MAGUSTA SECURITIES LTD. v. DAO KWOK FU

DCCJ 7737/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7737 OF 2001

(transferred from HCA 12031/99)

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JUDGMENT

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INTRODUCTION

[1] This was a claim by a securities dealer, against one of its former customer, for unpaid debts incurred on his securities trading account. The debts were accumulated in the period between September and October 1997.

[2] One of the Plaintiff's dealer representatives was Madam Leung Ka Yee ("Madam Leung"), a primary schoolmate and close friend of the Defendant.

THE PLAINTIFF'S CASE

[3] On 30th July 1997, the Defendant opened a Cash Securities trading account with the Plaintiff and signed a Cash Client's Securities Dealing Agreement (the "Agreement"). The content of the Agreement was not in dispute, it provided inter alia that: the Defendant would make payment or make delivery of securities sold within 2 days of the transaction; the Plaintiff had a general lien on all securities held by the Defendant and overdue balance will carry interest at a rate not exceeding Hong Kong Prime Rate plus 8.5%.

[4] Between 30th July 1997 and 15th October 1997, the Defendant's account was very active with purchases and sales of shares.

[5] It was the Plaintiff's practice to dispatch copies of brought/sold notes to its customers on everyday where there was a transaction. Additionally, monthly statements were sent to all customers.

[6] In the Agreement, the Defendant gave Madam Leung's address for the purpose of receiving the daily brought/sold notes and monthly statements.

[7] By 15th October 1997, the Defendant's account showed a net loss of HK$965,227. On the same day, the Plaintiff exercised its power under the general lien and sold some of the shares in the Defendant's account. As a result, the Defendant's debt was reduced to HK$483,284.41(the "Indebtedness").

[8] The Defendant alleged that the Indebtedness was caused by Madam Leung's trading activities using his account, without his knowledge or approval. The Defendant refused to repay the Indebtedness as demanded.

[9] In a signed statement dated 21st April 1997, Madam Leung admitted that the Defendant and she had an agreement to share equally on all profits made on her trading activities using his account.

[10] Madam Leung had vanished after dismissed by the Plaintiff.

THE DEFENDANT'S CASE

[11] The Defendant alleged that it was his wife who first opened an account with the Plaintiff. In the beginning, the Defendant traded stocks with his wife's account. Later the Defendant's wife was unhappy with his trading activities, then he opened his own account with the Plaintiff.

[12] Madam Leung advised the Defendant to use her address as correspondence address, such that the brought/sold notes and monthly statements would be sent to her address to avoid his wife finding out about his trading activities.

[13] The Defendant's trading strategy was to buy and sell on the same day whether it was at a profit or a loss. This meant that he did not have to deposit the whole price of the stocks purchased, with the Plaintiff.

[14] On 14th August 1997, Madam Leung first informed the Defendant that she had traded securities using the Defendant's account. Madam Leung agreed to share half of the profit, of around HK$6,000, with the Defendant. Although the Defendant was unhappy with Madam Leung's action, he did not report or complain about this because she was an old friend.

[15] On 25th August 1997, Madam Leung again told the Defendant that she had traded securities with his account. This time the profit was $9,293.64. Again half was shared with Madam Leung after the money was deposited into the Defendant's account.

[16] The next day, Madam Leung again told the Defendant that she had traded with his account and the profit was HK$5,375.40. The Defendant agreed to share half of the gain with Madam Leung, but the Defendant was upset that Madam Leung had once again traded with his account and told her specifically to stop.

[17] After the downfall of the stock market, the Defendant had lost interest in securities trading and ceased trading completely in the middle of September 1997.

[18] On the evening of 21st October 1997, Madam Leung called the Defendant and informed him that she again used his account to trade stocks without his authorization and she did not have money to cover the accumulated loss of around HK$400,000.

[19] The Defendant then confessed his trading activities to his wife and the next day, they went to the Plaintiff's office to lodge a complaint. At the Plaintiff's office, Mr. Chiu Tak Ki ("Mr. Chiu") admitted that he knew Madam Leung had traded with the Defendant's account without his knowledge and authority, but because Madam Leung could not repay the debt, they would look to the Defendant for repayment.

[20] The Defendant told Mr. Chung Kai Kwong ("Mr. Chung"), another primary school classmate, what had happened. Mr. Chung arranged a meeting between the Defendant and Madam Leung.

[21] Prior to the meeting on 28th October 1997, the Defendant prepared a written acknowledgement for Madam Leung to sign. After reading the letter, Madam Leung signed the acknowledgement.

[22] The Defendant made a complaint to the Securities and Futures Commission and reported the incident to the Stock Exchange of Hong Kong. However, he felt that he had suffered no loss and because Madam Leung was a friend, he did not report it to the police.

[23] The Defendant could no longer contact Madam Leung to give evidence in this matter.

THE ISSUE

[24] In his closing submission, Mr. Mok, Counsel for the Defendant, conceded that the Defendant need not be aware of and approved each transaction in his account to be liable to the balance outstanding. The issue is not knowledge or approval but authorization. The only issue in this matter was accordingly: Did Madam Leung trade securities, using the Defendant's account, with the Defendant's expressed or implied authorization?

THE FINDINGS

Burden of Proof:

[25] Mr. Mok argued that the burden of proving that Madam Leung had traded with the Defendant's authorization was on the Plaintiff. I do not agree. As the evidence showed, the Defendant was required under the Agreement to be responsible for any loss, costs, fees and expenses in connection with his failure to meet his obligations in his account.

[26] It was undisputed that the trading activities in the Defendant's account leading to the Indebtedness did in fact occur. The Defendant was liable to the Indebtedness, unless he can prove that the trading activities were done by another person, without his expressed or implied authorization.

[27] Although there was no dispute that the trading was actually done by Madam Leung, the Defendant, however, admitted that he had participated in 3 prior trading activities and approved of those trades by sharing in the profits. Prima facie, the Defendant knew of and approved Madam Leung's trading with his account, he must thus satisfy the burden of proving that Madam Leung's later tradings were without his authorization.

Reliance on the two Madam Leung Statements:

[28] Each party produced a statement from Madam Leung to support their

position.

[29] The statement produced by the Defendant was dated 28th October

1997, just after Madam Leung had confessed that she had accumulated approximately HK$400,000 deficit in his account. She was then confronted by the Defendant, in front of 2 close friends. Madam Leung must have been extremely remorseful and under the circumstance would have signed any statement presented by the Defendant, if it would help the Defendant to evade liability for the Indebtedness. I found that I could not rely on the content of the statement presented by the Defendant.

[30] The statement presented by the Plaintiff was dated 21 April 1999.

This statement was prepared by the Plaintiff's solicitors and was signed 11/2 year after the last trading activity in the Defendant's account. In this statement, Madam Leung admitted three separate incidents of trading in securities using other's accounts. The indebtedness under these three accounts totaled over HK$2,000,000.

[31] Under the circumstances, it would have been very difficult for

Madam Leung to disagree with the Plaintiff. It would have been natural for Madam Leung to sign any statement prepared by the Plaintiff's solicitor, whether she agreed with the content or not. Accordingly, I also found that the statement presented by the Plaintiff as unreliable.

Findings Based On Other Evidence:

[32] After careful consideration of all available evidence, I found that on balance of probability, the Defendant did authorize Madam Leung's trading activities with his account. My finding was based on the following:

[33] First, the Defendant stated that the only reason he used Madam Leung's address as his correspondence address was because he feared his wife would find out about his trading activities.

[34] Second, in his witness statement the Defendant indicated that he knew of the daily brought/sold notes, but at the beginning he threw away the notes after he checked them and later did not bother asking Madam Leung for these notes as he always traded in the Plaintiff's office.

[35] Third, the Defendant stated that even after he had specifically thought of the danger if Madam Leung had lost in the trading transactions, he only gently told Madam Leung to stop.

[36] Nothing else was done. The Defendant did not complain or report Madam Leung's activities; Did not terminate his account with the Plaintiff; Did not change his correspondence address to another friend's address or to a post office box, so that he will receive the daily brought/sold notes; Did not demand to see the monthly statements, such that he would have some idea if Madam Leung was using his account to trade again.

[37] I found the Defendant's story incredible and defied common sense. Any reasonable person, after being told of the 3 incidents of trading without authorization, would have taken steps to either complain to Madam Leung's superiors, report to the authorities or at the very least, terminate the account. Given the same circumstance, anyone would have taken steps to protect oneself. Yet the Defendant did nothing.

[38] The only credible explanation was that the Defendant knew of and, from the beginning, gave expressed authorization to Madam Leung to trade securities on his account; or at the very least, gave implied authorization by his inaction, after he learned of Madam Leung's trading activities and agreed to share in the profits.

[39] The Defendant had failed to satisfy his burden of proof and judgment shall be for the Plaintiff.

JUDGMENT

(1) Judgment is for the Plaintiff in the sum of HK$483,284.41;

(2) Interest on HK$477,898.76 at the prime rate plus 8.5%, calculated from 20th October 1997 until the date of judgment and thereafter at the judgment rate until payment is received.

(3) Costs of this matter, together with all costs reserved shall be to the Plaintiff, with certificate for counsel.