SHEK MEI LING AND OTHERS v. THE INSIDER DEALING TRIBUNAL

Civil Appeal No. 41 of 1998

Headnote

Appeal against financial orders imposed by Insider Dealing Tribunal.

Whether profits were gained as a result of the insider dealing.

Section 23 of the Securities (Insider Dealing) Ordinance, Cap. 395 and Securities and Exchange Commission v James E. MacDonald 699 F2d 47 considered.

American approach in s.21(d)(2)(A) of the US Securities Act 1934 adopted by the Insider Dealing Tribunal approved; likewise adoption of applicable principles of sentencing in criminal cases by the Tribunal in imposing financial penalties approved.

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

1998, No. 41
(Civil)

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

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

J U D G M E N T

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

Nazareth, V.-P.:

Introduction

1. This is an appeal by the four appellants against the financial orders, in the nature of fines, made against them by the Insider Dealing Tribunal on 21 January 1998, following findings of insider dealing against each of the four appellants.

The facts

Shek Mei-ling

2. The facts can be outlined in the following way. The 1st appellant ("Shek") was employed by one Ng Kwong-fung ("Ng") in Hong Kong. The exact position in which she was employed is not very clear but she seems to have been some sort of general assistant, who was also allowed to carry out a minor business of her own, buying and selling jade, on the side. In December 1992, she saw a faxed authorisation letter dated 23 December 1992 signed by the Beijing Municipal Treasury Department certifying Ng as its representative for the purpose of looking for a listed company. The fax indicated that the Beijing Municipal People's Government wished to take over a Hong Kong listed company, although at that stage no company had been identified and no name was mentioned in the fax. Later, from telephone conversations she overheard, a visit by Ng to Beijing at the end of April 1993, and particularly a telephone conversation between Ng and one of the Beijing parties on 6 May 1993 when she overheard the name "Hong Kong Worsted Mills" ("Worsted"), she was able to draw the inference that Worsted was the company that her boss and his Beijing venture partners were targeting.

3. On the same day, 6 May 1993, she opened a securities account and began purchasing Worsted shares. Over the period between 6 and 11 May 1993, she bought a total of 100,000 Worsted shares at a cost of HK$408,873.87 (i.e. at an average cost of HK$4.088 per share). She sold them all about a month later on 3 and 4 June for HK$640,619 (at an average of HK$6.40 per share), thus making an average profit of $2.32 per share, totalling $231,745. Significantly this was before the price sensitive information about the take-over was made public by an announcement on 17 June 1993. Immediately prior to the public announcement Worsted shares stood at HK$9.50. On that same day of the announcement trading in Worsted shares was suspended and did not resume until 5 days later on 22 June when they closed at HK$15.10, a rise of HK$5.60.

Tai Lai-wo

4. Shek had come to know the 2nd appellant ("Tai") over the two years preceding her purchase of Worsted shares, while he had business dealings with Ng. Tai was aware quite independently of Shek that Ng and a Chinese party were looking for a Hong Kong company to take over. However, he was unaware of the identity of the target company until he was provided by Shek with the name of Worsted on 11 May. This led him to purchase 523,000 Worsted shares over the next few days at a cost of HK$2,525,237 (i.e. at HK$4.828 per share). He never sold those shares, and has never realised any profit on them. Indeed, some 41/2 years later, as at 28 November 1997, the point in time at which the Tribunal addressed the matter, he had lost over HK$700,000.

Sinyo Wahid Winata Tan

5. The 3rd appellant ("Tan") was an Indonesian citizen. He had also been doing business with Ng prior to Shek's purchase of shares. He came to Hong Kong on 24 May 1993 and two days later Shek gave him the information about Worsted. Between 26 May and 28 May 1993, he bought 26,000 Worsted shares at a cost of HK$1,354,493 (i.e. at an average of HK$5.99 per share). He sold his shares on various dates between 22 June 1993 and 6 June 1994 at an average price of HK$11.15 per share and made a profit of HK$1,167,087.

Cheng Chun-ling

6. The 4th appellant ("Cheng") was a Taiwanese jade and jewelry trader with whom both Shek and Ng had previously done business. Shek gave him the same information about Worsted on 18 May 1993. He too bought Worsted shares, 687,000 of them between 18 and 24 May at an average of HK$5.05 each, totalling HK$3,429,939. He also never sold his shares and has never realised any profit on them. His loss as at 28 November 1997 was over HK$900,000. He had previously heard rumours that Ng was looking to take over a listed company but did not know which until he asked Shek on 17 May 1993 and she told him about Worsted.

Section 23(1), Securities (Insider Dealing) Ordinance, Cap. 395

7. The nature of the sanctions the Insider Dealing Tribunal may impose is provided in s.23 in the following terms:

"(1) At the conclusion of an inquiry or as soon as is reasonably practicable thereafter, where a person has been identified in a determination under section 16(3) or in a written report prepared under section 22(1) as an insider dealer, the Tribunal may in respect of such person make any or all of the following orders-

(a) an order that that person shall not, without the leave of the High Court, be a director or a liquidator or a receiver or manager of the property of a listed company or any other specified company or in any way, whether directly or indirectly, be concerned or take part in the management of a listed company or any other specified company for such period (not exceeding 5 years) as may be specified in the order;

(b) an order that that person pay to the Government an amount not exceeding the amount of any profit gained or loss avoided by that person as a result of the insider dealing;

(c) an order imposing on that person a penalty of an amount not exceeding 3 times the amount of any profit gained or loss avoided by any person as a result of the insider dealing."

The orders imposed by the Tribunal

8. The Tribunal under paragraph (a) made disqualification orders against all four appellants for three years in respect of Shek and two years in respect of the others. As will become clearer later, none of the appellants are likely to be considered for the positions for which they were disqualified and the disqualification cannot be regarded as other than a formality that has no real effect upon them. They do not appeal against such orders.

9. Under paragraphs (b) and (c) of s.23(1) the Tribunal ordered the four appellants to pay the following amounts:

	Under s23(1)(b) ($)	Under s23(1)(c) ($)
Shek	600,000	1,200,000
Tai	3,000,000	2,000,000
Tan	1,500,000	1,000,000
Cheng	3,900,000	2,600,000

The appeals

10. As I have said, the appellants do not appeal against the disqualification orders under s.23(1)(a). But all of them appeal against the financial orders made under s.23(1)(b) and (c), seeking to have them reduced on grounds that broadly fall within the following two heads:

(1) That the Tribunal erred in its method of calculation of amounts of profits gained; and

(2) That the financial orders made were excessive and do not sufficiently take into account mitigating factors.

Outline of Tribunal's approach to assessment of profits

11. It is helpful to outline the nature of the method the Tribunal used to assess the profits gained by the appellants as a result of their insider dealing. It is apparent from s.23(1) that the financial orders that can be made under paragraphs (b) and (c) are limited in each case by reference to "the amount of profit gained ... by that person as a result of the insider dealing". The amount of profit gained has, therefore, to be determined. Although that is not expressly stated, it was assumed before us and seems to me to be plain that the Tribunal did so by adopting the approach taken in the three previous Insider Dealing Tribunal Inquiries in Hong Kong in which we were told s.23(1)(b) and (c) first came to be applied. These were the Inquiries into dealings in the shares of Success Holdings Limited ("Success"), Public International Investments Limited ("PIIL"), and Hong Kong Parkview Group Limited ("Parkview"), held in that order and in the last of which, as here, Burrell J presided. In particular there is in the Parkview Report a significant reference at p.87 of the PIIL Report and to the American definition which includes the words "the value of that security as measured by the trading price of the security a reasonable period after public dissemination of the non-public information". I shall come to that definition shortly. What the Tribunal said was this:

"In this Inquiry some of those persons who have been identified as insider dealers never sold the shares which were the subject of the insider dealing and therefore still hold them and thus have not realised any actual financial profit. Of the others who did sell, some sold before the relevant information became public, some sold after, some sold all their shares, others sold only some of them.

In other words each insider dealer's situation is different and we have heard and considered a variety of different submissions and proposals as to how each insider dealer's 'profit' if any, should be calculated.

We are in no doubt that the same method should be adopted in each case regardless of whether or not the shares had actually been disposed of, regardless of when they were disposed and regardless of the price actually recovered at the time of sale.

In order to calculate the profit gained we subtract the price paid for a share from its value a short time after the relevant information became public and multiply that figure by the number of shares purchased. The 'short time after' is the time it takes for the public information to become disseminated and the share value re-rated. this is usually a matter of a few days. The simplest and fairest way of doing this is to take an average of the closing prices of the share over a number of days after the announcement. This method is fair provided there is no new information in the market place during the relevant period which might further affect its value."

It should be noted that the "short time after" is also referred to as "a reasonable time" and "the gestation period".

Appellant's case on assessment of profits

12. Mr Adrian Huggins, SC, who, with Mr Alfred Chan appeared for the appellants, concentrated his submissions upon what he said were four principal errors made by the Tribunal in the assessment of profits under s.23 which can be stated in the following way:

(1) The Tribunal erred in its approach to the meaning of the phrase "as a result of insider dealing" in s.23, which requires the offenders' own insider dealing to be a causa causans of the profit;

(2) The Tribunal erred in its approach to s.23 in failing to take account of the different functions of sub-paragraphs (b) and (c) of s.23(1), the first being remedial and restitutionary, and the second punitive and deterrent. In particular it erred in applying a concept of a "notional" rather than "actual profit" in relation to sub-paragraph (b) when such a concept may only be applied in relation to sub-paragraph (c). This tainted the Tribunal's approach to all four appellants and resulted in a double penalty.

(3) The Tribunal erred in requiring Tai and Cheng to disgorge profits under s.23(1)(b) which they had not made (they having on the contrary incurred losses). One cannot disgorge what one has not swallowed. One cannot make restitution of that which one has not received. This tainted the orders under s.23(1)(b) in relation to all four appellants.

(4) The Tribunal erred in assessing profits by reference to rises in the price of Worsted shares after 22 June when the public had already ample time (5 days) between 17 June and 22 June to absorb the public announcement made on 17 June. This tainted the assessment of profits in relation to all four appellants.

13. Mr Huggins's submissions were directed to showing that the way in which the Tribunal assessed the gains they held the appellants to have made are in some respects defective and cannot be sustained. He submitted that the assessment was made upon the basis of the test in the US case in Securities and Exchange Commission v James E. MacDonald 699 F2d 47 ("the MacDonald test") and yet did not follow that test correctly.

The MacDonald test

14. In addressing Mr Huggins's submissions, it is not necessary to examine the MacDonald test in any great detail, for, as will be seen, it has a limited impact upon this appeal.

15. In MacDonald, as helpfully explained in the Success Report, the defendant was trustee of an investment trust, the stock of which was traded on the American Stock Exchange. Shortly before publication of favourable price sensitive information, the defendant purchased shares in the trust. He did so without disclosing certain material insider information learned in his capacity as chairman of the trustees in violation of the US Securities Exchange Act 1934. A day later, the trust issued a press release of the good news, and the price of the stock increased dramatically. The defendant retained the stock for over a year at which point the stock was selling at almost double the price it had reached shortly after publication. The question was whether a corporate officer should in such circumstances be required to disgorge the entire profits realised upon his ultimate sale (about a year later), rather than an amount representing the value of the shares at a reasonable time after the dissemination of the price sensitive information.

16. The District Court ordered the defendant to disgorge for restitution to defrauded shareholders the entire profits that he had made. The 5th Circuit Appeals Court allowed his appeal against that order, excluding the profits gained after a reasonable time had expired following the discovery of the truth by sellers of shares. The following passages in their judgment were highlighted in both the Success and PIIL Reports, in the latter as being the essence of the decision:

"9.2.6 It was decided (see 699 F 2d 47 at pp 54 and 55) that the 'point of his full gain ... [was] a reasonable time after the undisclosed information has become public ...' and that 'any consequence of a subsequent decision, be it to sell or to retain stock, is not usually related to the fraud.' Since there was in the case 'no evidence of other material events during the period in question,' it was said that the market itself may be the best indicator of how long it took for the investing public to learn of, and react to. the disclosed facts ...

'... in determining what was a reasonable time after the inside information had been generally disseminated, the court should consider the volume and price at which [the] shares were traded following disclosure, in so far as they suggested the date by which the news had been fully digested and acted upon by investors'. So the approach taken was to ascertain the profit 'accrued from the rise in price caused by the disclosure'. That was an echo of the approach by the District Court, where it was said that 'the gain is determined by how much "paper" profit accrued between the acquisition dates and the conclusion of 'the gestation period'".

17. The Appeals Court was addressing the question already identified, i.e. the determination of "a reasonable time", and not the larger question of the assessment of profits in the context of which it arises to determine the end of the period of accrual of profits that result from the fraudulent act in MacDonald, or the insider dealing here. The assessment of profits (apart perhaps from the limited question in MacDonald) seems to have already had a recognised basis, i.e. that which was applied in MacDonald and reflected in the statutory provision subsequently enacted in 1984 as s.21(d)(2)(A) of the US Securities Exchange Act 1934 (and referred to in the Success Report as "the American approach").

18. The latter matter is not of particular concern in this appeal as Mr Huggins has made it clear that he accepts that "the MacDonald approach was correct in relation to the issue as to what profits were the result of the offenders' insider dealing".

The American approach

19. Section 21(d)(2)(A) of the Securities Exchange Act 1934 in providing the courts with power to impose a civil penalty not exceeding three times the profit gained as a result of the unlawful purchase or sale which constitutes the insider dealing states that:

"For the purposes of this paragraph 'profit gained' or 'loss avoided' is the difference between the purchase or sale price of the security and the value of the security as measured by the trading price of the security a reasonable period after public dissemination of the non-public information."

20. The American approach was adopted in the following passages in the PIIL Report at paragraphs 22.6.1 and 22.6.2 :

"22.6.1 ... what section 23 specifically requires is an assessment of profit gained as a result of the insider dealing. It is the act of insider dealing that is prohibited, and it is the profit which results from that act which is the target. That too is the scheme of the power of disgorgement provided by the 1984 Act in the United States: the basis of the penalty to which the court is enjoined to look is the profit 'gained as a result of such unlawful purchase or sale,' where 'such unlawful purchase or sale' means the purchase or sale of a security 'while in possession of material non-public information'. The test is whether the profit is attributable to the unlawful transaction, and not whether it is attributable to the use of a particular item of information the receipt of which has induced that transaction. Not only is there no reference to such a limitation, but the Act itself defines the profit gained as 'the difference between the purchase and sale price of the security and the value of that security as measured by the trading price of the security a reasonable period after public dissemination of the non-public information'. That is the long and the short of it; and it allows for no whittling down on the basis urged upon us in this Inquiry.

22.6.2 In the context of Hong Kong's statutory framework, the act of insider dealing is constituted by the act of dealing or of counselling or procuring a deal whilst in possession of relevant information. What is prohibited is the transaction, or the encouragement of a transaction, or the passing of information in contemplation of a transaction, and it is to those acts that the penalty is directed. ... the effect of [the] submission is that he should be penalised only in respect of that part of his transaction which was unlawful, namely, that part which was motivated by information not already in the public domain. There is no such concept. There was but one transaction, and the entire transaction was unlawful, even if part of the motivation was hope of a profit arising from factors other than the information yet unreleased to the investing public. The profit gained ... was the profit gained as a result of his transaction ... which transaction was an act of insider dealing. The whole profit was gained as a result of that act of insider dealing."

21. Given Mr Huggins's acceptance of the MacDonald test and that it embraced assessment of profits upon the basis incorporated in the American approach, I do not find it necessary to say more than that I accept the foregoing adoption of the American approach and the reasons therefor.

22. That overview of the MacDonald test, the American approach, and the adoption by the Tribunal of the latter as accurately reflecting the effect of s.23(1)(b) and (c) suffices for the purpose of enabling Mr Huggins's submissions to be placed in context and addressed.

Consideration of submissions on assessment of profits

Ground 1 - causa causans

23. The thrust of Mr Huggins's submission here is that profits that accrued before the 17th June, the date of the announcement, were not considered in MacDonald, that the MacDonald test does not apply to them, and thus that they could not have been "as a result of the insider dealing" on the part of the appellants, but rather to the rise in the value of the shares due to other factors.

"Notional" profits on Shek's shares sold prior to publication

24. It will be recalled that Shek sold her shares well before the publication date. Nonetheless the Tribunal assessed the profit she had made by reference to the value of the shares at the end of the reasonable time deducting from that the purchase price. They referred to the resulting sum as the "notional" profit. Mr Huggins complains that there was in fact no profit made by Shek in respect of the period after she disposed of her shares; also that MacDonald did not apply pre-publication. He might have added that the Tribunal's acceptance of the American approach as accurately reflecting the phrase "gained as a result of insider dealing" was not intended to apply to any pre-publication period after the inside dealer had disposed of his shares. Indeed, in paragraph 9.3.4 of the Success Report, this is what the Tribunal said:

"None of the cases or commentaries devoted to insider dealing addresses the approach to be adopted to the question of profit when the insider dealer sells before the information has been disseminated, either at a profit or a loss. That is not surprising, for the sale of shares acquired because of insider information will hardly ever take place before the inside information is publicised, and if it does take place prematurely, the sale may well have no profit motive allied to the use of the inside information."

In that respect this is a most unusual case in that Shek admits to insider dealing. On the general basis underlying the American approach, and the reasoning of the Tribunal in paragraphs 22.6.1 and 22.6.2, it is clear that the profits that had accrued to Shek's shares after she purchased them and prior to selling them are profits that have been gained as a result of the insider dealing. There was no supervening event, it may be added.

25. I am satisfied, therefore, that there is nothing in MacDonald, the American approach or the Success and PIIL Reports that would warrant the attribution to Shek of the "notional" profits determined upon the American approach and MacDonald. In my view, the MacDonald test (which, I repeat, was for the determination of the reasonable time after publication) simply does not apply to her circumstances. However, under the relevant reasoning in the PIIL Report, the profits that actually accrued to Shek on the sale of her shares (i.e. $231,745) clearly resulted from her insider dealing.

Different functions of paragraphs (b) and (c) of s.23(1)

26. Mr Huggins submits that the function of paragraph (b) is remedial and restitutionary, and the other punitive and deterrent. Thus he submits that an order under paragraph (b) could only apply to actual profit. The point has now become academic in relation to Shek. As I have already pointed out only the profit that actually accrued to her was profit that resulted from her insider dealing, however, in relation to the other three appellants, it is submitted that the profits that were attributed to them in accordance with the MacDonald test, and assessed by reference to their value at the end of the reasonable time were "notional" and punitive in that ultimately the three appellants actually made no profit at all or significantly less than the amount assessed.

27. The submission is founded upon a misconception of the effect of the MacDonald test. What was stated in MacDonald at p.54 was this:

"When a fraudulent buyer has reached the point of his full gain from the fraud, the market price a reasonable time after the undisclosed information has become public, any consequence of a subsequent decision, be it to sell or to retain the stock, is res inter alios, not causally related to the fraud."

Moreover, as pointed out in paragraph 22.5.1(3) and 22.6.1 of the PIIL Report, subject to any supervening event such as the decision to hold on to the shares after the market has completed its response to the released information would result in further profits being purely new matter. Thus, the profit gained upon the value of the shares at the end of the reasonable time is the actual and not a notional profit. Profits accruing thereafter are not profits that result from the insider dealing. The misleading effect that "notional" seems to have had suggests that it should be avoided. This ground does not avail the latter three appellants.

Ground 3 - profits not made cannot be disgorged

28. This ground, like ground 2, involves a misconception of profit assessed by reference to the end of the reasonable time being notional and not real profits. The profits were in fact made, even if they were not realised. It was the decision of the latter three appellants to hold on to their shares, i.e. as it were, to re-invest. The submission was also made in relation to Shek, but given the conclusion I have already reached, it is academic in relation to her.

Ground 4 - "reasonable time" allowed was excessive

29. Mr Huggins's submission here is that the Tribunal erred in assessing profits by reference to rises in the price of Worsted shares after 22 June, when the public had already had ample time, i.e. five days between 17 June and 22 June, to absorb the public announcement on the 17th. Mr Huggins submitted that in Hong Kong particularly, it should not take more than a day for information to be disseminated and not much more to be digested and reflected in share prices; and that to take the average price between the first trading day after the announcement, i.e. 22 June, and 30 June 1993 embraced much too long a period.

30. The point of the short or reasonable time or the gestation period, as it has been variously referred to, is for the market to absorb the information and fully react to it. The period of time seems to be generally recognised to be short (a fortiori in Hong Kong, it is said), for that is thought to be all that is required; and it should not be longer than necessary because that increases the likelihood of material events or factors distorting the effect of the information. The Tribunal could not have been unaware of those considerations. Moreover, it was well placed to evaluate the evidence and decide what period would be appropriate to ensure that the information had worked its way through, that the market had reacted to it and re-rated the price, that intervening material events did not distort the price, and even to resort to an average price to iron out fluctuations. There is no evidence nor other good reason upon which to fault the Tribunal's determination of the price and the period of gestation or re-rating it took for the purpose. I reject this submission also.

31. It is convenient to mention here the different way in which external factors impinge upon the determination of a reasonable time in the MacDonald test and the assessment of profits gained by the end of that time as a result of the insider dealing. In the former, the object is to ensure that the price sensitive information has been disseminated and has its full effect upon the price of the shares. It is important, therefore, that other causes that affect the price during that period are excluded. These are the "material events" referred to in the passages quoted that are said to be the essence of MacDonald. It is easy to conceive of such material events, e.g. a general rise in the market, other good news and so forth. The position is very different in assessing the profits under the American approach for the purpose of s.23(1)(b) and (c). There all profits accruing to the shares gained are casually linked to the acquisition of the shares in the insider dealing; they result from the insider dealing howsoever they are generated, and by the disclosure of the inside information or otherwise. That situation is only terminated upon the disposal of the shares or the equivalent, termed in the Success Report "a supervening event". The only such event that has come to notice is that of termination of the holding of the shares or its equivalent in the decision to hold (i.e. re-invest) at the conclusion of the reasonable time. It is, I suppose, possible that there could be other supervening events but certainly it is difficult to conceive of any. The practical effect of all this is that the intrusion of material events in the determination of a reasonable time is rather more likely and to be easier to establish than a supervening event.

Per curiam

32. Given Mr Huggins's concession that the MacDonald approach was correct in relation to the issue as what profits were the result of the offenders' insider dealing, there are aspects of the basis of assessing profits approved by the Tribunal that I have not addressed. I do not think it would have been right to have attempted to do so where those matters were not contested. Nonetheless, it seems to me that it would be undoubtedly advantageous to have the basis of assessment sanctioned by statute as was done in the United States notwithstanding a similar situation there albeit with apparently a broader base of judicial support.

Financial orders - whether excessive

General submissions

33. I would mention first that aspects of the submissions made on the appellants' behalf in respect of the method of calculating profits, apply to some extent also here. Thus, Mr Huggins's submission that s.23(1)(b) is remedial and restitutionary and that s.21(1)(c) is punitive and deterrent. That submission does not have to be considered further here, since the point made is obviated by the conclusions I have already expressed that the gains were actual and not notional gains (and in the case of Shek, the smaller amount of $231,745). Upon that conclusion, no part of the financial orders under s.23(1)(b) can be said to be other than disgorgement, i.e. remedial and restitutionary as opposed to the punitive and deterrent, for it was upon the basis that the s.23(1)(b) orders were in excess of the actual profits gained, that the submission in point here was made.

Assessment of financial penalties - general principles

34. In the Success Inquiry Report at pp. 97 and 98, the Tribunal had regard to a number of principles including the following:

"(1) The fact that the insider dealers presented to the SFC investigators a false story does not go in aggravation of the penalties which would otherwise be posed. It is merely that he who admits fraud at the very outset will be credited for that fact.

(2) The effect of admission before the Insider Dealing Tribunal especially at an early stage is a fact which goes in mitigation of the penalty, though in a strong case that will carry less weight than in a case where the evidence is not strong.

(3) Where an admission is put forward on a basis which is believed, the credit for the admission will be less than it would otherwise be.

(4) Financial penalties are to accord with the gravity of the wrongdoing, and are to be increased by reason of the substantial wealth of the insider dealer.

(5) The Tribunal should not impose a financial penalty on an assumption that someone else will paid.

(6) In determining whether to disqualify an insider dealer from holding offices as a director of a listed company, or of listed companies, there come into play a number of consideration. The determination will taken into account the need to ensure the integrity of the securities market; to protect the public from further abuse by that person of the privileged position of trust which the office carries; to deter others from breaching that trust and to mark the disapproval of the investment community with the conduct of the insider dealer.

(7) In determining whether to disqualify an insider dealer from holding of lice as a director of a private company, one should have regard to the correction, if any, of the company with the insider dealing, and any relationship between the insider dealer and the private company; and the impact upon the individual of such a disqualification.

(8) Where an incident in, or in connection with, the inquiry, gives rise to a justified sense of grievance, the Tribunal should recognise and take that fact into account in determining the appropriate penalties.

(9) In making its orders under section 23(1)(b) and (c) and section 27, the Tribunal should have regard to the totality of the financial burden imposed by these orders.

(See 'Current Sentencing Practice' by Thomas, from which text some of these principles, albeit in relation to criminal matters, are drawn.)"

35. Those principles have since been adopted in other Inquiries. They seem to me to be principles that are appropriate to the imposition of financial orders particularly under s.23(1)(c). Some of them may have to be balanced against the restitutionary aspect of orders made under s.23(1)(b), notwithstanding that such orders are also discretionary. Insider dealing, although not criminalised in the usual terms, is defined in a manner similar to many offences, it is required to be established before a Tribunal presided over by a High Court judge, it is subject to financial penalties than can assume very large proportions, easily in excess of the fines imposed for many serious criminal offices, and findings of such dealings can be appealed to this Court. Clearly, it is appropriate that where applicable, these general sentencing principles should be taken into consideration for guidance.

Section 25 Securities (Inside Dealing) Ordinance

36. This section is also of general relevance. Its text is as follows:

"Where a penalty is imposed on more than one person under section 23(1)(c) or under section 24(1), or under both sections 23(1)(c) and 21(1) the aggregate amount of the penalties imposed shall not exceed three times the profit gained or loss avoided by all persons as a result of the insider dealing."

Tribunal's general observations in imposing orders

37. Before dealing with individual circumstances of each appellant, the Tribunal at p. 92 said this:

"S. 23(1)(b) states that an order shall be 'an amount not exceeding' the profit gained. In each case we will discount both the profit gained and also the s. 23(1)(c) penalty for a combination of the following reasons:

(a) Mitigation advanced

(b) In some instances the shares were never in fact sold and no profit was actually made.

(c) In some cases the shares were sold before the announcement and the profit actuary made were significantly less than the notional profit.

(d) The insider dealers' means. It is a person's 'ability' to pay within a reasonable time and not the immediate availability of funds which determines a person's means.

(e) The principle of totality.

Mitigation

We do not propose to set out in this report all matters advanced by way of mitigation. Counsel made helpful submissions which can be found in the transcript of proceedings. What does and does not constitute a mitigating factor in insider dealing cases has been reported on in previous inquiries. We have followed the principles set out in previous inquiries and also taken into account such of the mitigation as it is appropriate to do so within those principles."

It likewise does not seem to me to be necessary to set out in this judgment Mr Huggins's very full submissions in mitigation. They are addressed in the context of the financial orders made in respect of each appellant.

Consideration of individual orders

Shek

38. In respect of Shek, the Tribunal recorded the following:

"Shek bought a total of 100,000 share which cost her $408,873. Had she sold them at $16.80 per share she would have realised $1,680,000 less expenses on sale of $8,484, namely $1,671,516. Thus the notional profit would be $ 1,671,516 - $408,873 which equals $l,262,643.

Section 23(1)(b) - Order

39. Here the Tribunal said this:

"Shek sold her own shares on the 3rd and 4th June 1993. The first public announcement by HKWM [Worsted] that they had received an approach had been made on May 31st. Whatever her reasons for selling were she made an actual profit of $231,745 - considerably smaller sum than her notional profit. However the decision to sell is entirely within the hands of the insider dealer. The wrongdoing is complete at the time of purchase. We do make some reduction from the notional profit but the reasons for so doing are connected more with her means and the principle of totality than with the fact of an early sale resulting in a relatively small profit. The sum we order is $600,000."

Section 23(1)(c) - Order

40. In this respect the Tribunal added:

"The maximum amount which can be ordered under this section is three times the amount of the 'profit gained'. It is not three times the amount of the actual profit. ...

The primary reasons for discounting the notional profit under s. 23(1)(b) were the principles of means and totality. Because s. 23(1)(c) is more in the nature of a fine, it is open to us to look at the overall picture and attach such weight as we consider appropriate to the wider mitigating and/or aggravating features in each case."

Turning to Shek's own circumstances, the Tribunal went on:

"It is under this section that we must take account of the very important role she played in counselling or procuring the insider dealing by Tai, Tan and Cheng. Their combined notional profits were over $16 million. The maximum order we could make would be approximately $3.7 million (i.e. three times her notional profit). The order we do make is $1.2 million."

The Tribunal also added the following generally:

"... in respect of all four of these insider dealers it was submitted on their behalf that they were ignorant of the law relating to insider dealing at the time. It is said that it was a breach of the law based on ignorance rather than cynical disregard. We entirely accept this but do not regard it as a mitigating factor of significance. It is merely illustrative of the widespread lack of understanding concerning the stringency of regulations governing share trading."

Mitigation

41. Mr Huggins made the following points. Shek's particular circumstances were far from being as serious as some of the cases of insider dealing that have come before the Tribunal. She was not in an occupation associated with the management of companies or of share dealing. There was no breach of trust associated with that sort of occupation, although there was in a broader sense a breach of the trust her employer would in the normal way have reposed in her. The evidence clearly points to her very limited financial resources and indeed an inability to pay the large sums ordered. She does not seem to have volunteered the information to Tai, Tan and Cheng nor to have actively persuaded or encouraged them to buy Worsted shares. Like the other three appellants, she appears to have frankly disclosed her involvement to the SFC when interviewed. The revelation of her insider dealing and the finding against her have had a severely damaging effect upon her. She understandably felt unable to continue her employment and left to form a business of her own which subsequently failed. She has since been working as an employee for another firm on a monthly salary of only $15,000 per month.

Conclusions on Shek's Orders

42. For the reasons already given, the "notional" profit of $1,262,643 assessed by reference to the reasonable time cannot be attributed to Shek. The MacDonald test and the gestation period it imports do not apply to her share. Her profits were only those she made, i.e. $231,745 and upon the basis approved, they resulted from her insider dealing.

43. The potential severity of the orders provided for by s.23(1)(b) and (c), and s.25 is an indication of the seriousness of insider dealing. At the same time, it has to be borne in mind perhaps more so than in the general run of criminal offences, what is apparent from the mitigating circumstances to which I have already referred, i.e. that Shek now has limited resources that would not extend to anything like the original total ordered to be paid, i.e. $1,800,000. However, I am not persuaded that she could not or should not repay the amount of the profit she actually made, i.e. $231,745 and that have resulted from her insider dealing. In those circumstances, although the original order under s.23(1)(b) for payment of $600,000 cannot stand, I would substitute for it an order that she pay $231,745. In my view, it would require circumstances of the most exceptional nature to justify an insider not being ordered to disgorge profits actually realised.

44. Turning to the order under s.23(1)(c) for payment of $1,200,000, this has to be re-assessed in the light of the profit gained. As against that, under s.25 of the Securities (Insider Dealing) Ordinance, the aggregate of all the penalties imposed on the appellants together could be as high as $50 million. Against the total "notional profit" arrived at by the Tribunal, i.e. $1,262,643, the s.23(1)(c) order is marginally less and would translate to an order for payment of about $231,745 subject to the s.25 maximum. However, it is with reference to s.23(1)(c) that Shek's lack of means is particularly pertinent. It cannot be the intention of the legislation that a penalty be imposed such as to destroy Shek, as Mr Huggins submits. It would seem on all the evidence that Shek would not be able to pay anything like the same amount again under paragraph (c) as she has to pay under paragraph (b). That conclusion seems to me to be reinforced by the substantial amount of legal costs she has already incurred. Accordingly, it seems to me that the punitive and deterrent elements of s.23(1)(c) would be amply met by an order that she pay an amount of $150,000. Although a fraction of the potential maximum, I do not think it could be classified as less than severe having regard to Shek's personal circumstances. I would add that I do not find myself assisted by comparisons with fines in revenue or other offences. I turn to the financial orders made in respect of the other three appellants.

Financial orders - 2nd, 3rd and 4th appellants

General considerations

45. The 2nd, 3rd and 4th appellants all retained the shares acquired by insider dealing well beyond the date of publication. For the reasons already given, the amount of profits they individually gained are those found by the Tribunal. These were not notional amounts, but the actual profits they gained although they did not realise them. In those circumstances I reject Mr Huggins's general grounds that much more consideration should have been had to the fact that they ultimately realised far lower gains or indeed no gain at all but a loss from the market ultimately declining. It was their choice to continue holding their shares, i.e. to re-invest, after the rise of the reasonable time following publication of the information and re-opening of trading. I have no reason to doubt that the Tribunal gave due consideration to this ground.

46. Before I turn to address their individual orders, it remains to outline the common features applicable to the three appellants. None of the three was actually involved in the securities business, or in corporate management. All of them appear to have been unaware of the sanctions against insider dealing. They all cooperated with the SFC and admitted their part in the transactions.

47. Section 25, and the cumulative maximum of $50 million applies also to them.

48. Apart from calling attention to the foregoing general mitigating circumstances, Mr Huggins made the following three general submissions with respect to the financial orders. First, he submitted that the Tribunal failed to differentiate the three appellants as offenders who had not benefited at all from their wrong, or had suffered a loss as compared to offenders who had actually benefited. It is wrong, he submitted, to punish an offender by reference to the benefit he might have received if things had worked out differently as distinct from the benefit he in fact received. Second, he submitted, there was a failure to attach any significance to the offender's ignorance of the law as a mitigating factor; and third, that the Tribunal failed to keep the penalties in proportion to those imposed in other manifestly more serious cases.

49. I turn then to consideration of the financial orders in respect of each of the latter three appellants.

Tai

50. Tai, it will be recalled, bought a total of 523,000 shares which cost him $2,524,237. On the post-publication price of $16.80, the shares would have realised $8,786,400 less expenses of $44,370, i.e. the gain was $6,217,793.

51. With respect to the s.23(1)(b) order, the Tribunal said this:

"Tai has never sold his shares. Again, it is not part of our function to make findings as to why a person sells or does not sell the shares they acquired by insider dealing. It is his misfortune that their present value is markedly less than that which he paid for them. However, the Tribunal considers it would be too harsh, in all the circumstances of the case, to order him to repay the whole of the notional profit which was in excess of $6 million. The sum we order is $3 million."

52. With reference to the s.23(1)(c) order, the Tribunal said this:

"We take into account, in respect of Tai, Tan and Cheng, that they were the three outsiders who became insiders on information from Shek. There was nothing sophisticated about their insider dealing. It was prompted by a mixture of greed and naivety. In evidence they made no secret of the fact that they were trying to get the information for some time before they bought and wasted no time once they got it. In Tai's case we will make an order under s. 23(1)(c) which represents a lesser sum than the amount ordered under s. 23(1)(b). It must however bear some relation to the s. 23(1)(b) figure because the size of the potential profit must be regarded as one of the factors in assessing the gravity of the wrongdoing. The sum we order under s. 23(1)(c) is $2 million."

53. Tai chose not to realise the post-publication profit and to continue to hold the shares in consequence of which he suffered a loss of over $700,000 as at 28 November 1997. That cannot be regarded as a significant mitigating factor. He might have done very well indeed if the shares had increased in value. It was his own choice.

54. Mr Huggins submitted that Tai was a relative newcomer to Hong Kong and had little knowledge about shares before the incident. What he did was not in deliberate or cynical disregard of the law; he was unaware that insider dealing was unlawful. He submits that the Tribunal was wrong, while accepting that fact, in taking the view that it was not to be regarded as a mitigating factor of any significance. He added that even in the civil context, that principle is well known, as expressed by Lord Devlin in Rookes v Barnard and others [1964] AC 1129 at 1236-7. In the particular circumstances here, I do not think the Tribunal can be faulted in taking the view that this consideration was not of particular significance.

55. Next, Mr Huggins submits that the Tribunal failed to keep the penalties here in proportion to those in the PIIL and Success Inquiries. In the former an experienced director involved in corporate finance who obtained price sensitive information during his involvement in a proposed take-over was ordered to pay $840,000 twice the profit gained. In the latter, a director and controller of a public company, who was found by the Tribunal to have breached the confidence reposed in him by those positions at every turn and treated the insider dealing laws with cavalier disregard, was ordered to pay $473,934, twice the profit gained by his girlfriend. The sentences here are plainly of a much higher order. However, I do not accept that it follows that they are manifestly excessive or that interference with them would be warranted on the basis of those two isolated cases.

56. Tai's insider dealing was of a serious order, not least in scale. He could in theory have been ordered to pay $6,217,793 under s.23(1)(b) and $18,653,379 under s.23(1)(c), possibly more if read with s.25. He was in total ordered to pay $5m which was under 20% of the possible maximum. Upon that basis the orders cannot be said to have been even as high as the middle of the permissible range. However that said, I feel bound to say that a fine of $5m is a very substantial sentence. Comparison in that regard has been sought to be made with actual tax evasion fines to demonstrate that the orders here are not excessive. As indicated, I cannot say that I found that exercise of particular assistance. In the end, not overlooking the general grounds, I am not persuaded that the Tribunal made an error of principle or law or that the two financial orders were in totality manifestly excessive, or that there are any other grounds that would warrant intervention. I would dismiss his appeal against the orders under s.23(1)(b) and (c).

Tan

57. Tan bought 226,000 shares at a cost of $1,354,493. After expenses of $19,174 the post-publication price of $16.80 produced a value of $3,777,626 resulting in a gain of $2,423,133.

58. As to his s.23(1)(b) order the Tribunal said this:

"Tan sold some but not all of his shares. The profit he actually made, we are told by his counsel, was $1,167,087. Bearing in mind the notional profit was approaching $2.5 million we consider an appropriate amount under s. 23(1)(b) to be $1.5 million."

With reference to their s.23(1)(c) order, they said:

"As indicated hitherto Tan's position is in many ways similar to that of Tai and Cheng. The fact that he has in fact sold the shares at a profit only distinguishes him in the sense that he has realised some assets which, in theory are available to meet any penalties ordered, whereas the other have not.

As with the other two we have been informed that his present financial circumstances are not as healthy as they were in 1993 when he was able to finance these substantial share purchases. Being Indonesian Chinese he has the present currency crisis in that country to contend with. In deciding what is a fair and proper order in his case we adopt the same arithmetic approach as we used in Tai's case i.e. two-thirds of the s. 23(1)(b) amount ordered, namely $1 million.

59. Mr Huggins stressed the following matters. Tan was an Indonesian citizen and unfamiliar with Hong Kong laws. He was unaware at the time that insider dealing was unlawful in Hong Kong. Because of the massive depreciation of the Indonesian currency his main business was at the time of the hearing on the verge of liquidation. And at the time of the Tribunal's orders, his company had a total debt of US$4m. Similar submissions were made as in Tai's case and similar considerations also arise.

60. The total amount Tan was ordered to pay was $2,500,000 out of the permissible maximum of $9,692,532, i.e. marginally over 25% of the possible maximum. Again, as in the case of Tai, and not repeating all the common considerations, I find myself unpersuaded that the orders in totality can be regarded as manifestly excessive, the mitigation notwithstanding, or that there is any good ground for intervention.

Cheng

61. Cheng was the biggest buyer. He spent $3,429,939 on a total of 678,000 shares. After the cost of selling i.e. $57,521 at $16.80 per share the value would have been $11,332,879. The profit gained was therefore $7,902,940.

62. In making its order under s.23(1)(b) for payment of $3,900,000, the Tribunal said this:

"Cheng, like Tai, still owns his shares. He bought more than anyone else. He therefore finds himself facing the largest penalty. We cannot give him a greater discount simply because his potential liability is so large. We will adopt a similar approach in respect of Cheng's dealings and order the sum of $3.9 million."

In respect of its order under s.23(1)(c) the Tribunal said this:

"Cheng also has financial problems now which he did not have in 1993. Through his counsel he offered his apologies and explained that his actions were primarily due to ignorance on his part. It is a sad but familiar pattern in this case that at the time of the 'offence' the insider dealer is wealthy and avaricious but at the day of reckoning he is apologetic and facing financial ruin. We nonetheless fully accept his contrition, we accept a hard lesson has been learnt. We cannot ignore the fact that the number of shares he bought was very great and potential profits, at the expense of the ordinary investor, were huge.

Adopting the same approach as with Tai and Tan the amount we penalise him is $2.6 million."

By holding on to his shares, Cheng sustained a loss of over $900,000 as at 28 November 1997, the largest loss of the three. I cannot see that the individual gain or loss between these three appellants would warrant significant variation in the orders.

63. Similar submissions and considerations as those already addressed in respect of Tai and Tan apply here. Out of a possible maximum of $31,611,616, he was ordered to pay in totality $6,600,000, i.e. a little over 20%.

64. For similar reasons to those in respect of Tai and Tan, I am not persuaded that the orders in respect of Cheng were manifestly excessive, or that there is any other good ground to intervene.

65. I feel bound to add that the severity of the awards under s.23(1)(c) has caused me much concern; but in the end I have been driven to the conclusion that there are insufficient grounds to warrant intervention in the very special jurisdiction concerned and the particular circumstances.

Conclusion

66. In the result, I would allow Shek's appeal, substitute orders for the payment of $231,745 and $150,000 for those the Tribunal imposed under s.23(1)(b) and s.23(1)(c) respectively; and I would dismiss the appeals of the other three appellants.

67. As to costs, Shek's conduct was no less reprehensible than that of the other appellants. However she had no alternative to coming to this Court to correct the s.23(1)(b) order against her. I would therefore give her her costs of the appeal. As to the other three appellants' costs of the appeal, I can see no reason why the costs should not follow the event. I would accordingly make a costs order nisi to the foregoing effect.

Mortimer, V.-P.:

68. I have had the opportunity of reading Nazareth V-P's judgment in draft. I agree with it entirely and cannot usefully add to it.

Rogers, J.A.:

69. I have had the advantage of reading the judgment in draft of Nazareth V-P. I concur with the conclusions therein and with his decision, albeit with some anxiety as to the level of the penalties imposed.

70. In respect of the approach in the Securities and Exchange Commission v. James E. MacDonald 699F.2D47. I only wish to emphasize that the approach in that case was to use the rise in the price of the shares from immediately prior to a public announcement to the end of a "gestation" period to quantify that part of the profit which an insider made which was attributable to the use of the confidential information. The first and most important point to be noted is that the assessment was of actual profit made and not any question of "notional" profit. The test adopted was a practical tool used to identify the particular profit, where the person concerned had also made profit due to other reasons. Care must be taken in applying its logic and reasoning to avoid, as in the case of Shek Mei-ling, inventing some "profit" which never existed or occurred.

71. I would also draw attention to the fact that Section 23(1)(b) of the Securities (Insider Dealing) Ordinance, Cap. 395 refers to any profit gained or loss avoided as a result of the insider dealing. In view of the facts found in this case that the four Appellants would not have purchased the shares otherwise than because of their use of inside information, I consider that provision is satisfied. However, it does not necessarily follow as a matter of course that even if a person has been held to have been guilty of insider dealing, all profit, or in the relevant circumstances loss, which can be calculated in respect of that individual would of necessity be as a result of insider dealing; such profit or loss may have resulted from other causes.

72. I have been particularly troubled in this case by the level of penalties which have been imposed. Whilst I still consider that they are high I concur that this court should not, except in relation to the 1st Appellant Shek Mei-ling, interfere with them. Clearly the establishment of the Tribunal headed as it is by a Judge of the High Court signifies to some extent the seriousness with which insider dealing is intended to be regarded. Nevertheless, the seriousness of the conduct charged has to be looked at in relation to the overall context and judged against penalties imposed for other conduct equally, if not more, damaging.

73. This is all the more so in this case because the particular company involved appears to have had little trading in its shares at least in the early part of 1993 which was the relevant year. Indeed, the analysis shows that in a period of one month a mere 19,000 shares were traded in 2 transactions the combined value of which was less than HK$66,000. The shares in the company were 2/3 held by a holding company and, with a virtual absence of trading, it can hardly be suggested that this share constituted anything other than one of the most insignificant shares on the stock market. In this respect, the activities of the Appellants which were the subject of complaint did not, in my view, raise significant concerns in terms of general public importance. Whilst not wishing to underestimate the importance of eliminating insider dealing, the bringing of these proceedings in respect of these dealings in this company's shares certainly does not demonstrate any severe or significant problem.

74. The penalties imposed on the 3 Appellants Tai, Tan and Cheng equate approximately to double the value of the assets they employed in purchasing the shares. That in, the context of this case, appears to me to be ample penalty, but one which I would not disturb.

Nazareth, V.-P.:

75. Shek's appeal is accordingly allowed. The orders in respect of her under s.23(1)(b) and s.23(1)(c) are set aside and orders for payment of $231,745 and $150,000 respectively substituted.

76. The appeals of Tai, Tan and Cheng are dismissed.

77. There will be costs orders nisi that Shek is to have her costs of the appeal and that Tai, Tan and Cheng pay to the respondent, the respondent's costs of the appeal (less those attributable to Shek's appeal).