LEUNG CHI KEUNG v. MARKET MISCONDUCT TRIBUNAL AND ANOTHER

HCMP 2539/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 2539 OF 2009

(ON AN INTENDED APPEAL PURSUANT TO S. 266 OF
THE SECURITIES AND FUTURES ORDINANCE, CAP 571
FROM DETERMINATIONS OF THE MARKET MISCONDUCT TRIBUNAL
IN RELATION TO CHINA OVERSEAS LAND AND INVESTMENT LIMITED)

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Hon Cheung JA :

1.  On 8 July 2009, the Market Misconduct Tribunal (‘the

Tribunal’) found the applicant guilty of market misconduct in the nature of insider dealing.  On 20 August 2009 the Tribunal ordered the applicant, among other things, not to deal with any securities without leave of the Court of First Instance for a period of eight months.  He was further ordered to pay the Hong Kong Government $2,069,582.42 and the Securities and Futures Commission (‘SFC’) $361,854.00 (‘the order’).

2.  By summons dated 8 December 2009, the applicant applied for leave to appeal out of time against the finding and determination of the Tribunal.  The applicant also sought leave to appeal against finding of fact by the Tribunal.  Under section 266 of the Securities and Futures Ordinance (‘the Ordinance’) (Cap. 571) the applicant may appeal against the finding or determination on a point of law or with the leave of Court of Appeal, on a question of fact. 

The relevant consideration

3.  The Court will consider the application with the following factors in mind :

(1) length of the delay;

(2) reason for the delay;

(3) merit of the proposed appeal;

(4) prejudice to the respondent.

Length of delay

4.  Under Order 59, rule 4 and Order 60A, rule 3 of the Rules of the High Court the applicant has 28 days to appeal against the order.  The appeal period expired on 18 September 2009.  The delay is 81 days.  This is a substantial delay.

Reason for the delay

5.  The applicant explained that he was advised by his former solicitors that he had meritorious grounds of appeal.  However he decided not to appeal before the deadline because of the following reasons :

(1)  He believed that the SFC was unlikely to bring additional disciplinary proceedings against him.

(2)  He understood that the SFC had not previously imposed a lengthy suspension or revocation of a licence in addition to the Tribunal order.

(3)  He was concerned with the length of an appeal and costs.  The transaction in this case occurred in January 2004 and the substantive Tribunal hearing only started five years later in January 2009.  Financially he was already required to pay his own costs and the government’s costs of about $7 million.  This represented a sizeable portion of his earnings and savings.  He was under great pressure and he was advised that the appeal may take 12 months to complete.

(4)  He considered that he could live with the eight months’ suspension and payment of the costs rather than to embark on another long legal battle.

6.  The position changed on 21 October 2009.  The SFC informed him that it intended to impose further sanctions against him, namely a life revocation of his trading licence and a life ban from conducting regulated financial activities.  Following the receipt of this letter, he sought advice from his present firm of solicitors and retained it on 4 November 2009 to proceed with the application.

7.  In my view the applicant has given a reasonable explanation for the delay.  His belief and understanding of further disciplinary proceedings came from the advice of his former solicitors who had made inquires with the SFC.  Considering that he had already gone through a 53-day hearing and incurred substantial financial liability, he obviously had to balance the choice of living with an eight-month suspension or pursue with the uncertainty of an appeal.  The notification from the SFC obviously put a new perspective on the matter which prompted him to lodge the appeal out of time.

Merits of the appeal

8.  In my view the applicant has raised issues of law and facts which satisfied the ‘reasonable prospect of success’ threshold.

1A) Was David Tsien a connected person?

9.  David Tsien was a ‘public-side’ equities salesman at JP Morgan.  The concept of ‘Chinese wall’ within JP Morgan would preclude him from having access to relevant information.  The Financial Secretary’s Notice of 12 September 2007 issued pursuant to section 252(2) and Schedule 9 of the Ordinance proceeded on the basis that David Tsien was a connected person under section 247(1)(c) of the Ordinance.  The section provides that,

‘ (1) For the purposes of Division 4, a person shall be regarded as connected with a corporation if, being an individual—

(a)    he is a director or employee of the corporation or a related corporation of the corporation;

(b)   he is a substantial shareholder of the corporation or a related corporation of the corporation;

(c)    he occupies a position which may reasonably be expected to give him access to relevant information in relation to the corporation by reason of —    

(i)    a professional or business relationship existing between— 

(A)  himself, or his employer, or a corporation of which he is a director, or a firm of which he is a partner; and 

(B)   the corporation, a related corporation of the corporation, or an officer or substantial shareholder of either corporation; or

(ii)   his being a director, employee or partner of a substantial shareholder of the corporation or a related corporation of the corporation;

(d)   he has access to relevant information in relation to the corporation and

(i)    he has such access by reason of his being in such a position that he would be regarded as connected with another corporation by virtue of paragraph (a), (b) or (c); and

(ii)   the relevant information relates to a transaction (actual or contemplated) involving both those corporations or involving one of them and the listed securities of the other or their derivatives, or to the fact that the transaction is no longer contemplated; or’

10.  Some assistance may be drawn from the interpretation of Section 9 of the Company Securities (Insider Dealing) Act 1985 of the United Kingdom which bears similarity to our section 247(1),

‘9 “Connected with a company”

For purposes of this Act, an individual is connected with a company if, but only if —

(a)   he is a director of that company or a related company, or

(b)   he occupies a position as an officer (other than a director) or employee of that company or a related company or a position involving a professional or business relationship between himself (or his employer or a company of which he is a director) and the first company or a related company which in either case may reasonably be expected to give him access to information which, in relation to securities of either company, is unpublished price sensitive information, and which it would be reasonable to expect a person in his position not to disclose except for the proper performance of his functions.’

11.  Gore Browne on Companies 44^th ed (1992) discussed the English provision as follows :

‘ It would seem from the wording of s 9 (b) that it is not enough for the prosecution to establish that a particular officer or employee, who is not a director, was definitely in possession of inside information relating to the securities of his company when he dealt. To be a primary insider, the officer or employee must be in a position which could reasonably be expected to give him access to confidential price-sensitive information concerning the securities of the company. If a particular officer or employee is not in such a relationship with the company, he cannot be guilty of an offence under s 1 (1), even though in a particular instance he might have come into possession of inside information. It would seem that the relationship must also be such that it is proper for the individual to have access to the information. For example, a junior clerk who improperly opens and reads confidential internal circulars could hardly be regarded as in an access relationship to his information, even though he obtains it in the course of his employment. Similarly, whilst numerous observations are commonly made about the omniscience of office tea-ladies, it must surely be clear that such individuals are not employed in a relationship which it is contemplated will give them access to confidential price-sensitive information concerning the company. In all such cases, there are adequate sanctions outside the criminal law to discourage abuse. Furthermore, in appropriate circumstances, it might be possible to regard such individuals as secondary insiders or tippees.’ (emphasis added)

12.  While David Tsien may have had actual information, it is certainly a substantial issue that someone with actual information may not be sufficient to fall within the statutory category of someone who ‘occupies a position which may reasonably be expected to give him access to relevant information’.  This appears to be an objective test.  In my view the issue whether David Tsien was a connected person under section 247(1)(c) satisfies the requirement of a reasonable prospect of success on appeal.

13.  The Tribunal had also considered section 247(1)(d).  Without deciding this point at this stage, it appears that this subsection connects a person to a listed company if

(1)   the person is connected with (e.g., works for) another company;

(2)   that other company is engaged in or contemplating a transaction with the listed company or involving its securities; and

(3)   the person in fact has access to information being the relevant information, about the transaction.

14.  For the subsection to apply in the present case the ‘relevant information’ must concern a transaction between China Overseas Land and Investment Ltd (‘COLI’) and David Tsien’s company i.e. JP Morgan.  However the Financial Secretary’s Notice did not define ‘relevant information’ by reference to such a transaction.  It is a live issue whether the Tribunal could rely on section 247(1)(d) without giving the applicant an opportunity to respond.

1B) Knowledge of the applicant that David Tsien was a connected person

15.  This issue is related to the one I have just discussed.

2A)  Was the information relevant?

16.  The Financial Secretary’s Notice stated that the applicant had come into possession of specific non-public price sensitive information that COLI would announce and carry out a top-up placement of 850,000,000 shares at a price of HK$1.8 per share on or about 26 January 2004.

17.  Between 2 January 2004 and 13 January 2004, the applicant had bought 6 million shares. The first talk of possible placement between him and David Tsien was on 12 January 2004.

18.  While the placement was indeed announced in the afternoon of 26 January 2004, the disposal by the applicant of COLI shares took place on 21 January 2004 at 10.21 am of 2,392,000 shares and on 26 January 2004 at 10.38 am of 2 million shares.  The information that the applicant had received up to 19 January 2004 was that the placement should be before the end of the month otherwise it would have to wait until April 2004.  On 20 January 2004 the applicant was told that there was no agreement yet and if there was to be agreement it had to be discussed next week.  The applicant then sold 2 million shares on 21 January 2004.  He did not dispose of all his remaining COLI shares.  Before the second disposal by the applicant on 26 January 2004 (again he did not dispose of all his remaining holdings) David Tsien informed him at 8.52 am that he ‘guessed’ the placement was to be that week.  It is a live issue whether the information received by the applicant was that there were negotiations for the placement i.e. a contemplated placement or whether the placement would take place on 26 January 2004.

19.  In Stime Watch International Holdings Limited (Report dated 14 February 2003) the Insider Dealing Tribunal (‘IDT’), addressing the issue of information relating to a contemplated takeover stated that,

‘ Obviously the fact that a takeover is merely contemplated was not thought to be a matter which prevented information to that effect from being found to be specific for the purposes of section 8. There is no additional requirement incorporated into those provisions of sections 9(1)(b), (d) and (e) that in addition to being contemplated the takeover proposed be likely or probable to result in an offer or a successful takeover.’

20.  But what is more important for the purpose of this appeal is what the IDT said about the relationship between price sensitivity and the probability of the transaction reaching fruition :

‘ Finally and importantly in this regard, we do not see any unfairness in the conclusions we have arrived at. Connected persons who divulge information about inchoate transactions which may be otherwise specific, but where the probabilities of any commercial completion of that transaction are low would be protected from any allegation that they divulged relevant information by the requirement of proof that the information was price sensitive. It would be more difficult to establish that the information was price sensitive the lower the probability was that the project or transaction would reach fruition. Further, it would be possible to establish that those persons were aware of the price sensitivity of the information.’

21.  As directed by the Tribunal in this case, Mr. Rigby gave his evidence on the basis of an actual placement and not a contemplated placement.  From that premise there was no discussion by him of the relationship with price sensitivity and the ‘probability’ of the placement taking place.  While the Tribunal may be correct to hold that the information did not become ‘relevant information’ only when the agreement on placement was signed, the experts did not provide an analysis whether the information was price sensitive on 21 January 2004 or on the morning of 26 January 2004 when the evidence pointed merely towards negotiations of the placement.  Despite the use of the phrase ‘prospective placement’ in the report of Mr. Rigby, he did not actually undertake the analysis as I have mentioned.

22.  The Tribunal at paragraph 967 held that

‘ The probability of commercial negotiations between the parties coming to fruition was a moving tableau obviously closely related to the market price of COLI shares. The greater the market price of COLI shares above $1.80 per share the greater was the probability that a discount of about 8-10% would permit placement of COLI at $1.80 per share and there would be agreement between the parties so to do.’

23.  This is a pertinent observation.  However, at this stage of the proceedings, I will leave the issue to be considered on appeal.  The position can be contrasted with the situation in Firstone International Holdings Ltd (Report of 8 July 2004) where the IDT held that,

‘ That leaves us with the final issue to determine in this chapter, i.e. whether the information concerning preliminary negotiations as they existed by the 26^th June 1997 as to the placement of 20% of Firstone’s share capital with Guangnan Holdings was information which at the time would likely materially have effected Firstone’s share price had it in fact been known to the category of persons likely or accustomed to deal in Firtone’s shares.’

2B) Knowledge of the applicant that he had relevant information

24.  This issue is again related to the issue whether the information was relevant information.

3) Reason of the sale

25.  The Tribunal rejected the applicant’s explanation that the sale was not related to the use of the relevant information.  On this point I agree with Yuen JA’s view and would not grant leave to the applicant to appeal on this point.

Prejudice

26.  No prejudice to the respondent has been shown.

Conclusion

27.  As a meritorious appeal has been shown I will grant the applicant extension of time to appeal on law and facts as indicated above.

Costs

28.  There will be a provisional order that costs of this application be in the cause of the appeal.

Hon Yuen JA :

29.  I agree that leave should be granted for grounds of appeal (1) and (2) only. Ground (3) is a ground of appeal on a pure question of fact, as Mr. Yu accepted.  Having seen and heard the witness, the Tribunal was entitled to reject his evidence that he sold the shares pursuant to his “trading philosophy/strategy”.  It is clear that the Applicant did receive information.  The arguments whether it is “relevant” information, and whether he received it from a “connected” person, do not impact upon the tribunal’s rejection of his allegation that he sold the shares pursuant to his “trading philsosophy/strategy”.