SECURITIES AND FUTURES COMMISSION v. CHAN PAK HOE PABLO

HCMA 754/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO. 754 OF 2010

(ON APPEAL FROM ESS 28970/2009)

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J U D G M E N T

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1.  The appellant was convicted on 5 August 2010 by a magistrate, Mr Anthony Yuen of an offence contrary to Section 291(5) and (8) of the Securities and Futures Ordinance, Cap. 571 (“the Ordinance”). He was sentenced on 19 August 2010 to serve a community service order (“CSO”) for 240 hours and ordered to pay HK$44,478 prosecution costs. Pursuant to an application for review brought by the prosecution and granted under section 104 of the Magistrates Ordinance, Cap. 227, the magistrate varied his original sentence by substituting four months’ imprisonment for the CSO and in addition imposing a fine of HK$120,000. The order to pay prosecution costs remained in place. The appellant now appeals against both his conviction and the sentence imposed upon review.

Appeal against Conviction

2.  In the light of the way the argument has unfolded, it is necessary to set out the particulars of the offence in order to identify what it was that the prosecution had to prove. The summons was particularised as follows:

“Information has been laid that you, Chan Pak Hoe Pablo, between 2 May and 20 June 2008, both dates inclusive, in Hong Kong having information which you knew was relevant information in relation to a listed corporation, namely there were negotiations between the controlling shareholder of the listed corporation, i.e. Universal International Holdings Limited (“Universe”), and a potential buyer for the potential buyer to acquire approximately 53.7% of the issued share capital of Universe from the controlling shareholder at a certain price and such acquisition would probably trigger a general offer, and which you received, directly and indirectly, from persons whom you knew were connected with Universe, i.e. Lam Shiu Ming Daneil, Lam Siu Keung Alvin, Chan Hau Chuen Keith and/or Wong Hin Wing, and whom you knew or had reasonable cause to believe held the information as a result of being connected with Universe, did deal in Universe shares.”

3.  It immediately becomes clear that one of the central issues in this case (and, indeed, in this appeal) was whether the information identified in the summons was “relevant information” within the meaning of the Ordinance, and whether the appellant knew it to be relevant information when he dealt in the shares. A subsidiary argument advanced was that, even if it was relevant information, the appellant did not in fact make use of it. To understand the issues and the argument, it is necessary to appreciate the factual background to the allegation.

4.  The appellant, who described himself in an account opening form with Phillip Securities (Hong Kong) Limited in early 2008 as having over 10 years’ experience in securities investment, was involved in finding a potential buyer for the 53.7% majority shareholding held by Globalcrest Enterprises Limited (“Globalcrest”) in a publicly listed company, Universe International Holdings Limited (“Universe”). The beneficial owner of Globalcrest’s shares in Universe was Mr Lam Shiu Ming Daneil (“Daneil Lam”). Mr Lam Siu Keung Alvin (“Alvin Lam”) was Daneil Lam’s younger brother and the chief operating officer of Universe, while Mr Chan Hau Chuen Keith (“Keith Chan”) was Universe’s financial controller and company secretary. Both Alvin Lam and Keith Chan took their instructions from Daneil Lam.

5.  Sometime in 2007, Mr Wong Hin Wing Simon (“Simon Wong”) of Legend Capital Partners Incorporated (“Legend”) came to represent a Korean client who was looking to acquire a Hong Kong listed company. It was in that context and against that background that the appellant, who represented Globalcrest, first introduced Daneil Lam to Simon Wong. Thereafter the identity of the would-be purchaser changed, although the mechanism of the proposed sale remained more or less the same. However, negotiations with the various successive purchasers all foundered. In around March 2008 Simon Wong found another potential purchaser known as Goldwyn Management Limited (“Goldwyn”) and entered into further discussions with the appellant. It was these negotiations which provide the immediate backdrop to the allegation of insider dealing against the appellant.

6.  It was the prosecution case that since March 2008, Globalcrest had entered into negotiations to sell all its shares in Universe to Goldwyn at a proposed price of HK$0.14 per share. The appellant on the evidence of various witnesses plainly knew about the proposal because he was privy to the negotiations acting as a bridge between the two parties. In the period between 2 May and 19 June 2008, whilst those negotiations were in progress, the appellant bought shares in Universe at prices between HK$0.087 and HK$0.103 per share.

7.  In the afternoon of 19 June 2008, Universe made an announcement to the public that Globalcrest was considering selling all its shares in Universe to an independent third party. At the same time, trading in Universe shares was accordingly suspended at a closing price of HK$0.114.

8.  When trading resumed on 20 June 2008, the price of Universe shares substantially increased, closing at HK$0.159: a 39.47% increase in the share price over the closing price the previous day. On the same day, the appellant sold all his remaining shares in Universe (some shares having already been sold in May 2008). The prosecution contended that the appellant had made a total profit from his sales of Universe shares (up to and including 20 June 2008) of HK$120,387.63.

9.  On 27 June 2008, Universe published another announcement informing the public that Globalcrest had ceased negotiations to sell its shares in Universe to an independent third party. On the following trading day (30 June 2008), the price of Universe shares dropped 35.76%, closing at HK$0.097 per share. The trading price of Universe shares between the two announcements had fluctuated between HK$0.125 and HK$0.191 per share.

10.  The prosecution further relied, in support of its case that the appellant was not only in possession, but must have known he was in possession, of relevant information and must have fully realised the importance of confidentiality during any negotiations, on a revised finder’s commission agreement made between Simon Wong’s company Legend and Comvest Holdings Limited (“Comvest”), a company controlled by the appellant. The agreement was drafted on or around 13 August 2007 and, at that stage, concerned the earliest of the potential purchasers of Globalcrest. Although unsigned, it was according to the evidence of Simon Wong drafted by the appellant, with whom Simon Wong had discussed the issue of confidentiality. Clause 6, headed ‘Secrecy’, reads as follows:

“The Finder (Comvest) and Principal (Legend) shall at all times exercise the highest degree of care in safeguarding the confidential information relating to the business or affairs of this Agreement against loss theft or other inadvertent disclosure and shall take all steps necessary or desirable to ensure the maintenance of the confidentiality thereof.”

11.  Furthermore, on 26 March 2008 Simon Wong sent an e-mail to the appellant attaching a revised draft of the Sale and Purchase Agreement between Globalcrest and Goldwyn. By that draft agreement, clause 14 headed ‘Confidentiality’ became the new clause 13, with each party undertaking that:

“(a)  it shall treat as strictly confidential and shall procure that its professional advisers and appointed representatives treat as strictly confidential, all information (whether oral, graphic, written or in electronic form) relating to, obtained or received by it as a result of negotiating, entering into or performing its obligations under this Agreement, including the provisions of this Agreement and any agreement entered into pursuant to this Agreement, the negotiations relating to this Agreement or the information and documents obtained in connection with any diligence review undertaken in connection with this Agreement which relates to the negotiation of, or the provisions or subject matter of, this Agreement or to the other Party (the “Information”); and 

(b)   it shall not, and shall procure that its professional advisers and appointed representatives not, except with the prior written consent of the other Party (such consent shall not be unreasonably withheld or delayed) publish or otherwise disclose to any person any Information.”

12.  When asked to explain the essence of this clause in evidence, Simon Wong testified as follows:

“A. Same as what I mentioned yesterday, this is a contract -- a commercial contract and secondly, it involved the transfer of shareholdings of a public listed company. That means besides observing -- besides of complying with the principle of commercial confidentiality, this transaction also involved the -- it involved public interest. That’s why confidentiality was very important.

Q. What was that particular interest ought to be protected?

A. Since Universe, as a public listed company, besides the majority shareholder, there were minority shareholders and shareholders from the public.

Q. And …

A. As the minority shareholders got the shares of the company, the -- what influence them directly was the price of the shares.”

13.  It was Alvin Lam’s evidence, in relation to the Confidentiality Agreement dated 23 June 2008 which Universe wanted the appellant to sign, that the discussions had to be kept confidential “because it’s price sensitive”, a view which Keith Chan, the financial controller and company secretary of Universe, endorsed in his evidence:

“A. … at that time, our legal representative, Fermis Fung, requested the parties to sign this confidentiality agreement. So, under that circumstances, I sent a confidentiality agreement to Pablo Chan.

Q. What had to be kept confidential?

A. Well, actually, according to what I understood, the whole negotiation - according to the Listing Rules - was regarded as price-sensitive. So, all parties involved in that negotiation should have an agreement on confidentiality. Well, so, when you asked me what had to be kept confidential, I would say that that is the discussion that Alvin carried out with Pablo on behalf of Daneil, as well as the deal structure offered by Somerley. All these should be kept confidential. Well, it was until an …

INTERPRETER : “A reasonable and appropriate time”.

… which the Board of directors, the company and all parties agreed that we published the announcement.” 

14.  It was clear on the evidence of various prosecution witnesses, in particular Simon Wong, that the appellant was privy to a number of important negotiations and discussions, and was exchanging documents and e-mails with the parties in relation to the same, which concerned, among other things, (i) the price offered by Goldwyn for Globalcrest’s shares and those of Universe’s minority shareholders; (ii) the structure of the proposed transaction; (iii) the assets which were to be split between the special purpose vehicle, which was to be privatised and sold to Globalcrest, and the assets of the remaining group which would be retained by Universe and sold to the purchaser, an issue which would obviously affect the price paid by Goldwyn to Globalcrest and the minority shareholders; (iv) the management of Universe upon completion of the proposed transaction; and (v) the various draft term sheets.

15.  I do not need to detail the remaining evidence showing the appellant’s clear knowledge of and involvement in the negotiation process for the sale of Globalcrest’s shareholding in Universe to Goldwyn. Mr McCoy SC for the appellant does not take significant issue with it nor was it disputed at trial. The thrust of his submissions is that, whatever may have been the initial intentions of the parties to the proposed deal (assuming they were even genuine on both sides), the transaction never had any realistic chance of coming to fruition. He argues that the parties had never even got close to agreeing a price: indeed, if anything, the parties were diverging, with the purchaser offering less and less and the seller asking more and more. Furthermore, at a Board meeting of Universe on 11 June 2008 at which Daneil Lam was present, Alvin Lam was given to understand that many of the independent executive directors had told his brother that the transaction was “problematic”: the sale price was not attractive and the form of sale might not be approved by the Securities and Futures Commission (“the SFC”).

16.  Alvin Lam was not himself present at that meeting; and nor, for obvious reasons, was Simon Wong or the appellant. Nevertheless, Alvin Lam was cross-examined as follows:

“Q. … Now, Mr Lam, listen to this question carefully. A person like you, who knows about this information -- in fact, to be fair, to put it very bluntly, you would not be optimistic about this deal going through.”

With this proposition he agreed, as did Keith Chan, who, unlike Alvin Lam, was present at the Board meeting, when a similar proposition was put to him:

“Q. … after the Board meeting on 11 June, am I correct to say that it is even more uncertain on whether the deal would go through or not? Agree?

A. I agree.”

17.  It was presumably evidence such as this, which in due course prompted counsel for the prosecution in the opening remarks of his closing address to the magistrate to say:

“Of course, we accept that the witnesses say that after the Board meeting that was held on 11 June, some of the directors showed some reservation. At that point of time the witnesses say they hit obstacles. In that regard, we accept.”

18.  Mr McCoy has argued that, even if the appellant was in possession of relevant information, the magistrate was wrong to find that he knew it was relevant information (Ground 3). He says the appellant should not have been convicted of insider dealing after the Board meeting of 11 June because he could reasonably have regarded the deal as doomed. Such argument of course would only go so far since the dates particularised in the summons are “between 2 May and 20 June 2008, both dates inclusive”. However, since the appellant bought 4,270,000 shares on or after 11 June before offloading all of his remaining shares in Universe on 20 June, those transactions would have to be excluded from the allegation if the argument were correct. As for the 3,245,000 shares bought prior to 11 June 2008 of which 1 million shares had already been sold by that date, Mr McCoy argues that there was no pattern of accumulation as one might expect of an insider dealing portfolio: rather, the pattern was simply that of an ordinary day trader buying low and selling high. By the time of the Board meeting on 11 June, the appellant had bought shares in Universe in six separate tranches amounting to 3,245,000 shares, but he had also sold 1 million shares on five separate occasions before that date.

19.  The argument has been attractively put. But I cannot accept it. It is true that there were so-called “obstacles” to the proposed deal but the evidence is that the parties were by the time of the announcement on 19 June 2008 still striving to reach an agreement; a process which continued up until the e-mailed ultimatum of 27 June entitled “Project Eleven – Last call” sent by Alvin Lam to both Simon Wong and the appellant. Although Alvin Lam agreed that he was not optimistic about the deal going through after the Board meeting of 11 June because of various problems which he understood had been voiced at that meeting, he explained:

“A. … I did not need to explore the problems. What I need to do was to negotiate on price because I was told to have further negotiation on the price.”

20.  In re-examination, Alvin Lam was asked about the negotiations during the period from the end of March up to 19 June 2008:

“Q. Was there any time that the negotiation about the takeover deal stopped?

A. No.

Q. Right. During the same period of time - end of March until 19 June – was Daneil interested to sell Globalcrest shares in Universe to the Korean customer, to the best of your knowledge? Was he interested to sell?

A. Well, if he had no interest in it, he would not carry on with the negotiation. So, if the negotiation was carrying on, that means he was still interested in it.

Q. So, can I take it that you received him -- instruction from him to carry on…

A. Yes.

Q. … the negotiation during the period of time I referred to?

A. Correct.

Q. Right. Now, you were asked quite several times that were you, yourself, optimistic about the deal?

A. For me, I was not optimistic about it.

Q. Right. Are you speaking for yourself only when you say that?

A. Yes.

Q. Yes. Would your personal view affect whether Daneil would sell the shares or not?

A. No.

Q. Now, you were also asked whether you considered the offer price of the Korean customer was attractive or not.

A. Yes.

Q. You said not attractive.

A. Yes.

Q. Are you speaking for yourself only?

A. Yes.

Q. Now, you tell us that there comes a time that Daneil has some personal consideration about the sale of the shares.

A. Yes.

Q. Yes. When was that time approximately?

A. After 20 April till May or June.

Q. Right. Did that personal reason -- or, I should, I think, ask this: Daneil told you that personal reasons, right?

A. Yes.

Q. Yes. When Daneil told you that personal reason, did he say whether that personal reasons would make him becoming more willing to sell, or would make him unwilling to sell?

A. More willing.

Q. So, after he told you that personal reason, what was the instructions to you as to the progress of the negotiation of the deal?

A. To carry on with the negotiation and to collect all those factors for him to consider whether it could carry on or not.

Q. Right. Now, it -- let’s take the time that he told you about the personal reason as a line. How would you say the pace, the progress of the negotiation about the deal prior to and after this line?

A. More willing to try.”

It was not, he went on to say, until around 25 or 26 of June 2008 that he first heard his brother say that if the purchaser did not increase the price, he would not continue with the deal.

21.  As for Keith Chan, who did attend the Board meeting of 11 June 2008, he testified that, notwithstanding the reservations of Universe’s independent non-executive directors, he knew that the process of discussion continued up until the announcement on 19 June 2008. Moreover, the minutes of the Board meeting of 11 June, to which I have been taken, do not bear out the suggestion that the deal was in any way dead, or even dying.

22.  This was a proposed takeover deal. It would in those circumstances have been remarkable if there were no problems, set-backs or disagreements (particularly about price) requiring sometimes difficult and protracted negotiations. What is clear is that those negotiations were continuing in earnest throughout the period cited in the summons and that the appellant must have realised the parties were trying to iron out their differences and were intent on achieving an agreement. If, as has been suggested, the appellant himself regarded the deal as “dead in the water” by the time of the Board meeting of 11 June, one wonders why he should have bought, on five separate occasions between then and the announcement on 19 June 2008, 1,635,000 shares in Universe at prices between HK$0.087 and HK$0.103 per share, as well as two further tranches on 20 June totaling 2,635,000 shares at prices between HK$0.129 and HK$0.142 per share, only to sell his entire Universe shareholding on the first day of trading after the announcement, namely 20 June 2008. Moreover, not only did he acquire 1,635,000 shares in Universe on five separate occasions between the Board meeting of 11 June and the announcement of 19 June 2008, he did not sell a single Universe share during that same period.

23.  As for what is said to be a pattern of buying and selling Universe shares from 2 May up to 11 June 2008 inconsistent with an insider dealer accumulating stock in a particular company, there was no evidence from the appellant to explain why he bought 3,245,000 shares on six occasions and sold 1 million shares on five occasions during that period.

24.  The fact is that during the period of the charge, which was at the height of the negotiations between the parties in which he was intimately involved, the appellant bought and sold 7,515,000 shares in Universe, making a profit of HK$120,387.63. The question we come back to is whether he did so on the basis of the information particularised in the summons and whether it was “relevant information” within the meaning of the law.

Relevant information

25.  “Relevant information” is defined under Section 285(2) of the Ordinance as follows:

“relevant information” (有關消息), in relation to a corporation, means specific information about – (a) the corporation; (b) a shareholder or officer of the corporation; or (c) the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would if it were generally known to them be likely to materially affect the price of the listed securities”.

26.  Although what amounts to “specific information” does not seem to have been judicially considered by an appellate court dealing with an insider dealing offence before, the term has been considered by the Insider Dealing Tribunal when dealing with a similar definition of “relevant information” in Section 8 of the now repealed Securities (Insider Dealing) Ordinance, Cap. 395. That particular section read as follows:

“In this Ordinance “relevant information” (有關消息) in relation to a corporation means specific information about that corporation which is not generally known to those persons who are accustomed or would be likely to deal in the listed securities of that corporation but which would if it were generally known to them be likely materially to affect the price of those securities.”

27.  It is useful in this context, therefore, to have regard to the past decisions of the Insider Dealing Tribunal, which was, as is the Market Misconduct Tribunal, chaired by a High Court Judge. In Chinese Estates Holdings Limited, the Tribunal under the chairmanship of Hartmann J (as he then was) held at p. 40 that:

“Specific information is information which possesses sufficient particularity to be capable of being identified, defined and unequivocally expressed. In this primary sense it is to be contrasted with mere rumour, with vague hopes and worries or with unsubstantiated conjecture. Of course, in the ebb and flow of business affairs, what begins, for example as a vague hope or worry may over time acquire sufficient substance and particularity to be properly defined as specific information. If and when such a transformation takes place is a question of fact.”

28.  The Tribunal drew a distinction, since drawn in other cases, between “specific” and “precise” information. The lack of precision of information did not prevent it from being specific. As the Tribunal under the chairmanship of Stock J (as he then was) put it in Public International Investments Limited, at para 19.2.3 :

“Information is not rendered general, as opposed to specific, merely because the information is broad and allows room, even substantial room, for particulars.”

29.  There is, however, a degree of tension between the statement in Chinese Estates Holdings Limited at p. 45 that

“ … knowledge of a contemplated commercial agreement is capable of amounting to specific information, even if all the terms have not yet been agreed, provided the probable consequence is that the agreement will be successfully concluded and the implicated person knows this to be so” [my emphasis]

and later decisions of the Tribunal. In Stime Watch International Holding Limited, the Tribunal under the chairmanship of Deputy Judge McMahon (as he then was) held, at p. 83 - 85:

“We consider that, for the purposes of Hong Kong’s legislation and our present considerations of the evidence before us relating to this inquiry, information becomes sufficiently specific concerning a company’s affairs if it carries with it such particulars as to the characteristics of a transaction event or matter or proposed transaction event or matter so as to allow that individual transaction event or matter to be identified and its nature to be coherently described and understood.

………

It has been suggested before other Tribunals in Hong Kong on occasion that before information concerning a contemplated transaction can be held to be sufficiently specific there must be demonstrated a probability that the transaction will succeed.

It seems to this Tribunal that there can be no additional requirement that information, otherwise specific, which relates to a proposed transaction can only be specific if, by some objective or even subjective measure, that proposed transaction is more probable than not to proceed or come to fruition.” [my emphasis]

30.  In Firstone International Holdings Limited, the Tribunal under the chairmanship of McMahon J (as he had by then become) held, at p. 60- 61:

“For the purposes of our determining issues in the present enquiry relating to the specific nature of information, as required by the provisions of section 8 of our legislation, the proposed placement whether described as under contemplation or at a preliminary stage of negotiation must, in our view, have more substance than merely being at the stage of a vague exchange of ideas or a “fishing expedition”. Where negotiations or contacts have occurred, as in the present case, there must be a substantial commercial reality to such negotiations which goes beyond a merely exploratory testing of the waters and which is at a more concrete stage where the parties have an intent to negotiate with a realistic view to achieving an identifiable goal.

…………….

In our view, there is no need to impose any additional requirement that there be any foresight that the transaction will “probably” or “likely” come to fruition before information concerning the contemplated transaction becomes sufficiently specific”. [my emphasis]

31.  In Asia Orient Holdings Limited, the Tribunal under the chairmanship of Saunders J held that the submission that a stage in negotiations had to be reached where there existed “a probable consequence that the agreement would be successfully concluded” was incorrect as a matter of law. For the reasons articulated in the Stime Watch case, I agree. It is also worth noting that subsections (2), (4) and (6) of Section 291 of the Ordinance all refer to knowledge of a “contemplated” takeover offer as relevant information.

32.  In my judgment, the information to which the appellant was privy was clearly specific information about Universe or, for that matter, about its shareholders and officers or its listed securities. The proposed sale of all Globalcrest’s shares in Universe to Goldwyn was clearly beyond the exploratory stage of ‘testing the waters’, mere rumour or a ‘fishing expedition’. The parties had spent substantial costs in engaging professional financial consultants and lawyers to advise on the details of the transaction. All-party meetings were held to discuss the details of the agreement. Indeed, Simon Wong testified that, by the all-party meeting of 24 April 2008, negotiations were 80% or 90% complete. The nature of the proposed transaction was clearly sufficiently specific and contained such particulars as to allow it to be identified and coherently described and understood. The fact that the details of the proposed transaction had encountered obstacles and needed further negotiation, and would ultimately have to be approved by the Board of Directors of Universe, the minority shareholders and the regulators did not take it outside the meaning of “specific information” and in turn outside the meaning of “relevant information”. Moreover, it was information which was not known to the public.

33.  The next question is whether, if the information had been known, it would have been likely to materially affect the price of the listed securities. The respondent says the answer is obvious. By looking at the stock historical data for Universe shares between 1 August 2007 and 31 July 2008, not only on the day after the announcement of 19 June 2008 did the share price have its highest percentage increase (39.47%) during this period, with the exception of 29 July 2008 (when it increased by 43.62%), but the volume of shares transacted experienced its highest increase. Indeed, the volume of trading for 20 June 2008, when trading resumed after being suspended because of the 19 June announcement, was in the context of the daily volume of business for this particular share, a massive 117,735,000. The closest that any other’s day’s trading volume during this period came near to this figure was 90,510,000 shares traded on 30 June 2008, the first trading day after the 27 June announcement that Universe had ceased negotiations. On that day the Universe share price closed 35.76% down on the previous day’s trading.

34.  If one simply looks at two periods, namely, the period between 2 May 2008 (when the appellant first bought Universe shares) and 19 June 2008 (when the first announcement was made and trading in the shares was suspended) and the period between 20 June 2008 (when trading recommenced after the suspension of trading) and 27 June (when the second announcement was made), the trading volume was within a range in the first period of 145,000 (21 May 2008) to 5,850,000 (28 May 2008), but between 24,845,000 and 117,735,000 in the second period. During the first period, the share price traded within a range of HK$0.080 (28 May 2008) and HK$0.103 per share (6 May 2008) whereas in the second period the share price traded within a range of HK$0.125 and HK$0.191 per share. The differences in volume and share price between the two periods are substantial.

35.  Mr McCoy argues that the only factor which the magistrate appears to have taken into account on the issue of material price sensitivity is the almost 40% increase in the share price between the 19 June announcement and the closing price on the resumption of trading on 20 June 2008, and that he was wrong to have done so (Ground 1). However, the magistrate would have seen the significance of that increase in the overall period covered by the stock historical data which was before him. Moreover, it could not have escaped him that the substantial increase in the share price on 20 June was not surprisingly accompanied by a huge increase in the trading volume for that day.

36.  I am alive to the fact that on 19 June 2008, prior to the announcement to the public, there had already been a 20% increase in the share price of Universe which closed at HK$0.114 per share. Volume on 19 June 2008 was 7,700,000, the highest recorded volume since 29 February 2008. Mr Bell SC for the respondent says this would not be the first share to respond to rumour or leaks in the marketplace immediately before a public announcement by the company concerned. Even if that is not a legitimate answer to the point - and it was the defence expert who raised this issue - I do not consider that the 20% increase on 19 June detracts from the dramatic increases in respect of share price and volume on 20 June 2008 following the announcement.

37.  A further complaint, which is a separate but related ground of appeal, is that the magistrate departed without any valid basis for doing so, from the defence expert’s evidence that there could be other reasons for the increase in the share price on 20 June 2008, which evidence was neither contradicted nor challenged by the prosecution nor disbelieved by the magistrate himself (Ground 2). I have read the evidence of the expert Mr Richard Witts with some care. I do not think it correct to characterise prosecuting counsel’s stance, after a cross-examination which occupies 22 pages of transcript, as one of accepting the expert witness’s evidence unchallenged. He certainly probed it with what at times might be termed a raised but respectful eyebrow but was ultimately concerned to show that his evidence did not go very far. The witness had made clear at the outset, consistent with his duty to the court as an expert, that although there were other possible causes, apart from the announcement, for the increase in the share price of a share like Universe on 20 June 2008, he had not done “any detailed search as to the circumstances surrounding this date on 19 June” (on which there had been the 20% increase in the share price): rather, his report was focused on responding to the expert report of the prosecution, which had in the event been ruled inadmissible by the magistrate.

38.  In relation to the possible causes of the increase in the share price on 20 June 2008, the witness gave the following evidence in chief:

“Q. Now, in your opinion, what was the -- was … the increase in the price on 20 June 2008 caused by the 19 June 2008 announcement?

A. I would suggest that it’s quite possible that the (a?) part of that increase could well have been caused by the announcement.

Q. Yes.

A. But I couldn’t subscribe to a suggestion that it was entirely that. …”

………

Q. … is it fair for me to say that you(r) answer amount to that the announcement could be a factor contribut(ing) to the rise?

A. Yes, it could be.

Q. There are other factors which also contribute to the rise?

A. Absolutely, of course, there invariably are.”

39.  It seems to me that that evidence was not inconsistent with the test for “relevant information”, namely, that it should “be likely to materially affect the price of the listed securities”. As for the other factors which could, according to the defence expert, also have affected the share price, the magistrate correctly understood them as factors which, as the witness had already himself explained, were “invariably” present in the market. Accordingly, during cross-examination, the magistrate interrupted prosecuting counsel (or, more precisely, defence counsel’s objection to prosecuting counsel’s question) to point out:

“COURT: … well, Mr. Witts’ evidence is that these various factors which contribute to a surge or a drop of the share price always exist in the market.”

To that interjection, the witness himself immediately responded without any prompting:

“A. Of course, yes.”

The magistrate then immediately went on to say:

“COURT: Yes, but you can never tell unless you have sufficient data to do the analysis, you can never tell which factors contributes substantially to increase or decrease”,

to which defence counsel responded:

“MR WONG: Yes, precisely. That’s his evidence.”

Following these exchanges, prosecuting counsel asked the witness whether there was:

“ … any evidence to suggest that there is a factor specific to Universe, but not to any other companies and which might explain the material change in price in the second period (i.e. 20 June to 27 June 2008) … when compared with the first period (i.e. 2 May to 19 June 2008)?”

To this question, the witness answered that, apart from his experience of such type of stock, he could not produce any evidence.

40.  Although outside the period of the charge, the witness was also asked in examination in chief about the 35.76% drop in the Universe share price on the first day of trading after the announcement of 27 June 2008:

“Q. Now, in your opinion, was the drop in share price from the 27th on 30 June 2008 caused solely by the announcement made on 27 June 2008?

A. It’s impossible to say that. I would be surprised if it wasn’t one of the catalysts or one of the reasons, but you can’t attribute the whole fall to that announcement.

Q. Yes.

A. It’s really almost a mirror to the earlier announcement -- the (price is?) declining …

Q. Yes.

A. … already before the announcement.

Q. Yes. Now, again, can you assess what percentage of the drop in share price on the 30th was contributed by the announcement?

A. No, it’s impossible to say.”

Prosecuting counsel returned to this evidence in cross-examination. He asked the witness:

“Q. Do you agree there is a material drop in the price of Universe shares when compared with the second period (i.e. 20 June to 27 June 2008)?

A. Yes.

Q. In fact, the share price of Universe in the third period (i.e. 30 June to 18July 2008), in a nutshell, return back to the share price of Universe during the first period (i.e. 2 May to 19 June 2008)?

A. Yes. I agree.

Q. Right?

A. Right.

Q. So the significance is the material increase in price during the second period?

A. Yes.

Q. Right, and are you aware of any evidence specific to Universe that would explain the material drop in its price in the third period?

A. The -- I thought I had answered Mr Wong this? The -- I would be surprised if the announcement of 27 June did not contribute to the drop on the Monday the 30th. What percentage of its contribution, is too difficult for me to say. I notice that it had already started to climb at the end of the previous week.

Q. Right, apart from the second announcement on 27 June.

A. Right, okay.

Q. Apart from that are you aware of any evidence that would explain the material drop in share price of Universe in the third period?

A. No, I’m not aware. No, I have not studied that. No, I have no evidence.”

41.  If I may say so, prosecuting counsel at trial (who is junior counsel for the respondent in this appeal) skilfully neutralised the effect of the expert witness’s evidence by reducing it to generalised statements about the behaviour of a stock such as Universe in the absence of any specific research, which the witness accepted he had not done, into the fluctuations of the Universe share price during this period; whilst at the same time getting him to confirm that the announcements and what lay behind them did materially affect the market price. I do not consider, in the light of all the evidence, that the magistrate was wrong to find as he did that “in the absence of any other reasonable explanation, the public announcement on 19 June 2008 contributed substantially to the sharp increase in the share price of Universe the day following the announcement and a 40% increase is certainly a material one.”

42.  Nor do I accept, in the light of the expert witness’s evidence and the nature and history of this particular share, that the almost 40% increase in the share price of Universe on 20 June 2008 (with the concomitant huge increase in trading volume on that day) was, as suggested, insufficient to support a finding by the magistrate of material price sensitivity. I am mindful of the caution with which one must approach the test for material price sensitivity set out in Public International Investments Ltd and adopted in subsequent decisions of the Insider Dealing Tribunal. The Tribunal in HKCB Bank Holding Company Ltd & Hong Kong China Ltd (now renamed Lippo China Resources Ltd) under the chairmanship of Lugar-Mawson J put the matter in this way:

“The test of price sensitivity has to be applied at the time the alleged insider dealer’s transaction took place. The exercise of determining how general investors would have behaved on that day, had they been in possession of that information, is an assessment. It is not a simple matter of deciding whether the information had a material impact on the market when it became general knowledge. The test is a hypothetical one, the tribunal must ask itself: had this information been generally known to the investing public on the day the insider traded would it, at that time, have been likely to have had a material impact on the company’s share price? It is well-established that evidence of how investors reacted once the information was stripped of its confidentiality and became public knowledge will often provide the answer. However, care must be taken to ascertain whether the investors’ response was attributable to the information released, or whether it was, wholly or in part, attributable to other extraneous events or considerations.

Further, the test is not simply whether the information, along with other matters already known, would have been likely to affect the price of the company’s securities; the test is whether it would have been likely to have affected their price materially. Thus information that would be likely to cause a mere fluctuation, or a slight change in price, is not sufficient; there must be the likelihood of change of sufficient degree to amount to a material change.” [my emphasis]

43.  I note that the word “extraneous” in the above quotation is a refinement on the original formulation in Public International Investments Ltd but it is an important one which looks to something beyond merely the intrinsic nature of the share itself. In my judgment, there was only really one realistic explanation for the significant increase in the Universe share price when trading opened on 20 June 2008 and that was the announcement on 19June 2008 that Globalcrest was “negotiating with an independent third party regarding the disposal of its entire holding of the Shares”.

44.  In my assessment, the evidence in this case was compelling that the information to which the appellant was privy, and which led to that announcement, was relevant information within the meaning of Section 285 of the Ordinance. Moreover, he must have known, as someone with over 10 years experience in securities investment, that it was relevant information. However, it is further argued that, even if he did have relevant information, the appellant did not make use of it, thus constituting a valid defence under Section 292(3) of the Ordinance (amended Ground 3A).

45.  In relation to this specific defence, the appellant did not give evidence. That is not conclusive but it did mean that Mr McCoy was driven to trying to show without the benefit of his client’s explanation that on the available evidence it could be inferred that the appellant’s purpose (or one of them) was not that of “securing or increasing a profit or avoiding or reducing a loss … by using relevant information”. With respect, in the light of the whole of the evidence and the compelling and obvious inferences which could properly be drawn from it, I do not consider that this defence could conceivably he made out.

46.  Finally, although not made a specific ground of appeal, complaint is made about the adequacy of the magistrate’s statement of findings. I cannot agree with that criticism. Although it might have been better for the magistrate to have said something about the Board meeting of 11 June 2008 and its impact, if any, on the issues in the case, I do not agree for the reasons I have already indicated that the meeting was, in reality and in the overall context of the ongoing negotiations, as significant as the appellant’s submissions assume.

47.  In my judgment, the conviction of the appellant was neither unsafe nor unsatisfactory and, accordingly, I dismiss his appeal against conviction.

Appeal against Sentence

48.  I turn now to the question posed by the appeal against sentence. As I indicated at the outset, the sentence being appealed against was imposed upon an application for review of sentence made by the prosecution. The magistrate acceded to that application and substituted for the original sentence of a CSO a sentence of four months’ imprisonment and a fine of HK$120,000. The original costs order of HK$44,478 was left unaffected. Mr McCoy submits that the magistrate lacked jurisdiction to review his sentence and that, therefore, the original sentence should stand and the substituted sentence be set aside.

49.  To understand the argument, it is necessary to appreciate the chronology of events upon and after conviction and sentence before the magistrate. The appellant was convicted of the offence on 5 August 2010, with sentence being then adjourned for 14 days pending a CSO report. On 19 August 2010, the magistrate, having obtained the necessary report, sentenced the appellant to a CSO for 240 hours and imposed the costs order to which I have referred. On 23 August 2010, pursuant to Section 104 of the Magistrates Ordinance, the prosecution applied in writing by letter dated 20 August 2010 for the magistrate to review his sentence. On 25 August 2010 the appellant’s solicitors filed an application for extension of time for giving notice of appeal against conviction (Form 103) as well as a notice of appeal against conviction (Form 101), setting out respectively the reasons for the delay in appealing and the grounds of the appeal. I am rather puzzled by the application for an extension of time since the time limit of 14 days within which to appeal against conviction did not begin to run until sentence was passed and the process of conviction became thereby complete: see S v Recorder of Manchester [1971] A.C. 481; HKSAR v Wang Jing Yun (unrep., Cr. App. No. 326 of 2005). Accordingly, the appeal against conviction was made properly within time.

50.  Be that as it may, there is a ‘Received’ stamp from the Eastern Magistracy General Registry on the Form 101, dated 25 August 2010 at 3:58 p.m. I emphasise this date because there is some dispute between the parties as to when the notice of appeal was actually filed; and whether, if it was, it was abandoned prior to the review hearing.

51.  On 14 September 2010, the review application was heard by the magistrate in open court. The magistrate granted the application and reviewed himself, passing the sentence to which I have referred and which is the subject of this appeal. On the same day, a further notice of appeal against conviction (Form 101) was filed by the appellant’s solicitors on his behalf and again stamped ‘Received’ by the Eastern Magistracy General Registry. The Respondent terms this a “new” notice of appeal, the earlier one having been effectively abandoned. But it is clear to me, by a comparison with the 25 August 2010 Form 101, that this is an amending document in which amongst other things the old sentence was simply crossed out and the new sentence inserted by hand. It is true that the date of the document has also been changed, again by hand, from “25 August 2010” to “14 September 2010” and endorsed by the solicitors, but that does not detract from it being an amending document. I see no evidence that the original notice of appeal against conviction dated 25 of August 2010 had ever been abandoned. Certainly, no formal abandonment of the appeal under Section 117 of the Magistrates Ordinance was ever filed on the appellant’s behalf.

52.  Mr Bell, however, relies on the notice of appeal of 25 August 2010 being implicitly, if not explicitly, abandoned by virtue of three paragraphs, which appeared in defence counsel’s written argument for the review hearing and which read as follows:

“ … (v) As regards the defendant’s filing of a notice of appeal against conviction on 25 August 2010, it is submitted that this conduct was clearly reactionary to the prosecution’s application for review of sentence on 23 August 2010, for the purpose of reserving the defendant’s rights. The notice of appeal has in fact not even been formally filed given that this Honourable Court has directed (without any objection from the defendant) that the notice should be held on to by the Registry pending the determination of this review of sentence.

………

IV. PROSECUTION’S PROCEDURAL CONCERN

22. Given that the defendant’s notice of appeal has not been formally filed in light of this Honourable Court’s direction that it should be held onto by the Registry pending the determination of this review of sentence, the defendant considers the prosecution’s procedural concern a non-starter.

23. The defendant does not in any way dispute this Honourable Court’s jurisdiction to conduct the present review on sentence.” [original emphasis]

53.  With respect, I do not think defence counsel at trial was correct in his appreciation of the legal position for reasons I shall come to; nor am I clear what was being “held onto”, or why, by the Registry. It seems plain to me that a valid notice of appeal against conviction had been filed and properly received on 25 August 2010 by the Registry at Eastern Magistracy. That was just under three weeks before the application for review was heard and determined by the magistrate. It is in that context that the question of jurisdiction arises.

54.  It is submitted by Mr McCoy that, although it was perfectly lawful for the prosecution to apply to the magistrate to review his sentence under Section 104(1) of the Magistrates Ordinance and the application was properly made under Section 104(2), it could not be granted once the appellant had filed his notice of appeal against conviction. He relies on Section 104(9), which is in the language of prohibition, namely:

“No application for a review shall be granted and no exercise by a magistrate shall be made of the power conferred on him by subsection (5) subsequent to the commencement of proceedings by either party with a view to questioning the decision of the magistrate by way of appeal, mandamus or certiorari, unless such proceedings shall have been abandoned.”

Since appeal proceedings had been commenced by the appellant upon the filing of a notice of appeal against conviction on his behalf, and the appeal proceedings had not been abandoned before the granting of the application for review, it is argued by Mr McCoy that the magistrate had no jurisdiction to review his decision.

55.  Mr Bell’s primary argument in response is that the 25 August 2010 notice of appeal had effectively been abandoned, even though nobody ever expressly purported to use that term. I have already rejected that argument. His secondary position is that there is a two-stage process in the review procedure: the first stage being the application for review, the second being the granting of the application for review (see Yeung Siu Keung v HKSAR [2006] 9 HKCFAR 144). He submits that where a party puts in a notice of application for review before a notice of appeal has been filed there is no disposal of the case before the magistrate. The defendant, in those circumstances, is not competent to file a notice of appeal where there is an outstanding application for review because the jurisdiction of the magistrate is not concluded. Mr Bell derives support for this submission from Section 104(10), which effectively stipulates that the time within which an appeal from a magistrate may be lodged shall be from the date of any determination or refusal of a review application.

56.  I was at first attracted to the respondent’s argument. Indeed, Section 104(4) stipulates that:

“It shall be lawful for the magistrate to grant the application for a review at any time provided that the application for the review shall have been duly made in accordance with the provisions of subsections (1) and (2)”,

suggesting perhaps that it would be lawful for a magistrate to grant an application for review at any time thereafteronce it has been applied for properly in accordance with the provisions of the section. In this case, the application for review duly complying with subsections (1) and (2) was made two days before the original notice of appeal was filed at the Registry. The respondent’s argument is that the magistrate is competent to grant the review at any time thereafter, provided the application has been properly and timeously made by a party, and cannot be thwarted by a notice of appeal from the other party.

57.  However, I cannot read Section 104(9) in such a way as to accommodate this argument. The language and meaning of the subsection is clear: no magistrate can grant an application for review after either party has commenced proceedings to appeal his decision unless those proceedings are first abandoned. I consider that the phrase “at any time” in Section 104(4) should be understood to mean “at any stage” (of the case).  As for Section 104(10), the subsection among other things simply clarifies from when the time period for an appeal runs in the event of a review application: I see nothing in that subsection which impinges upon or is in any way inconsistent with the prohibition in Section 104(9). Appeal proceedings in this case were commenced by the appellant on 25 August 2010: they were not abandoned. On 14 September 2010, the magistrate granted the application for review and reviewed his sentence at the same time. Indeed, he began his ruling by saying:

“The following is my ruling as to the prosecution’s application to review the sentence. This is an application by the prosecution to review the sentence I passed, namely, 240 hours of community service order.”

58.  It might seem strange, or even abusive of the court’s process, that a defendant can effectively prevent a magistrate from reviewing a decision such as sentence by simply putting in a notice of appeal; the more so if it is done as a matter of deliberate tactic (although I do not believe that happened here). However, it must be remembered that neither the District Court nor the High Court has such a power of review and the prosecution could not ultimately be prevented from reviewing the defendant’s sentence. Once the prosecution was frustrated in its intention to review the sentence by the operation of Section 104(9), the Secretary for Justice on behalf of the SFC could have (and should have) sought a review of the original sentence under Section 81A of the Criminal Procedure Ordinance, Cap. 221.

59.  I am fortified in the conclusion to which I have come by the decision of Tong J in HKSAR v Huang Dehui [2010] 1 HKLRD 727, where he held in relation to the effect of Section 104(9) at 731:

“Hence, there can be no doubt that when the appellant filed a notice of appeal, whether by herself or through her solicitors, the magistrate would no longer have power to further deal with the case. In this regard, I do not think it matters whether the notice of appeal is filed before or after the appellant has asked for a review.”

60.  Interestingly, this decision was drawn to the magistrate’s attention by prosecuting counsel at the review hearing. He sought to distinguish it in his written argument but in oral submissions said he did not find it necessary to go into the matter further unless the magistrate wanted to have further argument after hearing from defence counsel. However, defence counsel never mentioned the matter in his oral submissions, although he did, as I have pointed out, refer to it in his written argument (see para 52 above). Ultimately, the matter was simply left hanging in the air, with neither counsel nor the magistrate engaging and dealing with it at the review hearing.

61.  In the result, I have come to the view that the appellant’s argument is correct and that once appeal proceedings by the appellant had been commenced by the lodging of a valid notice of appeal against conviction on 25 August 2010, the magistrate had no power to grant the application for review of sentence thereafter by virtue of Section 104(9) of the Magistrates Ordinance. Accordingly, the sentence imposed upon review must be set aside and the original sentence of the magistrate restored.

62.  The appellant, however, should consider himself extremely fortunate. But for the conclusion to which I have come on the jurisdictional point, I would have upheld the sentence imposed upon review of four months’ imprisonment together with the fine of HK$120,000 as neither manifestly excessive nor wrong in principle. Indeed, I would have regarded six months’ imprisonment, which was the magistrate’s starting point upon review, before he discounted the sentence by two months because of the review, as a lenient sentence in the circumstances of this particular case. A CSO was a wholly inadequate response to the seriousness of the offence, as the magistrate himself belatedly recognized; whilst the failure to impose any fine whatsoever did not even deprive the appellant of his ill-gotten gains.

63.  Insider dealing is a serious criminal offence. The maximum sentence for an offence contrary to Section 291 of the Ordinance is, on indictment, 10 years’ imprisonment and a fine of HK$10 million or, on summary conviction, 3 years’ imprisonment and a fine of HK$1 million. Although not a specific element of the offence, insider dealing involves dishonesty. Very often (as in this case), such dishonesty will be accompanied by a breach of trust or confidence. Insider dealing is also the product of corrupt ethics and, as such, inevitably does harm to the integrity of Hong Kong’s capital market and to its financial reputation. In my judgment, the appropriate sentence for such an offence should, save in exceptional circumstances, be one of immediate imprisonment, coupled with a financial penalty, which at the very least removes a defendant’s unjust profits.

64.  Lest the idea has gained any currency that this is essentially a regulatory offence, the English Court of Appeal in R v McQuoid (2009) EWCA Crim 1301 has made clear, at para’s 8-9, in remarks that have a particular resonance in this case, that:

“Those who involve themselves in insider dealing are criminals: no more and no less. The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is undermined by market abuse. Takeover arrangements are normally kept secret. Very few people are permitted to have advance knowledge of them. Those who are entrusted with advance knowledge are entrusted with that knowledge precisely because it is believed that they can be trusted. When they seek to make a profit out of the knowledge and trust reposed in them, or indeed when they do so recklessly, their criminality is not reduced or diminished merely because they are individuals of good character.

………

If there ever was a feeling that insider dealing was a matter to be covered by regulation, that impression should be rapidly dissipated. The message must be clear: when it is done deliberately, insider dealing is a species of fraud; it is cheating.”

65.  The Court in McQuoid adopted the following observation made in R v Spearman (2003) EWCA Crim 2893, at para 10:

“We have been referred to the fact that new legislation enables some insider trading to be dealt with by means of regulatory or disciplinary process. That does not mean that the activity ceases to be a criminal offence which is likely to be prosecuted and if prosecuted likely in appropriate cases to be met by substantial sentences of imprisonment. Overall insider trading is a serious matter. On a large scale it corrupts the whole of the market in capital.”

66.  Sir Anthony Mason NPJ giving the judgment of the Court of Final Appeal in Koon Wing Yee v Insider Dealing Tribunal [2008] 3 HKLRD 372 at 390 considered insider dealing, under the now repealed Securities (Insider Dealing) Ordinance, to be an ‘insidious mischief’ which threatened the integrity of financial markets as well as public and investor confidence. It was, he said at 391, a “species of dishonest conduct”.

67.  It also needs to be remembered that, quite apart from the damage insider dealing does to Hong Kong’s capital market and financial reputation and to public confidence in the integrity of the system, it is a fraud on the public, for reasons explained in McQuoid at para 7:

“In passing sentence the judge observed that the offence committed by the appellant was not to be treated as a victimless crime. We agree. The person who sold the shares in TTP at 13 pence may have been determined to sell on that date at that price, or at any price. However, he would not have sold at that price if he had known that the takeover was already agreed and would become public within 48 hours. But, as is always the case, only those very few people on the inside knew exactly what was going on.”

Conclusion

68.  For the above reasons, the appeal against conviction is dismissed. However, the appeal against the sentence passed upon review must be allowed. Accordingly, the sentence of four months’ imprisonment will be set aside together with the fine of HK$120,000, which if already paid shall be returned to the appellant. The original sentence passed by the magistrate imposing a CSO for 240 hours will be reinstated. The costs order against the appellant will remain in place, having been unaffected by the review procedure.