SECURITIES AND FUTURES COMMISSION v. TIGER ASIA MANAGEMENT LLC AND OTHERS

CACV 178/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 178 OF 2011

(ON APPEAL FROM HCMP NO. 1502 OF 2009)

____________

____________

_______________

JUDGMENT

_______________

Hon Tang VP:

Introduction

1.  The Securities and Futures Ordinance (Cap 571) ("SFO") was enacted in 2003,

"… to consolidate and amend the law relating to financial products, the securities and futures market and the securities and futures industry, the regulation of activities and other matters connected with financial products, the securities and futures market and the securities and futures industry, the protection of investors, and other matters incidental thereto or connected therewith, and for connected purposes."

2.  Part XIII[1] concerns market misconduct and establishes a Market Misconduct Tribunal ("MMT").  Market misconduct is defined to mean: insider dealing (section 270), false trading (section 274), price rigging (section 275), disclosure of information about prohibited transactions (section 276), disclosure of false or misleading information inducing transactions (section 277), or stock market manipulation (section 278).  Under section 251(1), the MMT has "jurisdiction to hear and determine … any question or issue arising out of or in connection with the proceedings instituted under section 252" by the Financial Secretary.  The MMT normally consists of a chairman who shall be a judge and 2 other members who shall not be public officers.

3.  On a finding of market misconduct by a MMT, it may make[2]:

"(a) an order that the person shall not, without the leave of the Court of First Instance, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed corporation or any other specified corporation or in any way, whether directly or indirectly, be concerned or take part in the management of a listed corporation or any other specified corporation for the period (not exceeding 5 years) specified in the order;

(b) an order that the person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, in any way acquire, dispose of or otherwise deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any securities, futures contract, leveraged foreign exchange contract or collective investment scheme for the period (not exceeding 5 years) specified in the order;

(c) an order that the person shall not again perpetrate any conduct which constitutes such market misconduct as is specified in the order (whether the same as the market misconduct in question or not);

(d) an order that the person pay to the Government an amount not exceeding the amount of any profit gained or loss avoided by the person as a result of the market misconduct in question; [disgorgement order]

……

(g) an order that any body which may take disciplinary action against the person as one of its members be recommended to take disciplinary action against him."

4.  Part XIII also creates a civil liability for market misconduct in favour of a person who has incurred any pecuniary loss as a result of the market misconduct[3].

5.  Under Part XIV, market misconduct was made criminal offences as follows:

Division 2

Section 291 Offence of insider dealing

Division 3

Section 295 Offence of false trading

Section 296 Offence of price rigging

Section 297 Offence of disclosure of information about prohibited transactions

Section 298 Offence of disclosure of false or misleading information inducing transactions

Section 299 Offence of stock market manipulation

6.  There are other offences in Division 4 of Part XIV which do not have their equivalents in Part XIII.

7.  The penalty for contravention of the offences under Divisions 2 to 4 on indictment is a fine of $ 10,000,000 and imprisonment for 10 years; on summary conviction to a fine of $1,000,000 and to imprisonment for 3 years (section 303(1)).  Orders similar to those under section 257(1)(a), (b) and (g) may also be made.

8.  Section 305 also creates a civil cause of action in favour of a person who has suffered pecuniary loss as a result of a contravention of any of these offences.

9.  Parts XIII and XIV are mutually exclusive[4] and constitute a dual civil and criminal regime to deal with market misconduct. 

Background

10.  The 1^st Defendant is a New York-based company.  The 2^nd to the 4^th Defendants (none of whom resides in Hong Kong) work for the 1^st Defendant.  The Securities and Futures Commission's ("the Commission") case is that between December 2008 and January 2009, the Defendants were involved with insider dealing and/or false trading, contrary to section 291(5) and section 295(1).

11.  By originating summons dated 5 August 2009 amended on 23 April 2010, and re-amended 3 June 2011, the Commission sought wide ranging relief against these Defendants, purportedly under section 213(1)[5] on the basis that they have contravened section 291(5) and 295(1) of SFO. 

12.  By summons dated 20 September 2010, the 2^nd Defendant, supported by the other Defendants, applied to strike out the originating summons.  By judgment dated 21 June 2011, Harris J struck out the Re-Amended Originating Summons and dismissed the action.  Harris J explained why:

"12.   The Defendants’ case can be summarised as follows.  It is apparent from the material produced prior to and during the course of the Securities and Futures Bill through the Legislative Council that Parts XIII and XIV of the Ordinance were intended to introduce a dual civil and criminal regime to deal with misconduct in the financial markets.  The Ordinance clearly reflects this in Part XIII and Part XIV. If following investigations the Commission concludes that there is a potential case of market misconduct it may refer the matter to the Financial Secretary for civil proceedings before the Market Misconduct Tribunal or refer the matter to the Secretary for Justice for criminal prosecution on indictment.  The Commission can prosecute less serious offences itself summarily: section 388(1). Section 213 provides a mechanism for the Commission to obtain interim relief prior to the determination of civil proceedings before the Market Misconduct Tribunal or criminal proceedings or final relief after the conclusion of such proceedings.  What section 213 does not do is provide a third route by which the Commission can seek a determination before the Court of conduct prohibited by Part XIII and Part XIV.  It follows that the Court does not have the jurisdiction to make the declarations sought by the Commission and, therefore, the Re-Amended Originating Summons does not disclose a reasonable cause of action and is an abuse of process and should be struck out.  I agree for reasons which I explain in the remainder of this judgment."

The Appeal

13.  This is the Commission's appeal.  According to Mr Benjamin Yu, SC, for the Commission, the issue on appeal is, whether, where a contravention of a provision which falls within both Parts XIII and XIV of the SFO (as distinct from other relevant provisions) is alleged under section 213(1)(a)(i)(A), the Court of First Instance ("CFI") has jurisdiction to determine that question, or whether that must be determined by either the MMT or a criminal court.

14.  The appeal turns on the proper construction[6] of section 213, which, where relevant, reads:

"213. Injunctions and other orders

(1) Where-

(a) a person has-

(i) contravened-

(A) any of the relevant provisions[7];

(B) any notice or requirement given or made under or pursuant to any of the relevant provisions;

(C) any of the terms and conditions of any licence or registration under this Ordinance; or

(D) any other condition imposed under or pursuant to any provision of this Ordinance;

…… or

(b)   it appears, whether or not during the course or as a result of the exercise of any power under Part VIII, to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,

the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).

(2) The orders specified for the purposes of subsection (1) are-

(a)  an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);

(b)  where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly or otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;

(c)  an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;

(d)  an order appointing a person to administer the property of another person;

(e)  an order declaring a contract relating to any securities, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, futures contract, leveraged foreign exchange contract or collective investment scheme to be void or voidable to the extent specified in the order;

(f)   for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;

(g)  any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).

……

(6) Where the Court of First Instance considers it desirable to do so, it may grant such interim order as it considers appropriate pending the determination of an application made pursuant to subsection (1).

……

(9) The Court of First Instance may reverse, vary or discharge an order made or granted by it under subsection (1) or (6) or suspend the operation of the order."

15.  We are not concerned with section 213(1)(b), nor with the making of interim orders under section 213(6). 

16.  This appeal concerns the jurisdiction of the CFI to make final orders, for example, under section 213(2)(b) or (e) on the basis that there has been a contravention of sections 291 or 295.  It is common ground that in order to obtain any such order the Commission has to show contravention of sections 291 or 295.  What divided the parties is whether the Commission can obtain a final order under section 213(2) otherwise than on the basis of a finding of such market misconduct by the MMT or the criminal court.

17.  Mr Sussex, SC, for the Defendants, accepted that following proceedings under Part XIII or Part XIV, the Commission may apply under section 213(1) for an order under section 213(2), and that such orders may be final orders.  He called them ancillary final orders.  However, he submitted that where contravention of section 291 or section 295 is relied on under section 213(1), it must be shown that the person has been prosecuted and convicted of the offence[8].

18.  Mr Sussex's submissions have been described by the learned judge in the following terms:

"14.   Mr Charles Sussex SC, who appeared for the Defendants, submitted that in order to construe section 213 it was necessary to ascertain the purpose of Parts X, XIII and XIV of the Ordinance.  This was to be done not only by reference to the other provisions of the Ordinance, but also by reference to relevant legislative material.  The use of such material was explained by Li CJ in HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at paragraph 14:

'14.  The purpose of a statutory provision may be evident from the provision itself.  Where the legislation in question implements the recommendations of a report, such as a Law Reform Commission report, the report may be referred to in order to identify the purpose of the legislation.  The purpose of the statutory provision may be ascertained from the Explanatory Memorandum to the bill.  Similarly, a statement made by the responsible official of the Government in relation to the bill in the Legislative Council may also be used to this end.  See PCCW-HKT Telephone Ltd v Telecommunications Authority (2005) 8 HKCFAR 337 at p.351F-J and Director of Lands v Yin Shuen Enterprises Ltd (2003) 6 HKCFAR 1 at p.15A-H.'

15.    Mr Sussex argued that the legislative material produced in the course of the enactment of the Ordinance makes it clear that the Legislature intended that Parts XIII and XIV provided 2 methods by which allegations of market misconduct might be determined.  They refer to the Ordinance establishing a 'dual civil and criminal regime' and it is clear that the civil regime referred to was the Market Misconduct Tribunal.  For example, during the first reading of the Security and Futures Bill on 29 November 2000, the Secretary for Financial Services stated (Legislative Council Official Record of Proceedings, Wednesday 29 November 2000, page 1384):

'The Bill creates an alternative civil route to the existing criminal route for dealing with certain forms of market misconduct.  It will build on the strength of the Insider Dealing Tribunal which already provides a means of dealing with insider dealing, and expand it into a Market Misconduct Tribunal (MMT) to handle, in addition to insider dealing, five other types of market misconduct, including price rigging in securities or futures contracts and stock market manipulation, on the civil standard of proof and using civil procedures.  The MMT may, by way of civil sanctions, order payment of the profit gained or loss avoided, restrict a person's access to the markets, and disqualify a person from being a director or other officer of a corporation, and so on.'"

19.  The learned judge went on to say:

"16.   … No material has been put before me that suggests that the purpose of Parts X, XIII and XIV was to introduce a tripartite regime with, in addition to criminal prosecution or an inquiry by the Market Misconduct Tribunal, a third procedure by which the Commission could go to the Court and ask it to determine whether there had been a contravention of Parts XIII or XIV.

17.    The Commission argues that this is to take too narrow a view of the purpose of the legislation.  The object of the Ordinance it argues in paragraph 52 of its written submissions 'is to assist the SFC in achieving its regulatory objectives as set out in sections 4 and 5 of the Ordinance, especially investor protection, as explained in the Bills Committee':

'The objective of Part X [which included the provision which became section 213] is to provide the SFC with powers to protect the investing public, by intervening in the business or affairs of a licensed corporation, and by enabling it to apply to the Court for orders and civil remedies. Part X is largely based on existing legislation. A number of changes have been made… These are aimed at allowing the SFC to discharge its functions more effectively, so as to ensure better investor protection.' (transcript of meeting on 24 April 2001)."

20.  On the other hand, Mr Yu submitted that, on the plain and natural meaning of section 213(1)(a), what must be established is the fact that a person has contravened a relevant provision, not that any such contravention has been determined in other prior proceedings under Parts XIII or XIV; and that the nature and purpose of section 213 is different from proceedings for market misconduct under Parts XIII or XIV.  Section 213 proceedings under Part X are remedial in nature and not punitive, whereas proceedings under Parts XIII and XIV are essentially punitive in nature.  Their differences are obvious when one compares the orders which may be made under section 257(1) on a finding of market misconduct by the MMT, on a criminal conviction under section 303(1), and under section 213(2) on application under section 213(1).  The natural and ordinary meaning of the words "where a person has contravened any of the relevant provisions", denotes the fact of contravention, not a finding or opinion of contravention by another tribunal, since the jurisdiction to make orders under section 213(2) is conferred on the CFI, the CFI must have the jurisdiction to determine whether the precedent fact of contravention has occurred.  With respect, I agree with Mr Yu. 

21.  I also agree with Mr Yu that had the legislature intended to make the finding of contravention by another tribunal, for example, the MMT or the criminal court, a condition precedent to the exercise of the jurisdiction by the CFI under section 213, it would have said so. 

22.  Section 213 is a broadly drafted provision under which the Court may make orders which are essentially remedial, such as the grant of injunction to restrain recurrence (subsection (2)(a)), declaring contracts to be void or voidable (subsection (2)(e)) and requiring a person to pay damages (subsection (8)).  Nor is section 213 concerned solely with contraventions of Part XIII or Part XIV, it also applies to contraventions of notices or requirements given or made under the relevant provisions (section 213(1)(a)(i)(B)), licence terms and conditions (section 213(1)(a)(i)(C)), other conditions imposed under any provision of the Ordinance (section 213(1)(a)(i)(D)), and accessory and inchoate conduct and "knowing involvement" associated with such contraventions (section 213(1)(a)(ii) to (v)).

23.  The extract from the speech of the Secretary for Financial Services quoted by the learned judge[9] merely shows that the Bill was intended to create an alternative "non criminal" route for dealing with market misconduct; the disgorgement order under section 257(1)(d) being the Part XIII alternative to a fine and imprisonment under section 303(1) under Part XIV.  On the other hand, the transcript of the Bills Committee meeting on 24 April 2001, quoted by the learned judge in para. 17 of the judgment, makes it quite clear that section 213 was meant to augment the Commission's ability to protect the investing public and provide remedies for contraventions for the protection of investors. 

24.  Notwithstanding the availability of civil remedies to individual investors, there may be cases where investors cannot be expected to take proceedings individually to enforce their legal rights.  For example, in cases where there are executory contracts involving a large number of small investors, (depending on whether or not they could be set aside or declared void under, say, section 213(2)(e) such investors may or may not suffer loss), it may be unreasonable to expect small investors to take proceedings.  There may be circumstances when it would be eminently reasonable for proceedings to be taken by the Commission under section 213 for the investors' benefit. 

25.  The learned judge seemed to have accepted Mr Sussex's submission that the legislature had intended a specialist tribunal to determine market misconduct.  The learned judge said:

"20.   … The Commission has offered no explanation as to why it might have been intended that the Commission could choose to circumvent the procedure provided by Part XIII."

26.  But the MMT is only concerned with proceedings under Part XIII.  In the event of a prosecution, a criminal court would be involved.  In the event of civil claims under Part XIII or Part XIV, a civil court would be involved.

27.  As noted, Parts XIII and XIV create a civil liability[10].

28.  Mr Sussex rightly accepted that the court[11] has jurisdiction to determine whether or not there has been such market misconduct in the event of a civil claim brought under either Part XIII (section 281) or Part XIV (section 305).  Mr Sussex has also rightly accepted that such actions might be brought whether or not there had been proceedings under Part XIII or Part XIV.  Indeed, the learned judge also acknowledged the fact that in civil proceedings brought under Part XIII or Part XIV, a civil court may determine whether there has been any relevant contravention[12].

29.  When the learned judge said that section 213 was not intended to be a third route for determination whether there has been market misconduct, it may be that he was influenced by the fact that in the Re-Amended Originating Summons[13], the Commission asked for declarations that the Defendants had contravened sections 291(1) and 291(5) of the SFO.  However, this appeal is not concerned with whether on an application under section 213(1), the court may make any such declaration.  Section 213(1) enables the CFI "to make one or more of the orders specified in subsection (2)".  Whether that would enable the CFI to make such declarations as opposed to merely deciding whether there has been a relevant contravention does not require determination in this appeal.  We are concerned with jurisdiction only, namely, whether under section 213, the CFI has jurisdiction to determine whether there has been the contravention of a market misconduct provision.  We are not required to decide whether any of the reliefs claimed should be granted.

30.  The learned judge also acknowledged that:

"26.   … The language of section 213 is broad and the contraventions referred to are not limited to Parts XIII and XIV. …" 

31.  But he went on to say in the same paragraph:

"… I do not find anything in the language of section 213, which is inconsistent with the argument that contraventions of Parts XIII and XIV are to be determined solely in accordance with those 2 Parts of the Ordinance. …"   

32.  With respect, such a conclusion flies in the face of the language of section 213.  As Mr Yu has pointed out the construction advanced by the Defendants effectively meant that although the CFI would have jurisdiction to determine whether there has been a contravention of provisions other than those which are regulated in both Parts XIII and XIV, and any breach of terms of conditions, it would not have jurisdiction to determine whether there has been a contravention of provisions which appear in both Parts XIII and XIV. 

33.  The learned judge also favoured Mr Sussex's so-called gatekeeper point, namely, that since proceedings under Part XIII or Part XIV are controlled by the Financial Secretary or the Secretary for Justice respectively[14], the Commission's interpretation of section 213 bypassed the gatekeepers, and permits it to take action unilaterally[15].

34.  With respect, I agree with Mr Yu that this ignores the difference in nature between criminal proceedings and the non criminal proceedings before the MMT on the one hand and section 213 or sections 281 and 305 proceedings on the other hand.  Criminal proceedings are concerned with stigma, penalty and punishment.  MMT proceedings provide an alternative to criminal proceedings in that a disgorgement order deprives the wrongdoer of the benefit of the wrongdoing.  They are concerned with the conduct of the wrongdoer and not with the consequences of the wrongdoing.  Section 213 is concerned with remedial actions and sections 281 and 305 create civil liabilities enforceable in civil courts.  It does not follow from the fact that proceedings under Part XIII or Part XIV have gate keepers that there should also be gatekeepers for the remedial or compensatory proceedings. 

35.  The judge also expressed the concern[16] that the commencement of section 213 proceedings does not bar criminal proceedings, whereas section 307 does so where proceedings before the MMT are instituted.  This is the so-called double jeopardy point.  Part XIII and Part XIV which serve a common objective are rightly made mutually exclusive.  But, as I have endeavoured to explain, section 213 serves a different purpose.  I regard section 213 as complementary to the civil liabilities created by section 281 and section 305. Section 213 provides valuable tools to the Commission to protect the investing public which is an important objective of the SFO.  Section 213 is focused primarily upon remedial consequences and the orders specified in subsection (2), including injunctions, restitution, orders protecting property and avoiding contracts (so as to restrain, reverse or compensate for the mischief in question), are by their nature designed to ensure that the relevant provisions are complied with (section 5(1)(d)), maintain and promote confidence in the industry (section 5(1)(g)), protect investors (section 5(1)(l)) and suppress illegal practices (section 5(1)(n)).

36.  In the present case the alleged contraveners are outside the jurisdiction.  Criminal prosecution may be difficult or impossible. Mr Sussex submitted that proceedings under Part XIII are possible, and that in the event of proceedings under Part XIII, the Commission would be able to apply for interim relief under section 213 in the meantime.  And in the event of a finding of market misconduct by the MMT, ancillary final reliefs could be obtained under section 213.  Mr Sussex's complaint seems to be that the Administration is not willing to give up on criminal prosecution. 

37.  With respect, I am not persuaded that these proceedings are an abuse of section 213.  Rather, they support my view that section 213 provides much needed ammunition to the Commission to protect investors.  I do not agree that it is reasonable or desirable that investor protection under section 213 should come at the price of forgoing criminal prosecution.

38.  Lastly, Mr Sussex submitted that any analysis of section 213 must properly start with the decision of the Court of Final Appeal in Kayden Ltd v Securities and Futures Commission (2010) 13 HKCFAR 696.  He relied in particular on para 73:

"Lord Pannick QC, who came into the case with Mr Roger Beresford only at the present stage of the proceedings, sought to justify service out of the jurisdiction on Kayden on the basis of the case as reconstituted by the amendments.  However, as emerged at the hearing, it is a case which is not only new and different, but one which raises numerous difficult questions of law and statutory construction, not least as to whether the court has jurisdiction to adjudicate on alleged contraventions under section 213 and to grant orders of the kind sought in the amendments – questions which have not previously been canvassed or ruled upon in the courts below.  It would be quite inappropriate for this Court to entertain such questions without a proper foundation for their exploration having been laid."

39.  Mr Sussex submitted that the Court of Final Appeal's comments in Kayden show that, notwithstanding the apparent width of the language of section 213, section 213 is to be interpreted narrowly.

40.  With respect, I do not agree.  The quotation from the judgment of Ribeiro PJ shows quite clearly that the Court of Final Appeal had refrained from expressing any view which is relevant to this appeal.

41.  For the above reasons, I would allow the appeal and set aside the order of the learned judge, and make a cost order nisi in favour of the Commission here and below.

Hon Kwan JA:

42.  I agree with the judgment of the Vice-President.

Hon Fok JA:

43.  I also agree with the judgment of Tang VP.