LEUNG CHI KEUNG v. MARKET MISCONDUCT TRIBUNAL AND ANOTHER

CACV 256/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 256 OF 2010

(ON APPEAL PURSUANT TO S.266 OF THE SECURITIES AND FUTURES ORDINANCE, CAP 571 FROM DETERMINATIONS OF THE MARKET MISCONDUCT TRIBUNAL IN RELATION TO CHINA OVERSEAS LAND AND INVESTMENT LIMITED)

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BETWEEN

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J U D G M E N T

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Hon Cheung JA :

The decision

1.  By two reports dated 8 July and 20 August 2009 (‘the report’) the Market Misconduct Tribunal (‘The Tribunal’) found the appellant, who is referred to as Edmund Leung in the report, culpable of market misconduct by way of insider dealing, contrary to Section 270(1)(e) of the Securities and Futures Ordinance (‘SFO’) (Cap. 571).  It imposed the following penalties against the appellant :

(1) Eight-month prohibition from participating in the management of Cheetah Investment Management Limited (‘Cheetah’) or its subsidiary;

(2) Eight-month prohibition from dealing in securities (a ‘cold-shoulder’ ban);

(3) Payment of HK$2,069,582.42 to the Government for its costs and expenses;

(4) Payment of HK$361,854.00 to the Securities and Futures Commission (‘SFC’) for its costs and expenses; and

(5) A recommendation that the Hong Kong Institute of Certified Public Accountants, CPA Australia, Hong Kong Society of Financial Analysts, Hong Kong Securities Institute and Hong Kong Institute of Directors of which the appellant is a member take disciplinary action against the appellant.

2.  Pursuant to leave to appeal out of time granted by this Court, the appellant now appeals against the decision.  Under Section 266 of the SFO the appellant may appeal against the finding or determination of the Tribunal on a point of law or with the leave of the Court of Appeal, on a question of fact. 

Background

3.  The appellant was one of the three specified persons in the Tribunal proceedings into dealings in January 2004 of the shares of China Overseas Land and Investment Limited (‘COLI’) a listed company in the Hong Kong Stock Exchange.  The appellant was formerly the Director of Asian Equities in ABN AMRO Asset Management (Asia) Limited (‘ABN AMRO’).  In that position he managed nine separate funds, one of which was the China Equity Fund (‘CEF’).  He had since left ABN AMRO and had at one time joined Cheetah.

4.  For the purpose of this appeal the other relevant person was David Tsien.  In January 2004 David Tsien held the title of Equity Salesman in the Sales Department of JP Morgan Securities (Asia Pacific) Limited (‘JP Morgan’). 

5.  Between the end of 2003 and the beginning of January 2004 COLI was contemplating raising money by a top-up placement of its shares.  David Tsien who was acquainted with Horace Nip, the Deputy Financial Controller and Executive Director of COLI, arranged a meeting between Nip and his colleagues in the Equity Capital Markets Department of JP Morgan.  Eventually, JP Morgan was responsible for the placement of COLI’s shares.  COLI announced the placement of its shares on 26 January 2004. 

6.  Between 2 and 26 January 2004, David Tsien and the appellant had a series of telephone conversations in which the Tribunal found David Tsien had given the appellant price sensitive information relating to COLI shares and the appellant had made use of the information in dealing with COLI shares.

7.  The appellant had acquired COLI shares for CEF on five occasions between 2 and 19 January 2004. The total number of COLI shares CEF held on 19 January 2004 was 9,392,000.  On 21 and 26 January 2004, the appellant disposed of 2,392,000 and 2,000,000 COLI shares respectively.  On 27 January 2004, the appellant acquired 4.5 million COLI shares by placement and on 29 January 2004, he further acquired 1.5 million COLI shares :

Particulars

Date (January)	Buy/Sell	Unit price	Number of shares	Balance held
2	Buy	1.4602	2 million	2 million
6	Buy	1.6905	2 million	4 million
7	Buy	1.7699	2 million	6 million
13	Buy	1.6575	2 million	8 million
19	Buy	1.7961	1,392,000	9,392,000
21	Sell	1.9683	2,392,000	7 million
26	Sell	2.0563	2 million	5 million
27	Placement	1.8000	4.5 million	9.5 million
29	Buy	1.8050	1.5 million	11 million

The Financial Secretary’s Notice

8.  The Tribunal proceedings were triggered by the Financial Secretary’s Notice (‘FS Notice’) dated 12 September 2007 issued pursuant to Section 252(2) and Schedule 9 of SFO.  It averred that in the period between 7 and 26 January 2004 David Tsien and the appellant came into possession of relevant information in respect of COLI namely, ‘specific non-public price sensitive information that COLI would announce and carry out a top-up placement of 850 million shares at a price of HK$1.8 per share on or about 26 January 2004’. 

9.  The FS Notice (as amended by the Tribunal) stated that David Tsien had on various occasions directly or indirectly disclosed the relevant information to the appellant.  The appellant sold a total of 4,392,000 COLI shares on 21 and 26 January 2004 and obtained a profit of about HK$915,173.60 based on the placement price of HK$1.80 for the fund he managed. 

10.  The FS Notice further stated that :

(1) David Tsien was a person connected with COLI by virtue of his occupation of a position which might reasonably be expected to give him access to the relevant information (paragraph 3);

(2) David Tsien and the appellant knew that the relevant information was material, non-public, price sensitive and would have a depressing effect on the price of COLI’s shares traded on the Hong Kong Stock Exchange (paragraph 4);

(3) In directly or indirectly disclosing the relevant information to the appellant, David Tsien had reasonable cause to believe that he would make use of the relevant information to deal in COLI’s shares and had thereby acted in contravention of Section 270(1)(c) of SFO (paragraph 5);

(4) The appellant knew David Tsien was a person connected with COLI and he had obtained the relevant information by reason of his connection in COLI (paragraph 6); 

(5) Accordingly, in selling the shares of COLI the appellant had acted in contravention of Section 270(1)(e)(i) of SFO (paragraph 7). 

Finding by the Tribunal

11.  In an inquiry that spanned over five months of substantive hearing, the Tribunal found, among other things, that,

1) David Tsien was a person connected with COLI and had relevant information relating to COLI shares;

2) The appellant received the relevant information from David Tsien;

3) The appellant knew that David Tsien was a connected person and the information disclosed to him was relevant information;

4) The appellant dealt with the COLI shares.

Insider dealing

12.  Market misconduct means, among other things, insider trading (Section 2 SFO).  Section 270 makes it unlawful for an insider or a person who obtains inside information from someone whom he knows to be an insider to deal with the shares while in possession of the inside information.  The relevant section for the purpose of these proceedings is Section 270(1)(e) which provides that   

‘ S. 270(1) Insider dealing in relation to a listed corporation takes place –

(a)  –

(b)  –

(c)  –

(d)  –

(e)  when a person who has information which he knows is relevant information in relation to the corporation and which he received, directly or indirectly, from a person whom he knows is connected with the corporation and whom he knows or has reasonable cause to believe held the information as a result of being connected with the corporation –

(i) deals in the listed securities of the corporation ... or

(ii) –

(f)  — .’

The four elements

13.  As can be seen from Section 270(1)(e) there are four elements for someone to be engaged in insider trading :

(1) he has information which he knows is relevant information in relation to a corporation;

(2) he received the information (directly or indirectly) from a person whom he knows is connected with the corporation;

(3) he knows or has reasonable cause to believe that person held the information as a result of being connected with the corporation;

(4) he deals in the listed securities of the corporation.

Relevant information

14.  Section 245(2) of the SFO provides that:

‘ “relevant information” in relation to a corporation, means specific information about-

(a) the corporation;

….

(c)  the listed securities of the corporation ... ,

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;’

Connected with the corporation

15.  Connected person is defined by Section 247(1) of SFO as follows :

‘ (1) For the purposes of Division 4, a person shall be regarded as connected with a corporation if, being an individual –

(a) he is a director or employee of the corporation or a related corporation;

(b) he is a substantial shareholder of the corporation or a related corporation of the corporation;

(c) he occupies a position which may reasonably be expected to give him access to relevant information in relation to the corporation by reason of-

(i)  a professional or business relationship existing between –

(A)  himself, or his employer ... ; and

(B)  the corporation ... ;

(ii)  his being a director, employee or partner of a substantial shareholder of the corporation or a related corporation of the corporation;

(d)  he has access to relevant information in relation to the corporation and –

(i)   he has such access by reason of his being in such a position that he would be regarded as connected with another corporation by virtue of paragraph (a), (b) or (c); and

(ii) the relevant information relates to a transaction (actual or contemplated) involving both those corporations or involving one of them and the listed securities of the other ... .

(e)   —.’

Legislative history of insider trading legislation

16.  Mr. Benjamin Yu SC and Mr. Laurence Li, counsel for the appellant traced the legislative history of the Hong Kong insider trading legislation.  The history is accepted by Mr. Jonathan Kwan, counsel for the respondent. 

17.  We will gratefully adopt the summary of the legislative history by the appellant’s counsel.

1)  The wording of Section 247 and the policy it embodies can be traced back to the United Kingdom Companies Bill 1973.

2)  The White Paper leading to the Companies Bill 1973 stated that ‘directors, employees, major shareholders and professional advisers of the company together with near relations of such persons’ should be regarded as insiders.  The Paper explained :

‘ Dealing in a company’s securities by anyone who, by reason of his relationship with the company or with its officers had information which he knew to be price-sensitive, should be a criminal offence unless he can show that his primary intention in dealing at that particular time was not to make a profit or avoid a loss.’ (emphasis added)

See Rider and French : The Regulation of Insider Trading (1979), at page 197.

3)  The 1973 Bill was not passed.  But the provisions against insider dealing were reintroduced and became part of the Companies Act 1980 (See Rider and French, at page 198.).  Section 68 of the 1980 Act applied the prohibition to any person who was ‘connected with a company’ or who ‘has information which he knowingly obtained ... from an individual who is connected with a particular company’.  Section 73 defined connection in these terms:

‘ (1) ... an individual is connected with a company if, but only if:

(a) he is a director of that company ...

(b) he occupies a position as an officer ... or employee ... or a position involving a professional or business relationship between himself (or his employer ...) and the first company ... which in either case may reasonably be expected to give him access to … unpublished price-sensitive information    and which it would be reasonable to expect of a person in his position not to disclose except for the proper performance of his functions.’  (emphasis added)

4)  These provisions of the Companies Act 1980later became sections 1 and 9 of the Companies Securities (Insider Dealing) Act 1985.  Their wording remained essentially the same.

5)  Hong Kong’s first legislative provision dealing with insider dealing was Section 140 of the Securities Ordinance（‘SO’）1974.  The section applied to a person who ‘through his association with a corporation, has knowledge of specific information ... [that] has not been generally made available’.

6)  The Hong Kong Government deferred the section’s operation to await the UK legislation (See Official Report of Proceedings, Legislative Council, 12 December 1973, at page 281) and in 1979, without ever having brought it into force, replaced it with sections 141A-141L.  (See Insider Dealing – Identifying and Tackling It, Kemal Bokhary QC (now Bokhary PJ), 14 HKLJ 11 (1984)).  The new sections followed the UK concept of connection.  They also established the Tribunal’s predecessor, the Insider Dealing Tribunal (‘IDT’).

7)  Section 141E(1) was the definitional section.  Like the provisions in the UK, it covered (a) directors; (b) employees; and (c) a person ‘who occupies a position which may reasonably be expected to give him access to relevant information’.

8)  The substantive parts of sections 141A-141L later became the Securities (Insider Dealing) Ordinance 1990 (‘S(ID)O’) and, ultimately, parts of the present SFO.  Section 141E became Section 4 of the S(ID)O.

9)  When the Government proposed, and the legislature responded by re-enacting sections 141E-141L of the SO 1974 as the new S(ID)O in 1990, they were very much aware of the European Directive (see paragraph 18.3) of this judgment) but declined to adopt it (see Official Report of Proceedings, Legislative Council 25 July 1990).

10)  From 1999 to 2003, Hong Kong went through a major exercise of ushering in the SFO to update and replace ten ordinances.  Section 247 and Section 270 of SFO re-enacted Section 4 and Section 9 of the S(ID)O.

11)  Parallel to the market misconduct provisions, section 291 of SFO creates the criminal offence of insider dealing.  It is modelled on section 270 and adopts the connected person requirement.  Section 287 which defines connected person for the purpose of the criminal offence is also modelled on section 247.

Other jurisdictions

18.  Counsel for the appellant also referred to the approach towards insider dealing in Australia, United Kingdom and USA.  Again, as this is not controversial, we will adopt the summary provided by the appellant’s counsel.

Australia

1)  Australian legislations had, until 1991, followed the traditional UK approach in requiring as the first step the identification of a person ‘connected with’ the company. The relevant section in the Corporations Law, like those in Hong Kong’s SFO, could be traced back to the Companies Bill 1973.  (See Ford’s Principles of Corporations Law, 8^th and 14^th ed., both at paragraph 9.620.)  The authors stated that

‘ All of these early provisions on insider trading were based on a fiduciary concept. The underlying notion seems to have been that a person should not deal on the basis of price-sensitive non-public information if the information was acquired through a corporate connection. The connection could be with the company in whose securities the insider deals (as where a director of a mining company acquires shares in the company prior to the announcement of successful drilling) or it could be a connection with another company where the information relates to a transaction affecting the company in whose securities the insider deals (for example, where a director of an offeror acquires shares in a target company prior to the offeror’s announcement of a takeover bid at a premium over the market price). The policy justification for the law was that insider trading is a form of wrongdoing akin to breach of fiduciary duty, since an insider takes advantage of price-sensitive non-public information acquired in connection with his or her office. On this view, a person who receives information from a corporate insider (“a tippee”) should be prohibited from trading because the information is tainted by its source.’ (emphasis added)

2)  In 1991, Australia took the controversial step of dropping the person connection requirement principally in the interests of ‘simplicity’ (Ford, 8^th and 14th ed., both at paragraph 9.620).  In effect, Australia ‘removed the “insider element” from the law of insider trading, which then became a law about ‘trading with informational advantage’.  Ford, 8^th and 14^th ed., both at paragraph 9.600 stated that :

‘ The statutory prohibition on insider trading has now evolved to such a degree that it really has no place in a discussion about directors’ duties. This is because the statutory provisions no longer depend on the establishment of a fiduciary or similar connection between the trader and a relevant company. Statutory amendments in 1991 removed the “insider element” from the law of insider trading, which then became a law about “trading with informational advantage”.’

United Kingdom

3)  The United Kingdom by its Criminal Justice Act 1993 also significantly loosened the person connection.  The reform was part of conformity with the relevant European Directive.  Like the new Australian approach, the philosophy of the European Directive was to ‘penalise the exploitation of information advantages, more or less irrespective of the status of the individual concerned’.  See Gore-Browne on Companies (45^th Ed) Vol 2 at paragraph 42 [29] where the editors commented on the new UK 1993 legislation :

  ‘Perhaps the most significant change introduced by the 1993 Act was the abandonment of the traditional requirement in English legal thinking, in regard to insider abuse, that the insider should in some clearly defined way be ‘connected’ with the company in whose securities he makes his illicit profit.  The current law does not require such a nexus.

…

  The present legislation, however, unlike the earlier law, does not necessitate a connection between the insider and the relevant issuer. Therefore, given this and the philosophy of the directive to penalise the exploitation of informational advantages, more or less irrespective of the status of the individual concerned, it has been argued that the 1993 Act imposes considerably wider potential liability than the previous legislation. On this view, a journalist or analyst who deals prior to the publication of his own recommendations, even though the price-sensitive information is essentially nothing more than his own recommendations, will be guilty of insider dealing.’

See also Rider, Alexander, Linklater and Bazley : Market Abuse and Insider Dealing, 2nd ed., at paragraph 3.60.

4)  This change was apparently a reluctant one.  The UK Government at first proposed to retain the person connection requirement, but ultimately, following the European Directive, dropped the concept and expanded the categories of insiders considerably.  See Gower’s Principles of Modern Company Law, 5^th ed., at pages 629-630; Gower and Davies’ Principles of Modern Company Law, 6^th ed., at pages 464-465.

United States of America

19.  In respect of the position in USA the late Professor Betty Ho in Public Companies and their Equity Securities at page 673 stated that :

‘ the law [on insider dealing] was invented in the US and most of the theoretical and policy debates took place in the US.’

20.  See also Rider, Alexander, Linklater and Bazley, at paragraph 3.66 : ‘While most legal system now have laws seeking to regulate the misuse of inside information, the US Federal law is undoubtedly the most developed and worthy of mention here.’

21.  In the US, a person may be guilty of insider dealing if he himself is a fiduciary to the company; or if he has received inside information from a person who he knows or should know to be such a fiduciary breaching the fiduciary duty in passing him such information.  However, in such a case, it must be shown that the tippee knew or should have known that there has been a breach of fiduciary duty.  See Fundamentals of Securities Regulation, 5^th ed., page 1002; Dirks v. Securities and Exchange Commission, 463 US 646 (1983).

22.  The US Supreme Court has explained the rationale for this.  The wrong of insider dealing stems from the insider breaching his duty to the company and shareholders.  Any trading on inside information is, by definition, to the disadvantage of counter-party shareholders who do not know the information.  An outsider-tippee’s culpability stems from participating in the insider’s breach of duty.  Thus he is ‘in the wrong’ only if he knows or should have known the insider to be an insider owing and breaching a duty.  See Dirks, at 653-662; Bateman Eichler, Hill Richards, Inc. v. Berner, 472 US 299 (1985), at 311 fn21.

Grounds of appeal

23.  The appellant relies on two grounds of appeal :

(1) The Tribunal erred at law in holding that David Tsien was a person ‘connected with’ COLI in terms of both subsection 247(1)(c) and (d) of the SFO and that the appellant knew David Tsien was a connected person. 

(2) The Tribunal erred in law in holding that at the time the appellant sold COLI shares on 21 and 26 January 2004, he knew that he had ‘relevant information’ as alleged in the FS Notice.  Further the Tribunal did not have any evidence that the information which the appellant possessed at the time of his dealing in COLI shares was price sensitive.

The three issues

24.  The issues in this appeal are :

1)  Whether, under Section 247(1)(c) of SFO, David Tsien as a public-side salesman in JP Morgan was a person ‘connected with’ COLI.

2)  Whether the appellant knew David Tsien was a connected person; and

3)  Whether the information that the appellant had at the time of his placing of orders was ‘relevant information’ as defined for the purposes of the Tribunal proceedings.

25.  I will address the first and second issues while Yuen JA, whose judgment I agree, will address the third issue.

Person connected

26.  There are two elements in the Hong Kong law prohibiting insider dealing.  The first is an information connection namely, the relevant information must be specific information about a listed company or its securities which are non-public and which are price-sensitive.  This is reflected in Section 245 of SFO. The second element is a person connection to the listed company namely, the relevant information must come from certain defined insiders : section 247 of SFO.  It is clear from the wording of the relevant provisions of the SFO that the mischief of insider dealing involves person connection.  A person is guilty of insider dealing not merely because he dealt in shares while in possession of inside information, he also had to be either an insider or knew that the person who gave him the information was an insider.

FS Notice based on Section 247(1)(c)

27.  The Tribunal referred to the FS Notice where it was stated that David Tsien was a person connected with COLI by virtue of his occupation of a position which might reasonably be expected to give him access to the relevant information.  The Tribunal rightly held that this is based on the wording of Section 247(1)(c).

The basis of the Tribunal’s conclusion

28.  The Tribunal concluded that David Tsien was a connected person.  It held that,

‘ 878. On a consideration of all the evidence we have no doubt that in January 2004 Mr. David Tsien occupied a position which ‘may reasonably be expected to give him access’ to information in respect of the placement of COLI shares and had so not only by reason of his own business relationship with Mr Horace Nip and other officers of COLI but also by reason of the business relationship between JP Morgan and COLI. Having successfully brokered two block crossings of COLI shares to JFAM from JP Morgan in November and early December 2003 we are sure that Mr Ian Long’s [an associate in the Equity Capital Markets Department of JP Morgan] description of David Tsien as the man in JP Morgan with the “relationship” with COLI was accurate and apposite. He played a role in bringing the parties together for the lunch of 5 January 2004, followed up immediately in the afternoon with the meeting at the Hong Kong Club with Mr Horace Nip at which he was informed of the terms upon which COLI were considering a placement of it shares.’

The objective approach on connected person

29.  As stated earlier, the former section 68 of theUK Companies Act 1980 applied the prohibition to any person who was ‘connected’ with a company or who ‘has information’ which he knowingly obtained from an individual who is connected.  The definition of connected person in Section 73(1) of this Act is similar to our section 247(1).

30.  There is little judicial authority on the interpretation of our section 247(1) or section 73(1) of Companies Act 1980.  But counsel for the appellant referred the Court to the views of textbook authors on this topic.

31.  Buckley on the Companies Acts (14^th Ed Vol 2) at 1568-1569 stated that :

‘ (iii) To be ‘connected’ with a company he must be an officer or employee of it or of some other company in the group (as fairly narrowly defined) or in some professional or business relationship with either company. If he is a director, that is an end of the matter, for he is evidently assumed to be in a position to acquire the relevant information. If he is not, then he is only ‘connected’ if (a) the position he occupies is such that it may reasonably be expected to give him information which in relation to securities of either company is what is called ‘unpublished price sensitive information’ and (b) that information is such that it would be reasonable to expect a person in his position not to disclose it except for the proper performance of his functions. Note that both (a) and (b) are subjective criteria: in both cases it is not what actually is, but what other people may reasonably expect. Such an individual is ‘connected’ even if in fact his position does not give him access to such information and even if in fact he is authorised to disclose it.’ (emphasis added)

The footnote to the passage on ‘what other people may reasonably expect’ stated ‘Presumably the man on the Clapham omnibus’.

32.  Rider : Insider Trading at page 17 commented on Section 73(1)(b) as follows :

‘ It would seem from the wording of s. 73(1)(b) that it is not enough for the prosecution to establish that a particular officer or employee, who is not a director, was definitely in possession of inside information relating to the securities of his company when he dealt. To be a primary insider the officer or employee must be in a position which could reasonably be expected to give him access to confidential price-sensitive information concerning the securities of the company. If a particular officer or employee is not in such a relationship with the company he cannot be guilty of an offence under s. 68(1) even though in a particular instance he might have come into possession of inside information. It would seem that the relationship must also be such that it is proper for the individual to have access to the information. For example, a junior clerk who improperly opens and reads confidential internal circulars, could hardly be regarded as in an access relationship to this information, even though he obtains it in the course of his employment. Similarly, whilst amusing comments are commonly made about the omniscience of tea-ladies it must surely be clear that such individuals are not employed in a relationship which it is contemplated will give them access to confidential price-sensitive information concerning the company. In all such cases there are adequate sanctions outside the criminal law to discourage abuse. Furthermore, in appropriate circumstances it might be possible to proceed against such individuals as secondary insiders or tippees.’ (emphasis added)

33.  Suter : The Regulation of Insider Dealing in Britain (1989) at page 90 commenting on the UK Companies Securities (Insider Dealing) Act 1985 on who is a connected person stated that :

‘ 1. Individuals connected with a company

Adopting the access approach, the IDA 1985 primarily defines an insider as, subject to certain provisos, ‘an individual…connected with a company’.  But the concept of a listed insider has not been completely abandoned since an individual is treated as connected with a company when he is a director of the company or a related company.  As the latter is defined as any body corporate which is a company’s subsidiary, holding company or fellow subsidiary, directors within a group of companies are included.  Yet unlike the 1978 Bill, other officers, employees or substantial shareholders of the company or group are not listed insiders.

  In all other cases, an access test alone is used to determine whether an individual is connected with a company.  This connection is established when he occupies a position (a) as an officer (other than director) or employee of the company in question or a related company or (b) involving a professional or business relationship between himself (or his employer or a company of which he is a director) and the company in question or a related company which in either case may reasonably be expected to give him access to unpublished price sensitive information about the securities of either company and which he would not be reasonably expected to disclose, except for the proper performance of his functions.  The test is thus objective.  On the assumption that their positions may reasonably be expected to give access to unpublished price sensitive information about the securities, this definition is wide enough to cover a company’s secretary, solicitors, accountants, auditors, bankers, important customers, printers and messengers.     

  However, this objective test narrows the range of individuals within the definition of insider.  It excludes individuals such as employees or other individuals in the specified professional or business relationship, who occupy positions that quite unexpectedly give them access to unpublished price sensitive information.  Hence, an individual’s formal position prevails over the qualitative nature of the information.  Whereas both efficiency and equity considerations support the inclusion of such individuals as insiders, the IDA 1985 imposes liability only when the fall within its definition of tippee.’  (emphasis added)

34.  Ashe and Counsell : Insider trading The tangled web (1990) at pages 65-67 stated :

‘ Three distinct groups of individuals are regarded by the Insider Dealing Act as connected with a company (s 9).

The first group is directors of that company or of any of its subsidiaries, of its holding company or of any of its holding company’s subsidiaries.….

The second category comprises officers (other than directors) or employees of the company or a related company.

The third category comprises individuals who have, or whose employer has, or whose company of which they are directors has, a professional or business relationship with the company or a related company. 

In contrast to the first category, the central factor which will determine whether individuals in the second and third categories are in fact connected persons is whether or not their position is one which may reasonably be expected to give them access to inside information in relation to the securities of either the company or a related company.  If so, then the issue is whether or not it would be reasonable to expect a person in that position not to disclose the information except for the proper performance of his functions.

Clearly an executive of a merchant bank advising a company on a take-over will occupy such a position and will therefore be connected with that company.  The janitor of that same merchant bank is unlikely to be in the same position since it cannot reasonably be expected that as a janitor he has been given access to inside information.  An executive of a related company may or may not in fact have a position which may reasonably be expected to give him access to inside information about the company’s securities.  It will be a question of fact in every case.

It may not always be a straightforward matter to determine whether an individual does occupy a position which may reasonably be expected to give him access to inside information about a company’s securities. Take the example of a market maker or investment manager in a securities house, in which there is also a corporate finance department.  That securities house should ensure that a “Chinese Wall” prevents inside information about corporate finance clients from leaving that department (see Chapter 9).  If the corporate finance department is advising A Ltd about a prospective bid for its shares will this render X, an employee in the market making department, connected with A Ltd?  The answer to that is probably “no”, since X, as a market maker in the securities house, does not occupy a position which may reasonably be expected to give him access to inside information about the securities of A Ltd if Chinese Wall arrangements have been adhered to.  If the Chinese Wall arrangements are breached so that X receives that information, this may be insufficient of itself to make him connected with A Ltd as that breach should not have occurred.  On that basis, X will only be prevented from dealing if he is a tippee.’  (emphasis added)

The objective test

35.  It is apparent from these views that the requisite test in determining whether someone is in a position which may reasonably be expected to give him access to the relevant information is an objective one, namely, what other people may reasonably expect of that person by virtue of his position.  When the editors of Buckley used the phrase ‘subjective criteria’ (‘…it is not what actually is, but what other people may reasonably expect’), perhaps they were merely referring to the subjective view of a by-stander.  But reliance of a bystander’s perception will in my view put the test in an objective context. Mr. Jonathan Kwan, counsel for the respondent, accepted that the test in section 247(1)(c) is objective.

The approach of the Tribunal

36.  The Tribunal indicated its approach as follows :

‘ The approach of the Tribunal.

 868.  The Tribunal is satisfied that the resolution of the question it has posed, “... depends on the particular facts of each case”.  (See the report of the Insider Dealing Tribunal in Public International Investments Ltd, Chapter 11.2 (iii).)  Regard must be had to the reality of the situation not merely to the labels ascribed to positions of employment.’

37.  The relevant extract of the Insider Dealing Tribunal’s report dated 2 April 2004 of Public International Investments Ltd stated that,

‘(iii) Whether any individual is in a position “which may reasonably be expected to give him access to relevant information concerning the corporation” must depend on the particular facts of each case. An analysis of a similar provision, namely, section 9 of the Company Securities (Insider Dealing) Act 1985, suggests that:

“....... it is insufficient for the officer or employee to come across the information by chance, or for him to be in a position of access to confidential information. If he is to be an insider under these provisions then he must be in a position which may reasonably be expected to give him access to information which, in relation to securities of either company, is unpublished price sensitive information and which it would be reasonable to expect a person in his position not to disclose except for the proper performance of his functions. Whether he does occupy such a position is an issue of fact to be determined in each case.”

The factual context which we are to apply is that there existed a close relationship, in theory as well as in practice, between PIIL and JCG Holdings. They had a common controller; Mr Lai devoted himself to PIIL affairs as well as to JCG affairs; he worked closely with Mr Leong, who happened to be a qualified accountant when there was none at PIIL.  So, as an employee (or director) of JCG Holdings (which was a corporation related to PIIL) he was, in the context of that company’s relationship with PIIL, and his own functions in relation to both companies, likely to have access to relevant information concerning PIIL.’

38.  I have no doubt that the determination whether someone is in such a position is a question of fact.  However, that question must be considered in an objective context and not whether someone had actual access to the relevant information.

39.  If the test is objective, then in my view, the Tribunal has erred in its approach to Section 247(1)(c).  Reading the relevant parts of the report, the Tribunal has not discussed the issue whether David Tsien occupied a position which may reasonably be expected to give him access to the relevant information.  Further there is no indication that the evidence relied upon by the Tribunal in paragraph 878 of its report, namely, David Tsien’s relationship with Horace Nip/COLI and also JP Morgan’s relationship with COLI are matters generally known in the market.  Instead it had focused its discussion on David Tsien’s actual access to that information.  This course was adopted most probably because the parties had not referred the Tribunal to the objective test.

40.  1)   At paragraph 869 the Tribunal stated that,

‘ There is no doubt that [David Tsien] had actual access to detailed information about the COLI placement : directly and indirectly in respect of COLI’s position and directly in respect of JP Morgan’s position.’ (emphasis added)

2)  Earlier in the same paragraph it stated that,

‘ There is no doubt that there is a considerable body of unchallenged evidence of a role performed by Mr David Tsien in the COLI placement that went far beyond the role to be expected of an equity salesman not only in respect of JP Morgan itself but also in relation to COLI.’

3)  The Tribunal then dealt with the evidence of David Tsien’s relationship with Mr. Horace Nip.

(1)  David Tsien was introduced to Mr. Horace Nip by Mr. Raymond Ngai, an analyst at JP Morgan who had produced reports on COLI. 

(2)  On 26 November 2003 and 3 December 2003 two blocks of COLI shares of 60 million each were acquired by JFAM with the assistance of David Tsien.

(3)  David Tsien occupied the role of an active co-ordinator in respect of the lunch meeting between COLI, JFAM and JP Morgan on 5 January 2004.  When David Tsien informed the appellant of the meeting he also told him that he had brought a lot of COLI shares for JFAM.

(4)  On 5 January 2004 Mr. Horace Nip was involved in intimate discussions with David Tsien in respect of the on-going developments of the placing of COLI shares.  David Tsien occupied the role of mentor and adviser of COLI in that exercise. 

(5)  At the lunch meeting on 5 January 2004 Mr. Horace Nip told David Tsien that COLI was considering doing a placement of 800 million shares at a price of about $1.7 per share. 

(6)  The Tribunal referred to the telephone conversation between David Tsien and Mr. Horace Nip on 7 January 2004 :

‘ 873. In their conversation at 11:33 on 7 January 2004, Mr David Tsien told Mr Horace Nip of the price sought by COLI for placing it shares, that the market price:

“ ... has to go to about $1.90-$2.00.”.

Mr Horace Nip explained in his evidence that he had made it clear to Mr David Tsien that Mr Kong was not interested if the placement price was lower than $1.80 per share.  In their telephone conversation at 15:13 on 7 January 2004, Mr Horace Nip confirmed to Mr David Tsien that Mr Kong wanted that price, namely $1.80 per placement share.  For his part, Mr David Tsien told Mr Horace Nip of the requisite market price of COLI shares :

“So, a good price would be near two dollars, between $1.90 and $2.00.”.

He went on to assert :

“If it reaches $2.00, the possibility of $1.70 or $1.80 will be higher than now.”.’

(7)  The Tribunal stated that :

‘ 875. It was a recurring theme in Mr Ian Long’s testimony that he regarded Mr David Tsien as the person in JP Morgan enjoying the best “relationship” with COLI. It was in those circumstances that he kept him updated not only in respect of developments in JP Morgan’s position on the prospect of a placement but also in respect of his dealings with Mr Horace Nip and others at COLI in relation to the same matter.’ (emphasis added)

(8)  The Tribunal further referred to the telephone conversations between Mr. Ian Long and David Tsien :

‘ in the first of the recordings of telephone conversations between Mr Ian Long and Mr David Tsien on 7 January 2004, Mr Ian Long said of his earlier meeting with Mr Horace Nip that he wanted to :

“ ... give you an update actually on the meeting I had with him.”.

After Mr David Tsien had made it clear that he had received his own reports of the meeting, “He’s pretty stiff with the price” Mr Ian Long went on to stipulate the price requested by COLI as being 180.

876. In their telephone conversation at 13:07 on 19 January 2004, having exchanged information about current developments in the prospective placement, the telephone conversation concluded with Mr David Tsien saying :

“Have a check with Horace and .. I will also call him today. And if there is anything new, then we should swap information, okay?”.

877. In their telephone conversation at 16:24 on 20 January 2004, Mr David Tsien informed Mr Ian Long of the results of his telephone conversation of a few minutes earlier with Mr Wu that the latter was happy with a placement at a price of $1.70, whereas Mr Kong wanted a placement price of $1.80.  For his part, Mr David Tsien said that he had asked for :

“… a compromise at 1.75 on the basis that the stock price should be above $2.00.”.’

41.  It is plain from the summary the Tribunal considered that David Tsien had actual access to confidential information relating to COLI shares, and not specifically from an objective point of view that the position of David Tsien may reasonably be expected to give him access to the confidential information.

42.  Mr. Jonathan Kwan referred to the report of the Insider Dealing Tribunal dated 5 March 1997 in Hong Kong Parkview Group Ltd.  The issue there was whether the retired chairman of a listed company was a person who would ‘reasonably be expected to have access to relevant information … by virtue of … a business relationship existing between him and (the listed company)’ as per section 4(1)(c) of the S(ID)O 1990.  The Tribunal concluded that he was.  Among the matters considered by the Tribunal were the business deals that the person had conducted after his retirement which brought business to the listed company. The Tribunal, however, further stated that,

‘ When considering the weight to be attached to references in newspaper articles which suggest to the reader that Mr. C.S. Hwang is a person connected to HKPVG we have observed that the company itself seems to have taken no steps to correct the impression which, in this inquiry, they say is an incorrect impression. We conclude that either the company did not want to correct the impression or it was not a false impression at all. Whichever it was the company was clearly content with the fact that he was regarded as a connected person. Such an attitude by the company is a factor which is relevant to ascertain whether or not the definition in s. 4(1)(c) fits Mr. C.S. Hwang.’

43.  By this passage, the Tribunal was clearly adopting an objective test because it was dealing with the public perception of the position of the retired chairman.  This case does not assist Mr. Jonathan Kwan’s argument that the Tribunal in the present case had adopted the correct approach.

Section 247(1)(d)

44.  While the Tribunal had correctly understood the FS Notice referred to section 247(1)(c) of the SFO, its decision was based on both sections 247(1)(c) and (d).  It would appear that the Tribunal had equated David Tsien’s position under section 247(1)(c) with the position of someone having actual access under section 247(1)(d) which provides that,

‘ (1) For the purposes of Division 4, a person shall be regarded as connected with a corporation if, being an individual—

……

(d)  he has access to relevant information in relation to the corporation and—

(i) he has such access by reason of his being in such a position that he would be regarded as connected with another corporation by virtue of paragraph (a), (b) or (c); and

(ii) the relevant information relates to a transaction (actual or contemplated) involving both those corporations or involving one of them and the listed securities of the other or their derivatives, or to the fact that the transaction is no longer contemplated; or’

45.  Although both Mr. Jonathan Kwan and the Tribunal had referred to section 247(1)(d), how this section would apply to the facts of the case was not analysed by the Tribunal.  Even at this appeal there was a difference in views between the parties on the interpretation of the section.  While counsel for the appellant suggested that the first reference to the ‘corporation’ in the section is referable to COLI, the respondent suggested it meant JP Morgan.  In respect of ‘another corporation’ in paragraph (d)(i), again there was a difference in views.  However, what is more important is that there was no discussion by the Tribunal of what was the relevant information that relates to a transaction (actual or contemplated) involving both those corporations under paragraph (d)(ii).  If the transaction was in respect of the placement, there was no finding by the Tribunal on this specific issue.

The position of David Tsien

46.  This, however, is not the end of the matter.  In the course of the appeal, the Court raised the issue, applying the objective test, whether David Tsien was a connected person by reason of his position as an equity salesman who was tasked with matters concerning the placement.  This was neither an issue raised in the inquiry nor a point addressed by the Tribunal.

47.  To understand this point, I will refer to the evidence considered by the Tribunal. 

1)  Summary of David Tsien’s role

48.  The Tribunal summarised David Tsien’s role as an equity salesman in a placement as follows :

‘ 351. Mr David Tsien said that it was his role in a proposed or potential placement, as an equity salesman, acting on the instructions of ECDM [Equity Capital and Derivative Markets Department] and/or the heads of Sales, Mr Xen Gladstone and Mr Mark Bamber, to :

•  test market appetite/demand;

•  “anchor” interests of institutional clients; and

•  invite other institutional clients to place orders.

352. Mr David Tsien said that in making those approaches to institutional clients he would disclose not only the name of the company proposing to make the placement, but also the size and price of the placement together with the proposed use of proceeds.

353. Mr David Tsien said that at no time at or before the placement of COLI shares did he know, nor had he been told, that there were any restrictions within JP Morgan as to what information about the potential placement could be disclosed to those clients approached as described above.  It was not until he was involved in a placement at the end of 2004 that he was told by a colleague from ECDM of such restrictions, in particular that the institutional client approached in those circumstances was to be advised on a contingent basis and in advance of disclosure of information that the information was confidential and could not be used in any way.  Mr David Tsien pointed out that the procedures of the “Market Sounding Policy” of JP Morgan came into effect on 20 December 2004.

354. It is to be noted that the “Market Sounding Policy” states that the procedures set out the “minimum compliance obligations” of employees and asserts that the principles that underlie the procedures that are contained in the JP Morgan Chinese Wall policies and include:

“• material non-public information concerning a security or an issuer, generally, only be held by employees on the private side of the Chinese Wall;

• ... public side employees should not be in possession of material non-public information unless there is a Formal Wall Crossing or, if the information has been disclosed inadvertently or through another source, the public-sider immediately contacts the Asia Control Room to quarantine the relevant information.” ’

2)   Worldwide Rules of Conduct

49.  JP Morgan provided its employees with a set of rules on their business conduct entitled ‘Worldwide Rules of Conduct’ (‘the Rules’).  It provided for a ‘Chinese Wall Policy’ which prohibited the flow of inside information from the insider area of the firm (such as investment banking) to the public areas such as the departments which trade or sell securities.

50.  Paragraph 4.2.2. of the Rules provides that,

‘ 4.2.2. Employees in ‘public areas’

In order to avoid the inadvertent receipt of ‘inside information’, employees in public areas should clearly identify their roles when meeting with a client or potential client.

If you are a public area employee and receive inside information from an external source, including but not limited to a client, third party or outside paid consultant, or internally from an investment banking employee or from any other inside area personnel, contact your Compliance unit immediately.  If you have a question whether information constitutes inside information, contact your Compliance unit to discuss it.’

51.  Paragraph 4.2.4. of the Rules further provided for ‘crossing the wall’ by public areas employees to be informed of inside information.

‘ 4.2.4. Crossing the Wall

From time to time employees in ‘public areas’ may be brought over the Wall to consult with those in ‘insider areas’.  In such circumstances, ‘inside information’ may be communicated to public area employees only if:

•  there is a valid business purpose for such communication (e.g., when a research analyst’s or a salesperson’s expertise is required in a corporate finance transaction)

•  those in the public area are advised that the information is inside information and are given the limits on its further dissemination

•  the prior approvals of the appropriate supervising managing directors from each side of the Wall are obtained

•  the relevant Compliance unit on both sides of the Wall is notified whenever possible before, but in any event immediately after, any public area person is brought over the Wall and is provided the person’s name and the purpose of the Wall crossing’

52.  The Tribunal found that David Tsien was aware of the Rules.  In the present case, the Equity Capital and Derivative Markets Department of JP Morgan was in the inside area and David Tsien, as a salesman in the Sales Department, was in the public area of JP Morgan.

3)  The protocol

53.  JP Morgan issued in December 2004 another set of rules entitled Market Sounding Policy.  It provided the protocol for an equity salesman being brought over the wall when he is tasked with market sounding.  The protocol required, among other things, the equity salesman to inform the recipient that the information he is to disclose is confidential and the recipient must not use the information and must agree to treat the issuer’s securities as restricted (‘the protocol’).  Under the Rules, the requirement was for the equity salesman to inform the compliance unit upon his receipt of inside information.

‘ Market Soundings

ECDM is responsible for market sounding of potential investors in an ECDM transaction.  ECDM may bring a Salesperson over the wall to assist in the soundings provided the wall crossing procedures have been followed.  Where the market soundings involve the disclosure of confidential or inside information the following procedures must be followed:

(a) Prior to initiating contact, the Head of ECDM or delegate must approve the names of the clients to be approached.  A record of the list and the approval must be kept on the transaction file.

(b) The person contacted at the investor must first be advised that the JPM representative proposes to provide confidential and potentially inside information and that they must treat the information accordingly.  Before the mention of any names or information which would reasonably identify the proposed issuer, the investor must be given the opportunity to terminate the conversation.  Words to the effect of the following script must be followed in each case with the investor:

“In connection with a [describe the general nature of the transaction without issuer name], we would like to discuss certain aspects of the transaction with you. However, this transaction has not been publicly announced and all matters relating to is, including the issuers name, must be kept confidential if disclosed to you. You may not use this information in any way and agree to treat the issuer’s securities as restricted. Do you wish to proceed with the discussion?”

(c)  If a public sider is brought over the wall to assist, any calls must be made in a private location away from the trading floor, but not in the ECDM area.  ECDM must conduct these soundings from within the segregated ECDM area.

(d)  Market soundings should be conducted on a taped telephone line. Where this is impractical, the JPM representative must keep a written record of the conversation at least including when, who and what warning was given to the client.

(e)  Under the EMEA procedures, soundings involving convertible bonds undertaken by the London desk require prior written confidentiality agreements.  Please contact Legal and Compliance should you require participation of the London desk in a CB transaction.’

The Appellant’s response

54.  1)  The response of the appellant to the point raised by the

Court is, first, that if the Tribunal had proceeded on an incorrect approach, then its conclusion is arrived at on a mistake of law, and that finding must be set aside.  It is not the function of this Court to seek to explore the evidence to come up with its own findings.  The respondent has not submitted otherwise.

2)  Second, without prejudice to the first point,

(1)  the position of a public side salesman is not one which would be expected to have access to confidential information.

(2)  the situation where there may be occasions when a public side salesman may be tasked by Equity Capital and Derivative Markets Department to, say, obtain an anchor, would involve the salesman to be ‘taken over the wall’.

(3)  there was clear and uncontroverted evidence that JP Morgan did have a Chinese wall in place, and did have a Compliance Department.  If David Tsien were to be ‘taken over the wall’, it is likely that the Compliance Department would have advised on the procedure.  It does not depend on whether an individual witness remembers reading the Rules.

(4)  the market would not expect a public side salesman to have access to confidential information.  That a public side salesman may be brought over the wall does not detract from the fact that such a person occupied a position that would not reasonably be expected to have access to confidential information concerning a corporation.

(5)  the exception to this would be if the public side salesman is wall-crossed within a bank for the purposes of assisting in the execution of a private placement, and in turn (as he is required to do) follows wall-crossing procedures when approaching and talking to institutional investors about their interest in taking up shares in the private placement.  By following the required procedure, the market (in the form of all of the institutional investors that the salesman approaches and seeks to wall-cross) will know that the ‘position’ of the salesman has changed, and that he has become a connected person for the short period of time between when institutional investors are contacted by the salesman and when the placing is announced publicly.  It is this indicator - whether the salesman has told the institutional investors that they are restricted - which signals a change of position to one which may reasonably be expected to give the salesman access to relevant information and himself a be connected person.  In those circumstances the institutional investors will have had to agree to be restricted from trading in securities (or listed or unlisted derivatives in the securities).  But no such wall-crossing procedure was followed by David Tsien or JP Morgan in this case.

(6)  A further exception is where there had been public manifestations that David Tsien had previously been known to be involved with placements.

(7)  Whether a public side salesman is per se a person within section 247(1)(c) because of the possibility that he could be brought over the wall and work for Equity Capital and Derivative Markets Department or by reason of public manifestations, involves questions of fact, which must be for the determination by the Tribunal, not by this Court.

3)  Counsel for the appellant further submitted that one needs to bear in mind that a fund manager is under a duty to manage the portfolio of shares that he is managing.  A fund manager regularly receives calls from public side salesmen such as David Tsien who may launch into discussion about certain listed securities.  If the public side salesman is to impart confidential information to a fund manager, the public side salesman should - and proper practice would expect him to, in advance of disclosure of such information, ask whether the fund manager is prepared to receive the information on a confidential basis.  Otherwise, the fund manager would be placed in an invidious position.  He has a duty to his ultimate clients (beneficiaries of the fund) to trade in the changing market conditions and according to his best judgment.  If the salesman, without giving him a chance, blurts out price-sensitive information, he might be prevented from trading, even if, independently of the information, he would otherwise have done so, and cannot properly discharge his duties to his clients.

My view on connected person

55.  These are, of course, cogent submissions.  I was initially concerned whether it is appropriate for this point to be raised at this stage of the proceedings when the Tribunal had not addressed it.  However, after due consideration I come to the view that it is proper for this Court to address the issue provided that in so doing there is no injustice or unfairness to the appellant.

56.  In my view the matter can be approached in this manner :

1)  In deciding whether someone is a connected person under section 247(1)(c), one does not simply look at his post or office but rather, as the legislation requires, at his position to see whether he may reasonably be expected to have the confidential information.

2)  The present case is not a situation of someone, like a tea lady or an office assistant, who comes across confidential information by chance.

3)  While the Chinese Wall Policy which segregates the outsiders and the insider is a relevant consideration and generally should be used as a starting point in the analysis, the Court must approach the matter with the factual context of the case in mind.  To ignore the factual context will unnecessarily exclude material relevant matters from the Court’s consideration.  Further to adopt such a restricted approach will be tantamount to assessing the situation solely by reference to the post or office occupied by the person and not his position.

4)  The factual context of the case is that David Tsien was not merely an equity salesman.  While an equity salesman without more may not reasonably be expected to have access to confidential information by reason of the Chinese Wall, in this case David Tsien was tasked by the Equity Capital and Derivative Markets Department to sound out potential investors for a placement which it was actively negotiating with COLI to be carried out.

5)  In order to perform this task, invariably confidential information relating to COLI’s placement such as the price, size and timing (or their approximations) must be provided to David Tsien.  One would have thought that this is a common sense recognition of the reality.  In any event the imparting of confidential information in certain situations is expressly recognised by the Chinese Wall Policy.

6)  In such circumstances the position of David Tsien as an equity salesman who was tasked to sound out investors on the placement, may reasonably be expected to give him access to relevant information of the COLI placement, such as the price, size and timing.  In my view this is what the investment community as an objective bystander would perceive David Tsien’s position.  It is also not something that is so extraordinary that a reasonable expectation will not arise.

7)  The present situation is unlike the stark ‘black and white’ scenario envisaged by Ashe and Counsell, namely, an equity salesman without more on the one hand and an equity salesman who breached the Chinese Wall by his own accord on the other hand.  In those situations he is not reasonably expected to have access to the confidential information.  But in the present case David Tsien was not someone who had breached the Chinese Wall by his own accord but rather was actively fed or allowed to be fed with confidential information regarding the placement.

8)  This being the case it is irrelevant if David Tsien had not observed the protocol by raising the warning when he approached the appellant.  In any event I reject the appellant’s submission that David Tsien would only be regarded as a connected person if the protocol on crossing the wall had been observed.  This approach is too formalistic because there may be circumstances when a person is a connected person and yet has not observed the protocol when he imparted the relevant information to the recipient.  The suggested approach begs the crucial question of whether a person’s position may give rise to the requisite reasonable expectation.

9)  Further, the protocol on crossing the wall was issued in December 2004 which was after the event in question.  Under the Rules, the requirement was for the public side equity salesman to inform the compliance unit when he comes across confidential information from the inside.  The reference in paragraph 4.2.2. to a pubic side employee identifying his role when meeting a client is to prevent accidental receipt of information and not the reverse situation of him imparting information to the client.

10)  The Tribunal had, of course, addressed the issue of David Tsien’s knowledge on the ‘Market Sounding Policy’, however, it did not specifically find that the crossing of wall protocol was generally observed in January 2004.

‘ 1000. We reject Mr David Tsien’s evidence that he did not know that there were any restrictions as to what information in respect of a placement he could disclose to those of his clients who were potential participants in such a placement. His reliance on the fact that JP Morgan’s “Market Sounding Policy” was not published until December 2004 is misplaced. We are sure that in January 2004 he knew that information about :

“(a) the amount of capital to be raised or shares to be transacted;

(b) the price or price range of the transaction;

(c) the timing of the transaction;

(d) ...

(g) the likelihood of the transaction even worthy about details are not finalised

may be considered material non-public information.”.

1001. Equally, we reject Mr David Tsien’s evidence that he believed that no “relevant information” came into being until agreement was reached or was certain to be reached, in this case between JP Morgan and COLI about the placement of its shares. Once again, we are sure that the articulation of this issue in the JP Morgan “Sounding Out Policy” did no more than state that which was known to be the case to Mr David Tsien in January 2004, namely:

“A transaction need not be certain for information to be material. The tests for material non-public information are based on the likely effect on price or a person’s decision to invest or not. Even though a placement at a discount may only be 50% likely, if known publicly, that information may be relevant to the investment decision of a potential investor. The less likely or the more remote a transaction is, the less likely it will have an impact upon the decision making of an investor and the less likely it will be considered material non-public information. The more imminent a transaction is the more material it becomes.” ’

11)  The appellant, in response to the Court’s request for the protocol on crossing the wall, had also referred to the ‘Guide on disclosure of price-sensitive information’ issued by the Hong Kong Exchanges and Clearing Limited in January 2002 where at paragraph 33 it states that,

‘ At certain times, issuers may need to give information in confidence to, for example, prospective financiers, potential business partners, underwriters or other parties with whom they are negotiating.  Before a meeting at which price-sensitive information is to be given, an established procedure should be followed unless the relationship with the participants is automatically one of confidentiality.  The relevant party should be told that, if he attends the meeting, he must keep the relevant information strictly confidential and that he will not be able to deal in the issuer’s securities before the information is made public.  He should give consent to being made an ‘insider’ and this should be recorded.  No one should be made an insider without his consent or for a longer period than necessary.’

However, as this document was not before the Tribunal, it is not proper for me to rely on it in this appeal.

12)  Even according to the appellant (witness statement dated 19 February 2009, paragraph 117), in January 2004 there was not yet a common practice for warning messages to be used prior to the dissipation of non public price sensitive information.

13)  As to public manifestations, there is evidence that the appellant knew David Tsien had previously been involved with placements in relation to, among other things, Asia Aluminium.  However I will not rely on this evidence to say that, by way of public manifestation, David Tsien was a connected person in January 2004 because of the lack of specific findings by the Tribunal.  In any event, in the light of my approach, it is not necessary to consider public manifestation by way of David Tsien’s previous activities.

14)  The approach I have adopted does not usurp the fact finding role of the Tribunal.  It also does not cause injustice or unfairness to the appellant.  The contextual consideration is readily apparent if the correct approach to the application of section 247(1)(c) has been recognized in the first place.

15)  As to the argument of the invidious position faced by a fund manager like the appellant, this must again be considered in the context.  To an investment professional, there must be an obvious difference between market rumours and price sensitive information relating to events that are actively being considered such as placement of shares, particularly, as in the present case, the extent of the information on the placement that came from David Tsien.

16)  Accordingly in my view David Tsien was a connected person within the ambit of section 247(1)(c).

Knowledge of the appellant

57.  The next issue is whether the appellant knew David Tsien was a connected person. 

58.  I will set out the relevant finding of the Tribunal on this issue.

‘ Background.

1065.  It was Mr Edmond Leung’s evidence that in January 2004, COLI was a company known to him in that on 9 December 2003, as part of a tour of Mainland property companies organised by Morgan Stanley, he had met representatives of COLI in Shanghai.

2 January 2004.

1066.  In the course of their telephone conversation at 09:59 on 2 January 2004, Mr Edmond Leung was given various pieces of information by Mr David Tsien of the latter’s connection with COLI.  First, that he was to meet officers of COLI, in particular Mr Kong, whom he described as the new Mainland boss, and Mr Horace Nip on Monday 5 January 2004.  Second, that it was going to “spin-off” its construction company from the property business, “For construction, it is all given to the shareholders for free”.  Third, in the course of a discussion initiated by Mr Edmond Leung, as to whether it was recommended that the stock be brought, Mr David Tsien asserted, “the stock has been doubled already last year”.  Mr Edmond Leung responded, “But it was only $1.2 in September, that is not an exceptionally good rise.”  For his part, Mr David Tsien said:

“I have brought a lot for JFAM at this price level ... for our fund management arm ... if you go to Stock Exchange’s website it is something called SDI Disclosure ... that is to say ... go to see the major shareholder, then ... you can check the price. At around this price level, they will buy the shares again ... this company is one of the companies ... this year would become very big.”.

1067.  The Tribunal accepts Mr Edmond Leung’s evidence that he thought that in this conversation Mr David Tsien was encouraging him to have confidence in the outlook for COLI shares.  However, the Tribunal is satisfied that Mr Edmond Leung understood the real significance of that fact lay in what else was being asserted, namely that Mr David Tsien had been involved in a transaction which had resulted in JFAM, a well-known institutional fund and “our fund management arm”, holding a lot of COLI shares and was now to meet its senior management.

5 January 2004.

1068.  In the course of their telephone conversation at 15:52 on 5 January 2004, Mr David Tsien confirmed to Mr Edmond Leung that he had met officers of COLI:

“But just now I met with the whole board of China Overseas -- Ah Sing of finance, Horace, Hung Hing Ping. They are not going to be floated on the Mainland so soon. Now it’s going to be put off until at least the end of next year.”.

The Tribunal is satisfied that Mr Edmond Leung realised that one significant factor of the two conversations was that, in prospect, Mr David Tsien had informed him of his meeting with COLI and now he was reporting to him information from the meeting.

The telephone conversations between Mr David Tsien and Mr Edmond Leung on 12, 13, 15, 19 and 20 January 2004.

1069.  The Tribunal is satisfied that, having received the information contained in the telephone conversations of 12, 13, 15, 19 and 20 January 2004, Mr Edmond Leung knew that Mr David Tsien had access to and was disclosing to him relevant information about the COLI placement.  Initially, the details provided concerned issues of price and size of the placement.  On 12 January 2004, Mr Edmond Leung was told that COLI wished to place 800 million shares at $1.80, that JP Morgan had turned down that proposal and bid $1.55. We reject Mr Edmond Leung’s denial that he knew that Mr David Tsien had obtained this information from ECDM of JP Morgan.  Further, we are satisfied that he knew, from the telephone conversations of 13 and 15 January 2004, that if there was to be a placement it would be at the price COLI was insisting upon, $1.80, that as yet there was no agreement on price, and that the information came from the parties to those negotiations.

1070.  In their telephone conversation at 16:25 on 19 January 2004, Mr David Tsien again re-asserted the position taken by COLI, when asked by Mr Edmond Leung whether it was “Time to place?”, namely “He wants it to be $1.8”.  In their telephone conversation at 10:53 on 20 January 2004, he informed Mr Edmond Leung that JP Morgan were offering $1.60, in response to COLI’s demand for $1.80 for the placement of its shares, and that:

“Therefore, there was no agreement as a result of the talks, in respect of price.”.

Again, the Tribunal is satisfied that Mr Edmond Leung knew that this information was “non-public price sensitive information” and came from the parties. Clearly, it was only in light of the rising market price of COLI shares, given the resolute position occupied by COLI as to the placement price it wished to obtain of $1.80, that Mr David Tsien said, “... now really looks like it’s really going to be $1.80.”.

1071.  The Tribunal is satisfied that when he was informed by Mr David Tsien in their telephone conversation at 08:52 on 26 January 2004, of the COLI placement that he would go ahead that week and that, “The price range is from $1.70 to $1.80”, Mr Edmond Leung knew that the information as to the difference between the parties on the issue of price was “non-public price sensitive information” that came from the parties.

CONCLUSION

1072.  In the result, the Tribunal is satisfied that Mr Edmond Leung knew that Mr David Tsien was a person “connected with” COLI in terms of both subsection 247(1)(c) and (d) of the Ordinance.’

All this is clearly relevant to the question of whether the appellant knew David Tsien to be a connected person.

Evidence of the appellant

59.  The appellant stated that,

1)  he regarded the information provided by David Tsien to be public information,

2)  he did not consider that he was being sounded out by David Tsien on the placement, and

3)  he did not, in any event, regard the information to be reliable information on the placement.

My view on the appellant’s knowledge

60.  1)  As a starting point the information given to the appellant was clearly related to a possible placement by COLI.  As found by the Tribunal, on 12 January 2004, David Tsien had told the appellant about the price and size of the placement, namely, COLI wished to place 800 million shares at $1.80.  The information on the price was repeated by David Tsien on 19 and 20 January 2004 respectively.  Even though at that time there was no definite indication as to the timing of the placement, considering the context in which David Tsien provided the information to the appellant the information was clearly related to the placement of COLI shares.

2)  The Tribunal specifically found that the appellant knew David Tsien had access to relevant information about the COLI placement : the information came from the parties to the negotiations on the placement.  This is a finding of fact that the Tribunal is entitled to make.

3)  The appellant’s case is that he thought the information given by David Tsien was public information in the sense that if it was not public information it would not have been cleared by the Chinese Wall Policy of JP Morgan.  In other words JP Morgan had allowed the information to be used.

4)  The Tribunal, however, found that the appellant knew the information was ‘non-public price sensitive information’ that came from the parties.  In other words it rejected the appellant’s case that the information was public information.  This conclusion is hardly surprising because how could details about the price, size and timing of the placement be public information even before the placement was announced?

5)  Although the Tribunal did not specifically address the appellant’s contention that David Tsien in disclosing those information must have been allowed by JP Morgan, it must have by its decision rejected it.  The appellant’s perception is self contradictory because he had also said in his witness statement dated 19 February 2009 that when David Tsien discussed with him the COLI shares,

‘116. I have no recollection of thinking, at the time of the calls, that I was being sounded out by Mr Tsien. If I was not asked whether I was interested in a share or a placement, I would not regard myself as being sounded out. Looking back at the recorded conversations, Mr Tsien did not ask me such questions.’

This being the case, his contention that the information must have been cleared by JP Morgan is not sustainable : an equity salesman would only be expected to be brought over the wall if he was required to assist in the placement by, among other things, sounding out potential investors.

6)  In my view the Tribunal had correctly found that the appellant knew David Tsien was a connected person by virtue of his position.

Hon Yuen JA :

61.  Put simply in the context of this case, under s.270 of the Ordinance, the appellant would be culpable of insider dealing if he:

61.1    sold COLI shares

61.2  when he had what he knew was “relevant information”, which is defined in s.245(1) as: 

61.2a -  specific information about COLI

61.2b -  which was not generally known

61.2c -  and which was price-sensitive

61.3  which he received from David Tsien, if he knew that:

61.3a - Tsien was a “connected person”, which is defined in s.247(1)(c) as:

61.3a.1 - a person whose position was such that it may reasonably be expected that he would get access to relevant information about COLI

61.3a.2 - by reason of a business relationship between his employer (JP Morgan) and COLI and

61.3b - Tsien held the information as a result of being connected.

62.  There is no dispute on para. 61.1 above, as the appellant sold 2 tranches of COLI shares on 21 January 2004 and 26 January 2004, respectively the last trading day before the Chinese New Year break and the first trading day after the break.

63.  Cheung JA has dealt with the issues related to para. 61.3 above, which focuses on the “connected person” aspect. 

64.  I shall deal with the issues related to para. 61.2 above, which focuses on whether the appellant knew he had “relevant information” within the meaning of the Ordinance.  It may be helpful to refer to the “Revised Chronology of Conversations/Voicemails and Edmund Leung’s Purchases/Sales of COLI Shares” (appended to this judgment as Appendix 1) which conveniently sets out in tabular form most, although not all, of the matters to which I will refer in the following passages.  (The abbreviation “TT” refers to the Transcript of Telephone recordings).

Particulars in Financial Secretary’s Notice

65.  To qualify as “relevant information”, the information must be specific, not generally known and price sensitive.  The Financial Secretary’s Notice has particularised the “relevant information” in this case as follows:

“ that [COLI] would announce and carry out a top-up placement of 850,000,000 shares at a price of HK$1.8 per share on or about 26^th January 2004”.

66.  At the hearing of the appeal, we were informed by Mr Yu that he no longer sought to argue that the information the appellant received was not specific (para. 61.2a above), or that it was generally known (para. 61.2b above).  Further the Tribunal’s holding that close approximations of the size of the placement and price were acceptable (para. 981) was not challenged on appeal.

67.  However Mr Yu argued that the particulars in the Financial Secretary’s Notice referred to a placement in definite terms as being the “relevant information”, but there was no evidence that the appellant knew it, as the information he had at the time of the sales was uncertain. 

68.  Mr Yu also argued, on the same basis, that the information the appellant had was not price-sensitive (para. 61.2c above) because of its uncertain state.

Certainty argument        

69.  First, Mr Yu argued that as a matter of language, the word “would” in the particulars refers to a definite event (the announcement of the placement with the stated details), and that event was not certain until sometime between 4 and 5 pm on Monday 26 January when terms were agreed between COLI and JP Morgan as placing agent.  He referred to evidence from Rupert Fane, then a Vice-President of the Equities and Capital and Derivatives Markets Department of JP Morgan, to the effect that generally an agreement was not certain until the documents were signed.  In this placement that happened at about 6 pm.  Therefore, he argued, when the appellant sold the shares, it was by no means certain that the placement would take place.    

70.  In my view the word “would” simply refers to a prospective event.  It is in the nature of commercial negotiations that nothing is ever “certain” until both parties sign on the dotted line.  Although specified persons in Tribunal proceedings face potentially serious consequences, it is not unfair to them to read the particulars this way, because the degree of likelihood of the event taking place is reflected in the degree of relevance of the information.  The less certain that a future event would take place, the less will the respondent be able to prove the relevance of the information about the event. 

71.  Further, with respect, the Tribunal was right when it held that by referring to the movement of the market price of COLI shares, the appellant would have seen that things were building up to the stage when the event was likely to take place (the “moving tableau” in para. 967). 

71.1  There was no dispute that placement prices would generally be at a discount of about 10% of the market price (see the appellant’s discussions with David Tsien that if COLI wanted a placement price of $1.8, the market price would have to be “kicked up” to $2: TT on 15/1/2004, counters 67 and 78). 

71.2  COLI was consistent in targeting a placement price of $1.8 (see David Tsien’s statements to the appellant: TT on 12/1/2004, 13/1/2004, 15/1/2004, 19/1/2004, 20/1/2004).  If COLI had revised the target placement price upwards, then the placement would be less likely to happen, but COLI did not, nor did it change the proposed placement size. 

71.3  Therefore it was simply a question of tracking the market price, so that when it rose to $2, the likelihood of the placement taking place was high. 

71.4  It is clear from all the taped discussions that the appellant was tracking the movement of the market price of COLI shares frequently.

71.5  On Tuesday 20 January, COLI shares rose for the first time to $2.025.  The market price having thus risen, the market condition was ripe for placement.

71.6  The next trading day (Wednesday 21 January), the appellant sold the 1^st tranche of shares at $1.9683.     

72.  With regard to this sale, Mr Yu pointed to the fact that the day before, David Tsien had told the appellant that there was no agreement from the talks.  He focused on David Tsien’s use of the phrase “講唔埋欄”(see TT on 20/1/2004, counter 70).  It was argued that the Tribunal had failed to take that remark into account. Therefore, it was argued, if the appellant was told there was to be no agreement, he did not order the sale of the shares with information that a placement was likely to happen.

72.1  However that is to ignore the fact that the appellant had been told by David Tsien that JP Morgan was not the only placing agent vying for the COLI placement.  Therefore the fact that JP Morgan could not come to terms with COLI did not mean that the placement was not likely to happen.  The “relevant information” was about COLI’s prospective placement, not an agreement between COLI and JP Morgan (see the particulars of the Financial Secretary’s Notice).

72.2  The appellant was aware of other placing agents’ interest right from the start when David Tsien first told the appellant about COLI’s proposal for a placement.  David Tsien told him that Morgan Stanley and CLSA had also wanted to do the deal (see TT on 12/1/2004, counter 51). 

72.3  David Tsien told the appellant about JP Morgan’s bids at $1.55 on 12 January (see TT on 12/1/2004, counter 67) and again at $1.55 on 15 January (see TT on 15/1/2004, counter 69).

72.4  On 19 January, David Tsien again told the appellant of the positions of JP Morgan’s rival placing agents.  He said Morgan Stanley and CLSA were offering a target placement price of $2 (see TT on 19/1/2004, counter 52).  He also said a placement at that price would not be done by JP Morgan but by someone else (counter 68).

72.5  It was in this context that on 20 January, after David Tsien told the appellant that JP Morgan had only raised its bid to $1.6 (see TT on 20/1/2004, counter 68), he said “therefore” they could not come to terms at that price “所以講唔埋欄，呢啲價錢”(counter 70).  In other words, COLI would not appoint JP Morgan as its placing agent as its bid was too low.

72.6  However that did not mean that the placement would not take place.  It was clear that the appellant knew that David Tsien was referring to JP Morgan not getting COLI’s business, because his immediate response to David Tsien’s words “講唔埋欄”was that “緊係講唔埋欄，佢 --佢都唔會幫你做啦 …”(“of course terms could not be agreed, they would not do it with you” (see TT on 20/1/2004, counter 71). 

72.7  The fact that the appellant was alive to the fact that the placement could be effected by other placing agents (other than JP Morgan) can also be seen from his asking David Tsien on 26 January after David Tsien had advised him to take profit above $2 (see TT on 26/1/2004, counter 26), whether they (JP Morgan) were doing the placement (counter 32).

72.8  It is therefore clear that it does not follow from David Tsien’s mention of “講唔埋欄”on 20 January that the appellant would have thought that a placement was not likely to happen, and the Tribunal did not err in not taking that remark into account. 

73.  As for the 2^nd sale of shares on 26 January, Mr Yu referred to David Tsien’s remark to the appellant, just before the market opened after the Chinese New Year break, that they “guessed” COLI would go ahead with the placement that week (see TT on 26/1/2004, counter 8).  It was argued that that showed there was still uncertainty about the placement.   

73.1  In my view, that single word should not be construed as if it were a statute, but should be considered in the light of all the information that the appellant had at the time. 

73.2  Given that (i) COLI’s target placement price was $1.8 (or indeed may even have been reduced to within a price range of $1.7-$1.8, as David Tsien disclosed in the same sentence), meaning that a market price of $2 (or slightly less) was targeted, (ii) the market price had already reached a high of $2.05 on the last trading day, and (iii) COLI opened at $1.95 (at least) that day, it would have been clear that the placement was imminent.

73.3  The appellant’s sale of the 2^nd tranche of shares was therefore entirely logical and consistent with an understanding that the placement was imminent.  His understanding was correct.  In fact the placement took place that day. 

Price-sensitivity

74.  Mr Yu’s argument on “price-sensitivity” is based on the same ground of uncertainty.  I will not repeat the discussion set out above.  It is a matter of fact in each case what information (including the fact that negotiations are taking place) is price-sensitive.  The Tribunal found that the information was price-sensitive after considering expert evidence from both sides (para. 965-982).         

Knowledge that it was relevant information          

75.  Finally, there is the issue whether the appellant knew the information was “relevant information” within the meaning of the Ordinance.  It was argued by Mr Yu that since the appellant knew David Tsien was a “public side” equities salesman, he could assume that whatever information David Tsien gave him could not have been price-sensitive, as the Chinese Wall policy at JP Morgan would have prevented a person in David Tsien’s position from being given relevant information. 

76.  In my view, that does not follow at all. Taken to its extreme, it is equivalent to saying that since banks have high security, one could assume that a masked man running out with a gun and banknotes in his hands was not a robber. 

76.1  The function of equities salesmen included “sounding out” the market before a placement (para. 351) - this was not challenged on appeal.  An equities salesman in that situation would have access to information about the proposed placement. 

76.2  The appellant was an intelligent and experienced fund manager. He could not have failed to recognize price-sensitive information when he heard it.  He had ample time to digest it.  It is disingenuous to suggest that because he had not been expressly told not to use the information, he did not know it was wrong to trade with it.  

76.3  There was nothing wrong per se in an equity salesman giving information about a proposed placement to a fund manager client, or in such a client receiving it.  The wrong was in the client trading with it, which was what the appellant did.

76.4  The fact that David Tsien was aware that the appellant was trading with the information cannot exonerate the appellant.  On this argument, the more egregious the breaches of confidentiality by a connected person, the less culpable the dealer would be.  That cannot be right.   

77.  The Tribunal was entitled to find that the appellant knew that the information he was receiving was relevant information (para. 1057, 1058, 1061).  His repeated urgings to David Tsien that the market price of COLI be “kicked up” indicated that he knew that that action would bring about the placement, and that the process of raising the market price would enable him to take a profit on a sale before the placement took place. That was why he asked David Tsien to inform him when the placement would take place - so that he could sell the shares before then (see TT on 20/1/2004, counter 53).

78.  For these reasons and those set out in Cheung JA’s judgment, I would dismiss the appeal with costs.

Hon Chu JA :

79.  I agree for the reasons given by Cheung and Yuen JJA that the appeal should be dismissed with costs.

Conclusion

80.  Accordingly the appeal is dismissed with costs to the 2^nd respondent.