HKSAR v. FU KOR KUEN, PATRICK AND ANOTHER

CACC179/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 179 OF 2010

(ON APPEAL FROM DCCC 981-1020 OF 2008)

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JUDGMENT

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Hon Lunn J (giving the judgment of the Court) :

1.  The applicants seek leave to appeal their convictions after trial in the District Court by Deputy Judge Sham on 7 May 2010 on 20 charges of false trading, contrary to section 295(1)(a) and (6) of the Securities and Futures Ordinance, Cap. 571 (“the Ordinance”) and the sentences of imprisonment imposed in consequence, namely two years’ imprisonment in respect of each charge and a total sentence of imprisonment of two years and nine months in respect of the 1^st applicant and three years’ imprisonment in respect of the 2^nd applicant.

THE CHARGES

2.  Each of the charges alleged that on various dates in the period in and between January 2004 and January 2005 the applicants jointly placed or caused to be placed orders to buy and sell derivative warrants issued by Macquarie Bank Limited (“Macquarie”) :

“… with the intention that, or being reckless as to whether, such orders had, or were likely to have, the effect of creating a false or misleading appearance of active trading in respect of these warrants traded on the stock market operated by the stock exchange of Hong Kong Ltd.”

3.  At the trial much of the evidence was placed before the judge by way of witness statements and admitted facts, pursuant to section 65B and 65C respectively of the Criminal Procedure Ordinance, Cap. 221.  Oral evidence was given by three witnesses permitted to give evidence as expert witnesses, namely Mr Clive Rigby for the prosecution, Mr David White for the 1^st applicant and Dr Tom Vinaimont for the 2^nd applicant.  The applicants did not avail themselves of their right to give evidence.

4.  There was no dispute that the applicants bought and sold warrants issued by Macquarie in the period alleged in the charges.  They did so from desks that they occupied in the Dealing room of Grand Investment (Securities) Limited (“Grand”) on the 22^nd floor of Entertainment Building, 30 Queens Road, Central.  The 1^st applicant had an account with Grand and the 2^nd applicant an account with Shun Loong Securities Company Limited (“Shun Loong”).

5.  The overwhelming majority of the purchases and sales by the applicants of the warrants issued by Macquarie, the subject of the charges, were between each other at the same price back and forth throughout the day.  At an early stage of each day of the trading the subject of the charges one or other of the applicants bought such warrants, overwhelmingly from Macquarie.  Before the end of each trading day the warrants were disposed of (exit) either by sale to Macquarie, to a third party or to a combination of the two.  The exit price was generally at the same as or very close to the original purchase price.  As a result, profit or loss was not made by the trading itself.  Rather, it was made as a result of rebates that ultimately were paid to the applicants for the fact of their trading.

6.  Under an agreement with the two brokers, Grand and Shun Loong, Macquarie paid a rebate to brokers which matched the commission charged of that client for trading by the brokers.  In their turn, the brokers passed on that rebate to the applicants.  In addition, under separate agreements with the applicants, contingent on their trading reaching a certain level, the two brokers paid a rebate of the commissions they had charged the applicants for their trading.  In the result, since the total amount of rebates paid to the applicants was greater than the transaction costs that they incurred, they were able to make a profit.

7.  The prosecution’s case was that on each of the dates the subject of the charges by the “circular trading” between the applicants, by which they dominated the market turnover, they intended to create a false and misleading appearance of active trading in those warrants or were reckless as to whether it had or was likely to have that effect.  Such appearance of ‘active trading’ did not reflect the forces of genuine supply and demand.  One of the purposes of their “circular trading” was to create a misleading appearance of liquidity in trading in the warrants thereby encouraging buyers of the warrants to enable them more easily to dispose of (exit) the warrants at the end of the day.

The applicants’ case

8.  The applicants’ case, in particular as advanced through the experts, was that the trading between the applicants was legitimate and a form of arbitrage.  The commission rebate schemes operated by Macquarie, Grand and Shun Loong were lawful and created a position whereby trading at the same price between the applicants nevertheless generated a profit to the applicants.  The applicants did not have the requisite intention nor were they reckless as required by section 295.  The applicants trading did not create a false or misleading appearance of active trading in the warrants.  Rather it was real trading creating real liquidity.  Neither applicants was not an “associate” of the other, as defined in section 295(5) of the Ordinance.  The evidential burden required of the applicants in respect of the defence afforded by section 295(7) of the Ordinance was satisfied and the prosecution had failed to discharge the persuasive burden placed on them to prove that one of the purposes of the trading included the creating of a false or misleading appearance of active trading.

REASONS FOR VERDICT

9.  In his admirably succinct and focused reasons for verdict the judge determined that the actus reus of the offence, namely the trading, was not an issue.  What was an issue was the applicants’ state of mind or mens rea (paragraph 28).  Of that issue, he determined that it, “… can be resolved by taking a commonsense approach without the help of an expert.” (paragraph 30).

10.  Of the applicants’ multiple trading of warrants with each other at the same price, the judge determined that “… they simply traded with each other to earn the excess of rebates... ” (paragraph 48).  He went on to find that such trading, “… can never be regarded as real trading” (paragraph 51).  Having noted that they occupied neighbouring desks in the dealing room at Grand and co-owned a property, he found that they were “... acting in concert to conduct the game together.” (paragraph 56).  Further, he found that, although on occasions unavoidably the applicants traded with third parties, they wanted to trade with each other and to do so “as many times as possible so as to maximise their profit.” (paragraphs 57-8).

11.  Of the issue of their intention in so trading, the judge found that the applicants’ knew it to be a “virtual certainty” that their trading resulted in active trading in the warrants and, since he determined that their trading was not “real”, “... they intended their orders to have the effect of creating a false or misleading appearance of active trading in the warrants.” (paragraph 61).  Alternatively, he found that the applicants were reckless as to creating such an appearance.  (Paragraph 63.) 

12.  The judge said that he was satisfied (paragraph 68) that each of the applicants was an “associate” of the other, as defined in section 285(1)(e) of the Ordinance, namely a :

“… person with whom the person has an agreement or arrangement—

(i)    with respect to the acquisition, holding or disposal of such securitities or such interest;...”

13.  Further, he determined (see paragraph 66) that the provisions of section 295(5)(b) and (c) were operative, namely that where a person offers to sell (buy) securities at a price that is substantially the same as the price at which he has made or proposed to make, or knows an associate of his has made or proposes to make, an offer to buy (sell) the same or substantially the same number of them, then for securities traded, inter-alia, on the Stock Exchange of Hong Kong the person shall :

“… be regarded as doing something or causing something to be done, with the intention that, or being reckless as to whether, it has, or is like, the effect of creating a false or misleading appearance.”

14.  The judge went on to determine that the burden of proof imposed on the applicants in respect of the defence provided for by section 295(7) of the Ordinance was an evidential burden only, not the persuasive burden.  The sub-section provides that :

“... it is a defence to the charge for the person to prove that the purpose for which he committed the act was not, or, where there was more than one purpose, the purposes for which he committed the act did not include, the purpose of creating a false or misleading appearance in active trading in securities...”

15.  The judge determined that, as day traders, unless they were sure that someone would buy the warrants at the end of the day, the applicants ran the risk that they would be unable to “exit the market”.  He noted that although Macquarie had bought back all the warrants sold to the applicants on the majority of the 20 trading days, nevertheless on five of the days third parties had been the buyers and on four days third parties and Macquarie had been the buyers.  Having found that an active liquid market would be easier to exit than a illiquid market the judge determined that is what the applicants wanted and, in particular that by their trading the applicants had “... a purpose to create a false or misleading appearance in active trading in the warrants.”  Accordingly, the applicants were unable to avail themselves of the defence creating provision.

GROUNDS OF APPEAL AGAINST CONVICTION

The 1^st applicant

Ground 1: ‘active trading’

16.  By ground 1, Mr Lok SC submitted on behalf of the 1^st applicant that the judge had failed to make a finding of the meaning of the phrase “active trading”, as used in section 295 of the Ordinance.  It was contended that the phrase fell to be construed in the same way in which the Court of Appeal of Western Australia in Braysich v The Queen [2009] WASCA 178 construed the phrase in the context of section 998 of the Corporations Law, namely that “‘active’ ... requires something more than ordinary volume or price changes in the securities in question”.  Further, he failed to make a finding that the trading of the applicants had or was likely to have the effect of creating a false or misleading appearance of active trading.  Alternatively, if he had made such a finding he erred in so doing.

Ground 2: intention

17.  By ground 2, it was submitted that the judge had erred in determining that the appropriate test for determining “intention” was that set out in R v Woollin [1998] 1 AC 82, as summarised in Archbold Hong Kong 2010 at 20-19.  It was argued that, in consequence, the judge erred in determining that the applicants intended their trading in the warrants to create a false or misleading appearance of active trading.  It was contended that the appropriate test was that articulated by Sackville J, in the context of section 998 of the Corporations Law, in the Federal Court of Australia in Australian Securities Commission v Nomura International PLC (1998) 89 FCR 301 at 303-4, namely the contravener’s “sole or dominant purpose, or ‘central object’”.  Application of that test would have resulted in the judge determining that the applicants traded the warrants between themselves for the “sole or dominant purpose” of earning the excess of monies of the rebate commissions over the transaction costs.

Ground 3: reckless

18.  By ground 3, it was contended that the judge erred in finding in the alternative that the applicants were reckless as to whether their trading in the warrants had or was likely to have the effect of creating a false or misleading appearance of active trading.  It was submitted that the judge made no finding that the conduct of the applicants had or was likely to have that effect.  He was wrong to determine that their trading was not genuine and to do so by the application of “commonsense”, not having regard to the evidence of the expert witnesses.  There was evidence that the pattern of the applicants’ trading, namely to maximise rebate commissions was known in the market and practised by other participants.  Accordingly, the judge erred in determining that the 1^st applicant was aware that his conduct carried with it the risk of creating a false and misleading appearance of active trading.

Ground 4: section 295(7)—the statutory defence

19.  Ground 4 of the 1^st applicant’s grounds of appeal is common to that taken by the 2^nd applicant, under whose grounds of appeal it is considered.

The 2^nd applicant

Grounds 1 to 3: expert evidence

20.  By grounds 1-3, Mr Duncan SC submitted that, having admitted the testimony and reports of three expert witnesses, the judge erred in ignoring that evidence.  The testimony of the experts constituted a “science or body of knowledge outside the normal bounds of knowledge to the expected that the average citizen.”  That evidence was relevant to the central issue of whether the applicants’ trading constituted a genuine form of trading.  The judge had erred in failing to make findings in respect of the evidence, on the one hand of Mr White and Dr Vinaimont, that the applicants’ trading was an accepted and normal form of arbitrage and that, on the other hand of Mr Rigby, it constituted a form of market manipulation.  In this case, the judge’s was not entitled to approach the resolution of the central issue by deploying commonsense only.  Further, he failed to give reasons as to why he had rejected evidence of the experts led on behalf of the applicants.

Ground 4 : section 295 (7)—the statutory defence

21.  By ground 4, it was contended that whilst the judge had determined correctly that the burden of proof imposed upon the applicants at trial by section 295(7) of the Ordinance to avail themselves of the statutory defence was an evidential burden only, he had erred in determining that the applicants had failed to discharge that burden.  The judge was in error to determine that there was no evidence to support such a defence (see paragraph 72).  Reliance was placed on the evidence of Dr Vinaimont and Mr White that the purpose of the applicants’ trading was “arbitrage”.  Given that Macquarie, as liquidity provider, had to respond to requests for quotes in respect of the warrants and, having regard to the evidence that before the end of each respective trading day Macquarie had bought back 70% of the warrants sold to the applicants, there was evidence that raised a reasonable doubt that the one of the purposes of the applicants’ trading was to create a false or misleading appearance of trading activity, thereby implying liquidity, in order that they could dispose of the warrants, if necessary to third parties, and thereby “exit” each trading day.  Also, there was evidence from Mr Rigby that the prices quoted by Macquarie in that exercise were “reasonable”.  There was no evidence that the applicants had any difficulty in disposing of their warrants at the end of the day’s trading. In any event, the appearance of liquidity created by the applicants’ trading was merely a consequence not the purpose of that trading.  The purpose of the trading was to make a profit from the fact that the monies received by way of rebates were greater than the costs of the transactions.

A CONSIDERATION OF THE SUBMISSIONS

‘Active trading’

22.  As the judge noted, the trading activities of the applicant in respect of the warrants the subject of the charges was undisputed and was set out in the schedules attached to his reasons for verdict (paragraph 26).  The schedules speak for themselves.  The judge noted their significance at paragraph 59.  On the 19 days on which the applicants traded in the 20 warrants, the subject of the charges, their trading accounted for 75% or more of the total market turnover in those warrants on all but two occasions.  Even on those two occasions, their trading was more than 50% of the total market turnover in the warrants.  The lowest number of warrants they traded on a particular day was 14 million, whereas on most occasions they traded in many tens of millions of warrants and on a number of occasions in hundreds of millions of warrants on a single day.

23.  Whilst the judge did condescend to articulate the dictionary definition of ‘trade’, namely the activity of buying and selling, and he did note that the phrase ‘active trading’ was not defined in the Ordinance he did not seek to define the word ‘active’.  He did not need to do so.  It is a simple English word, the meaning of which is readily understood.  Similarly, he did not determine specifically that the applicants’ trading fell within the phrase ‘active trading’.  Again, he did not need to do so.  No sensible suggestion to the contrary was sustainable.  There was no doubt whatsoever that the applicants’ trading had, or was likely to have, the effect of creating an appearance of active trading in those warrants.

‘False or misleading appearance’

24.  In the context of a consideration of the phrase “false or misleading appearance”, the judge cited passages from the judgment of Mason J, as he was then, with whose judgment the other judges concurred, in the High Court of Australia in North v Marra Developments Ltd [1981] 148 CLR 42, in which consideration was given to the ambit and object of a provision in section 70 of the Securities Industry Act (NSW) that proscribed conduct calculated to create “... a false or misleading appearance of active trading”.  In particular, he noted that Mason J stated that the object of the section was to seek “... to ensure that the market reflects the forces of genuine supply and demand”.  Also, that he had observed that “… it is in the interests of the community to the market for securities should be real and genuine, free from manipulation.”

25.  We are satisfied that Mason J’s observations in respect of the object of section 70 of the Securities Industry Act (NSW) are apposite and applicable to a consideration of the objects of section 295 of the Ordinance.

26.  Having noted that the pattern of trade between the applicants was to buy and sell to and from each other frequently and at the same price, the judge determined that such trading was not ‘real’ (paragraph 54).  In reliance on that finding, he went on to determine that the applicants intended their orders to have the effect of creating “... a false or misleading appearance” of active trading (paragraph 61).  Clearly, the trading of the applicants did not reflect the forces of “genuine supply and demand”.  It was not ‘real’.  That trading had or was likely to have the effect of creating a false or misleading appearance of active trading.

Intention

27.  The criticism of the judge’s acceptance of the summary of the law in respect of intention as set out in Archbold Hong Kong 2010, 20-19 (paragraph 32 and 36) is ill-founded.  The same description is to be found in the 12^th edition of Smith and Hogan’s ‘Criminal Law’ at page 98, namely :

“(1) A result is intended when it is the actors purpose to cause it.

(2) A court or a jury May also find that the result is intended, though it is not the actor’s purpose to cause it, when—

(a) the result is a virtually certain consequence of that act, and

(b)   the actor knows that it is a virtually certain consequence.”

28.  As this Court explained in its judgment delivered by McMahon J in Securities and Futures Commission v Zou Yishang [2007] 3 HKC 409 the description of the law at item (2) has its origins in the judgment of the Court of Appeal of England and Wales in R v Nedrick [1986] 1 WLR 1025 and R v Woollin [1999] AC 82.  In particular, McMahon J noted (paragraph 38) :

“It is plain that the direction is a rule of evidence which allows a finding of the requisite intention where the defendant appreciated that the results of his act were virtually certain.”

Further, McMahon J went on to note that although the rule was developed in the context of the offence of murder, given that it was an evidential rule (paragraph 40) :

“... it is a rule which logically would apply to proof of specific intention whatever the offence.”

29.  In Zou this Court rejected an argument that the magistrate had erred in determining that the defendant was possessed of the intention required by section 135 of the Securities Ordinance, having found that he, “... knew that the creation of a false or misleading appearance of active trading was a virtually certain consequence of his deliberate actions.”

30.  As was pointed out in oral argument, the reliance placed by Mr Lok on statements by Sackville J in Nomura is misplaced.  The full context of those statements is made apparent from the judgment of Sackville J (page 394C) :

“Mr Bathurst submitted that, having regard to the fact that s. 998(1) creates a criminal offence, ‘intended’ should be construed as referring to the alleged contravener’s ‘sole or dominant purpose’ or ‘central object’. I do not think it is necessary to express a final view on this issue. I am content to proceed on the basis that Mr. Bathurst’s submission is correct.”

31.  In the result, we are satisfied that the judge was correct in approaching the issue of intention in the manner in which he did.

Reckless

32.  No quarrel was taken with the judge’s reliance on or summary of the description of the law of recklessness set out in the judgment of Sir Anthony Mason NPJ in Sin KamWah & Another v HKSAR (2005) 8 HKCFAR 192 at paragraph 44.  Contrary to the submissions made on behalf of the 1^st applicant, in making a finding that the applicants were reckless, alternative to his primary finding that they were possessed of intention, the judge did make a determination that the applicants were aware of the risk that their trading was “… likely to have the effect of creating a false or misleading appearance of active trading” and that it was not reasonable for them to take that risk.  (See paragraph 63.)

The expert evidence

33.  It is to be noted that, on being informed during the prosecution opening that it was proposed to lead evidence from Mr Rigby, the judge immediately expressed misgivings about the need for the receipt by the court of expert evidence (transcript 15N) :

“But is it really a matter for the experts to tell me the phenomenon, from the trading pattern of the defendant?”

He went on to observe (transcript 16P) :

“But at the end of the day, I will ask the question myself, whether people would -- say, private investor, would trade in this way, genuine investor would trade in this way.”

34.  Further, it is to be noted that objection was taken on behalf of the applicants to the receipt of such evidence from Mr Rigby, inter alia, on the basis that the court could reach his own conclusions :

“… without the assistance of a witness possessing special knowledge or experience.”

(Transcript 44D-G; 40 4S-T; 90M-N)

35.  In ruling that Mr Rigby was suitably qualified to give expert evidence in relation to “financial instruments, including derivative warrants, and trading of these instruments”, the judge said that he would give full reasons for so doing in due course.  (See transcript 96J-L.)  Significantly, the judge made no ruling in respect of the need for the court to receive such testimony.

36.  In the course of evidence‑in‑chief, Mr Rigby testified in respect of reports of Mr White and Dr Vinaimont, to which he had made reference in supplemental reports of his own.  (Transcript 123-7.)

37.  In face of Mr White’s oral testimony, counsel for the prosecution stated that he did not object to its admissibility.  (See transcript 183.)  No statement was made by the prosecution in prospect of Dr Vinaimont’s testimony.  However, in his closing speech for the prosecution, having noted that none of the factual evidence led by the prosecution had been disputed and that the applicants had not given evidence, counsel noted that the evidence led from the experts was the only area in issue.  In that context, he submitted that the central issue was the “state of mind” of the applicants in respect of which issue the evidence of the experts was of “little assistance” or “inadmissible” (transcript 346K-348A; 352K-353A).

Ruling: voir dire

38.  In his reasons for verdict, as he had promised to do, the judge provided his reasons for permitting Mr Rigby to give expert testimony.  Of the issue of the need at all for the receipt by the court of expert testimony, the judge noted (paragraph 20) :

“The question to be asked regarding the trading activities of the defendants at the end of the day May well be within the experience and knowledge of a jury, but not until all the evidence has been adduced before the court, could the court be so sure that in the final analysis of the matter, it would not touch on any of the technical aspects of warrants which may require expert assistance.”

The need for the court to have the assistance of expert testimony

39.  Having noted that there was no dispute as to commission of the actus reus of the offence, the judge identified the “real issue” as being (paragraph 28) : the “question of mens rea and for what purpose(s) the Ds traded in the way as they did.” [Underlining added].  In the result, he determined (paragraph 30) :

“Despite the expert evidence, I do not think that the real issue in the present case really touches on the finer points nor the technical aspects of derivative trading; in other words, the above question can be resolved by taking a commonsense approach without the help of an expert.”

40.  Of the issue of the purpose(s) that the applicants traded, the judge posed the rhetorical question (paragraph 40) :

“Was it just for the purpose of earning the rebates and nothing else?”

41.  In a subsequent analysis of the evidence, the judge explained his determination that he did not require the assistance of expert testimony. Of the applicants’ multiple purchases and sales between each other at the same price, the judge determined (paragraph 48):

“They simply traded with each other at the same price to earn the excess of rebates-such game, in my view, does not require any advanced mathematical training to understand. Furthermore, it does not really touch on the finer points of warrant trading...”

42.  In the context of his consideration of the issue, arising out of the statutory defence provided for by section 295(7) of the Ordinance, of whether or not it was one of the purposes of the applicants in trading as they did to create a false or misleading appearance of active trading in the warrants, the judge stated (paragraph 74) :

“Again I do not need an expert to tell me that comparatively speaking, an active market of any warrant, other things being equal, is more attractive than that of an illiquid one for the simple reason that in a liquid market with more market participants taking part in the trading activities, it would be easier to exit the market.”

43.  Clearly, having received not only the reports of the three experts but also their oral testimony, the judge was best placed to determine whether or not he required their expertise in resolving what he had identified as the “real issues” in the case.  Given the nature of the issues involved, namely the applicants’ intention/recklessness and purpose(s) in their trading and in all the circumstances of this case, we are satisfied that the judge was entitled to determine that he was not assisted by the expert evidence and that he could determine the matters himself by the application of common sense.

The hierarchy of the judge’s findings: relevance of the statutory defence, section 295(7)

44.  In its closing submissions, both written and oral, the prosecution invited the judge to approach the issue of determining the mens rea of the applicants and the conduct of their trading on the following basis (paragraph 10; transcript 331) :

“(i) D’s purpose and intention was to create a false or misleading appearance of active trading ;

(ii) alternatively, even if D’s purpose was confined to make a profit, they nevertheless intended to create a false or misleading appearance of active trading for the reasons set out in R v Nedrick [1986] 1 WLR 1025 and R v Woollin [1999] AC 82;

(iii) alternatively, D’s were reckless as to whether their trading caused a false or misleading appearace of active trading;

(iv)    there is in any event a deeming provision as to D’s intention : Section 295 (5).” [Italics added]

45.  Further, in making submissions in support of items (i) to (iii) (paragraph 18; transcript 338) the prosecution specifically invited the judge to leave “... the deeming provision aside”.  Finally, and only after he had invited the judge to make findings based on his primary submissions, counsel for the prosecution invited the judge to have regard to the “deeming provision”, section 295(5) and the statutory defence provided for by section 295(7) of the Ordinance (paragraphs 23 and 54; transcript 342 and 351).

The judge’s findings

46.  In his analysis of the evidence the judge made it clear that his findings were hierarchical.  First, he addressed the issue of intention in the applicants.  He determined (paragraph 60-1) :

“... the virtual certainty of the increase in the number of trades is that the trading becomes more active as the volume of trade grows-the relationship is one of direct proportion.

61.     I am sure that the Ds knew that this was a virtually certain consequence of their actions.  Since I found their trading was not real, I have no difficulty in drawing the only conclusion that they intended the orders had the effect of creating a false or misleading appearance of active trading in the warrants.”

47.  In going on to consider the issue of recklessness, the judge made it clear that he did so lest his determination in respect of intention be found to be wrong (paragraph 62).  Having approached his determinations in that sequence and on that basis, the judge determined that the applicants were, in any event, reckless in their conduct.

48.  Then, but only then, the judge went on to consider for the first time the “deeming provision” of section 295(5)(b) and (c) of the Ordinance (paragraph 66-8).  In consequence of his determination that the deeming provision was operative, the judge went on to consider the operation of the statutory defence provided for by section 295(7) of the Ordinance.  Nevertheless, before doing so he stated :

“Even without the deeming provision, I would have come to the same conclusion as stated above.”

49.  We are satisfied that it was appropriate for the judge to approach his determinations in that sequence and manner.  For the reasons set out above, we are satisfied that there is no merit in the proposed grounds of appeal against conviction of the applicants, in particular that the judge erred in determining that they were possessed of the requisite intention and/or recklessness.  Accordingly, it is not necessary for this court to go on to consider the grounds of appeal arising out of the judge’s consideration of the statutory defence provided for by section 295(7) of the Ordinance.

REASONS FOR SENTENCE

50.  In his reasons for sentence, delivered on 30 May 2010, the judge noted that the applicants’ conduct had occurred on 19 days in a period of 13 months.  The trading in all of the 20 warrants had resulted in a profit to the applicants, in a total amount of $1 million.  The judge said that, on information available to him, he was unable to determine that “... nobody suffered any loss as a result” of the applicants’ trading (see paragraph 24).  However, he said that in his view “the false trading provisions are geared to deal with market manipulation rather than the actual losses, if any, that is occasioned by such manipulation.”

51.  Although he acknowledged that, since the rebate system operated by the warrant issuers had been banned by the Securities and Futures Commission (“SFC”) in 2006, there was little likelihood of re-offending, he said that, “Unless the market manipulators are deterred, the investors cannot be said to be sufficiently protected.”  (Paragraph 27.)

52.  In determining that the delay in bringing the proceedings was not a relevant mitigating factor in this case, the judge noted the “voluminous documentary evidence” adduced at trial and observed that the investigation into the applicants’ conduct was only part of a “large-scale investigation” which required the SFC to go through “an avalanche of documents and interviewing a number of suspects.”

53.  Having sentenced each of the applicants to 2 years’ imprisonment on each of the 20 charges the judge said that the sentences of imprisonment should be made consecutive to one another but, having regard to the totality principle, by making one month only of some of the sentences consecutive to the sentence imposed in respect of Charge 1, he sentenced the 1^st and 2^nd applicants to a total sentence of two years and nine months and three years’ imprisonment respectively.  He afforded the 1^st applicant a discount of two months’ imprisonment “to reflect his clean record” and one month “for his generosity”.  The latter was a reference to sizeable charitable donations made by the 1^st applicant.

54.  The applicants did not oppose the order sought by the SFC and made by the judge that they pay the SFCs costs of the investigation.  In the event, the judge ordered each of the applicants to pay $694,498 to the SFC.

GROUNDS OF APPEAL AGAINST SENTENCE

1^st Applicant

55.  It was submitted on behalf of the 1^st applicant that the judge erred in determining that it was appropriate to order a deterrent sentence, given that the 1^st applicant was a man of 40 years of age of previous good character.  Further, that he had given insufficient weight to the fact that there was no prospect of re-offending by way of the same conduct given that the system of rebates had been prohibited.  Finally, it was contended that the judge erred in failing to give weight to the fact of delay in bringing the prosecution.  The 1^st applicant had been served with a notice by the SFC that he was a person under investigation in September 2005 and an interview conducted of him in October 2005.  However, the summonses against him were not issued until October 2008 and, after the transfer of the case to the District Court, the hearing did not commence until February 2010.

2^nd Applicant

56.  It was submitted on behalf of the 2^nd applicant that the judge had erred in not giving weight to the fact that there was no proof of loss to other investors in consequence of the offences.  Further, that the judge ought to have given weight to the fact of the absence of aggravating features in the commission of the offence, namely that there was no evidence of a breach of trust, the use of corporate vehicles as camouflage for the activities or of corruption.  The 2^nd applicant merely took advantage of an opportunity to make profit from a legal arrangement for the rebate of commissions for trading in selected warrants on selected dates.  It was contended that the judge was wrong to distinguish between the applicants on the basis of previous good character, given that the convictions of the 2^nd applicant for blackmail and assault occasioning bodily harm were in 1985 when he was 15 years of age.  Finally, the 2^nd applicant joined the 1^st applicant in contending that the judge had erred in not giving weight to the issue of delay, he too having been served with a notice that he was a person under investigation by the SFC in September 2005.

 A CONSIDERATION OF THE SUBMISSIONS

Delay

57.  We are satisfied that the judge was correct in determining not to have regard to the fact of delay as a mitigating factor in favour of the applicants.  Although the delay of about 4½ years from the time that the applicants became aware first of investigation into their misconduct until the commencement of their trial is undesirable, in the circumstances of this case it was both explicable and understandable.  From the ‘Chronology’ provided by the respondent, with which no issue is taken, it is apparent that, prior to the applicants being informed in September 2005 that they were persons under investigation, the Surveillance Department of the SFC had conducted enquiries for some six months.  Initially, the investigation encompassed the month of December 2004 only in respect of five warrants.  The SFC interviewed many witnesses and in August 2006 the ambit of the enquiry was enlarged to cover trading in two additional warrants.  In January 2007, following legal advice it was expanded further to encompass the period 1 April 2003 to 31 July 2005 and trading in all warrants issued by Macquarie.  In April 2007, the enquiry was expanded to cover 25 additional warrants traded on 35 trading days.  All the while, the interviewing and re-interviewing of witnesses continued apace.  Advice was first sought from a market expert as early as November 2005.

The seriousness of the offence

58.  It is clear that, in context, the judge had noted that the issue of whether or not other investors suffered loss “is a question of proof” and that there was insufficient evidence in that respect to make a determination.

59.  We are satisfied that the judge was correct to identify the primary objective of the false trading provisions to be directed at the fact of market manipulation itself.  It is difficult to see in the circumstances of this case how loss, if any, could be calculated.  As the judge noted, (paragraph 21) the observations of Sir Anthony Mason in North are apposite (page 59) :

“It is in the interests of the community that the market for securities should be real and genuine, free from manipulation.”

60.  As a significant financial services centre, those interests are of considerable importance to Hong Kong.  Misconduct that threatens those interests jeopardises Hong Kong’s reputation for integrity in its markets.  Contravention of those provisions is to be treated seriously.

61.  Given the fact that the 2^nd applicant’s convictions occurred when he was 15 years of age, for which a probation order was made, and were about 20 years prior to the misconduct the subject of the charges, we are satisfied that the judge erred in distinguishing between the applicants and affording the 1^st applicant a further discount of two months’ imprisonment.  In respect of their character, they ought to have been afforded the same treatment.

62.  We are satisfied that, in all circumstances, the sentence of two years’ imprisonment imposed upon the applicants in respect of each of the charges was manifestly excessive.  In our judgment, the appropriate sentence for each of the 20 charges is 15 months’ imprisonment.  Having regard to the appropriate totality of sentence in our judgment, an uplift of 8 months’ imprisonment would be appropriate, subject to the discount of two months’ imprisonment afforded by the judge in respect of character, now to be afforded to each applicant, and in addition one months’ imprisonment for the 1^st applicant for his charitable donations.  From the resulting total of 23 months’ imprisonment, 3 months and 2 months’ imprisonment is to be deducted for the 1^st and 2^nd applicants respectively.

CONCLUSION

63.  For the reasons set out above, the applications made on behalf of the applicants for leave to appeal against conviction are dismissed.  In relation to sentence, we grant each applicant leave to appeal, treat the applications as the hearing of the appeal; allow the appeals and quash the sentences imposed hitherto; and in place thereof we order that each applicant serve a sentence of 15 months’ imprisonment in respect of each of the charges.  In respect of the 1^st applicant, we order that one month’s imprisonment of the sentences of imprisonment imposed in respect of Charges 2 to 6 be served consecutively with each other and the sentence of 15 months’ imprisonment imposed in respect of Charge 1.  In respect of the 2^nd applicant we order that one month’s imprisonment of the sentences of imprisonment imposed in respect of Charges 2 to 7 be served consecutively with each other and the sentence of 15 months’ imprisonment imposed in respect of Charge 1.  Accordingly, the total sentence of imprisonment imposed on the 1^st and 2^nd applicants is one year and 8 months and one year and 9 months respectively.