RIADY, TJONDRO STEPHEN v. INSIDER DEALING TRIBUNAL

HCAL 89/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST
NO. 89 OF 2002

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J U D G M E N T

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Introduction

1. This is an application for judicial review, leave to do so having been granted on 18 February 2002. The decision under challenge by the applicant is the decision of Lugar-Mawson J sitting as a Chairman of the Insider Dealing Tribunal ("the Tribunal") dated 13 December 2001. The learned Chairman concluded that the terms of reference of the inquiry given by the Financial Secretary on 2 November 2000 were wide enough for the Tribunal to issue a "Salmon" letter to the applicant on the ground that he is a person implicated in the inquiry. The inquiry which the Tribunal was required by the Financial Secretary to conduct is that set out in the terms of reference which read:-

"Whereas it appears to [the Financial Secretary] that insider dealing ... in relation to the listed securities of the corporations, namely the HKCB Bank Holding Company Limited and the HongKong China Limited (now renamed as Lippo China Resources Limited) ("the corporations") has taken place or may have taken place, [the Tribunal] is hereby required to inquire into and determine:-

(a) whether there has been insider dealing in relation to the corporations arising out of the dealings in the listed securities of the corporations by Messrs. Carlton Poon Kam Tao and Edmund Kung Chiu Nam and Ms. Jenny Kong Yuen Kwan during the period from 1 May 1997 and [sic] 23 May 1997 (inclusive);

(b) in the event of there having been insider dealing as described in paragraph (a) above, the identity of each and every insider dealer; and

(c) the amount of any profit gained or loss avoided as a result of such insider dealing" (emphasis supplied) ("the TOR").

The Hon Chief Justice has earlier, pursuant to s. 32(3), High Court Ordinance, Cap. 4, directed that this application be heard and determined by 2 judges of the Court of First Instance.

Events Leading to this Application

2. The learned Chairman has in his decision stated that the issue before him was one of law and related to the Tribunal's jurisdiction, namely, what the ambit of the inquiry before the Tribunal was. More specifically, the issue was related to the Tribunal's power, within the terms of the reference (set out above), to draw people into the inquiry, and to make findings (if such findings are appropriate) that they have engaged in insider dealing and, if so, to make order against them under s. 23, Securities (Insider Dealing) Ordinance Cap. 395.

3. In order to understand how this application (and the decision under challenge) came about, events leading to the decision under challenge should be briefly mentioned. There was a relatively lengthy investigation by the Securities and Futures Commission ("the SFC") into the dealings in the shares of the corporations named in the TOR. Later, the Financial Secretary issued the TOR requiring the Tribunal to conduct an inquiry. The applicant has been interviewed by the SFC and has given written statements. After the commencement of the inquiry (but before the substantive inquiry began), a report from an expert engaged by one of the 3 named individuals stated in effect that the applicant had counselled and procured the suspected insider dealing. It was essentially for that reason that the Tribunal ruled that a "Salmon" letter should be sent to the applicant by counsel for the Tribunal.

Issues in This Application

4. Counsel for the applicant has, in his skeleton argument and in the course of the hearing before this court, made clear that this application is about the jurisdiction of the Tribunal and that issue alone. The applicant's argument in this application is, in short, that the Tribunal has erred in its said decision of 13 December 2001 in concluding that there is jurisdiction to inquire into matters relating to persons (specifically the applicant) not named in the TOR.

5. In approaching the issues raised in this application, it is important to remember that no challenge is made against the TOR issued by the Financial Secretary themselves; for example, whether they were given in accordance with s. 16 of Cap. 395. Ss. 16(1) and (2) of Cap. 395 are relevant to the Financial Secretary's power to give terms of reference to a Chairman of the Tribunal. The relevant parts of those provisions read:-

"(1) If it appears to the Financial Secretary, whether following representations by the Commission or otherwise, that insider dealing in relation to a listed corporation has taken place or may have taken place, he may in accordance with this section require the Tribunal to inquire into the matter.

(2) An inquiry shall be instituted by the Financial Secretary by notice in writing to the chairman of the Tribunal containing such particulars as are sufficient to define the terms of reference of the inquiry".

Since there is no challenge against the TOR, the answer to the dispute between the parties in this application turns solely on the true construction of the TOR given to the Chairman by the Financial Secretary. This court notes that arguments have been raised by the applicant regarding matters such as the true construction of s. 16 of Cap. 395, alleged procedural unfairness and so on. Whether, and if so in what way, these other matters are relevant to the ultimate issue in this application will be discussed in the later parts of this judgment (under the heading "Other Points Raised").

6. Before embarking on an analysis of the issues raised in this application, since the power of the Tribunal in an inquiry into possible insider dealings is (in addition to the terms of reference) also provided in ss. 16(3) to (6) of Cap. 395, this court proposes to set out those provisions as well for ease of reference:-

"(3) The object of an inquiry shall be to determine at the conclusion of the inquiry or as soon as is reasonably practicable thereafter, within the terms of reference of the inquiry as defined under subsection (2)- (Amended 61 of 1995 s. 5)

(a) whether insider dealing in relation to a listed corporation has taken place; (Amended 29 of 1994 s. 8)

(b) the identity of every insider dealer; and

(c) the amount of any profit gained or loss avoided as a result of the insider dealing.

(4) Where the Tribunal identifies a corporation as an insider dealer under subsection (3)(b) the Tribunal may also identify any officer of that corporation to whose breach of the duty imposed on him by section 13 the insider dealing in question is directly or indirectly attributable.

(5) The Tribunal shall not identify any person as an insider dealer or as a person to whose breach of the duty imposed on him by section 13 the insider dealing by a corporation may be directly or indirectly attributable without first giving such person an opportunity of being heard.

(6) Where the Tribunal identifies a corporation as an insider dealer under subsection (3)(b), if the insider dealing took place with the knowledge, consent or connivance of any officer of the corporation then such officer as well as the corporation shall be regarded as having been so identified" (emphasis supplied).

Construction of the TOR

7. The applicant's arguments under this heading as to why the Tribunal does not have the jurisdiction to include him in the inquiry as one of the implicated persons can be summarised as follows:-

(a) by virtue of s. 16(3), Cap. 395, the Tribunal can only inquire into matters "within the terms of reference" given by the Financial Secretary;

(b) the TOR have only named 3 individuals, namely, Poon, Kung and Ms Kong;

(c) on a true construction of the TOR, the 3 individuals were named therein as the suspected "insider dealers";

(d) further, the TOR have specified the period during suspected insider dealing occurred, namely, from 1 May to 23 May 1997;

(e) on a true construction of the TOR, the events which the Tribunal was entitled to inquire into would either be events subsequent to 1 May 1997 or those within the period 1 to 23 May 1997.

This court will deal with the above points in turn.

(1) Do the TOR Limit the Identity of Individuals?

8. For convenience, this court will repeat para. (a) of the TOR:-

"whether there has been insider dealing in relation to the corporations arising out of the dealings in the listed securities of the corporations by Messrs. Carlton Poon Kam Tao and Edmund Kung Chiu Nam and Ms. Jenny Kong Yuen Kwan during the period from 1 May 1997 and [sic] 23 May 1997 (inclusive)".

9. Insofar as the construction contended for by the applicant is related to the natural and ordinary meaning of the words in the TOR, this court does not see how the TOR have the effect of having restricted the inquiry only to the 3 individuals named therein. The TOR do not, for example, state that:-

"whether there has been insider dealing in relation to the corporations by Messrs. Carlton Poon Kam Tao and Edmund Kung Chiu Nam and Ms. Jenny Kong Yuen Kwan during the period from 1 May 1997 and [sic] 23 May 1997 (inclusive)".

Instead, the context in which reference was made in the TOR to the 3 individuals was the dealings in listed securities of the corporations by them.

10. Dealings in listed securities could have been undertaken by suspected insider dealers, just as they could have been undertaken by entirely innocent individuals at the instigation, and/or unknowingly on behalf, of suspected insider dealers. In fact, past experience in the Tribunal shows that many times innocent individuals have been made use of by insider dealers to do so. Instances of low ranking employees, or unsuspecting relatives or friends, being exploited for such purpose have often been detected by the Tribunal. That was probably the reason why in many of the terms of reference issued by the Financial Secretary, the wordings used were similar to the TOR in this application. The reference therein was to the actual dealings in the listed securities, coupled with an express direction to the Tribunal to inquire and determine the identity of each and every insider dealer. In view of the above matters, at least in relation to terms of reference worded in a similar way as the TOR, the intention of the Financial Secretary must have been to require the Tribunal to inquire whether insider dealing has taken place leaving it to the Tribunal (if insider dealing has been detected) to identify every insider dealer involved.

11. Indeed, in the TOR in question, such a construction is entirely consistent with the presence of para. (b) which states that the Tribunal was to inquire into and determine:-

"the identity of each and every insider dealer".

The applicant argues that para. (b) of the TOR is subsidiary to para. (a) in that the "each and every insider dealer" referred to therein means one or more of the 3 individuals named in para. (a). The use of the phrase "each and every insider dealer" militates against such a construction. In addition, if it were that the TOR only intended the Tribunal to inquire into whether the 3 named individuals have undertaken insider dealing, para. (b) would have been entirely superfluous.

12. Reliance has also been placed by the applicant on the words "arising out of" in the TOR as showing that the Tribunal's inquiry was intended to be restricted to the 3 named individuals. For the same reasons set out under the sub-heading "Do the TOR Limit the Time Period and, If So, How?" below, this court disagrees that such was the intention of the TOR.

13. Lastly, the applicant contends that in construing the TOR, this court should have regard to the circumstances under it was issued by the Financial Secretary, in particular, the SFC investigation before the issuance of the TOR and the information placed before the Financial Secretary before he decided to issue the TOR. This court does not find this to assist the applicant and will discuss this matter further below.

(2) Do the TOR Limit the Time Period and, If So, How?

14. This part of the applicant's arguments is that, by reason of the words "arising out of" and "during the period from 1 May 1997 and [sic] 23 May 1997", the Tribunal's inquiry is limited to events after 1 May 1997, alternatively, those during the stated period.

15. The parties have referred this court to quite a number of authorities regarding the meaning of the phrase "arising out of". These authorities were concerned with the use of that phrase in other circumstances, such as contractual terms regarding arbitration or provisions in statutes. Little assistance can be gained from the authorities save the principle that the meaning of that phrase depends ultimately on the context in which it has been used. For this reason, and without disrespect to counsel, this court does not propose to set out the authorities herein.

16. What then is the context in which the phrase "arising out of" was used in the TOR? This court has already concluded that the TOR were not intended to restrict the Tribunal's inquiry to the 3 named individuals as a matter of the natural and ordinary meaning of the words therein. Further, this court finds that the true meaning of that phrase is that it is intended to mean "connected with". In other words, provided events were sufficiently connected with the dealings in listed securities specified in the TOR, the Tribunal was entitled to inquire into the events even if they took place before 1 May 1997. This court therefore disagrees with the applicant's arguments.

17. One can test the validity of the applicant's arguments regarding the meaning of "arising out of" in the TOR by examining the meaning of "insider dealing" in Cap. 395 and what evidence would be relevant to establishing such dealings. For example, among other provisions in Cap. 395 which may be relevant to the Tribunal's inquiry (and this application), ss. 9(1)(a) and (c) provide:-

"(1) Insider dealing in relation to a listed corporation takes place

(a) when a person connected with that corporation who is in possession of information which he knows is relevant information in relation to that corporation deals in any listed securities of that corporation or their derivatives (or in the listed securities of a related corporation or their derivatives) or counsels or procures another person to deal in such listed securities knowing or having reasonable cause to believe that such person would deal in them ...

(c) when relevant information in relation to that corporation is disclosed directly or indirectly, by a person connected with that corporation, to another person and the first-mentioned person knows that the information is relevant information in relation to the corporation and knows or has reasonable cause for believing that the other person will make use of the information for the purpose of dealing, or counselling or procuring another to deal, in the listed securities of that corporation or their derivatives (or in the listed securities of a related corporation or their derivatives); " (emphasis supplied).

18. Thus, irrespective of whether the insider dealing is based on an act of dealing, or acts of counselling or procuring another to deal, or disclosing relevant information to another person in the knowledge or reasonable belief that the latter will deal, in listed securities, the insider dealer must already possess the relevant information at the time when he acted. Accordingly, it is almost invariable that the Tribunal's inquiry will involve investigating events prior to the actual dealings in the listed securities. The applicant's argument that the Tribunal is prohibited from investigating such events because (quite apart from other reasons) the phrase "arising out of" has been used in the TOR would amount to turning the object of the inquiry on its head. This is because, as counsel for the applicant fairly accepted during the hearing before this court, very little (if any) relevant events would take place after the dealings in the listed securities.

19. Even if the TOR had restricted the inquiry to the time period stated in the TOR, this court agrees with the respondent's argument that the applicant's act on which the Chairman's decision that he was a person implicated was based was one which fell within that period. Para. 17 of a document headed "Synopsis of Suspected Insider Dealing" (which was served on the applicant) states:-

"On 1 May 1997 ... [Poon], a director of the brokerage ... and head of its research department, met with [the applicant] ... During the meeting, [the applicant] disclosed that the Lippo Group was contemplating a reorganisation; in particular, certain details of the shareholding structures of HKCB Restructuring were given to him. [Poon] offered the corporate finance services of [the brokerage] to [the applicant]".

Further, para. 23 of that document reads:-

"... on 12 May 1997, [Poon] again met with [the applicant] in relation to the proposed Reorganisation. In the afternoon of the same day, 2,000,000 HKC warrants were bought for the account of Kong ... ".

20. The applicant also submits that the meaning of the phrase "arising out of" in the TOR is ambiguous and unclear. Any such ambiguity in the meaning of the TOR should be resolved in the applicant's favour. There is no need to repeat the above paragraphs save to say that this court disagrees with this submission.

(3) Conclusion on the Construction of the TOR

21. This court disagrees with the construction contended for by the applicant and concludes that on a true construction of the TOR based on the natural and ordinary of the words therein, the Tribunal is entitled to decide the way the Chairman did in his decision of 13 December 2001.

Other Points Raised

22. The applicant also argues that:-

(a) on a true construction of s. 16, Cap. 395, the Financial Secretary must issue the terms of reference on proper grounds, in good faith and in accordance with the rules of natural justice. Further the terms of reference issued by the Financial Secretary must contain the restrictions contended for by the applicant because of the requirements of s. 16(2) regarding the need to contain:-

"... such particulars as are sufficient to define the terms of reference of the inquiry";

(b) further or in the alternative to (a) above, the common law requirement (such as the rules of natural justice and/or procedural fairness) regarding the way in which the Financial Secretary is to exercise his powers under ss. 16(1) and (2), Cap. 395;

(c) terms of reference which do not contain the restrictions contended for by the applicant will not complied with s. 16, Cap. 395 and/or result in procedural unfairness;

(d) there has been contradictory approach by the Tribunal in its previous inquiries regarding whether people not named in the terms of reference could be included in the inquiry;

(e) s. 16. Cap. 395 must have intended the Tribunal's inquiry to be limited to the individuals named in the terms of reference because the new Securities and Futures Ordinance (Ord. No. 5 of 2002) ("the new Ordinance") expressly so provides.

23. The applicant having accepted that this application is to be determined by ascertaining the true meaning of the TOR, this court fails to see how his above arguments can be relevant to the construction of the TOR. The only way in which they can become relevant is when the construction of the TOR adopting the literal rule would result either in an inconsistency between the TOR and the empowering provisions of s. 16, Cap. 395, or in gross unfairness and/or injustice to people being "joined" by the Tribunal. This court does not find any inconsistency between s. 16, Cap. 395 and the TOR (as construed by the Tribunal). Furthermore, this court agrees with the respondent that such a construction would not result in any inherent unfairness and/or injustice.

(1) The Financial Secretary's Power to Issue the TOR

24. The applicant contends that the Financial Secretary must exercise his power under ss. 16(1) and (2) to issue a terms of reference upon reasonable grounds and in good faith. It is also contended that he is obliged (and is presumed) to have regard to the rules of natural justice.

25. As stated above, this court does not find it necessary to determine the validity of these contentions. Because the applicant has not argued that the TOR offend these matters, this court does not see how they can affect the construction to be placed on the TOR. This court will proceed to consider the applicant's arguments for completeness.

26. The applicant says that since the SFC has carried out what must have been a comprehensive and thorough investigation and sent its report to the Financial Secretary, the Financial Secretary would have been in a position to determine whether, and if so, against whom a prima facie case of suspected insider dealing would lie. The Financial Secretary would also have drafted a terms of reference to reflect his reasonable belief as to who should be implicated. The wordings of the TOR must have been intended to correctly reflect the extent to which the Financial Secretary required the Tribunal to inquire. Thus, if he only named 3 individuals in the TOR, this is an indication that he only found these 3 to be the proper suspects.

27. This argument presupposes the Financial Secretary stands in the position of (or is someone similar to) a prosecutor and the TOR are similar to a criminal charge. This is not supported either by the relevant statutory provisions or the nature of (or the actual proceedings in) the inquiry.

28. This court will assume the applicant's contention regarding the need for the Financial Secretary to issue a terms of reference based on reasonable grounds and good faith to be correct. Even so, this court concludes that s. 16, Cap. 395 only stipulates the terms of reference should provide the Tribunal with general parameters within which an inquiry is required. In this connection, the source of the Tribunal to inquire originates primarily from s. 16 (especially s. 16(3)). The terms of reference, although to certain extent can be regarded as an empowering document, are in essence intended to require an inquiry to be carried out (s. 16(2) expressly so provides). On the other hand, it is equally important, both from an administration and resources point of view, for the Tribunal to know from the terms of reference what is/are not required to be inquired into. Terms of reference are therefore needed to give the Tribunal the parameters of the inquiry so as to make the inquiry manageable from a resource point of view.

29. For the same reasons (set out above), this court does not find that the rules of natural justice (at common law) has any place in relation to the issuance of a terms of reference insofar as the applicant may be arguing that he has a right to be heard in the matter. Insofar as the applicant is arguing that the rules of natural justice are related to the inquiry by the Tribunal, this is irrelevant to the issuance of the terms of reference as such (and therefore irrelevant to this application).

(2) Ss. 16(1) and (2) and Contents of the TOR

30. This court does not propose to set out the applicant's arguments regarding the construction of ss. 16(1) and (2) as they relate to the contents of the TOR (and terms of reference generally), save that by reason of this court's conclusion under the sub-heading "The Financial Secretary's Power to Issue the TOR", this court does not find that terms of reference should be viewed in effect as some kind of criminal indictment (as the applicant is effectively arguing).

(3) Alleged Procedural Unfairness

31. This part of the applicant's arguments is based primarily on the rights of "a person whose conduct is the subject of an inquiry or who is implicated, or concerned in the subject matter of an inquiry" (words used in para. 16, Schedule to Cap. 395):-

(1) to be afforded an opportunity to be heard: see, for example, s. 16(5), Cap. 395;

(2) to be present in person at any sitting of the Tribunal and to be represented by a barrister or solicitor: para. 16, Schedule to Cap. 395.

In relation to point (2) above, even counsel for the applicant accepts that such a person's right to be present can, depending on the circumstances, include taking such steps as to enable him in effect as having been present. For example, a stockbroker or banker who, at some stage after the commencement of an inquiry, can properly claim a right to be present at the inquiry (in any of the capacity referred to in para. 16, Schedule) cannot insist on the inquiry to be re-convened de novo provided his right of presence can adequately be taken care of (such as by the provision of transcript of the notes of hearing or tendering of witnesses for questioning).

32. In relation to the claim for the right for an opportunity to be heard, this is at the end a matter for the Tribunal to determine. Ultimately the Tribunal is obliged to ensure that such an opportunity is sufficiently afforded to the affected person. In some cases, providing him with the relevant documents, such as records of the hearing (and the like) will suffice. On the other hand, without the need to pre-determine what circumstances will give rise to such situation, it seems to this court it is possible that in some other cases no procedural steps will be able to sufficiently afford such an opportunity to the affected person. In such cases, the Tribunal will no doubt take the appropriate steps (including ordering a de novo inquiry hearing) as necessary. However, all these only relate to procedural fairness which the Tribunal is obliged by law (whether under Cap. 395 or the general law) to ensure. For this reason, this court cannot see how the right to be heard can be made use of to challenge the decision of 13 December 2001. If and when the Tribunal fails to appropriately take care of an affected person's rights, the usual venue for rectifying such failure (including in appropriate cases an application for judicial review) is always available.

33. In relation to the applicant's complaint that a "Salmon" letter is not an adequate substitute for a properly worded terms of reference, this court does not find it necessary to repeat what has been stated herein above. If and when an affected person can properly claim that his right to be heard (and/or to be present) has not been adequately ensured because of a "defective" "Salmon" letter, complaints can be made to, and dealt with by, the Tribunal.

(4) Alleged Contradictory Approach of the Tribunal

34. This court does not find it necessary to go into the details save to say that the alleged contradictory approach by different panels of the Tribunal is not factually established. Insofar as apparently different conclusions have been reached in relation to whether a terms of reference need to be re-worded, perusal of the records shows that the conclusions were only reached in the particular circumstances of the case and not intended to have general application.

(5) The New Ordinance

35. The new Ordinance is intended (among other things) to create a new Market Misconduct Tribunal. It covers a range of market misconduct (among which is insider dealing). The whole statutory regime is different. In these circumstances, this court fails to see how the new Ordinance can help the applicant in this application.

36. Even leaving aside the differences outlined above, the requirement in clauses 13 to 20, Schedule 9 of the new Ordinance that only the Financial Secretary can identify the individuals which can be included in an inquiry is irrelevant to the Tribunal's power to do so in an appropriate case under Cap. 395.

(6) Alleged Ambiguity in the TOR and/or s. 16, Cap. 395

37. By reason of the above matters, this court finds no ambiguity in the TOR and/or s. 16, Cap. 395 which is either relevant to, or can assist, the applicant's arguments in this application.

Conclusion

38. This application is refused.

Costs

39. There is no apparent reason to depart from the usual rule that costs should follow the event. The applicant is to pay to the respondent costs of this application (including any reserved costs) to be taxed if not agreed.