WIN WONG SECURITIES LTD v. LEI WAI MENG

HCA1867/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1867 OF 2001

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J U D G M E N T

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1. The plaintiff is a Hong Kong company licensed and authorised to deal in securities under the provisions of the Securities Ordinance Cap.333. 

2. On 2 February 1999, the defendant, a native of Jiangmen but, at the time, a resident of Macau, attended at the offices of the plaintiff for the purposes of opening an account with the plaintiff.  One of the plaintiff’s designated traders called Chan Po-chun (Mr Chan) was instructed to look after the defendant; in particular, to prepare, explain and get him to complete the necessary documents.  One of these was called the “cash client’s agreement”; another, the “authorisation for third party to operate my/our account”; and there was an information card. 

3. The records of the plaintiff reveal that on that day the defendant entered into and signed the appropriate documents leaving also with the plaintiff a photostat copy of his Macau identity card.  Mr Chan was, by the third-party authorisation, the plaintiff’s trader designated and authorised to trade on the defendant’s behalf.  The defendant was given an account number.  Reciting this over the phone enabled him to instruct a purchase or sale by telephone. 

4. By the terms of the agreement the defendant, following an instruction to purchase shares, was required to put the plaintiff in funds to complete the purchase on or by two days after the date of instruction.  Similarly if he gave instruction to sell, he had to have bought them on or by two days later.  Default in compliance with these obligations by the defendant gave the plaintiff the right to trade in the defendant’s stocks to make good or reduce that fault.  The defendant was to be held responsible for all losses occasioned by his default.  That included an obligation to pay interest at a designated rate. 

5. During the currency of their relationship, the defendant traded only in the shares of two companies called China DigiContent Company Limited (China Digic) and a major shareholder of China Digic called Leading Spirit High-Tech Holdings Company Ltd (LS High-Tech). 

6. On the eve of 14 December 2000, the plaintiff held to the defendant’s account 21 million shares in China Digic, 3,240,000 shares in LS High-Tech and a credit balance of $3,082,593.44. 

7. It is what happened on 15 and 18 December resulting in a significant reversal in that credit balance that led to a falling-out between the parties and this action.  On 15 and 18 December the plaintiff undertook a number of trades in the defendant’s account, at the conclusion of which the holding of the defendant had become 68,860,000 in LS High-Tech and 22,350,000 in China Digic.  The credit balance of 14 December had become a debit balance of $3,488,403.80. 

8. The defendant was called upon to make good the shortfall.  But contrary to his obligations under the agreement, the defendant failed to put the plaintiff in funds or by two days after the trades were completed. 

9. The plaintiff sent a letter of demand to the defendant on 9 April 2001.  Solicitors then representing the defendant wrote in reply to the effect that the defendant had stopped trading from 14 December 2000 so that all trades thereafter purportedly undertaken in his name using his funds were unauthorised.  They sought an acknowledgment of this and immediate rectification.  The plaintiff was not impressed.  It issued this writ on 26 April 2001.  It sues to recover the debit balance of $3,488,403.80 plus interest at the designated rate due as at the date of the writ of $93,804.62, interest to the date of judgment and thereafter, and costs. 

10. In his defence the defendant pleaded that when he signed the documents to open his account, Mr Chan represented that the plaintiff would only deal in shares for him upon his instructions; therefore, that at no time was Mr Chan or the plaintiff permitted to trade on his behalf without his express authority; that he gave no such authority for any trades to be undertaken after 14 December 2000; that such trades that were carried out were unlawful; that as a result, the defendant suffered the loss of the value of the shares held by him as at 14 December 2000 calculated as follows:  21 million shares in China Digic at $0.047 per share, that is, $987,000; 3,240,000 shares in LS High-Tech at the rate of $0.117 per share, that is $379,080; and what he claimed to be his cash balance at the time, being $3,006,000.  In fact, this is understated.  The amount then held to his credit was $3,082,593.44. 

11. The defendant originally sought to recover this total indebtedness of $4,372,080 by counter-claim, but this is no longer being pursued.  The plaintiff applied for an order for security for costs in respect of the counter-claim and a Master ordered security in the sum of $250,000.  When that was not forthcoming, the plaintiff applied for a dismissal of the counter-claim if the security for costs was not met by a payment in default.  In the event, leave for the defendant to discontinue his counter-claim was granted.  The pleadings have been varied accordingly.

12. In its pleaded reply, the plaintiff stated that the trades of 15 December were in accordance with its customer’s instructions with the exception of the last one, being a sale of 280,000 shares in China Digic at 24 cents per share.  It pleaded that this was a mistake, that Mr Chan notified the defendant as soon as it was discovered after the market closed that day; that the defendant agreed to ratify the sale and instructed the re-purchase undertaken on the next business day, being 18 December.  The pleadings thus set out the issue for determination:  Is the defendant liable for the shortfall in his account with the plaintiff, or not, because the trades of 15 and 18 December were unauthorised?

13. Prior to trial, the defendant having been, up to then, legally represented, gave notice that he intended to appear in person.  However, this day being the trial date, he has failed to show up and has given no explanation.  The trial has thus proceeded in his absence.

14. I come now to the evidence.  Mr Chan was the main witness for the plaintiff.  He adopted his witness statement in which he set out the history of the relationship between the plaintiff and defendant; in particular, the circumstances giving rise to the preparation and completion of the documents which resulted in the defendant becoming a customer of the plaintiff.  He said he took the defendant through the documents.  The defendant raised no queries and appeared to understand what he was committing himself to.  Mr Chan confirmed the individual transactions undertaken on the defendant’s account on 15 December were as per telephoned and authorised instructions in the usual way, save for the final trade which was the sale of 280,000 China Digic Shares.  In the context of the authorised sales, this was a relatively small transaction.  But it was a mistake and unauthorised.  Discovered by him after the market had closed, Mr Chan said he notified the defendant as soon as he became aware of it.  The defendant authorised a reverse transaction; hence, on the morning of the next trading date, being 18 December, the one deal on the defendant’s behalf was the repurchase of 280,000 China Digic shares.

15. Mr Chan went on to say that the plaintiff called for settlement of the cash shortfall.  The defendant did not pay, but neither did he complain about the amount claimed to be due.  To this day he has not settled the amount or any part of it.  To date the plaintiff still holds in the defendant’s account the shares in LS High-Tech and China Digic.  Whilst under the agreement with the defendant the plaintiff has the right to sell the shares to recover or reduce the shortfall, in or about May 2001 trading in the stocks of both companies was suspended; that remains the position to date.

16. That being the plaintiff’s case and there being no evidence from the defendant to counter it, I find that the defendant, as a customer of the plaintiff, authorised it to trade in the shares that the plaintiff bought and sold on his instructions on 15 and 18 December 1997, thus rendering the defendant liable to meet the costs thereof and interest thereon in default. 

17. I find for the plaintiff in the sum of $3,488,403.80, together with interest calculated to 25 April 2001 of $93,804.62.  There will be further interest on $3,488,403.80 from 26 April 2001 to this date at the prime lending rate as quoted by the HSBC and thereafter at the judgment rate.  Costs are to the plaintiff to be taxed if not agreed.