EAA SECURITIES LTD v. FATTYDAD ALICE PUI YAN, the Administratrix of the Estate of Fattydad Henry, Deceased

HCA 2507/2003 and HCA 2520/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2507 OF 2003

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ACTION NO. 2520 OF 2009

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(Consolidated by Order of Registrar Lung dated 25 May 2011
and Order of Master Ko dated 10 May 2012)

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JUDGMENT

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Introduction

1.  These proceedings were commenced by writ issued as long ago as 8 July 2003.  The writ contained what Mr Dennis Kwok, Counsel for the Plaintiff (“EAA”), described in his opening as a simple claim for the debit on the balance of a margin account belonging to the defendant (“Henry”).  That 14 years have passed since the writ was issued lends some support to Mr Kwok’s further submission that the proceedings have spiralled into something more complex.

2.  My task is to cut through the suggested complexity. That task not made much easier by the issue of a second writ in December 2009 (6½ years after the first writ, and 7½ years ago) asserting an overlapping or related claim by EAA, now consolidated with the original claim.  As extra seasoning for the mix, each of the two defendants has made a counterclaim against EAA, and EAA has made a third party claim against one of the defendants arising out of the counterclaim made by the other. 

3.  If extra flavour were needed, it is to be found in the fact that between the dates of the two writs, Henry passed away, so that the claims against him are defended, and his counterclaim is pursued, by his daughter (“Alice”) as administratrix of his Estate, Henry having died intestate.

4.  One of the persons that would normally take a share of Henry’s Estate, including any recovery in these proceedings, under the rules on intestacy would be his wife (“Anita”).  It is unfortunate that the simplicity of that statement is complicated by the fact that Anita is the other defendant.  She was the dealing director or account executive employed by EAA, and through or by whom Henry’s account was managed.  It is her activities in managing the account which lie at the heart of the matter.

5.  To investigate that matter requires looking back to events materially beginning in about 1998, at the close of the last century, and now nearly two decades ago.

6.  No wonder it is sometimes said that ‘the wheels of justice grind exceeding slow’.  But if that phrase implies criticism of those who administer justice, it may be misplaced in this case.  The procedural history (an apt word) of these proceedings does not make happy reading. Suffice it to say that it comprises a melange of periods of inactivity, some interlocutory skirmishing, lots of amended and re-amended pleadings – there is even that rarest of pleading animals, a surrejoinder – and later, after only a decade, a first attempt at a trial when it became clear (to put it neutrally) that not all of the parties were ready for trial, followed by a subsequent side trip to the Court of Appeal. 

7.  There was even going to be a fight about whether EAA should be permitted to file voluntary particulars, merely identifying some other clauses of the contractual documents on which it might rely, though fortunately that was dealt with by consent at the start of the trial.  This trial was fixed for 6 days.

8.  If one recalls that the main claim is for a principal sum of just over $700,000, that the alternative claim is around $4m and the counterclaims are for less than $1m and between $3m and $10m respectively, one might ask about the wisdom of incurring the legal costs which must be involved.

9.  To borrow a phrase from elsewhere, here endeth the lesson but not the story.

The Core Facts

10.  The story materially begins in 1994, when Henry and Anita married.  They lived at 7C, Starview in Discovery Bay ("the Starview address").  Henry was a small business operator, with ownership of a golf cart servicing business and a bakery, and Anita was working as a securities broker.

11.  EAA is a securities brokerage company, and an Exchange Participant of The Stock Exchange of Hong Kong Limited.  It is part of a group of companies, which includes EAA Finance Limited ("EAF”).  Amongst other things, EAF lends money to employees of the group by what are called staff loans.

12.  Anita was employed by EAA as a Dealing Director for the period from 1 March 1995 to 30 April 2002.  Her contract of employment was contained in a countersigned letter dated 28 February 1995.  It is noteworthy that her remuneration was by way of 14 months’ monthly payments (which included twelve months ordinary pay and an annual two month bonus payment), and that she earned no commission.

13.  EAA says that Anita was entrusted with supervising the performance of other securities brokers, as well as acting as a securities broker herself in connection with the securities accounts opened by clients who were introduced by her to EAA.

14.  One such client was Henry, who opened a cash account ("Cash Account") on 18 May 1995.  Other clients who opened accounts with EAA through Anita included her mother and Alice.  There is an issue as to whether EAA knew that the Cash Account belonged to Anita's husband. EAA says it did not know, but Anita says (and I accept) it was common practice for account executives to open accounts in the names of relatives and friends.

15.  The Cash Account was operated under the terms of a General Trading Agreement ("GTA"), which was signed by Henry and witnessed by Anita using her initials, and countersigned by EAA through Anita using her full signature.  In the schedule to the GTA, Henry provided residential and business addresses in Discovery Bay.  The residential address was the Starview address.

16.  There was also a Cash Client's Agreement ("CCA") signed by Henry, and witnessed and countersigned by Anita.  Neither the GTA nor the CCA contained any authorization from Henry for anyone other than himself to operate the Cash Account.

17.  The operation of the Cash Account generated two types of statement, one a daily transaction statement (issued only on days when there was account activity) and the other a monthly statement which summarized the transactions during that month, as well as setting out the closing position as at the end of the month.

18.  There is an issue between the parties as to whether not those statements were in fact sent by post to Henry, as EAA claims.  EAA says that, but for a short period when statements were sent to a business address of Henry, all statements were duly posted to Henry at the Starview address.  EAA says that the process of sending statements to Henry did not involve Anita.  Anita says that she intercepted some statements at EAA, and she also intercepted statements at home before Henry could see them if they had actually been posted to Henry.

19.  In any event, it seems that no daily transaction statements were generated until January 1997, or perhaps mid-1997, for that is when activity on the account really began.  There ought to have been monthly account statements each month.  It was accepted by EAA’s witness that though the internal operations manual stated that the statements should have been sent to the client by staff not being the account  executives, in practice that rule was not always followed (at least not until rather late in the material chronology).

20.  In an attachment to his witness statement dated 12 May 2004, Henry set out the stock trading transactions he says he instructed and authorized on the Cash Account (later a Margin account, see below).  They number about 25 transactions.

21.  However, from the account statements, it is clear that there was significantly greater activity, with almost daily dealing in shares.  Henry says that other than those transactions he has identified from his own records, none of the other transactions were authorized by him. This is the key issue in dispute.

22.  Henry retired in around May 2000.  From then, he spent considerable time outside Hong Kong, mainly living in Zhongshan in the PRC.  He had been spending quite a few days outside Hong Kong even before he actually retired, and his travel records show that he was out of Hong Kong for 94, 149, 203, 226, and 303 days in the years 1997, 1998, 1999, 2000, and 2001 respectively. As it may be relevant to later attempts to contact Henry, it can also be noted that he was out of Hong Kong for 284 and 343 days in 2002 and 2003 respectively.

23.  In addition to the daily and monthly statements which were meant to be sent to clients, EAA appears to have generated statements for MC and MD accounts ("MC/MD Accounts").  These ‘accounts’ were essentially used internally.  The origin of them is unclear, but they may have been created to deal with liquidity and credit concerns over certain Indonesian-based clients around the time of the Asian financial crisis in 1998.  But their use clearly spread.

24.  It seems the MC/MD Accounts were essentially operated to take the transfer, on a daily basis, of the net gain from any trading on that day.  That gain could be held to one side, as it were, away from the main account, and then (at least for Henry’s account) later be used to fund cash withdrawals from the account.  Of course, it was not necessary to have MC/MD Accounts to be able to calculate settlement amounts.

25.  The use of the MC/MD accounts might also have been used to facilitate – and they were certainly able to an extent to disguise – the unauthorized use of client accounts by certain EAA staff for their own purposes (though this does not necessarily mean for their own personal gain). Anita says she did not know of the MC/MD Accounts at the time and learned of them only much later, but I am not persuaded of that fact.  When cheques withdrawals were made and accounted for on the MC/MD Accounts, I think it likely that Anita who gave instructions with knowledge from sight of those accounts.

26.  The MC/MD Accounts were no longer used after the change in EAA’s computer system in August 2000.

27.  By early 1999, Anita was the only Securities and Futures Commission ("SFC") licence-holder at EAA.  Thus it was that she bore the brunt of the censure imposed by the Stock Exchange of Hong Kong ("SEHK") and the SFC in early 1999, when they discovered that one member of EAA staff had been engaging in unauthorized trading on four client accounts.  That staff member was apparently an Elson Wong, who made a witness statement for these proceedings but who was not called to give live evidence (on which basis his statement has been excluded).

28.  Of course, it is Anita's case that by that date she and numerous other account executives were engaged in extensive unauthorized trading using client accounts.  Anita says this was encouraged and officially overlooked, and perhaps even required, so as to increase the number of transactions and trading volumes EAA was apparently carrying out at a time of difficult markets.  Anita referred in evidence to the accounts so used as ‘head-count accounts’.  Anita says it was Elson Wong who told or encouraged the account executives to do this, but it is clear that the activity continued after Elson Wong left EAA in March 2000.  Anita says it was well known to EAA senior staff, including a Susan Choo, that this activity was prevalent.

29.  On the facts, ignoring whether the trades were authorized by Henry or not, it is clear that there was a significant volume/value and number of transactions in Henry's account from mid-1997 onwards.  From a summary produced by Mr Kwok from the account statements on Henry's account, the following figures are apparent:

	1997 (June onwards)	1998	1999	2000	2001 (to  August)
$ volume of 'buy' transactions	10,210,000	24,769,000	62,380,000	113,722,000	48,666,000
$ volume of 'sell' transactions	10,529,000	24,761,000	62,907,000	112,528,000	47,409,000
Number of 'buy' transactions	69	204	378	423	302
Number of 'sell' transactions	69	191	360	419	300

30.  The very close similarity between the volume and value of transactions for each of the ‘buy’ and ‘sell’ transactions, and in the actual number of the ‘buy’ and ‘sell’ transactions, paints a clear picture. Essentially, the account was being used to buy and sell the same stocks using the T+2 settlement ability.  In other words, a stock could be bought on day T, and sold on day T+2, without money needed to pay for the stocks bought, unless a loss was made on the difference between the buy and sell prices.  If such a loss was made, that difference ought to have been paid.  If the price difference was the other way and a gain was made on the sale, the gain could, and often would, be moved from the main account to the MC/MD Accounts.

31.  EAA took a commission on every transaction, whether it was authorized by the customer or not.  The commission rate was at that time to take $25 for every $10,000 transacted, buy or sell.  By way of example, for just the year 2000 on Henry’s account alone, EAA would have taken commission in excess of $560,000.  But Henry’s account was just one of 27 accounts Anita says she operated on a similar basis, and she was just one of a number of account executives she says were acting in a similar way.

32.  On 15 August 2000, the Cash Account was changed to a margin securities trading account ("Margin Account"), and the then balance of the Cash Account was transferred to the Margin Account.  As it seems from the statements, both stock and a debt were transferred.

33.  Henry signed an agreement in Chinese ("Margin Account Agreement"), which terms are said to govern the operation of the Margin Account.  There is no doubt that Henry's signature is on the Margin Account Agreement, but Henry has asserted that the change was made without his knowledge or consent.

34.  It is correct to point out that there is no document – other than the last statement on the Cash Account dated 31 August 2000 which ends with a nil holding and nil balance – that formally closed the Cash Account.  Henry did not sign, and was not even asked to sign, any such document as would have instructed the closure of the Cash Account, and it is possible for a client to have both types of account, cash and margin.

35.  Transactions in securities subsequent to 15 August 2000 in the Margin Account all continued to be conducted by Anita, though Henry has accepted that he instructed or authorized three (and only three) specific transactions in the account after that date.  In relation to those transactions which he says he authorized or instructed, Henry dealt with the transactions as though they were on a cash account in the sense that he paid the full price for a settlement on T+2 (save a for a small sum which I shall have to consider below).  He used the 888 Account (defined below) to draw cheques for purchase prices.

36.  At the time of the change to the Margin Account, Henry signed a form designating an HSBC bank account ("Joint Account") as the bank account designated for the receipt of settlement funds.  No similar designation had been made at the time of the opening of the Cash Account, but EAA nevertheless asserts that the Joint Account had been designated for settlement purposes under the Cash Account.  It is the case for Henry that he essentially operated the Cash Account, on the transactions he actually authorized, by using another HSBC bank account held in his sole name ("888 Account").

37.  The Joint Account was an account held jointly by Henry and Anita.  There is an issue as to the extent that Henry had knowledge of, and/or was involved in the operation of, the Joint Account.  Anita says she kept the chequebook and operated the account on her own, including dealing with the statements received.  EAA relies on the fact that it was a joint account to say that Henry must have known about it and the activity on it, and that any funds put into it were by definition received by him.

38.  In the period from 4 May 1999 to 20 July 2001, 40 cheques ("40 Cheques") were issued by EAA made payable to Henry, and they were deposited by settlement staff into the Joint Account.  The total proceeds of the 40 Cheques amounted to $4,029,335.82 ("Cheque Proceeds").  There was no requirement for any receipt to be signed by the client receiving the cheque and no such receipt by Henry exists in relation to any of the 40 Cheques.

39.  Each of the cheques was drawn on the instructions of Anita, and she says that there had to have been funds standing to Henry’s credit in the account at each date for each cheque to have been issued.  Each cheque was signed by Anita and countersigned by another authorized employee of EAA (one of Elson Wong, Becky Wong, or Richard Lau).

40.  From late 1999, it is possible to see the cheque withdrawals shown in the MC/MC Account statements.  Earlier cheque withdrawals are sometimes seen on the main account statements (albeit probably identified merely as ‘Settlement’), but it is sometimes necessary to try to work out where the money came from.  (In doing that, there is almost always a slight – and unexplained – mismatch in the assumed source of the funds underlying the cheque and the amount of the cheque itself.)

41.  On 29 March 2001, Anita signed a term loan agreement with EAF for a total sum of $468,000.  EAA says there was nothing unusual about such a staff loan.  But Anita says that she was forced to take out the loan to pay a sum of money owed by a client for certain placement shares, which the client had not herself paid, and for which EAA through Susan Choo was holding her responsible.  The loan appears to have been fully repaid by the end of 2001.  The loan is the subject of part of Anita’s counterclaim.

42.  In mid-2001, there was a management change at EAA.  Amongst the changes was the appointment of Richard Lau as operations manager.  Mr Lau gave four witness statements and gave live evidence at the trial.  Though technically higher to Anita in staff ranking, he was not really supervising her or her work.  His evidence was based on his knowledge of the EAA documentation, and his involvement in later investigations. 

43.  In fact, Anita was probably not really supervised, as she was quite senior (for a time effectively the most senior) and there was no apparent real chain of reporting.  It seems Anita had most contact with Elson Wong and later Ms Choo, though she was also not really the direct supervisor of Anita.  There was also a managing director called Robert Wu.

44.  Anita gave evidence that it was Robert Wu who instructed or encouraged the account executives to change clients’ cash accounts to margin accounts in mid-2000.  This was because the high levels of indebtedness shown on the cash accounts might attract regulatory attention, but lending on margin accounts would not.

45.  In November 2001, EAA (through Mr Lau and/or Ms Choo) required Anita to sign Letters of Guarantee by which she agreed to guarantee the indebtedness of clients whose accounts she handled. There were 27 such letters of guarantee, for all Anita’s clients as were identified (perhaps only later identified) as having an ‘irregular’ account.

46.  Anita says she signed the guarantees because she felt she had no choice, and she was constantly asked to do it by Ms Choo.  Indeed, I was told in evidence that at the commencement of their employment all the account executives gave indemnities to EAA for the indebtedness of the clients whose accounts they handled. Anita had been a more senior employee, and no such indemnity had been taken when she was first employed; but, perhaps as her employment neared its termination, EAA felt the need to extract the letters of guarantee from her.

47.  By taking the indemnities and guarantees from the staff overseeing the accounts, by which those staff members guaranteed the debts of their own clients, EAA was passing at least a significant part of the credit risk inherent in its business to its staff.  This may explain some of the ‘loose’ approach to management as allowed the events giving rise to these proceedings to occur.

48.  In passing, I note that Mr Lau accepted in evidence that EAA had never accounted to Anita for the sums recovered from the clients whose debts she guaranteed, and at least some of which debt she must have covered.  That is so, even though EAA made demands and took proceedings against some clients which led to some recoveries.  Anita said it was telling that no other client had sued EAA, showing she had looked after them.

49.  The last transaction on the Margin Account was conducted on 26 April 2002 (though Henry says the last transaction he authorized was in September 2000).  As at 30 April 2002, there was a debit balance of a little over $693,000 on the Margin Account.  

50.  On 1 May 2002, Anita was dismissed from her employment, by the giving of one month's notice.  The dismissal letter is anodyne and says nothing of the reasons behind the dismissal, but I was told in evidence that it was because of the large amounts of indebtedness in the accounts of her clients.

51.  At the time she left, Anita was owed $334,715.44 in salary and benefits, and a long term service payment of $177,756.59. Apparently, both sums were withheld, as payment against debts said to be owed by Anita on behalf of her clients.  In the documents are two schedules which purport to break down, across a number of her clients, the amounts of a payment schedule on outstanding clients, which add up to the two sums mentioned above. Anita says she did not agree those schedules.  Those sums form part of Anita’s counterclaim.

52.  Before she ceased employment, Anita left (she says she was forced to leave them) 12 post-dated cheques payable to EAA totalling $360,000 for the repayment of clients’ debit balances.  From June to December 2002, Anita also deposited 15 cheques totalling $53,000 into EAA’s bank account for her payment of the debit balance of her clients.  There is no dispute those sums were paid by Anita.  She also counterclaims those sums.

53.  Anita briefly worked for another securities brokerage after May 2002, but left the brokerage industry altogether in early 2003.  She voluntarily gave up her SFC licence as from 1 April 2003.  From then until the end of the year, she retired to live with Henry in Zhongshan.

54.  In the meantime, from sometime after May 2001, the new management of EAA, including Mr Lau, began an internal investigation into some long outstanding accounts receivable.  I think it likely that part of the results of the investigation led to the taking of the guarantees from Anita, and to her later dismissal.

55.  From its internal investigation, EAA identified 27 ‘irregular’ clients (including Henry), displaying many common characteristics. Those characteristics included that: 17 gave written instructions to change address in late March 2001; 11 changed address without proper authorization; 6 changed address to a GPO box number; 22 had 9 common addresses; 10 had addresses in Discovery Bay (where Anita lived); 11 had telephone numbers shown on the database differing slightly from those on the account opening documents; 18 could not be reached through telephone follow-up call.

56.  In November 2002 a Mr Fung, one of Anita's former clients, made enquiries with EAA as to the persistent delays in the receipt of dividends on shares held in his portfolio.  Mr Fung showed EAA a statement of account, which was different from the standard statement used by EAA, even though it was apparently issued on EAA letterhead.  Investigations revealed that the shares had already been sold.

57.  As a result, the management suspected acts of misappropriation and falsification of company documents by Anita.  The matter – including reference to the 27 irregular clients – was reported to the SFC and to the police. The SFC requested EAA to appoint independent accountants to conduct a circularization of all clients of EAA, and to investigate the suspected acts, as well as to review the internal controls of EAA.

58.  The independent accountants appointed were Moores Rowland Mazars, who issued a report in December 2003 ("Report").  I deal separately below with what the Report found.

59.  In its conclusion, the Report recommended regulatory and law enforcement agents to investigate the conduct of Anita from a criminal perspective.  That is what happened.

60.  On 7 September 2004, the SFC severely reprimanded EAA and reprimanded its managing director, Robert Wu.  The enforcement action press release notes that Anita had left the industry and that her licence had been revoked on 1 April 2003, the inference being that she would otherwise have also been the subject of enforcement action.

61.  Criminal proceedings were brought against Anita after she returned to Hong Kong in on one occasion in May 2003, and was arrested on arrival to assist the police in their enquiries.  Though things seemed to go away, and bail money was returned to Anita in October 2004, she was again detained and charged in March 2006.  In December 2006, Anita was convicted after trial of 18 counts of false accounting, and 3 counts of using a false instrument.  Anita was sentenced to 5 years imprisonment, and served 40 months.  No compensation was ordered.  An appeal was unsuccessful.

62.  Mr Kwok wishes to emphasize that the conviction was completely unrelated to Henry’s Cash Account or Margin Account.  But I think that overstates matters where the convictions were for a course of dealing that had marked similarities with the dealings on Henry’s account.

63.  The first claim was brought against Henry by writ dated 8 July 2003, though there had been previous demands and a letter before action.   As stated above, the claim was for the outstanding balance of the Margin Account in the sum of $717,918.99 and interest.  The statement of Claim was served on 11 September 2003.

64.  At the same time, a claim was brought against Alice and a friend who held an account with EAA within the portfolio of accounts under Anita.  That action was for a relatively smaller sum and was later settled.

65.  Henry filed his Defence and Counterclaim on 11 October 2003.  He denied any knowledge of the operation of the relevant account, other than those transactions which he identified as were authorized by him.  He counterclaimed for delivery up of shares which he said ought still to be in his account, alternatively for damages to be assessed.  Henry filed a witness statement on 12 May 2004.

66.  In early 2004, Henry had also filed complaints to the SFC about EAA and what he said was the unauthorized manipulation by Anita of his account.

67.  Henry died intestate on 5 September 2004. 

68.  Alice was appointed as the administratrix of Henry’s Estate on 22 December 2005.  Before that, on 24 January 2005, Anita had signed a Disclaimer irrevocably disclaiming any interest in the Estate. 

69.  The Disclaimer was witnessed by the solicitor then also acting for the Estate in this litigation, but I reject the suggestion made by Mr Kwok in his cross-examination of Anita (but not put to Alice) that the fact and timing of the Disclaimer and the witness stamen Anita made a few months later evidenced a ‘plan’ between Anita and the Estate to allow the latter to make a claim against EAA.

70.  Anita made her witness statement in  support of Henry’s Defence and Counterclaim on 30 April 2005, though it was only formally served some time later.  (A similar statement had been filed in the litigation between EAA and Alice.)  In it, she effectively admitted her wrongdoing and took responsibility for the way the account was operated, stating that Henry was unaware of that, and that he had not given instructions for most of the transactions conducted through his account.

71.  The second claim was brought by EAA by writ dated 22 December 2009.  It is said that this claim was a reaction to Henry's counterclaim in the first action (though the reaction time was more than 6 years).  The second action claimed against Anita damages arising from her wrongful breach of fiduciary duties owed to EAA, and also sought a full indemnity, including as to the liability to make good the outstanding balance owed on the Margin Account.  The alternative claim against both Anita and Henry was for return of the Cheque Proceeds of the 40 Cheques, and for an account and tracing enquiry into what had become of those proceeds as trust assets.

72.  Thereafter, the proceedings progressed (if that is the right word), including that in June 2011 EAA made a third party claim against Anita.  Eventually, the proceedings reached this trial.

The Report

73.  The Report was made subject to certain limitations encountered during the investigation, including the inability to contact Anita and several customers (including Henry), the absence of any tapes recording transactions when Anita worked for EAA, and the loss of material as a result of the change of the computer system in mid-2000. 

74.  Reference was also made to the fact that some movements in the clients' monthly statements generated by EAA could not be traced to any supporting documents, including as to transfers of balances among the main operating account and the MC/MD Accounts.

75.  As to the MC/MD Accounts, the Report opined that given the fact that all cheques drawn against credit balances were apparently made to the "real" account holders, those accounts represented the actual amount due to the account holders and the debit balances remaining in the main accounts arose from transactions that were not conducted by the account holders.  In his evidence, Mr Lau did not agree wholly with that opinion.  Indeed, it seems to me that if the MC/MD Accounts were operated as I have set out, the balances in those accounts might reflect the result of both authorized and unauthorized trading.

76.  The Report identified that clients' statements were printed by the Settlement Department and passed to the respective account executives, dealers or Dealing Director (Anita) for the purposes of putting them into envelopes. They were then returned for mailing, but there was no control on the number of statements passed to and the number of envelopes returned from the account executives, or as to what was inside the envelopes. This facilitated staff in the dealing function to withhold statements, or to replace them with other materials.  The Report noted that that loophole had since been rectified.

77.  The Report's summary of conclusions included:

a.   the transactions, accounts and stock balances recorded in certain statements sent to clients were different from EAA's records;

b.   cheque deposits had been made to some clients for settlement of net sale proceeds or dividend entitlements, which cheques were not drawn by EAA, but by someone else;

c.   on the contrary, settlements for balances owed to EAA by apparently unconnected account holders were by cheques with closely sequential cheque numbers;

d.   a number of clients had carried out significant over-limit trading activities, and cheques had been drawn to these clients at the time when they were in fact owing material sums to EAA.  EAA had to make provision for bad debt of approximately $30 million on long overdue balances.

78.  The Report also concluded that there is evidence to indicate that Anita was the person responsible for these irregularities, possibly with the knowledge or assistance of other former staff of EAA.  (In passing, I accept that there must have been such knowledge and likely such assistance.)  A number of features pointing to Anita's responsibility are identified, including:

a.   Anita was responsible for the operation of the suspicious accounts, which displayed many common characteristics;

b.   following the resignation of the ex-director Elson Wong, from March 2000 to March 2001, Anita was the most senior staff and effectively in charge of EAA's overall operations;

c.   significant increase in debtors' balances was observed during that period;

d.   two of the suspicious account holders were close family members of Anita, being her husband (Henry) and her mother;

e.   Anita was the person responsible for taking and executing orders for the suspicious accounts, and the sampled bought and sold notes were all signed by Anita alone;

f.   Anita was one of the authorized signatories for the cheques paid to suspicious account holders;

g.   Anita had authority to approve the use of MC/MD Accounts, which were apparently to facilitate making cheque payments to account holders when there were outstanding debit balances in the main accounts at the time of payment.

The Pleadings

79.  There is a respectable school of thought which holds that in any case where the pleadings have reached a Rejoinder, a reasonable assumption can be made that something has likely gone wrong with the clarity of expression in the earlier pleadings.  This case has a Surrejoinder (a rejoinder to a rejoinder).

80.  Albeit accepting that there is much duplication across the two sets of pleadings, the pleadings in the two separate actions and those in the consolidated actions run to hundreds of pages.  But stripped back to the essentials, the claims and defences seem to me to be capable of relatively simple expression.

81.  EAA’s primary claim is for the debit balance of $717,981.99 arising on cessation of operation of the Margin Account.  Obviously, the claim asserts that the activity on the Margin Account (and previously on the Cash Account) was instructed and authorized by Henry as the account client.  Reliance is placed upon certain terms of the account documentation that the client will pay outstanding sums upon demand.

82.  The alternative claim proceeds upon the assertion that Anita acted in breach of fiduciary duties owed to EAA, including to act with fidelity and honesty and in good faith, not to misuse her position, and not to make secret or unauthorized profits.  It also proceeds on the basis that Anita made false claims that she was acting under the authority, knowledge and consent of Henry (when she was not so acting) in the operation of the Cash Account and the Margin Account.  On that basis, the alternative claim seeks the return of the Cheque Proceeds of the 40 Cheques, totalling $4,029,335.82.

83.  As against Henry, the alternative claim asserts that he was in knowing receipt of the Cheque Proceeds and/or that it would be unconscionable for him to keep them.  It is further pleaded that Anita was Henry’s agent and/or he had recklessly allowed his account to be used by her for her trading and has been the recipient of assets arising from her breach of duties.

84.  Henry’s defence proceeds on the assertion that he had no knowledge of the activity on the Cash Account or the Margin Account, other than in respect of the identified transactions which he says he did in fact authorise.  Indeed, he claims that he did not even know that the account had been changed to a margin account.  He asserts that he used his own money in the 888 Account to settle the purchase price of shares bought by him and for the deposit of sale proceeds of shares sold by him.  He raises the defence of limitation, namely that by 22 December 2009 the alternative claim on the 40 Cheques was time barred.

85.  Henry’s Counterclaim is for the loss of his stock portfolio, which disappeared as a result of Anita's unauthorized activities.  Henry pleads reliance upon certain provisions of the GTA and CCA in breach of which it is said EAA has caused or permitted the account to be manipulated and the portfolio to be lost.

86.  Anita, who has throughout been self-represented, has pleaded her own Defence and Counterclaim.  The essence of the defence is that though she did engage in extensive unauthorized trading on numerous clients' accounts, she did so only for the purpose of expanding EAA's turnover and increasing commission profits.  As to the 40 Cheques, Anita relies on the fact that any cheques issued were verified by the accounting manager, that the client had to have had a remaining credit balance before the cheque was issued, and that in order to be effective each cheque was countersigned by one of an executive director, accounting manager or trading director.

87.  Anita's counterclaim is in relation to the various cheques and payments that she made on behalf of indebted clients, the amount withheld from her at the termination of the employment, and the amount of the term loan taken out with EAF.  The broad basis of the counterclaim is that it is not fair or appropriate for her to have had to settle debts on other persons' accounts.

88.  In EAA's Reply and Defence to Henry's Counterclaim, EAA relies on the terms of the GTA under which it was entitled to have relied on instructions, notices or communications which EAA reasonably believed originated from the client or ‘authorized person’.  EAA says that Anita was ‘effectively’ acting as Henry's authorized person.  EAA also relies on the lien and power of sale in default of a client in the due performance or observance of the terms of the GTA, so that it had the right to sell securities held in the Cash Account or the Margin Account at any time when there was a debit balance and an unsatisfied demand.

89.  EAA also pleads reliance upon clause 17 of the GTA which imposes limitations on the liability to a client for any damage suffered by the client arising out of any act or omission in relation to any matters contemplated by the GTA unless the loss results from the AA's fraud, negligence or wilful default.  Henry's limitation defence is denied.  An alternative claim to set off the Cheque Proceeds in extinction or diminution of Henry's counterclaim is raised.

90.  EAA's Reply and Defence to Anita's Counterclaim specifically denies that any former executive, director or anyone else within the management of EAA had instructed and/or allowed Anita to use clients' accounts to conduct unauthorized trading.  EAA pleads that it is unclear what Anita's cause of action is for her counterclaim, asserts a limitation time bar, and also asserts a set-off.

91.  I do not think it necessary to rehearse here the matters in the Rejoinder or the Surrejoinder, save to point out that they both essentially repeat points otherwise made in the pleadings and emphasize or slightly expand on some aspects of them.

92.  EAA's Third Party Claim against Anita seeks an indemnity against her should Henry's counterclaim succeed.  The claim has two bases: the alleged breaches of duty or abuse of powers elsewhere pleaded, and reliance upon the relevant letter of guarantee signed by Anita.

The Issues

93.  On the pleadings, the key issues and the basis of a decision tree seem to be as follows:

a.   Were the transactions that led to the claimed indebtedness on the Margin Account conducted with Henry’s actual or deemed authorization?  If so, EAA’s primary claim succeeds, and Henry’s counterclaim fails.  If not, EAA’s primary claim fails. 

b.   If EAA’s primary claim fails, does Henry’s counterclaim for his lost portfolio succeed?  If so, what is the proper assessment of his loss, and by reference to which date? 

c.   If Henry’s counterclaim succeeds, does Henry have to give credit for or set off the receipt into the Joint Account of the Cheque Proceeds?

d.   Does EAA have a separate claim against Henry for knowing receipt of the Cheque Proceeds?  If so, is that claim time barred?  If not, does the claim succeed?

e.   If EAA’s primary claim fails, does its alternative claim against Anita for its claimed loss on the Cheque Proceeds succeed on either the alleged breach of duty or under the letter of guarantee? Is the claim time barred?

f.   Does Anita have any good counterclaim against EAA for monies withheld from her, or paid by her by cheques or under the staff loan?  Is that claim time barred?  If not, to what extent is the claim a good one?

g.   If Henry’s counterclaim against EAA succeeds, does EAA have a good third party claim to an indemnity from Anita?  If so, to what extent?

94.  Obviously, the questions may not be approached quite in that order, and under these questions are the various sub-questions and factual issues which will be traversed below.

Witnesses at Trial

95.  Mr Kwok called Mr Lau as EAA’s witness.  As noted above, Mr Lau was part of the new management of EAA from May 2001 (though he had previously worked within the group).  I think his witness statements were in part somewhat over-egged.  But, in my view, he tried to give oral evidence fairly, and he frankly acknowledged points which might be taken against EAA.

96.  Of course, he was not really able to speak to matters at EAA before May 2001, save insofar as matters were clearly set out in earlier contemporaneous and reliable documents.  But no other witness was produced by EAA to speak to the earlier period.  Mr Brian CW Wong, Counsel for the Estate, made something of this fact; as he said, it might have been expected that Ms Choo, who is still with the group, might have been called to speak to earlier matters, not least in light of Anita’s evidence that Ms Choo and other staff then employed were aware of the significant unauthorized trading conducted by Anita and the other account executives.

97.  I note that Elson Wong, who Anita says specifically encouraged the increased trading to lift the turnover and thereby commission, had made a witness statement but did not come to give evidence.  He might have been in a position to help, but he did not, so in any event I ignore the statement he made.

98.  Anita (who appeared in person) gave evidence for herself, and as a witness for the Estate.  In my assessment of her evidence, I have taken into account that Anita has been convicted of offences of dishonesty in relation to matters highly relevant to the issues thrown up by these proceedings.

99.  Mr Wong also called Alice as a witness, though inevitably she has little direct knowledge of the material events.  Mr Wong also relied on the witness statement of Henry, which was admissible as hearsay.  

100.  In my consideration of all of the witness evidence, but especially as regards Henry, I have tested insofar as I can the evidence given against the contemporaneous documents as well as the inherent probabilities and implausibilities.  I specifically have in mind and have exercised caution in light of the fact that Henry’s evidence was not able to be tested through cross-examination.

What Henry knew of the operation of the Cash / Margin Accounts

101.  Probably a useful first consideration is what knowledge Henry had as to the operation of the Cash Account and subsequently the Margin Account.

102.  It is Henry's case that apart from the trades which he specifically instructed Anita to conduct, he had no knowledge of the extensive further trading conducted through his account.  Putting aside any knowledge which might have been gained from sight of the monthly statements, it seems to me inherently unlikely that Henry instructed Anita to engage in practically daily trading, with many trades being simply the purchase and immediate sale of stock (a hallmark of churning).

103.  Part of the unlikelihood arises from the fact that he was out of Hong Kong for significant and increasing amounts of time as the material period progressed.  That seems to me to point to the improbability in Henry having given specific near daily instructions for trading.  This is tacitly accepted by Mr Kwok, when he places such emphasis on the suggestion that Anita had been generally authorized to act in whatever dealings she conducted on the account, or that Henry was reckless in allowing Anita to operate the account in the way she did.

104.  I also accept that the way Henry’s account was operated by Anita can be considered by reference to the way in which she operated the accounts of her other clients.  EAA (by Mr Lau) itself recognized that Henry’s account was questionable, as it was one of those referred to the independent accountants who were asked to produce the Report.  I note that the Report was inconclusive on the point as to unauthorized trading on Henry's account, but in part that was the result of their failure to contact him. There is no reason to think that if contact had been established that Henry would have told any different version than he subsequently told the SFC and the Court a few months later (and in so saying, I would point out I do not accept that he evaded contact).

105.  It is undisputed that Anita did operate a large number of other accounts with significant unauthorized trading, which she sought to conceal from the account holders by various means.  There seem to me to be greater similarities than differences in the way those accounts were operated with the way Henry’s account was operated.  I also accept the logic in the point that Anita made in evidence that she felt more able to manipulate Henry’s account as she likely had greater confidence in being able to control his receipt – or lack of receipt – of knowledge about its operation.

106.  I accept as likely, amongst other things as against the amount of time that Henry spent out of Hong Kong, that Anita had the key to the mailbox at the Starview address.  I see Mr Kwok’s point that it would have required Anita to have intercepted all of the statements, but it seems to me likely that she was indeed in a position to have done that.  As Mr Wong pointed out, in addition to having the key she would have known when statements would have been sent and so when to be ready to intercept them.  I reject Mr Kwok’s submission that the access to the mailbox was a purely ‘domestic’ affair between Henry and Anita, when Anita was the EAA interface or point of contact with Henry.

107.  It is relevant too that the address for statements was later changed, probably in March 2001, to a GPO Box number. Though that PO box had been opened many years before by Henry, I accept that Anita had the key for it from say 2000 or 2001, by which time Henry spent most of his time in Zhongshan and even before which time he rarely came to Central, whereas Anita did.

108.  In a similar context, I accept Anita’s evidence that she had effective control over the Joint Account.  She had the chequebook, and could control who had sight of the statements.  She was able to operate the account, and I accept that Henry was likely not concerned about that account as he had at least the 888 Account for his own use, insofar as he needed a Hong Kong account, and (as Mr Kwok also emphasized) probably other accounts connected to his businesses.

109.  I have taken into account the fact, which I accept, that Henry signed the form in blank as was later filled in to designate the Joint Account as the settlement account.

110.  I also take into account Henry’s apparent ability, as was recognized by Mr Kwok in his closing submissions, to have worked out or to have reconstructed his share holding position – including calculations of his position on PCCW shares following its merger with HKT – from his own records.  It is telling what he could and did say by reference to the documents which he did have to hand, being certain bought and sold notes, and his own 888 Account statements.  There was even one sold note which had stapled to it calculations made by him on a printing calculator, where the figures were annotated. 

111.  Those transactions as he identified as authorized were readily verifiable by reference to the EAA documents, including the internal MC/MD Account statements which Henry would undoubtedly have not seen.

112.  I do not think EAA’s reliance on the CITIC Pacific shares trade settlement and I-Wood placement add much to the consideration. 

113.  As to the former, it seems Henry did draw a cheque for the actual cost of the shares except $25,000, but it is rather speculative as to why the cheque was for $25,000 less than the actual transaction price.  Anita gave evidence that the amount would have been stated by the Settlement Department of EAA.  On his schedule attached to his witness statement, Henry has linked the right cheque to the transaction, which link is plainly correctly made – see the odd dollars and cents – even if there is an unexplained difference.  

114.  As to the I-Wood matter, there is no real evidence to suggest that Henry had any involvement in or knowledge of the placement.

115.  I also do not think that there is any safe inference to be drawn by the transfer into Henry’s account of certain stock from another brokerage house called SKN.  Whilst Mr Kwok invited me to draw the inference that Henry had an account with SKN so must have given instructions to transfer, Mr Lau fairly accepted that was not necessarily so.  Also, Anita said (and I accept that she organized the transfer for another client and that Henry did not have an account with SKN, and there is no mention of any such account elsewhere, including in the schedule of assets attached to the Letters of Administration).

116.  I also bear in mind that Anita was convicted on the criminal standard of proof of several counts of false accounting and using false instruments in her dealings with the accounts of other clients.  In his evidence, Mr Lau accepted that as a matter of fact Anita had manipulated clients’ accounts and had engaged in unauthorized trading.  As I said above, I see it to be logically likely that she acted in a similar way on Henry’s account.

117.  Therefore, on balance on the totality of the evidence, I accept that Henry did not know that his account was being used by Anita for extensive unauthorized trading.

Whether Henry Bound by Cash Account and Margin Account terms

118.  The operation of the Cash Account was governed by the terms and conditions of the GTA and CCA.  Both agreements are in English, and there is no dispute that they were signed by Henry.  At that time, he plainly knew he was signing documents in relation to the opening and operation of a Cash Account.  He is plainly bound by those terms and conditions.

119.  The Cash Account was converted into the Margin Account on 15 August 2000.  The Margin Account is governed by the terms of the GTA and the Margin Account Agreement.  The latter is in Chinese, and was signed by Henry.

120.  It is said for Henry that he did not understand what he was being asked to sign, but signed it at the request of Anita, his wife.  That he may have been sleepy, as Anita suggested in her evidence, at the time he signed the documents does not impress me.  Anita says she did not tell Henry what the document was, and indeed that she misled him to think that it was a document related to the change of the company name to EAA; he trusted her, and she abused that trust.

121.  I note Mr Wong’s point that there is no suggestion of any document actually instructing or effecting the closure of the Cash Account, so Henry might have believed that account continued even if there was also the Margin Account.  But I doubt this takes the analysis much further, where Henry’s case is that he did not read the document anyway.

122.  The evidence as a whole suggests that when Henry bought or sold stock, he did so – and expected to do so – on a cash basis.  This continued after 15 August 2000.  I therefore accept that it is unlikely that he would have intended, or knowingly entered into, the change of his Cash Account to the Margin Account.  But that does not seem to me to enable him to escape the fairly trite principle that where a person signs a legal document, he is usually bound by the act of signature; it is no defence to say that he did not understand its contents, let alone that he did not trouble to read them.

123.  Indeed, Henry was a businessman and must have been aware of the importance of contractual documents. 

124.  I have considered whether in this instance, the fact that Anita was in effect the face of EAA in the making of these documents would make a difference.  I do not think it would.  It was readily open to Henry to have read the agreements and documents which he was being asked to sign.  The main document was headed as a uniform margin client’s agreement. 

125.  In any event, Henry himself relies upon the terms of it in his pleadings.

126.  Also, at the same time Henry signed a risk disclosure statement, also in Chinese, immediately beneath the last paragraph which identified at a glance that the whole document was a risk disclosure statement. 

127.  Henry also signed a bilingual account opening information form, and a bilingual account opening questionnaire.  Albeit that Anita gave evidence that he signed those forms in blank, and she or someone else later filled in the content, I do not think that greatly assists Henry in except in one respect.  It cannot generally help an experienced businessman to say he signed in blank or did not read what he was signing, if he was prepared in fact to sign documents in blank.

128.  The point of exception is in relation to the designation of the Joint Account as the settlement account.  If the relevant form had indeed been signed in blank, that is some evidence that Henry would not have been alive to the fact that the Joint Account had been designated for settlement purposes (when there is no other documentation identifying any other or earlier designation by him), and that fact might make it less likely that would need to pay attention to that account.

129.  Nevertheless, I am not convinced that the terms of the various contractual documents take EAA's case much further as against Henry.  Whilst EAA would seek to rely on the clause under which it was entitled to act on instructions which it reasonably believed to be originating from the client, I do not see how it can do so if the EAA employee interacting with the client actually knows that the instructions have not originated from the client.

130.  Hence, if I were to find (as I have) that Anita conducted the vast majority of activity on Henry's account without authorization and instructions, she must have known that.  EAA could not reasonably rely upon a deeming provision when its relevant employee knows the truth to be otherwise.

131.  I think the same point arises in respect of the deemed receipt of notices, demands and communication sent to the client by post, if the relevant EAA employee knows either that the communication was not in fact sent at all, or that it was intercepted before it could have been received by the client.  In such circumstances, no estoppel could arise either.

Suggested Approbation and Reprobation

132.  In circumstances where it is undisputed that Anita executed at least some securities transactions for Henry that were expressly authorized by him, Mr Kwok submits that the Estate is not able to adopt a position where it seeks to affirm some transactions executed via Anita whilst at the same time disowning other transactions executed via her.

133.  He relies on the well-known principle that a principal of an agent must act consistently; he cannot approbate and reprobate at the same time, and he must adopt entirely or repudiate entirely.

134.  However, I do not think that submission really arises on the facts of this case.  Leaving aside the question as to whether or not Henry was simply content to leave the entire operation of the Cash Account and the Margin Account to Anita (which is a separate point to which I shall return), it must first be noted that Anita was not appointed by Henry as an ‘authorized person’ to operate the accounts.  That part of the relevant forms was struck out, with no person so appointed.

135.  It is obviously incorrect to assume that merely because Anita was the account executive, that somehow constituted her an ‘authorized person’.  Every client would have to deal with some member of staff of EAA, and in those dealings that staff member would represent EAA, not the client.  It cannot sensibly be suggested that because the account executive was the person who operated a client’s account at EAA, that somehow authorized the account executive to pick and choose what stocks to buy or sell and when.  Mr Lau fairly accepted this point.

136.  That Henry did not contact any other account executive does not seem to me to advance EAA’s case either.  Anita was his account executive, and for the relatively limited activity that he actually authorized. It would have been odd if he had contacted another executive.

137.  Nor do I think that, when Anita accepted in cross-examination that Henry trusted her absolutely with handling his account, that was an acceptance that she was constituted his agent or authorized person.  She was simply saying he trusted her, not that he had somehow authorized her to do whatever she wanted with his account.  Trust amongst family cannot be easily assumed to give rise to reckless reliance.  Indeed, Anita’s own evidence elsewhere was that she abused that trust, and she knew that many of the trades were clearly not authorized and she went to considerable lengths to keep them from Henry (so that, as she put it, everything would not ‘burst’).

138.  In other words, subject perhaps only to the separate point I have already mentioned, Henry had no agent in his dealings with EAA.  He did his dealing himself.  He therefore can and does say from his own knowledge what was authorized and what was not.

139.  Indeed, in any event, if Anita knew that any individual securities transaction had not been authorized by Henry, I do not think it would be a breach of any principle requiring consistent action for the Estate now to say (repeating Henry’s own evidence) that some of the transactions were authorized and most were not.

140.  The separate point arises on Mr Kwok's invitation to draw the inference, he says as a matter of law, that Henry must be regarded as having ratified and acquiesced to the activities of Anita in connection with the securities accounts.  He points to the relationship of husband and wife; to the fact that the Cheque Proceeds were regularly deposited into the Joint Account from 1999 to 2001; to the manner in which he says Henry effectively entrusted the whole operation and management of the securities account to Anita (including signing documents at her request without question); to the absence of any enquiries about monthly statements; and to the failure to make attempts to recover the portfolio until the counterclaim was made in October 2003, and even though he knew of Anita’s arrest earlier in 2003.

141.  But I consider many of these points to be circular or ‘bootstraps’ points, rather begging the question as to what in fact happened, as opposed to identifying an intention to ratify.  Not least where I do not think it would be open to EAA to rely on any deeming provision about reliance on instructions originating from the client, I do not think Henry's apparent inaction or even silence amounts to evidence from which I should properly infer an intention to ratify.

142.  In any event, I am satisfied on the balance of probabilities that Henry did not know about the unauthorized activity conducted by Anita on his account.  Any silence or inactivity on his part is wholly explained by that lack of knowledge, and by an ordinary assumption – placing trust, both in his spouse and in the proper operation and supervision of the business of the securities brokerage – that there was no reason for alarm, until the contrary facts were specifically brought to his attention by the claim. 

143.  It might be noted that when Henry complained to the SFC, the thrust of his complaint was that EAA had failed to prevent Anita or its other staff from manipulating his account.  When he thought the SFC was informing him that it could take no action in light of the fact that Anita was by then no longer holding an SFC licence, he was understandably perplexed and posed the cogent question as to why if, EAA could not be held responsible for Anita’s actions, EAA could nevertheless still claim against him for the result of those actions.

144.  It follows that I also accept that Henry did not act jointly with Anita.

EAA’s Right to Sell the Securities

145.  Most of the securities in the portfolio now claimed by the Estate had been sold prior to 6 September 2000, which is the date of the last transaction which Henry claimed was authorized by him.  EAA has provided a table which shows the debit balances outstanding on the Cash Account and Margin Account at the time when the various securities now claimed by Henry/Estate were sold by/through EAA.

146.  I accept that for the Cash Account, under the terms of the GTA all debit balances should have been immediately settled by Henry.  If that did not happen, EAA had the right to sell assets held in the account and to utilize them to offset or discharge part or all of the obligations Henry had to EAA.  In fact, provisions to this effect can be found in both the GTA and the Margin Account Agreement.

147.  EAA relies on the posting of the statements as constituting valid demands to Henry.  But this assertion runs into the problem that the statements were intercepted and not received by Henry. 

148.  Further, a more fundamental point seems to me to be that the stocks were not in fact sold in the exercise the EAA’s rights to reduce the indebtedness.  There is no evidence that EAA’s exercise of any contractual entitlement was the aim behind any sale, or any combination of sales.  On the contrary, it seems clear that sales occurred simply because that was what Anita did as part of her unauthorized trading.

149.  EAA’s argument also overlooks the point that the indebtedness, which it says would have entitled it to sell the stock held in the account, was the result of unauthorized trading.  There has not been any suggestion that the trades which Henry identifies as being authorized by him did give rise to, or could have given rise to, any indebtedness triggering an entitlement to sell stock. That is perhaps obvious because Henry paid the full cash price for the stock he says he instructed to be purchased.

150.  In this context (though it is also relevant to a possible defence to Henry’s counterclaim), I can deal with clause 17 of the GTA.  That clause provides that EAA and its officers and employees shall not be liable to the client for any direct, indirect or consequential loss or damage suffered as arises out of the agreement, unless such loss results from EAA’s fraud, negligence or wilful default.

151.  Leaving aside the fact that unauthorized dealing leading to loss might be regarded as a form of fraud, there can be little doubt that there was at least negligence.  Indeed, Mr Lau fairly accepted in cross-examination that it was negligent of the then managing director Mr Wu to have allowed a situation where the accounts were manipulated, where statements were dealt with in a way which was detrimental to clients, and where Anita was permitted to use clients’ accounts for other purposes.  Of course, there was also the reprimand by the SFC of EAA and Mr Wu.

Decision on EAA’s Primary Claim

152.  I therefore dismiss EAA’s primary claim.

The Cheque Proceeds

153.  I have already rejected the submission that the Cheque proceeds are direct evidence that show Henry had knowledge of the trading being carried out in his securities account.  Whilst I accept on balance that the 40 Cheques were paid into the Joint Account, for reasons already given I do not think Henry would likely have seen them or that they would have come to his attention.

154.  Mr Kwok makes some play of the fact that the bank statements for the Joint Account have not been produced as disclosure in these proceedings.  He says that they should have been produced, not least when a request was made to Henry for them as far back as April 2004.  The request, and the response, is to be found in an exchange of solicitors’ correspondence in April and May 2004.  In their response, the solicitors for Henry identified that he had asked Anita for the bank statements, but she had rejected the demand, saying that the disclosure of the bank statements of the Joint Account would jeopardise her in relation to the ongoing criminal investigation being conducted by the CCB.

155.  I accept the submission that the bank statements of the Joint Account would have been discoverable as relevant.  It is, therefore, somewhat surprising that the response in May 2004 was apparently accepted by the solicitors for EAA, because no further discovery request was repeated until June 2009.  I would have thought that the point might have been made five years earlier that, as the Joint Account is a joint account, it was be open to Henry to have obtained the statements from the bank himself. Alternatively, the statements might have been obtained direct from the bank under, for example, a banker's books order.

156.  By the time the request for discovery of the bank statements was repeated in June 2009, it seems that they were no longer available, either from Anita or the bank.  Anita later made a Declaration to state that the Joint Account was cancelled or closed in around mid-2003, and although she had previously kept the monthly statements, they were thrown away at some point when she moved to live with her mother after Henry passed away. In this context, I note that Henry had passed away in September 2004, and that Anita was not a party to any proceedings in which she might be required to give any disclosure at all until at least late December 2009.

157.  EAA asserts that if the trading was unauthorized, Anita would have acted in breach of her fiduciary duties owed to EAA, so that it suffered damages including the roughly $27 million of bad debts which it wrote off.

158.  I have struggled with why EAA would have suffered any loss from the unauthorized trading.  If stock was purchased in the market and then sold at a profit, the profit would not ordinarily represent a loss to the brokerage house through which the trading was effected.  Indeed, EAA would actually have made money on the transaction by taking a commission on both the purchase and the sale.

159.  Of course, I accept that if stock was purchased in the market and then sold at a loss, that loss would be recorded in the account of the relevant client whose account was used and that would give rise on its face to a liability on the part of the client to make good the loss to EAA. 

160.  But, the written off $27 million is not the subject of the claim in this action.  Further, insofar as clients of Anita were left in debit balance, she was required to give guarantees to cover that indebtedness, she did in fact make some payments to cover her clients’ indebtedness, and her final salary and provident fund payments were withheld as further contribution to that indebtedness.  Also, some (albeit an unidentified amount) of the indebtedness was recovered direct from the clients.

161.  As I see it, therefore, the indebtedness created by Anita’s activities in individual client accounts has already been settled by the clients or by her, or it is now far too late for that to be pursued against her.  Anyway, as I say, that is not the subject of the claim.  Rather, EAA now pursues the return of the Cheque Proceeds on the 40 Cheques.  That is a different thing, and insofar as it might be said to overlap in some way, that overlap has not been identified.

162.  Just as fundamentally, if EAA's claim relies upon in effect undoing the result of the unauthorized trades conducted by Anita, it ought to give credit for the commissions that it ‘earned’ on those unauthorized trades.  EAA cannot itself keep the commission and at the same time ask for all of the loss it says resulted from the trades on which it earned that commission.  I think Mr Kwok accepted this point.  No attempt has been made in the evidence to calculate that commission.

163.  I note that though in her closing submissions Anita estimated the commission might exceed $30 million, no basis for that figure in the evidence was identified.  Mr Kwok said that the $27.3 million that EAA wrote off would dwarf the commission earned, but that was also not really made good evidentially.

164.  What can be estimated is the commission that was earned on transactions on Henry’s account alone.  By reference to Mr Kwok’s useful summary chart – which I have touched on above – the total dollars worth of buy and sell transactions from 1997 to 2002 was $522,701,000.  At $25 for every $10,000 transacted, the commission on this would have been $1,306,750, the lion’s share of which was from unauthorized trading.

165.  There is also some evidence that monies were being paid into EAA by Anita for the benefit of the Cash Account or Margin account.  Whilst it may be right that EAA has only been able to establish one cheque for $75,000 coming directly from the Joint Account back into EAA’s bank account, I do not think the evidence is sufficiently full to find or to assume that was the only sum coming from that account – and Anita said that was unlikely.  Anyway, the Cash and Margin Account statements do show a number of cheque deposits, and insofar as the claim is pursued against Anita it does not seem to me to matter that she may have deposited cheques drawn on accounts other than the Joint Account; money in is money in, and account ought to be taken of it.

166.  A full accounting to and fro would be required, but this has not been attempted – perhaps because, despite the years since the claim was made, the focus has been elsewhere.

167.  I take into account that when any of the 40 Cheques was issued, staff within EAA other than Anita were satisfied, or acted in a way which is only consistent with being satisfied, that the cheques were properly payable.

168.  It seems to me therefore to be impossible for EAA to prove any loss against Anita that it actually suffered and as actually arose from her unauthorized trading on Henry’s account.  I would dismiss EAA’s claim against Anita on the 40 Cheques.

169.  If it were necessary, I would also dismiss that claim against Anita on the limitation problem (on the assumption that the claim as to breach of fiduciary duties giving rise to an alleged trust is one which is nevertheless subject to a 6-year limitation period).

The Limitation Issue

170.  Insofar as the claim on the 40 Cheques is pursued against Henry, a limitation defence has been expressly raised.  The Estate says that the cut-off date for limitation purposes should be at latest when Henry filed his counterclaim on 11 October 2003, so that the writ on 22 December 2009 was out of time.

171.  In response, EAA says that the counterclaim dealt only with the position post-15 August 2000, whereas most of the 40 Cheques were paid to the Joint Account before that date.  It is therefore argued that it was unclear what Henry's position was in relation to transactions before that date, so that the natural cut-off date should be April 2005 when Anita first filed her witness statement claiming all responsibility for all transactions on the account.

172.  I disagree.  It seems to me that the counterclaim sufficiently set out Henry's position in relation to the totality of the trading which he said was unauthorized.  In any event, EAA had been conducting its own internal investigation into Anita's portfolio of accounts since sometime in 2001, and had been specifically put on notice about significant issues relating to her by Mr Fung's complaint in November 2002.  That was the time when EAA expressly suspected various irregularities including potential misappropriation and falsification of documents, which prompted the report to the regulator and the police.

173.  I would also note that for its limitation point EAA relies on section 26 of the Limitation Ordinance.  I agree with Mr Wong’s submission that EAA has not shown which fact relevant to its right of action against Henry was deliberately concealed from it by Henry.

174.  Further, stepping back from the detail, it seems to me that the limitation question is something of a red herring.  If the loss to EAA said to flow from the issuing of the 40 Cheques arose from the unauthorized trading by Anita, plainly it did not arise from any activity on the part of Henry for which he could be held liable (apart from possible knowing receipt, as to which see below).

175.  The real point is not one of a claim against Henry, but rather of a defence or set-off against Henry’s counterclaim.  EAA would say that if Henry has a good counterclaim to his lost portfolio, he should give credit for the benefit he received from the activity which led to that loss.

176.  But on the basis of my earlier findings, I am not satisfied Henry received any such benefit.  First, I have found that he did not know of the deposits of the 40 Cheques.  Secondly, I do not think there is any proper evidence from which it is safe to draw the inference on the balance of probabilities that Henry received monies from the proceeds of the cheques. 

177.  Mr Kwok provided a schedule which sought to draw a chronological link between the dates of some of the 40 Cheques and the same or similar dates of (usually rather smaller) cash deposits paid into the 888 Account.  He presumably did so in recognition of the fact the merely showing the money’s arrival in an account held in Anita’s and Henry’s joint names might not be sufficient to show Henry received the money.

178.  But there may be other explanations for the cash deposits seen in Henry’s 888 Account, such as those offered by Anita that cash was generated from his businesses (one of which at least was continued even after he retired).  There were also other cash deposits shown on the 888 Account statements that are not chronologically close to the dates of the 40 Cheques.

179.  This is also an aspect where it would logically be necessary to take account of the impact of the commission earned on the trades which allowed the 40 Cheques to be drawn, and to take account of monies paid into EAA in the overall course of the unauthorized dealing.

180.  Mr Wong took a point on the pleadings, namely that EAA’s alternative claim is based on the contract of the Margin Account, but only 4 of the 40 Cheques were issued after the Margin Account came into being on 15 August 2000.  So he says EAA cannot claim for pre-margin agreement loss on the face of the pleadings.  I confess I do not really understand the argument, as the point for EAA is simply that Henry has received benefits for which he should account, but on my other analysis it does not matter.

181.  On Mr Wong’s evidential point, namely that EAA has not been able to produce copies of all the 40 Cheques, and has produced none of the 4 that were issued after 15 August 2000, I nevertheless find on the balance of probabilities from the surrounding circumstances that all 40 Cheques were deposited into the Joint Account.

Knowing Receipt

182.  There has been some recent judicial exploration of the requisite state of mind of a recipient in knowing receipt: see Thanakharn Kasokorn Thai Chamkat v. Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 at [134]-[137].  Following the test laid down in Bank of Credit and Commerce International (Overseas) Ltd v. Akindele [2001] 437 at 455, Lord Neuberger identified that the question is whether the state of mind of the person receiving the relevant asset was such that it would be unconscionable for him to have retained it.  As he put it:

"If the recipient's reliance on the alleged agent's apparent authority, when accepting the asset from the alleged agent on behalf of the principal, was dishonest or irrational, it seems to me that it would be unconscionable for the recipient to retain the asset against the wishes of the principal, or, to put it another way, the recipient would have the relevant "actual knowledge (or the equivalent)" [a reference to a passage in Akindele at 452C]. On the other hand, if the reliance was merely negligent, then I doubt that the unconscionability test would, at least normally, be satisfied – at best it would amount to "constructive knowledge".

183.  Hence, Mr Kwok accepted that if Henry was merely negligent in not checking the Joint Account statements, then the court could hold that he did not have requisite knowledge or knowing receipt. But if he knew the Cheque Proceeds arose from the unauthorized transactions, or simply if he knew that the deposits came from EAA and could not have been from legitimate trading so that it would have been either dishonest or irrational for him not to have made enquiries about them, that would meet the requisite test for unconscionability for knowing receipt.

184.  The knowing receipt point must fail on my previous findings.  Even if it be right, as Mr Kwok submits, that receipt of the Cheque Proceeds into the Joint Account must be taken as receipt by Henry, he did not have requisite knowledge that the receipts are traceable to a breach of fiduciary duty.  In my view, he did not have actual knowledge (or the equivalent) and at worst he can be said to have been negligent in not monitoring the Joint Account. As it has been put elsewhere, it is difficult to see how the conscience of a recipient can be affected if he is ignorant of the facts that are alleged to affect his conscience.

185.  Further, in the absence of any clear evidence which can satisfy me on the balance of probabilities that the Cheque Proceeds were then passed on in part to Henry via his own 888 Account, that also points away from it being unconscionable not to require him to give credit for the sums of the Cheque Proceeds.  I accept Anita’s evidence that these monies were essentially used for her own purposes, including on occasions being recycled into EAA to pay down the debt on various clients' accounts.

Decision on EAA’s Alternative Claims

186.  I therefore dismiss EAA’s alternative claims as against both Anita and Henry.

Anita’s Counterclaims

187.  I accept Mr Kwok’s submission that Anita’s counterclaims are not substantiated.  First, there is some force in the point pleaded for EAA that the very basis of the counterclaims is unclear. 

188.  But in any event, the counterclaim essentially comes back to the letters of guarantee signed by Anita.  Although she claims she signed them involuntarily, perhaps more accurately ‘reluctantly’, she has not pleaded any vitiating factors as would render the guarantees void or unenforceable.  The same points apply to the term loan.

189.  Further, even in her short written closing submissions, Anita expressed remorse for her activities which caused some loss and for which she has tried to effect repayment or client indebtedness.

190.  Lastly, I agree with Mr Kwok that Anita’s counterclaim suffers limitation problems too.  Her complaints relate to matters going back to at the time and before she ceased employment at EAA in May 2002. On what she says now, she must have known she had a claim then.  I appreciate she has spent some part of the following years with other things on her mind, and for a time in custody, but that cannot change the position. 

191.  I would dismiss Anita’s counterclaims.

Henry’s Counterclaim

192.  I can conveniently deal first with the defence of equitable set-off raised against Henry’s counterclaim for his lost portfolio.

193.  Mr Kwok has referred me to the law on the defence of equitable set-off.  For such a defence, it was formerly said that there needs to be shown two things: the cross-claim must arise out of the same transaction as the claim or be closely related to it; and the relationship between the respective claims must be such that it would be manifestly unjust to allow one claim to be enforced without regard to the other: see Federal Commerce & Navigation Co Ltd v. Molena Alpha Inc [1978] 1 QB 927, at 973-975.

194.  Traditionally this has been expressed in terms that in the absence of some other equitable ground for being protected, the claims must be connected such that the title to sue is impeached. 

195.  But as the concept of impeachment is not a familiar one today, it is sometimes now put that an equitable set-off may occur if there is a cross-claim flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim.  This has led to suggestions that the impeachment of title test should no longer be used: see, for example, Geldof Metaalconstructie NV v. Simon Carves Ltd [2010] EWCA Civ 667, at [43].  The point is to ask what should be done so as to ensure fair dealing between the parties, though this does not give rise merely to some subjective discretionary exercise.

196.  For the reasons I have already given above, I do not think fair dealing between EAA and Henry requires Henry to give credit or to set-off the Cheques Proceeds against any good counterclaim he might have. To put it another way, if he has lost his portfolio as a result of EAA’s acts or omissions as he claims, I do not think it would be unconscionable or manifestly unjust to permit him to recover his full loss without having to give credit for sums which he did not knowingly receive, and from which he probably did not in fact benefit at all, and which sums might be said to have arisen for consideration at all only out of the failures as would found a good counterclaim.

197.  The counterclaim is based upon alleged breaches of the terms of the CCA, GTA and Margin Client’s Account.  The breaches alleged are in the failure to have kept the shares safe, the parting with possession of them, and selling them without instructions, thereby allowing the shares to be lost or diminished.

198.  I have already decided that EAA cannot rely on terms of the contractual documents as to any reasonable belief that it acted on Henry’s instructions, or that would have justified its power of sale, or that would have limited its liability.  I have decided, as Mr Lau accepted and the SFC and SEHK censures show, that the loss was the result of the at least negligent failure to have supervised Anita and to have exercised proper controls.  I have also already decided that there was no demand made to Henry as the statements by which such a demand would have been made were either not sent to him or intercepted before he could receive them.

199.  I am therefore satisfied that Henry’s counterclaim should succeed.

200.  The original claim to delivery up of the shares has obviously been dropped as the shares were sold.  Instead, the Estate pursues damages to be assessed. 

201.  As to the assessment, a key question is to the date by reference to which there should be the calculation of damages.  Mr Wong submits that despite the usual starting point that damages should be assessed as at the date of the breach, this is a case in which the damages should be calculated as at the date of the trial.

202.  He relies on the evidence of Alice that, from her point of view at least, there would have been no intention to sell the shares, and she would have held them for the dividend income.  He also says that the Estate would not have been able to mitigate loss by buying in replacement shares, because the Estate had no cash and would unlikely have been able to arrange a loan against its only real property, being the property at the Starview address.  Further, he points out that if the damages are assessed as at the date of breach, the Estate would not likely be able to acquire a replacement portion of shares now at an assessment value of more than 10 years ago.

203.  Mr Kwok says that the usual date of breach would be apt for any assessment, and that in any event the date for assessment should not be after September 2013, when the first listed trial of these proceedings was aborted because of the Estate’s making an application to amend its pleadings (and though the Court of Appeal changed a costs ruling made by the Judge below, it did not disturb his ruling on the amendments, some of which he allowed and some he denied).

204.  First, I should say I agree with Mr Kwok that September 2013 would be the latest possible date.  But in the overall circumstances, and on balance, I also agree that a much earlier date is the correct date for assessment.

205.  At the end of closing submissions I asked the parties to give me an agreed Schedule of figures being the sale or market values of the shares which should have remained in Henry’s account, by reference to various different dates.  The Schedule has also taken into account the fact that some of the shares in question have been consolidated into differing numbers of shares over the period since 2000.  Without needing to set out the precise details, the relevant shareholdings were in PCCW (stock code 8), CCT Land (261), South Sea Petro (76), China Unicom (762) and HKEX (388).

206.  The Schedule shows the sale price or market value (rounding odd cents) as follows.  The huge disparity and fluctuation in these figures is clearly the result of the snapshots of value being taken over very long period of time.

Date	Sold for / market value at that date
August 2000 (ie. when sold in breach)	$3,286,511
8 July 2003 (ie. date of writ)	$1,007,597
12 September 2013 (ie. date of aborted trial)	$7,032,827
8 June 2017 (ie date of end of trial)	$10,944,938

207.  In deciding what I think is the correct date for calculation, and whether I should depart from the usual starting point that it should be the date of breach, I have taken into account and balanced the following factors:

a.   what Henry himself might or might not have done with the shares during his retirement, for example whether he would have realised them or some of them to fund his retirement living, seems entirely speculative;

b.   individuals choose at any given time to hold or sell shares for a variety of different reasons, or by balancing numerous different reasons, including eg. a desire for dividend income; to lock in any increase in capital value; to crystallize any loss, or to minimize loss on a lower or depreciating capital value; to change to other shares or to different forms of asset; or as part of the management of overall financial affairs;

c.   those decision are wholly dependent on subjective decisions made against whatever are the prevailing circumstances and by reference to views taken as to those circumstances and the future from that point;

d.   it is therefore difficult to make any safe assumption as to what any individual, in this case either Henry or Alice, might have done over such a lengthy period of time;

e.   had the shares or any part of them been sold, it is entirely speculative as to what would have happened to the proceeds, which might have been spent or used to buy another asset which itself might have fluctuated in value;

f.   the value of the portfolio at the time that it was sold in 2000 was significantly higher than the value would have been had it been retained until the time the proceedings were commenced in 2003, or likely even when the letters before action were sent;

g.   if mitigation had been performed in 2003, that might have been possible at that lower price/value;

h.   the value of the portfolio overall has continued to fluctuate since the time the proceedings were commenced and has increased significantly over a significant period of time;

i.   there has been a significant increase in the value of one of the stocks (HKEX), wholly out of line with the change in value of the other stock held;

j.   every other stock in the portfolio is worth less at the time of this trial than it was at the time it was in fact sold;

k.   that the Estate may not have been able to mitigate loss because of a perceived difficulty in borrowing against the Starview property is a matter over which EAA could have had no influence;

l.   had EAA replaced the portfolio at the time the counterclaim was raised, not long after the commencement of these proceedings, it could have done so at less than the prices realised when the shares were in fact sold;

m.   the shares were sold and in part were used to settle debt which Henry had not generated.

208.  In the circumstances, it seems to me that there is no good reason to depart much if at all from the date of breach as the relevant date for the assessment of value of the counterclaim.  Therefore, I assess the damages at $3,286,511 and give judgment on Henry’s/the Estate’s counterclaim in this sum.

Interest

209.  There is a claim to interest.  In the exercise of my discretion it seems to me that the appropriate rate of pre-judgment interest would be simple interest at 5% per annum, over a period beginning from 11 October 2003 (date of the counterclaim).

210.  I do not think it would be fair or appropriate to allow interest for the whole of the period since then.  Whilst some of the blame may be said to rest fairly and squarely with EAA, these proceedings have dragged on for too long and at least the time since the aborted trial is essentially wholly the result of the Estate in acting so as to cause that trial to be aborted.  I also take into account the significant other periods during the slow progress from 2003 to this trial.

211.  Doing the best I can in the circumstances, I think it would be apt to allow interest to accrue for a period of 6 years. That would be interest of $985,953, giving a total judgment sum of $4,272,464.

Third Party Claim

212.  No formal defence was filed in response to the Third Party Claim against Anita.  No particular point on that was taken by Mr Kwok, and I think it fair to work on the basis that Anita would rely on the other matters she has already raised.

213.  As stated above the claim is brought to seek an indemnity against whatever sum might be awarded to Henry on his counterclaim, and the indemnity is sought on two bases.  One is the breach of fiduciary duty by Anita, and the other is on the letter of guarantee.

214.  As I have found that any breaches of fiduciary duty owed by Anita to EAA were either acquiesced in or negligently facilitated by the senior staff of EAA, it would seem to me to be inappropriate to permit EAA to square the circle by granting it an indemnity on its third party claim.

215.  As regards the claim on the letter of guarantee, I think that is infected by the same problem.  On its face, the guarantee was given in consideration of making or continuing to make advances or otherwise giving credit or affording credit and general finance and borrowing facilities to Henry.  But, on my findings there was no such facility actually provided as Henry only conducted shares purchases by paying cash.  Even if he is bound by the terms of the Margin Agreement, he has not in fact sought any credit.  In essence, EAA is liable to Henry / the Estate, not because it granted any credit facility, but because it sold his share portfolio.

216.  Further, though I have already expressed my doubts about the factual correctness of the assertion, it is EAA's assertion that it sold Henry's share portfolio so as to settle debt on the account.  But I have already found that any such debt was not properly incurred, and so any such sale could not properly have occurred.

217.  I dismiss the third party claim.

Costs

218.  On the basis of my findings above, I consider that costs should be dealt with as follows.  However, I shall make a costs order nisi in the first instance.  The order will become absolute if no party seeks to vary it within 14 days.  Should any party seek to vary it, that party (or, if more than one, those parties) should write to the Court within that 14 days identifying the precise order it says (or they say) should be made instead. I will then give directions as to any argument on costs, which may include dealing with it by written submission only.

219.  The costs order nisi is:

a.   As between EAA and Anita, there shall be no order as to costs.

b.   As between EAA and Henry / the Estate, EAA shall pay the costs of Henry / the Estate in both consolidated actions, to be taxed if not agreed on the (standard) party and party basis.

Postscript

220.  I should add that I am grateful to the parties for the way in which the trial was conducted.  The evidence was concluded well within 4 days, and the oral submissions to supplement the written materials provided were over in less than a morning.  The focus and economy with which the trial itself was conducted was a marked and somewhat refreshing contrast to the way in which the proceedings had come to the trial.