SECURITIES AND FUTURES COMMISSION v. JUN DU (previously "A")

HCMP 1407/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1407 OF 2007

----------------------

----------------------

----------------------

----------------------

D E C I S I O N

--------------------

The application

1.  On 27 July 2007, the Securities and Futures Commission (the “SFC”) obtained an ex parte interim injunction against the defendant under section 213(6) of the Securities and Futures Ordinance, Cap. 571, restraining him from disposing of or transferring out of the jurisdiction his assets up to a value of HK$46,595,011.00.  The amount under restraint was calculated on the basis that in the event a financial penalty is imposed in relation to a disciplinary action brought by the SFC under section 194, the likely penalty would be two times the notional profit in respect of the defendant’s 26.7 million shares in CITIC Resources Holdings Ltd (“CITIC Resources”).  The defendant was suspected to have engaged in insider dealing in respect of those shares.

2.  The ex parte order was continued pending the determination of the inter partes summons for its continuation and the defendant’s cross application for its discharge or variation.  On 29 November 2007, I handed down my decision refusing the defendant’s application and ordered that the ex parte injunction be continued until further order of the court (Securities and Futures Commission v A [2008] 1 HKC 89).

3.  Today’s application is the second time the defendant has applied to discharge or vary the injunction. He did so on the basis there are material changes of circumstances since the dismissal of his first application in November last year.  Under section 213(9), the court may reverse, vary or discharge an order made under section 213(6) or suspend the operation of the order.

4.  In a nutshell, the material changes he seeks to rely on are as follows.

5.  On 10 July 2008, the defendant was arrested by the Commercial Crime Bureau.  On the following day, he was charged with ten counts of insider dealing contrary to section 291.  In September 2008, his criminal case was ordered to be transferred to the District Court and on 25 November 2008, he pleaded not guilty to the criminal charges.  His criminal trial was scheduled to commence on 4 May 2009, with 25 days reserved.

6.  In respect of nine of the criminal charges, it is alleged that the defendant had on nine occasions dealt in the shares of CITIC Resources having information he knew was relevant information in relation to that corporation, namely the proposed acquisition by CITIC Resources of oil field assets in the PRC.  The 10^th charge is that the defendant had on one occasion counselled or procured his wife to deal in the shares of CITIC Resources, having such relevant information and knowing or having reasonable cause to believe that his wife would deal in them.

7.  The other material change is the recent financial turmoil, which caused the defendant’s assets in Hong Kong, which amounted to HK$128 million in November 2007, to fall drastically to HK$52 million as at end of November 2008, leaving the defendant with available funds in Hong Kong not under restraint of about HK$5.8 million.

8.  The defendant seeks a discharge or variation of the injunction to the extent of about HK$15 million to enable him to use the released funds for the defence in his criminal case, and is willing to give an undertaking that any funds so released from the injunction can only be used for the purpose of paying his legal fees and disbursements in connection with the alleged insider dealing transactions.

9.  The SFC is opposed to a discharge, but is not opposed to variation if this is necessary on the basis of hardship and/or in the interests of ensuring the defendant receives a fair trial, provided there is a reasonable rather than a speculative foundation of the matters advanced by the defendant in support of this application.  The SFC remains sceptical that the defendant has demonstrated he does not have resources other than those covered by the injunction out of which he can finance his defence in the criminal trial.

The criminal prosecution

10.  When I made the order on 29 November 2007 to continue the interim injunction until further order, a decision had not been made whether to prosecute the defendant in criminal proceedings or to pursue proceedings in the Market Misconduct Tribunal, as investigation had not been completed at that stage.  Mr Mok, SC submitted on behalf of the defendant that the decision of the Secretary for Justice to bring criminal charges against the defendant has brought about a significant and material change of circumstances.  His argument ran as follows.

11.  Section 283 provides that no market misconduct proceedings may be instituted if (a) criminal proceedings have been instituted against the same person in respect of the same conduct; and (b)(i) those criminal proceedings remain pending; or (ii) by reason of the previous institution of those criminal proceedings, no criminal proceedings may again be lawfully instituted against that person in respect of the same conduct.  It is accepted by the SFC as the defendant is being prosecuted for offences of insider dealing contrary to section 291, he cannot now be referred to the Market Misconduct Tribunal in respect of the same conduct.

12.  That leaves the disciplinary action that may be taken against the defendant by the SFC under Part IX of Cap. 571.  The SFC is awaiting the outcome of the criminal proceedings before taking disciplinary action.  A decision of a criminal court is no bar to the bringing of disciplinary proceedings as the double jeopardy rule has no application save to other courts of competent jurisdiction (R (Redgrave) v Metropolitan Police Commissioner [2003] 1 WLR 1136 at 1145F to 1146D, paras. 36 to 39).  There is no dispute about this.

13.  Mr Mok submitted in the event of a conviction, the criminal court will have more than sufficient power to impose the appropriate level of punishment which fully reflects the gravity of the offences.  Under section 303(1), a person who is convicted of an offence under Part XIV on indictment is liable to a fine of HK$10 million and to imprisonment for ten years for each offence.  Two things are to be noted here.  Firstly, as stated by the Court of Appeal in HKSAR v Yau [1999] 2 HKLRD 633 at 641J, although it is not normally appropriate to fine an offender who is serving a term of imprisonment at the same time, a fine may be coupled with a sentence of imprisonment “if that is necessary to recoup the profits of the offender’s wrongdoing”.  Secondly, as the defendant was charged with ten offences, if he were to be fined upon conviction of all these offences, each offence must be assigned its own fine, subject to the totality principle (Attorney General v Wong Sek-shing [1989] 1 HKLR 192 at 196D to 197A; R v Chelmsford Crown Court ex parte Birchall (1989) 11 Cr. App. R. (S.) 510).

14.  Mr Harris, SC for the SFC did not dispute these powers of the criminal court.

15.  Mr Mok has drawn my attention to the SFC Disciplinary Fining Guidelines published in the Gazette pursuant to section 199(1).  These Guidelines indicated the manner in which the SFC will perform its function of imposing a fine on a regulated person under section 194(2) or 196(2).  When considering whether to impose a fine and the size of any fine, the SFC will consider all the circumstances of the particular case, including the specific considerations described in the Guidelines, which include “any punishment imposed or regulatory action taken or likely to be taken by other competent authorities”.  A sentence of a fine and/or a period of imprisonment by a criminal court must be a material consideration for the sanction to be imposed in disciplinary action.

16.  The SFC had also made policy statements in a number of public documents regarding the exercise of its disciplinary powers.  It had stated that no fine would be imposed where the misconduct in question also constitutes an offence and the person guilty of the offence has been convicted (see Guide to Legislative Proposals on Disciplinary Powers of the Securities and Futures Commission, 5 July 1999, para. 11; Consultation Document on the Securities and Futures Bill, April 2000, para. 7.9) These policy statements would appear to be in line with the practice adopted by the Financial Services Authority in the United Kingdom under the Financial Services and Markets Act (see Response to Consultation Paper 17: Financial services regulation: Enforcing the new regime, July 1999, paras. 67 and 68).

17.  Thus, whilst the SFC had in the application for the interim injunction last year taken the view that the likely penalty in a disciplinary action against the defendant would be two times the notional profit in respect of the dealings in CITIC Resources shares, after the criminal court has imposed an appropriate sentence on the defendant upon his conviction, it cannot possibly be appropriate for the SFC to mete out this financial penalty in a disciplinary action.  Although there is a still a theoretical possibility the defendant might be subject to a pecuniary penalty of a civil fine under section 194(2) by reference to two times the notional profits after he had been subjected to a criminal prosecution, Mr Mok contended this would not be a realistic outcome.  He submitted that if a term of imprisonment were to be imposed, this should be capable of being a sufficient punishment.  He argued the likely result is that the SFC would consider whether it would be appropriate to bring any disciplinary proceedings against the defendant for regulatory purposes under section 194(1), as opposed to penal purposes, such as by prohibiting the defendant from applying to be licensed or registered as a “regulated person”, as the defendant’s licence for “dealing in securities” with the SFC was deemed revoked effective from June 2007.  There being no realistic possibility that a civil fine would be imposed by reference to two times the notional profit (or any substantial pecuniary penalty would be imposed in any disciplinary action), this amount should no longer be the basis for calculating the amount to be frozen in the interim injunction.

18.  As for the fine that might be imposed by the criminal court, notwithstanding that the total maximum fine in respect of the ten offences might be HK$100 million, Mr Mok would appear to have contended that the Court of First Instance would not have power under section 213(2)(c) to grant an injunction restraining the disposal of assets so that they might be available to pay a fine in the criminal proceedings, citing Chief Constable of Leicestershire v M [1989] 1 WLR 20; and Malone v Metropolitan Police Commissioner [1980] 1 QB 49.

19.  Furthermore, there would be the inevitable delay of at least two years between the granting of the interim injunction in July 2007 and the commencement of the disciplinary action.  It is unlikely that any disciplinary action against the defendant would commence before July 2009, and if there is an appeal against conviction and/or sentence, there may be a further delay.

20.  Under section 213(4), before granting an injunction, the court is required to satisfy itself, so far as it can reasonably do so, that it is desirable the order be made, and that the order “will not unfairly prejudice any person”.  Mr Mok submitted that the substantial delay before the commencement of any proceedings in respect of which the interim injunction was granted would result in unfair prejudice to the defendant, in view of the drastic deterioration in his assets and given that no cross-undertaking in damages was required to be given by the SFC when the interim injunction was granted.

21.  In his oral submissions today, Mr Mok emphasised that the granting of an injunction under section 213(6) should be subject to considerations of proportionality as this has the effect of interfering with the freedom to dispose of property guaranteed under Article 105 of the Basic Law.  The injunction should only be made where it serves a purpose, such as by ensuring that a future order of the court or a tribunal would not be rendered futile and academic.  In respect of an order for a fine that might be imposed by a criminal court, Mr Mok submitted that such an order would not be rendered futile and academic, as under section 114(1) of the Criminal Procedure Ordinance, Cap. 221, an offender would serve a term of imprisonment if a fine is not paid.  As the criminal court already has sufficient power to deal with an offender if that should happen, it would be unnecessary and a disproportionate exercise of power to have the injunction in place.

22.  Mr Harris submitted that Mr Mok’s arguments were based on a flawed understanding of section 213 and my decision in November 2007.  Mr Mok’s apparent thinking was that the purpose of the injunction made under section 213 was limited only to the disgorgement of illicit profits under section 257(1)(d) by the Market Misconduct Tribunal and the financial penalty that might be imposed by the SFC in disciplinary proceedings under section 194(2).  I would agree withMr Harris that on a proper reading of the decision, in particular paragraphs 19 to 23, it was held that section 213(2)(c) does not specify the basis on which such an injunction could be made, so long as the conditions in sections 213(1)(a) or (b) are met.  It was stated that a range of penalties are available where insider dealing is established, including a fine under section 303 where a criminal prosecution is brought, and that the different proceedings that might be brought against the defendant are not mutually exclusive.

23.  At the time the application for the interim injunction was heard, it was considered by the SFC that a disciplinary action would be a more likely outcome of the investigation.  Hence, the amount of the property under restraint was calculated by reference to the likely penalty in a disciplinary action.  But I do not understand my decision to have confined the anticipated action that might be taken against the defendant to only market misconduct proceedings and disciplinary action.

24.  I accept Mr Harris’s submission there is a degree of inbuilt flexibility under section 213(2)(c) in that any sum of money ordered to be frozen can apply towards whatever type of penalty that is eventually imposed for whatever type of proceedings that may be brought against the particular act complained of, whether this be market misconduct proceedings, disciplinary action or a criminal prosecution, as it is envisaged in sections 213(1) and (2) that these provisions may be invoked at a stage where investigations are ongoing and it is unsure what type or types of proceedings may eventually be brought.  Just because the amount to be frozen was calculated with reference to a disciplinary action, it does not mean the frozen money can only be applied to a fine in a disciplinary action.  The amount of HK$46.5 million frozen in this case can equally be applied to satisfy a fine that would result from criminal prosecution.

25.  As for the power of the criminal court to impose a term of imprisonment if the offender should fail to pay the fine imposed, I see no reason why this should render the injunction unnecessary or unfair.  No doubt, in imposing a fine on the defendant as a form of punishment, the criminal court would have regarded this to be the most appropriate form of punishment in all the circumstances.  It should not be left to the defendant to decide whether he would pay the fine imposed by the court, or to serve a term of imprisonment.

26.  As for the cases relied on by Mr Mok regarding the power of the court to grant an injunction for the purpose of ensuring that funds would be available to pay a fine in criminal proceedings, those decisions are distinguishable as the court was concerned with the position at common law.  It was stated in those decisions it was not for the courts to extend the common law powers of the court in this respect but a matter for the legislature.  Here, the power to grant such an injunction is found in section 213.

27.  The only question, as submitted by Mr Harris, is whether the amount frozen has become excessive, now that it is known that a criminal prosecution is brought.  That does not appear to be the case, bearing in mind the maximum fine that could be imposed for the ten charges is HK$100 million.

28.  I would agree withMr Harris the mere fact that criminal prosecution is brought against the defendant does not, without more, provide justification for discharging or varying the interim injunction.  I turn to consider the defendant’s deteriorating financial position and his need to finance his defence in the criminal proceedings.

The deterioration in assets

29.  The present asset position of the defendant is as follows.  His total assets in Hong Kong are about HK$52.43 million and are made up of:

(1)  assets in securities accounts HK$45.28 million;

(2)  sums in bank accounts HK$3.95 million; and

(3)  costs on account with solicitors HK$3.2 million.

30.  The total assets frozen by the court amounted to HK$46.5 million.  I am given to understand the defendant had on 19 December 2008 placed an order to sell 10 million CITIC Resources shares at HK$0.98, and it would appear that he was able to sell some of those shares at that price, so the present amount of assets in the securities accounts would probably exceed HK$45.28 million.  There is however no information from the defendant regarding the amount of proceeds realised to date by that order placed on 19 December 2008 to sell the CITIC Resources shares.

31.  I would apply by analogy the principles and approach in an application to vary a Mareva injunction to allow for the payment of legal expenses.  They were comprehensively summarised in the decision of Recorder Ronny Wong, SC in Wang Jian & Anr v Zhang Tien Feng & Ors., HCA No. 607 of 2001, 27 August 2001, para 16. Of particular relevance are the propositions at sub-paras. (6) to (10) and they read as follows:

“(6)  Payment of moneys in legal costs is not, prima facie, dissipation.  A defendant ought to be at liberty to defend himself, notwithstanding the grant of the injunction.  Prima facie a defendant ought to be allowed to choose the legal representatives he thought best qualified to present his case and to pay them such charges as may be properly payable as a matter of contract.  It does not lie in the mouth of a plaintiff to say that the defendants ought to have gone to a cheaper firm of solicitors.  (Per Ferris J. in Cala Cristal SA v. Emran Al-Borno (1994) The Times Law Reports 251).

(7)  If there is reason to believe that people are asking for money for solicitors' costs simply as a means of avoiding bringing free money into this country, or as a means of not having to use other moneys which have not been discovered and which they wish to keep out of the clutches of the court, of course they will be refused.  (Per Sir John Donaldson MR in Campbell Mussels v. Thompson, Unreported, Transcript 24^th May, 1984).

(8)  Judges should have a very healthy scepticism when they are dealing with parties to whom Mareva injunctions apply.  (Per Sir John Donaldson MR in Campbell Mussels above cited).

(9)  A Defendant seeking to obtain a variation of a Mareva should satisfy the court, by full and frank disclosure of their assets, that there is no ulterior motive which involved the removal of other undisclosed assets out of the jurisdiction.  (Per Griffiths L.J. in Campbell Mussels above cited).

(10)  In the exercise of its discretion the court may allow the defendant to use his own assets within the jurisdiction for a purpose for which they would ordinarily have been used if the proceedings had not been brought.  If the evidence indicates that the defendant had already hidden away substantial assets abroad, it would be unjust to permit him to use what is left of the depleted Hong Kong assets to make such a payment.  (See Gee on Mareva Injunctions and Anton Piller Relief, 4th edition at p. 320).”

32.  Mr Harris submitted the defendant has not made full and frank disclosure of his assets so as to demonstrate he does not have resources other than those covered by the injunction out of which he can finance his defence.  In his written submission, he made these criticisms about the evidence adduced by the defendant:

(1)  Between 2004 and 2006, the defendant received total income of HK$58 million odd from his then employer, of which about HK$37.5 million was in cash.  He has not disclosed information what he did with the income he earned prior to August 2006, he merely commented on the fund flow analysis of the SFC regarding his payroll account and that analysis was from 11 August 2006.

(2)  It did not appear the defendant had paid the balance of his income after payment of living expenses exclusively to his securities account, as otherwise there would have been substantially more assets in the securities account.  He did not produce statements of his securities account showing the flow of funds.

(3)  The defendant claimed he had paid more than HK$18 million on legal fees since May 2007.  It is his evidence he has only two bank accounts in Hong Kong.  The available documents indicated he had paid HK$6.4 million odd to Deacons from one of the bank accounts.  He did not disclose the source of payment of the remaining HK$11 million towards legal fees.

33.  The defendant has made a 5^th affirmation today to address the above criticisms.  The sources of funds for the payment of all the legal fees, in the total sum of HK$24 million, have now been identified.  The defendant has endeavoured to give an account of the cash bonus and compensation he had received from his employers over the years.  He has produced those statements of his securities accounts that are in his possession, although they are not complete.  He deposed that most, if not all, of the cash bonus received, apart from the bonus received on 8 January 2007 (which was paid into his payroll account) was put into his securities account.

34.  As far as assets in Hong Kong are concerned, I am satisfied the defendant has disclosed all his assets.  For assets in the PRC, the disclosure is not as adequate.  There is no way to verify his assertion regarding his bank balances maintained in the PRC.  I note the legal opinion produced by the defendant regarding foreign exchange control in the PRC.

35.  On balance, I would exercise my discretion to vary the interim injunction to release funds to enable the defendant to pay his legal expenses.

36.  The estimated total legal expenses are HK$19.7 million, less costs on account he would require HK$16.5 million to pay legal fees.  Of this amount, HK$6.3 million are attributable to the expenses of engaging a Queen’s Counsel from the UK.  Do not propose to allow expenses on this until such time that overseas counsel has been admitted for the criminal trial.

37.  The amount of funds to be released for the payment of legal fees is HK$10 million.  The injunction is varied to this extent subject to the undertaking of the defendant that the funds so released are only to be used for this purpose.

38.  Mr Mok seeks an order that the costs of this application be in the cause.  I am not persuaded that is appropriate.  It is necessary for an application to be made for the variation of the injunction.  He has failed in the application to discharge the order.  The evidence adduced by the defendant in support of the application was supplemented only at the last minute to address some of the criticisms made.  In these circumstances, I think it is appropriate to order the defendant to pay the costs of the SFC in this application in any event.