SECURITIES AND FUTURES COMMISSION v. DU JUN (previously "A")

HCMP 1407/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1407 OF 2007

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D E C I S I O N

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I.   INTRODUCTION

1.  In September 2009, after a trial lasting 2 months, Du was convicted of insider dealing in CITC Resources shares by Judge A. Chan of the District Court.  Judge Chan sentenced Du to 7 years imprisonment.  The Judge also ordered him to pay a fine of $23,324,117 and to reimburse $933,340 of the SFC’s investigation costs.

2.  The fine of over $23 million represented the notional profit which Du might have obtained from his insider dealing.  The Judge gave Du 9 months to pay the fine.  In default of payment, the Judge ordered that Du be subject to a further 12 months imprisonment.

3.  Because CITIC shares fell in value recently and Du had held on to a substantial number of CITIC shares, as of today the actual net profit which Du has made from insider dealing in CITIC shares apparently amounts to just over $2 million.

4.  Du has appealed against his conviction and sentence.  The appeal remains to be heard.

5.  I have to decide 2 matters.

6.  First, the SFC applies to amend its Originating Summons (OS) in these proceedings.  By the OS, the SFC sought an order freezing $46,595,033 of Du’s assets.  It then obtained an interim order freezing that amount of Du’s assets.  The sum represented the SFC’s initial estimate of twice Du’s notional profits from insider dealing.  Over time, the value of frozen assets has been reduced as a result of various Court Orders to somewhat over $30 millions.

7.  Second, Du applies to pay the fine and SFC investigation costs ordered out of his frozen assets.  In the alternative, subject to the payment of the fine and investigation costs, Du asks that the interim order freezing his assets be discharged.

II.  DISCUSSION

A.  SFC’s application to amend OS

8.  By its amendments the SFC seeks declarations that Du has engaged in insider dealing contrary to the Securities and Futures Ordinance (Cap.571).  As particulars of insider dealing, the SFC repeats the 10 charges made against Du in the District Court proceedings.  The SFC asks by way of new relief that the Court require Du to take such steps as may be necessary to restore any counterparty with whom he traded on the basis of insider knowledge, to the position which the counterparty was in before the relevant transaction with Du. The SFC also asks for the appointment of a receiver and the nullification of Du’s insider dealing trades as appropriate.

9.  Mr. Johnny Mok SC resists the SFC’s proposed amendments essentially because they are unparticularised.

10.  I agree with Mr. Mok to an extent.

11.  The amendments are general in nature.  The SFC is seeking to restore counterparties or other persons who may have suffered loss as a result of Du’s insider dealing to the same position that they would have been in if they had not entered into transactions with Du.  But the SFC does not identify precisely who these counterparties or other persons are and what their loss is supposed to be.  The Court is simply asked to make all necessary directions without the SFC specifying what those directions should be.  As to the amount due to anyone by way of restitution, the Court would need a clearer idea of how the SFC proposes to calculate or measure the same.

12.  But, contrary to Mr. Mok’s suggestion, I think that it would be wrong to disallow the amendments at this stage.

13.  There is still a dispute between the SFC and Du as to whether Du engaged in insider dealing and (if so) what the proper level of a fine based on Du’s profits should be.  Mr. Mok says that, in light of the District Court’s judgment, there is no “lis” between the parties in relation to the declarations of insider dealing sought by the SFC.  But Du has appealed against his conviction and sentence.  Pending determination of that appeal, it cannot be said that there is no civil dispute as to Du’s liability.

14.  Further, it is arguably a consequence of any insider dealing by Du that he not only profited, but that he also caused loss (perhaps significant loss) to others.  It may be a difficult question how that loss is to be proved or measured.  But at this stage, I do not think that I can rule out that others have made a loss and of there being some way of calculating that loss in an individual case.

15.  It is common for Originating Summonses to set out the relief sought in only a general manner.  In such situations, the affidavit evidence routinely filed in support of the substantive application provides the requisite particulars to flesh out the relief sketched out in the Originating Summons.

16.  The SFC has filed numerous affidavits in support of its interlocutory application to amend.  Unfortunately, the SFC has not filed a draft of the affidavit upon which it proposes to rely for the substantive disposal of its OS if the same is allowed to be amended.

17.  That is not an insurmountable problem.  It is my view that the general relief in the SFC’s proposed amendments can be made good with particulars in a supporting affidavit.  What is important is for the SFC to identify in such affidavit precisely who are said to have made a loss and what the quantum of that loss is alleged to be.  That, I think, ought to be done sooner rather than later.

18.  I will thus allow the amendments.  But I shall direct that the SFC file an affidavit identifying the counterparties or other persons who (it is alleged) have suffered loss as a result of Du’s activities, and quantifying as best as can be just what that loss is.  I shall hear counsel on the time required for such an affidavit and as to what further directions I should now give for the substantive disposal of the SFC’s OS as amended.

19.  For the avoidance of doubt, I stress that my allowing the SFC’s amendments at this stage should not be taken as barring a later application by Du to strike out the Amended OS.  For instance, it may become apparent from the supporting affidavit filed that the SFC actually has no viable case at law for the general relief which it seeks.  It would then be open for Du to apply to strike out the Amended OS in whole or part as disclosing no reasonable cause of action.

B.  Du’s application to vary or discharge freezing order

20.  Mr. Simon Westbrook SC opposes the application for variation of the amount frozen.  He argues that Du may have other assets from which the fine and other amounts may be paid.

21.  But here I agree with Mr. Mok that, on the evidence, Du cannot pay the fine without resorting to the frozen funds.

22.  Du’s frozen and unfrozen assets currently amount to about $46 to $49 million or so.  His assets not subject to the freezing order amount to about $15 to $17 million or so.  Of these free assets, a Beijing property has been gifted to his brother and, in any case, is worth only $1.46 million.  Another Beijing property (worth about $9.15 million) is owned jointly by Du and his wife.  Even on the assumption that a quick sale of the latter Beijing properties is possible, it is unlikely that the proceeds can easily be transferred to Hong Kong in light of the Mainland’s foreign exchange controls.

23.  There is also evidence that, prior to Du’s present application, the parties appear to have proceeded on the basis that the frozen sums could be used to discharge fines imposed on Du.  Judge Chan may additionally have imposed the fine on the assumption that, over $30 million of Du’s assets having been frozen, it was possible for him to pay about $23 million.   In any event, that the monies frozen were envisaged as a source for the payment of any fine based on Du’s notional profit is implicit in the way that the amount of assets to freeze was originally calculated for the purposes of an interim order.

24.  The SFC suggests that Du should first pay as much as possible of the fine from his free assets.  It is said that this is because the SFC’s restitutionary claims, if successful, may eat up a substantial part of the frozen assets. 

25.  I am not persuaded by that submission.  As I have pointed out, the SFC has failed to give particulars as to the quantum of its restitutionary claim.  In the absence of particulars, I cannot speculate as to how much the claim may or may not be.  As a practical matter, Du’s assets were frozen to meet eventualities such as the payment of monies based on Du’s notional profit.  A fine having been imposed on that basis, in the absence of compelling reason, Du should be entitled to pay the fine from the frozen assets.

26.  Mr. Mok argues that, the fine having been paid, there is no other basis upon which monies should remain frozen.  The fine being based on notional profits made by Du (Mr. Mok’s argument runs), there would be no further reason to hold any sums once the fine has been paid.  However, there would still remain the question whether and to what extent Du should compensate anyone who lost money as a result of his insider dealing.  In the interim pending the filing of a supporting affidavit by the SFC as to the specifics of its case on restitution, I think that it would be premature to discharge the balance of the freezing order.

27.  By analogous reasoning, I think that Du should be allowed to pay the investigation costs out of his frozen assets.

III. CONCLUSION

28.  The SFC’s application to amend the OS is allowed.  But the SFC is directed to file an affidavit in support of the OS as amended.

29.  Du’s application to pay the fine and investigation costs out of his frozen assets is allowed.

30.  There will be liberty to apply.

31.  I shall hear the parties on costs and consequential orders.