidence is the letter dated 29th October 1999 from Dharmala to Raymond which informed Raymond that effectively immediately, he Raymond was no longer authorised to undertake any dealing activity on behalf of Dharmala. It is plain that prior to this letter, Raymond has full authority to deal on behalf of Dharmala.

(8) The eighth positive evidence is that the fact that these 2 Trades were made by Raymond with the active assistance of Paul in circumstances when, both Paul and Raymond knew that their conversations on the 2 Trades were taped by the taping machines of Dharmala. This could only suggest that they knew that the senior management of Dharmala when hearing these tapes would regard the business conducted under the tapes as being part of the daily business of Paul and Raymond and well within the actual authority of these two Dealer's Representatives.

(9) The ninth positive evidence is the inherent nature of trading in the securities industry in Hong Kong. Whilst it is sensible for the Exchange to make a distinction between authorised clerk and sales representatives in terms of Exchange Trading, there is no logic in carrying over the distinction generally to Off Exchange Trading, which is not concerned with the Trading Hall or the AMF terminals. As Mr. Witts said in his evidence, if the function of trading Off the Exchange is to be limited and to exclude sales representatives, then most Off Exchange Trading in Hong Kong will become quite impossible as it will mean that every time a professional is trading with his opposite number, he would have to ask the exact status of the other professional, whether that other person is authorised clerk or sales representative or dealing director or what not. The evidence which I accept clearly shows that this is not the way Off Exchange Trading was done in Hong Kong.

32. I have therefore no doubt and I hold as a fact that so far as Off Exchange Trading is concerned, it is usual and customary for sales representatives, such as Paul and Raymond to carry out such trading.

Authority of Raymond to do Grey Market Trading

33. The question therefore is whether in respect of Grey Market trading, there was any specific restriction by Dharmala on its sales representatives and in particular on Paul and Raymond.

34. Grey Market as a form of securities trading was not something new to Hong Kong in October 1997. It had been a well known and common feature of the Hong Kong securities scene for some time and it had been widely practiced. When the market was good and buoyant, that was also the time when companies wanted to go public and therefore generated large volume of business in the Grey Market. The Hong Kong market's appetite for Grey Market trading naturally would create the demand by all parties (including retail investors) for Grey Market shares and it would be a foolish or backward or particularly cautious brokerage house which did not meet the demand for such Grey Market trading. This is the background against which I now consider the matter of restriction on Grey Market trading.

35. The starting point on this aspect is of course the evidence of Kenneth that in his firm Dharmala Grey Market trading was never done and that everyone in Dharmala knew that there was no authority for any sales representatives of Dharmala to enter into any Grey Market trades. As I have indicated earlier, I do not accept anything material said by Kenneth and this oral evidence which I reject, therefore does not assist the Defendant. Secondly having regard to the widespread popularity of Grey Market trading, I find it simply incredible that an active firm such as Dharmala would have adopted a policy of hands-off policy in relation to Grey Market. Finally, what Kenneth said about Dharmala never doing any Grey Market trading was contradicted by the contemporaneous admission of Paul in the 1st Call that Dharmala had purchased from another broker China Telecom shares.

36. What is left for the Defendant to prove restriction of authority to do Grey Market trades therefore rest on three documents:-

(1) Memo dated 4th September 1997 ("1st Memo");

(2) Memo dated 13th October 1997 ("2nd Memo") and

(3) Memo dated 20th October 1997 ("3rd Memo").

37. The 4th September Memo said:-

"Please note with immediate effect all off-board crossing tickets must be signed off by the team leader/branch manager before execution."

This Memo was not that of Dharmala but of Dharmala Capital (Asia) Ltd. Paul's evidence is that he did not understand that Memo as referring to Grey Market trading. Kenneth also said to the same effect that he did not refer to Grey Market trading in his Memo. Both Paul and Kenneth admitted that there were no crossing tickets used in Dharmala for Grey Market trading and Mr. Witts confirmed that there was no "crossing tickets" in Grey Market trading. Mr. Lau's evidence on this was speculative and in any event as I have indicated earlier, I reject his evidence. I therefore conclude that the 4th September Memo does not prove any valid restriction on Raymond to do Grey Market trading.

38. The 2nd Memo dated 13th October 1997 came into existence after the making of the 2 Trades on the 9th of October and this 2nd Memo could therefore hardly prove the existence of restriction of authority to do Grey Market trading on the 9th of October. This Memo says:-"Due to the high volatility of the recent stock market, please note that our Company will not accept any "Grey Market" trading of China Telecom". For me this Memo indicated that there was authority to trade in Grey Market, that there was such trading in Grey Market by Dharmala and that a restriction was placed on trading of China Telecom (not generally on Grey Market trading) from the 13th October due to the recent high volatility of the market. This 2nd Memo helps the Plaintiff not the Defendant.

39. The 3rd Memo dated 20th October 1997 also does not help Dharmala but supports Tullett's case. The restriction in that Memo placed on trading of China Telecom acknowledged implicitly that Grey Market trading was within the actual authority of the marketing and dealing staff of Dharmala. What it did was to place a temporary restriction on the trading of one particular Grey Market share, China Telecom.

40. It is to be noted that China Telecom shares had been trading hot for quite some time before 13th October and yet the timing of the 2nd Memo dated 13th October was said by Kenneth to be a pure coincidence. It was no coincidence for it was created directly as result of the 2 Trades being done by Raymond on 9th October. For me the timing of that 2nd Memo specially in the light of the circumstances suggests that by the 13th October, the senior management of Dharmala knew about these 2 Trades and hence the writing of the 2nd Memo and the 3rd Memo.

41. I find as a fact that up to the 9th of October 1997, there had been no restriction imposed by Dharmala on its sales representatives including Raymond and Paul on Grey Market trading and it follows therefore and I so find as a fact that Raymond had actual express authority to make the 2 Trades.

ACTUAL IMPLIED AUTHORITY

42. In the light of my above findings, strictly speaking it is not necessary to consider the issue of actual implied authority. For the sake of completeness however I will also briefly state my conclusion on this issue.

43. Actual implied authority is the authority of the agent to do whatever is necessary or ordinarily incidental to, the effective execution of his express authority in the usual way (page 117 of Bowstead on Agency). Further, an agent has implied authority to act in the execution of his express authority according to the usages and customs of the particular market or business in which he is employed (page 130 of Bowstead).

44. In the light of my earlier findings of fact of the express authority of Raymond as sales representative of Dharmala to deal in securities including Grey Market shares, it must follow that Raymond had the actual implied authority of Dharmala to buy Grey Market shares.

45. The evidence of Mr. Witts however, which I have accepted in whole, made the point really incapable of serious argument because Mr. Witts said in quite clear terms (both in his written and oral evidence) that registered Dealer's Representatives have and are understood in the securities trade to have the implied authority to act on behalf of the registered Dealer in the performance of any functions of a dealer in relation to the sale and purchase of securities and that includes the making of agreements with third parties on behalf of the registered Dealer to buy and sell shares including Grey Market shares.

46. The above evidence of Mr. Witts underlies the whole basis of registration of Dealer's Representatives by a broker under the Ordinance. It is for a broker to apply to the SFC for the registration of his sales representatives as Dealer's Representatives and without such registration the sales representatives will not be able to deal on behalf of the broker. While so registered the Dealer's Representative whether employed as sales representative or as dealer by the broker has the authority to deal in securities on behalf of the broker and bind the broker. Section 57 of the Ordinance goes in fact further, providing that suspension or revocation of registration of Dealer's Representative would not operate to avoid any transaction entered into by that Dealer's Representative either before or after the suspension or revocation. It is clear therefore that transaction entered into by a registered Dealer's Representative binds the registered Dealer namely Dharmala and such responsibility does not cease even upon the revocation or suspension of registration of that Dealer's Representative. It is therefore for the Dealer (such as Dharmala) to ensure that upon suspension or revocation, such Registered Dealer does not carry out any transaction for the Dealer. In my view the statutory scheme wholly supports the view of Mr. Witts on the authority of Raymond.

47. I therefore conclude that on this issue, the Plaintiff is correct and that Raymond did have the actual implied authority to make the 2 Trades on behalf of Dharmala.

APPARENT AUTHORITY

48. I will again only briefly state my conclusion on this third Issue of Apparent Authority, having regard to the fact that the matter of authority has already been decided in favour of the Plaintiff by my findings and decision on Actual Express Authority.

49. What is the management of the affairs of Defendant which led to the Plaintiff to trade with Raymond and to Plaintiff's belief that Raymond was acting on behalf of Dharmala. The evidence clearly shows that it was the fact that both Paul and Raymond as sales representatives of the Dharmala were allowed to trade from the Dealing Room of Dharmala, by representing each other as colleagues in trading, by making and receiving calls from the Dealing Room and by receiving settlement details fax from the office of Dharmala. The evidence as a whole (including for example listening carefully to the tapes where one could make out from the background sound that it was the Dealing Room of Dharmala where the calls were being made and received) indicates that it was reasonable for any dealer such as Stephen to believe that that both Paul and Raymond had authority to trade these Grey Market securities on behalf of Dharmala.

50. A number of authorities were cited to me on the issue of apparent authority but they all turn on their particular facts and are of no assistance to me and certainly do not in any way alter my conclusion that in the circumstances of this case there had been sufficient holding out by Dharmala as to the authority of Raymond to make the 2 Trades.

51. One way to test the holding out and reliance is by asking what would have happened if Raymond did not trade from the Dealing Room and did not give out the number of the Dealing Room. I think there would be no trade. I would very much doubt that Raymond would have tried to trade from his home and/or by giving out to Stephen his home telephone number to call back. It was because both Raymond and Paul had the confidence that they could safely trade from the Dealing Room of Dharmala that they gave the telephone number of such Dealing Room and confidently talked about these 2 Trades from the taping telephones of the Dealing Room and within earshot of their team leader Sam Wong.

52. I have no doubt that in these circumstances apparent authority has been established against the Defendant and therefore there is also liability of Dharmala for the 2 Trades based on apparent authority.

NON-BINDING BECAUSE NO PRIOR WRITTEN AGREEMENT & NO SUBSEQUENT WRITTEN CONFIRMATION

53. Dharmala raised the defence that the 2 Trades were not binding on Dharmala because of a custom of the trade that where the parties had not had any prior dealings, there could be no binding oral contract for the sale and purchase of shares in the absence of:-

(a) a prior agreement in writing whereby the parties had expressly agreed on the terms and conditions of trading which were to apply to oral trades between the parties (Issue 4);

(b) a subsequent written confirmation of the specific trade (Issue 5).

54. To succeed in this defence, Dharmala must rely on the evidence of its expert, Mr. Lau and my simple conclusion on this defence is that it utterly fails because I do not accept his evidence. I might also add here that the evidence of Mr. Witts is to the contrary, whose evidence I accept.

55. In evidence there was explored the matter of what ought to be done in situations of no previous dealings and of course I accept that there would always be room for caution in securities dealing but that is not the point here. An oral contract is just as binding as a written contract and the fact that there had been no previous dealing between the parties does not make the contract less binding. The fact of no previous dealings might suggest that the parties would be less likely to enter into any trade. But once they had entered into the trade and here twice as clearly evidenced by the tapes, then only established custom to the contrary could save the Defendant.

56. The evidence adduced by the Defendant went nowhere of even beginning to suggest that there was such custom or practice on validity of contract dependant on prior written agreement or subsequent written confirmation. These defences are wholly without merit and like many other defences relied on in this Action should never have been raised or pursued. In any event so far as subsequent written confirmation is concerned, there were such written confirmations as helpfully pointed out by Mr. Huggins.

CIVIL UNENFORCEABILITY WHEN CRIMINAL BREACH

57. Mr. Huggins submits that common to three statutory defences (Sections 48, 20 and 80) is the question of whether any of these statutory breaches (assuming they could be established which are denied by Tullett) would carry the consequence of civil unenforceability of the contract.

58. The criminal sanctions of the four relevant sections are to be found in the following provisions:-

(a) Section 48(2) provides for a fine of $50,000 in respect of carrying on a business of dealing in securities or holding itself out as carrying on such business without registration;

(b) Section 20(2) provides for a fine of $500,000 in respect of operating a secondary stock market;

(c) Section 76(2) provides for a fine of $5,000 in respect of effecting transaction with delayed settlement. However Section 76(4) also provides for unenforceability of a contract where such contract was to effect delayed settlement in breach of Section 76(1);

(d) Section 80(2) provides for a fine of $10,000 and to imprisonment for 6 months in respect of short selling.

The short but important point of Mr. Huggins is that any statutory provision which carries criminal sanction must be strictly construed so as not to import any legislative intent to create civil unenforceability.

59. Although a mass of cases had been cited to me, the most illuminating judgment on this question is the judgment of Bokhary, J. (as he then was) in Richardson Greenfields of Canada (Pacific) Ltd. v Paul Chow [1989] 1 HKC 261. What happened there was the plaintiff broker entered into a contract with the defendant customer to act as the defendant's broker. A large sum was owing by the customer to the broker plaintiff who sued to recover the sum. One of the defences raised was unenforceability due to the breach of section 50(1) of the Securities Ordinance which provides that no person may act as dealer's representative unless he was registered. Section 50(2) provides for the criminal sanction of a fine of $10,000. The person employed by the plaintiff broker handling the dealings was not registered as a dealer's representative.

60. At page 269 of the Judgment, after reminding himself of the modern liberal approach to unenforceability in Shaw v Groom [1970] 2 QB504, the learned Judge said this:-

"It is not lightly to be inferred that the legislature intended sanctions beyond the penalties it laid down. ....... When the legislature sets out to regulate an industry, enacting rules and penalties by which to enforce them, the courts must be very careful not to adopt an overzealous construction of the enactment..."

Then after referring to various sections of the Security Ordinance which expressly provide for civil consequences of breach of particular provisions, the learned Judge said at page 270:-

"The fact that a statute expressly provides for civil consequences in regard to some breaches tends to suggest that the legislature did not intend civil consequences in regard to breaches for which no such consequences are expressly provided. That is the view taken by the Court of Appeal in Cheng Ah Hung Bernard v Chintung Commodities Ltd. [1985] 1 HKC 318 which deals with Commodities Exchange (Prohibition) Ordinance (Cap 82) and the Commodities Trading Ordinance (Cap 250). It is also the view taken by Duffy J in James Capel (Far East) Ltd. v So which deals with the Securities Ordinance. Lord Justice Sachs took the same view in Shaw v Groom at p.525E, where he uses the illuminating formula 'any intended result on civil liabilities'."

61. I am wholly persuaded by the reasoning in Richardson Greenfields which I note was applied by Recorder Kotewall, S.C. in Chung Fai Holdings Ltd. v D.H. International Ltd. (HCA3351/98). It seems to me that the most powerful factor which point to the breach of the relevant sections in the Securities Ordinance as having no civil consequence is the fact that sections under consideration such as sections 48, 20 and 80 provide only for criminal sanctions with no additional provisions for civil consequence in the event of a breach of the section. These provisions are to be contrasted with section 72(4), 73(4), 76(4), 85(2) and 143(5) of the Ordinance, each of which expressly also provides for an adverse civil consequence. In these circumstances, it seems to me that the Court must be "compelled to assume that the legislature did not intend" (to use the words of Cons, JA in Cheng Ah Hung at page 323E) a result of civil unenforceability.

62. Notwithstanding the full submissions made to me by Mr. Tong referring me to interesting authorities ranging from Cope v Rowlands (1836) 150 ER 707 through Cornelius v Phillips [1918] A.C. 199, Yango Pastoral Co. Pty. Ltd. v First Chicago Australia Ltd. [1978] 139 C.L.R. 410 to Phoenix Insurance v Halvannon Insurance [1988] Q.B. 216, I am firmly of the view that even if there was any breach of Section 48, 20 and 80 of the Ordinance, such breaches do not render the 2 Trades unenforceable against Dharmala.

SECTION 76 DEFENCE OF DELAYED SETTLEMENT

63. Section 76(1) of the Ordinance provides:-

".... a dealer shall not transact in Hong Kong ...

(a) any dealing whereby the dealer confers on any person an option to purchase from or sell to the dealer any securities listed on the Unified Exchange; or

(b) any dealing in any such securities which is completed later than the end of the next trading day after the dealing was entered into."

64. Section 76(2) provides for the criminal penalty of fine of $5,000. Section 76(4) however provides that:-

"A contract entered into in contravention of subsection (1) shall not be enforceable by either the dealer or the other contracting party."

65. The defence of Dharmala is that there was a breach of Section 76(1)(b) of the Ordinance in that completion for the 2 Trades was later than the next day of the 2 Trades.

66. Mr. Huggins argues that the purchase of the Shares was incapable of being the subject matter of Section 76(1)(b) because these Shares were not listed on the Exchange on the day when the 2 Trades were done. Although reference was made by Mr. Tong to the definition of security in section 2(3) of the Ordinance which reads:-

".... a security is regarded as listed on the United Exchange when the exchange has on the application of the company which issued the security, or on the application of any holder of the security, agreed to allow, subject to the requirements of this Ordinance, dealings in that security to take place on the Unified Exchange."

there was simply no evidence before the Court that on the 9th of October 1997 there was either an application of China Telecom to the Exchange or that the Exchange had agreed to allow dealings in China Telecom to take place on the Exchange. It follows therefore that in my view any dealing in China Telecom was not caught by the delayed settlement provision of Section 76(1)(b).

67. The Plaintiff however has a second answer to the alleged breach of Section 76(1)(b) and it is that the alleged dealing had the benefit of professional exemption provided in Section 3(1) of the Ordinance and therefore there was no dealing under Section 76(1)(b).

68. Section 3(1) creates a "Saving for certain transactions" and therefore modifies the definition of dealing in securities in Section 2. Section 3(1) provides:-

"For the purpose of determining whether or not a person has dealt in securities or has communicated an offer to acquire or dispose of securities, no account shall be taken of ..... his having as principal ..... effected transactions with a person whose business involves the acquisition and disposal, or the holding, of securities (whether as principal or as agent)."

I accept Mr. Huggins' submission that the Plaintiff clearly falls within this Section 3(1) exemption having, "as principal" "effected transactions" with a person (the Defendant) whose business involves the acquisition and disposal of securities. Mr. Lau also agrees that if the Plaintiff effected the 2 Trades as principal then the Plaintiff enjoys the benefit of Section 3(1). I find as a fact that the Plaintiff was acting as principal in effecting the 2 Trades and it follows therefore that the Plaintiff was not in breach of Section 76(1)(b).

69. Strictly speaking in the light of my above findings, it is not necessary to further consider the merits of the three individual statutory defences. However as the matter had been so forcefully argued by Mr. Tong, out of courtesy to him I will briefly state below my conclusions on the three statutory defences.

SECTION 20 DEFENCE OF OPERATING SECONDARY MARKET

70. Section 20(1) provides:-

"no person shall

(a)establish or operate a stock market that is not the Unified Exchange"

71. Section 2 defines stock market as:-

"a place where persons regularly meet together to negotiate sales and purchases of securities (including prices), or a place at which facilities are provided for bringing together sellers and purchasers of securities; but does not include the office of

(a)a stockbroker;

(b)a registered dealing partnership of which a stockbroker is a partner; or

(c)a recognised clearing house;"

72. The prohibition of Section 20 is against the setting up a secondary stock market. Could it be said with any common sense that the Plaintiff had operated a second stock market. I regret to say that this is simply not possible on the evidence before me.

73. Descending into technicalities, the case of Dharmala does not improve. The essential requirements of a stock market under Section 2 definition are:-

(1) a place;

(2) facilities are provided;

(3) bringing together sellers and purchasers of securities.

The Defendant's case is that the place of the secondary market operated by the Plaintiff is the office of Tullett. That being the case, the question is whether the office of Tullett was where facilities were provided to bring together sellers and buyers of securities. I find as a fact that there were no facilities provided at the Tullett's office and there was no bringing together of sellers and buyers of securities. I emphasise (as I did at the hearing) the words "bringing together" and there is simply no evidence which I can accept that there was any bringing together of sellers and buyers (in the plural) by Tullett. For reasons stated above, I find therefore that there was no breach of Section 20 of the Ordinance.

SECTION 80 DEFENCE OF SHORT SELLING

74. Grey Market trading was and is active in Hong Kong because it was perceived in the securities industry that such trading was not illegal (e.g. in breach of Section 80) and the risk was controlled (e.g. its validity dependent on the share being listed). Is the securities industry wrong.

75. The evidence in this Action shows that on the 9th of October the 2 Trades were done on the basis that completion would take place 2 days after the China Telecom shares were listed and if they were not listed then there would be no completion and the 2 Trades would go off. This is simply standard Grey Market trading. How does that fit into section 80.

76. Section 80 provides:-

"A person shall not sell securities at or through the Unified Exchange unless, at the time he sells them -

(a) he has .............. or

(b) he has reasonably and honestly believes that he has ...

a presently exercisable and unconditional right to vest the securities in the purchaser of them."

77. The time of sale was 9th of October because that was the time when the parties agreed to the sale and on that day there was no selling of China Telecom shares at or through the Exchange because China Telecom had not yet been listed on the 9th of October and therefore such shares were incapable of being sold at or through the Exchange.

78. The alternative case was put on the basis that the sale was not on 9th October but at the time when China Telecom was formally listed and capable of being traded. On that scenario then the evidence clearly showed that the Plaintiff would have (and did in the event have) a "presently exercisable and unconditional right to vest the securities in the purchaser of them". Therefore on that basis there was no breach of Section 80.

79. I therefore conclude that the securities industry is not wrong and had not indulged in reckless illegal activity of short selling prohibited by Section 80 of the Ordinance. The Defendant also fails under this Issue 9.

SECTION 48 DEFENCE OF CARRYING ON BUSINESS OF DEALING WITHOUT REGISTRATION

80. This is the main thrust of the Defendant case of statutory defences and the contention is that the Plaintiff being unregistered under the Ordinance, carried on the business of dealing in securities. Section 48 of the Ordinance provides:-

"A person (whether an individual or a body corporate, or a member of a partnership or director of a body corporate) shall not carry on a business in Hong Kong of dealing in securities, or hold himself out as carrying on such a business, unless he is registered as a dealer under this Part."

"Dealing in securities" is defined in Section 2 of the Ordinance as:-

"in relation to any person (whether acting as principal or agent) subject to section 3(1), means making or offering to make an agreement with any person, or inducing or attempting to induce any other person to enter into or to offer to enter into any agreement ---

(a) for or with a view to acquiring, disposing of, subscribing for or underwriting securities.."

Section 3 creating a "Saving for certain transactions" had been referred to earlier but I will now set out its fuller relevant provisions as follows:-

"(1) For the purpose of determining whether or not a person has dealt in securities or has communicated an offer to acquire or dispose of securities, no account shall be taken of an act done on behalf of that person by, or of an offer made by that person to, a registered dealer, a dealer's representative ..... or of that person having .....

(a)...

(b)...

...

(g)...

or of his having as principal, acquired, subscribed for, or underwritten securities, or effected transactions with a person whose business involves the acquisition and disposal, or the holding, of securities (whether as principal or as agent)

(1A) Without prejudice to the generality of the definition of "dealing in securities" in section 2(1), a person shall be regarded as dealing in securities if in return for a commission, rebate or other remuneration, he

(a) receives from another person an offer to effect a dealing or to acquire or dispose of securities, and communicates it, either in his name or in the name of the person from whom the offer is received, to a registered dealer, a dealer's representative, an exempt dealer or an exempt dealer's representative;

(b)

(c)on behalf of another person

(i) effects a dealing through a registered dealer..... or

(ii)makes an offer to a registered dealer .... to acquire or dispose of securities;

and subsection (1) shall be construed and have effect accordingly."

As far as I can understand from the submissions of the parties (this whole area is not without some difficulties and occasional confusions) the Plaintiff's contentions are that it is not in breach of Section 48 for the following reasons:-

1. there was no dealing in securities because of the professional exemption under Section 3(1), namely that Tullett dealt in this case as principal and the business carried on by Tullett was done on that basis;

2. there was no dealing in securities as caught by Section 3(1A) because Tullett did not receive any commission or other remuneration and did not communicate the offer made by Dharmala to either Pergrine or New China and did not do the things ... referred to in Section 3(1A)(c) on behalf of another person.

I will consider each of these questions in turn.

81. The primary case of the Plaintiff is that in effecting the 2 Trades it was acting as principal and not as agent. The evidence shows quite clearly that Tullett was not acting as agent for any person but was selling as principal to make, as it was entitled to do so, a healthy profit which it would not be entitled to do if it was acting as agent owing all the fiduciary duties of such agent. In fact Tullett was as good as its word written in its letter to the SFC and the evidence shows clearly that throughout not only in relation to these 2 Trades but in respect for example all China Telecom transactions effected over the first half of October 1997, Tullett was acting only as principal and confining itself to dealing with only professionals as promised to the SFC. It incurred liabilities personally and it involved no other person in liabilities as an agent would do. Tullett did not charge a brokerage fee as an agent for any one and it did not receive commission as an agent from either the party from whom it bought or sold shares or in turn from parties to whom it sold or bought shares. I hold therefore that the Plaintiff is entitled to the professional exemption under Section 3(1) of the Ordinance.

82. To outflank this exemption under Section 3(1). the Defendant relies on Section 3(1A) of the Ordinance and contends that there was brokerage for the Plaintiff in the 2 Trades and that therefore there was the receipt of either a commission or remuneration by Tullett. Although in the relevant Calls, there was reference by Stephen to brokerage and he added 10 cents to the price of $18.00, a true and realistic view of what happened is that it was a salesman's devise used by Stephen to add 10 cents to the price he was selling to Raymond. He was therefore able to sell to Raymond at $18.10 instead of $18.00. There was in fact no commission charged to the buyer Dharmala or to the seller Tullett. This defence under Section 3(1A) therefore falls on the first hurdle.

83. Mr. Huggins however has two further points on Section 3(1A) for he says that Section 3(1A) has no application because:-

(a) in respect of Section 3(1A)(a), Tullett did not communicate the offer made by Raymond to buy at $18.10 to either Peregrine or New China, from whom Tullett bought the Shares;

(b) in respect of Section 3(1A)(c), Tullett did not on behalf of another person, effected a dealing through a registered dealer's representative or made an offer to a registered dealer's representative and the emphasis here is on behalf of another person.

84. I accept Mr. Huggins submissions on this and the evidence speaks for itself for the essence of the evidence is that Tullett was not acting for any one but acting for itself as principal. In that situation there is simply no room for the operation of Section 3(1A).

85. I therefore conclude that the defence of Section 48 also fails because although not registered, the Plaintiff did not carry on the business of dealing in securities, having the benefit of Section 3(1) professional exemption and not being caught by Section 3(1A) of the Ordiance.

CONCLUSION

86. Having considered all the submissions made to me by Mr. Tong and Mr. Huggins (both by way of extensive written submissions and full oral arguments) I have no doubt that all the defences raised by Dharmala cannot be sustained. The Plaintiff in my view deserves to succeed and I therefore enter Judgment in favour of the Plaintiff in the sum claimed of $7,569,572.38 together with interests at 3% above prime from 24th October 1997 until Judgment. The Plaintiff is also entitled to costs of the Action.