THE SECURITIES AND FUTURES COMMISSION v. YOUNG BIK FUNG AND OTHERS

HCMP 2575/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2575 OF 2010

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J U D G M E N T

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Introduction

1.  These proceedings are brought by the Securities and Futures Commission (“SFC”) in respect of 2 cases where the defendants had allegedly acquired shares by using “confidential material price sensitive information”[1] (“CMPSI”) for personal profit.

2.  The first of these cases involves the takeover of a Taiwanese bank, Hsinchu International Bank Co Ltd (“Hsinchu Bank”) by Standard Chartered plc (“SCP”).  The second concerns the privatisation of Asia Satellite Telecommunications Holdings Ltd (“AsiaSat”) by its major shareholder, CITIC Group (“CITIC”).

3.  The SFC brings these proceedings pursuant to s.213 of the Securities and Futures Ordinance, Cap. 571 (“SFO”) and seeks :

(1) declarations that the defendants have contravened or were concerned in fellow defendants’ contravention of s.300 of the SFO in the Hsinchu Bank case and s.291 of the same Ordinance in the AsiaSat case; and

(2) remedial orders to return the profits from those illicit dealings in Hsinchu Bank shares and to restore the counterparties to their pre-dealing positions in respect of AsiaSat shares.

4.  As an overview, the basic facts in this case are not in dispute.  There are undisputed contemporaneous documents, emails, telephone, bank, and trading records from which much of the facts can be ascertained.  In addition, there are admissions made in pleadings and a fairly extensive Admission of Facts filed by the defendants pursuant to a Notice to Admit Facts served on them by the SFC.

5.  In this judgment, unless it is indicated otherwise, the facts stated are not in dispute.  However, the legal issues in this case are extensive, and in order to resolve the same this court is required to venture into certain areas of the criminal law.

Parties

6.  The 1st defendant (“Betty”) was, at the material times, a solicitor at Messrs Slaughter & May (“S&M”).  S&M served as solicitors to Standard Chartered Bank (HK) Ltd (“SCB HK”).  SCB HK was a subsidiary of Standard Chartered Bank, which was SCP’s banking arm.  For ease of reference, these entities will be referred to collectively as “SCB”.

7.  At the times material to the Hsinchu Bank case, Betty had been seconded to and was working in SCB’s Group Legal Department, spending a lot of her time on SCB’s takeover of Hsinchu Bank.

8.  The 2nd defendant (“Eric”) was a solicitor in the Mainstream Corporate Department (“MCD”) of Messrs Linklaters (“Linklaters”).  Linklaters served as solicitors to CITIC in relation to the privatisation of AsiaSat.  It also acted for the corporate entity making the offer for all the shares in AsiaSat.

9.  Betty and Eric, by virtue of their profession as solicitors and employment with S&M (and secondment to SCB) and Linklaters stood in the position of fiduciaries.  They owed various duties of loyalty and confidentiality to their principals (including the duties not to disclose, misuse, let others use or abuse confidential information and to abstain from insider dealing), and were subject to restrictions on trading securities[2].

10.  Betty and Eric were in a romantic relationship and cohabited between 2003 and 2006.  According to them, their romantic relationship came to an end in January 2006 but they remained close friends.

11.  The 3^rd defendant (“Patsy”) is Eric’s elder sister.  She was a customer service assistant in a property management company.  The 4^th defendant (“Stella”) is Eric’s elder sister and Patsy’s younger sister.  She was a housewife.

12.  Through Eric, Betty was acquainted with Patsy and Stella.  When Patsy was asked to describe her relationship with Betty, she said that they would chat when they met up.  Such evidence suggests that they were not close friends. 

Hsinchu Bank Case

13.  The facts of the Hsinchu Bank case can be summarized as follows.

14.  SCB was interested in expanding its operations in Taiwan.  In 2006, it was in confidential negotiations with Hsinchu Bank, which was listed on the Taiwan Stock Exchange, to takeover and privatise the latter by making a recommended tender offer for all its shares (“Tender Offer”).  The Tender Offer would be “recommended” in the sense that the management of Hsinchu Bank would recommend the shareholders to accept the offer. 

15.  SCB’s Group Legal Department in Hong Kong was involved in handling and managing the legal and regulatory work.  Ms Mabel Chu (“Mabel”) (one of SFC witnesses) was the lead in-house lawyer on the matter. On 20 April 2006, Betty was seconded by S&M to SCB to assist Mabel on the transaction.  She was reminded and she acknowledged that she was an insider and had access to highly confidential and sensitive information. 

16.  Important milestones in SCB’s negotiations with Hsinchu Bank in August and September 2006 are summarised in §11 of the Statement of Claim (“SOC”), which are admitted by Betty at §§15-16 of the Amended Defence of the 1st to 4th Defendants (“AD”).  At that time (August and September 2006), Betty was spending around 70-80% of her time working on this project.

17.  On around 23 August 2006, SCB and Hsinchu Bank started negotiations on the price for the Tender Offer.  By 14 September 2006, the proposed tender price of NT$24.50 per share was approved by SCB and inserted into a draft press release which was circulated internally.  Hsinchu Bank shares were then trading at around NT$14 per share.

18.  Information about the Tender Offer, together with information about its offer price of NT$24.50 per share, constituted CMPSI about Hsinchu Bank shares before the public announcement of the Tender Offer on 29 September 2006 (the parties’ experts are in agreement on this issue).

19.  There is no controversy that Betty was aware of both the Tender Offer and the proposed tender price on 14 September 2006 at the latest.  In respect of her fiduciary duties[3], the SFC relies on :

(1) an express duty of confidentiality in her employment letter with S&M;

(2) S&M’s Dealing Rules prohibiting disclosure or misuse of confidential information, in particular in buying and selling any shares (whether directly or indirectly) without first obtaining permission from S&M and complying with insider dealing laws;

(3) an email sent by Betty on 6 June 2006 in which she acknowledged reading and understanding SCB’s Memorandum on Inside Information, imposing a duty of confidence and prohibiting disclosure or use of inside information;

(4) Principle 8.06 of the Solicitor’s Guide to Professional Conduct which prohibits a solicitor from making personal profit by using confidential information acquired in the course of a professional relationship; and

(5) the common law duties of a person in a fiduciary position to act in good faith and not to “act for his own benefit or the benefit of a third person without the informed consent of his principal” (see Bristol & West Building Society v Mothew[1998] 1 Ch 1, at 18B-C).

20.  Betty was aware of her obligations to maintain confidentiality in relation to the Tender Offer.  As stated in §32 of her witness statement, which was adopted as part of her evidence :

“Having worked as a solicitor on corporate transactions for several years already I was well aware of my professional obligation to avoid breach or misuse of client confidential information. At no time did I discuss any of the bank’s projects with individuals outside and at no point did I knowingly deal in shares of the bank, Hsinchu Bank or any other business in which the bank was interested, nor did I encourage anyone else to deal.”

21.  On 20 September 2006, Patsy opened a new securities account in Hong Kong with Tai Fook Securities Co Ltd (“Tai Fook” and “TF Account”) which allowed her to trade in Taiwanese shares.  Between 21 and 29 September, Betty, Eric, Patsy, and Stella put together substantial sums of money and injected them into the TF Account.  Between 22 and 29 September 2006, Patsy acquired for the defendants a total of 1,576,000 shares in Hsinchu Bank at an average price of NT$16.99 (HK$4.05) per share and an aggregate cost of NT$26,782,000 (HK$6,381,000).

22.  This court has been provided by the SFC with a helpful Chronology for the Hsinchu Bank Case.  Section II of that document contains the details concerning the raising of funds by the defendants, the acquisitions of Hsinchu Bank shares and the source of the information.  Such facts are based on undisputed documentary evidence.

23.  Both Betty and Eric went to considerable length in raising funds.  Overdraft facilities were drawn down by them, and they liquidated a considerable portion of their investment portfolio[4].  Eric also borrowed HK$430,000 from Patsy.  The money came from breaking a fixed deposit, which was due to mature in 2 weeks’ time, with the forfeiture of interest of HK$1,228.  Likewise, Betty borrowed HK$300,000 from her sister.  Betty’s funds were first transferred to Eric before they were deposited into the TF Account.  As soon as funds became available, Hsinchu Bank shares were acquired.  In all, 6 purchases were made. 

24.  In the afternoon of 29 September 2006 (Hong Kong time), SCP announced the Tender Offer.  The offer price was at a substantial premium to the market price.  For the defendants, the offer price was 44% above the average price of their acquisitions.

25.  Patsy accepted the Tender Offer for all the Hsinchu Bank shares in the TF Account.  She then distributed the proceeds to the others in proportion to their contributions.  The principal invested, sale proceeds, and profits for each defendant are as follows :

	Sum Invested (HK$)	Sale Proceeds (HK$)	Profits (HK$)
Betty	2,250,000	3,250,000	1,000,000
Eric	3,280,000	4,580,000	1,300,000
Patsy	351,000	526,000	175,000
Stella	500,000	710,000	210,000
Total:	6,381,000	9,066,000	2,685,000

26.  Neither Betty nor Eric sought approval from or reported to S&M, SCB or Linklaters any of their respective transactions in Hsinchu Bank shares.

SFC’s Case

27.  The SFC contends that when Patsy opened the TF Account and placed the orders to acquire Hsinchu Bank shares through the account :

(1) each of the defendants knew about the Tender Offer and that it was CMPSI;

(2) Betty was the source of information for the other 3 defendants.  Eric, Patsy, and Stella each knew that Betty was the source.  Betty had passed the information to them directly or through Eric and/or Patsy; and

(3) Eric, Patsy, and Stella each knew that Betty was in breach of her fiduciary duties or was otherwise acting wrongfully in passing the information to any of them.

28.  In simple terms, Betty tipped off Eric, Patsy, and Stella about the Tender Offer, knowing that they would insider deal on the Hsinchu Bank shares for personal profit, both for Betty and themselves.

29.  The SFC says that this was in contravention of s.300 of the SFO.  It contends that even on the defendants’ own case (see below), Patsy and Stella were following Eric in acquiring Hsinchu Bank shares.  As long as it can be established that Betty had passed the inside information to Eric, Patsy and Stella would be persons involved in the contraventions of the law by Betty and Eric, and legal consequences would follow.

Defendants’ Case

30.  Betty’s case is that she entrusted her money to Eric for overseas investment.  Eric did not disclose to her that the money entrusted to him was deposited into Patsy’s TF Account (according to Patsy’s evidence, it was actually Eric’s account although it was in her name) and then used to purchase Hsinchu Bank shares.  Betty did ask Eric about the target of the investment but the latter deliberately avoided telling her about the details of the investment.

31.  Eric’s case is that he identified Hsinchu Bank shares as an investment target through his own research.  In particular, he noticed that Fubon Bank, a major investor in Hsinchu Bank, had steadily increased its shareholding in Hsinchu Bank in August 2006, and speculated that Fubon Bank could move to acquire Hsinchu Bank in a few months’ time or the increased shareholding might trigger a competitor’s interest in Hsinchu Bank as an acquisition target.  Even if a takeover did not take place, his view was that continued investor interest in a possible takeover alone would drive up the price of those shares.  

32.  It is said that Eric’s evidence is supported by the opinions of both Mr Shek (one of SFC’s experts) and Mr Rigby (defendants’ expert).  The market experts agree that :

(1) During 2006 there were repeated rumours or news about mergers and acquisitions in the banking sector in Taiwan, including Hsinchu Bank; and

(2) Since August 2006 there were a number of news articles about the continued investment of Fubon Financial Holding Co Ltd in Hsinchu Bank and a potential merger of the two companies.  The experts agree that this news could justify investors’ buying decision in Hsinchu Bank shares before 29 September 2006.

33.  Eric says that he had made a deliberate decision not to mention the details of his investments to his lawyer and corporate financier friends.  The mergers and acquisitions as well as corporate finance circles in Hong Kong were small and dominated by “city firms”, there was always a chance that some of his friends might have access to price sensitive information.  Particularly in relation to the Hsinchu Bank investment, the market rumours and his speculation was that Fubon Bank would take over Hsinchu Bank.  Fubon bank being a Hong Kong based bank, there was a real possibility that someone in his circle of friends might compromise his investment if it was mentioned.

34.  The use of Patsy’s TF Account to buy Hsinchu Bank shares was at the request of Eric by reason of convenience and expedience.  This was not known to Betty or Stella.

35.  Patsy’s case is that she was asked by Eric to help him open a securities account and to buy a particular Taiwanese share. She decided to speculate in Hsinchu Bank shares because Eric had told her of the market rumours that Hsinchu Bank was a target of acquisition by Fubon Bank or another financial institution.  Patsy did not know that part of the money deposited by Eric into the TF Account belonged to Betty; nor did she receive any information about SCB’s intended takeover of Hsinchu Bank.

36.  Stella’s case is that she decided to speculate in Hsinchu Bank shares because Patsy told her about Eric’s view on Fubon Bank’s likely takeover of Hsinchu Bank. She did not receive any information about SCB’s intended takeover of Hsinchu Bank.

AsiaSat Case

37.  The SFC says that the AsiaSat case is similar to the Hsinchu Bank case in all key material respects, except that the roles were reversed: Eric was the tipper and Betty the tippee.  The facts can be summarized as follows.

38.  AsiaSat’s shares were listed on the Stock Exchange of Hong Kong (“SEHK”) and, by way of American Depository Receipts, also on the New York Stock Exchange. It was 69% owned by Bowenvale Ltd, which in turn was jointly owned by CITIC and SES S.A. (“SES”).

39.  At the material times, AsiaSat stock was thinly traded.  Its daily turnover averaged around 140,000 shares and less than HK$2 million.

40.  CITIC was interested in privatizing AsiaSat.  In 2006, CITIC, SES, and General Electric Capital Corporation (“GE”) discussed a potential transaction in which SES would sell its stake in Bowenvale Ltd to GE; AsiaSat would then be privatised such that it would become jointly owned and run by CITIC and GE (“Proposed Privatisation”).  The transaction would involve regulatory matters such as making a mandatory general offer to all the shareholders under the Code on Takeovers and Mergers and Share Repurchases of Hong Kong (“Takeovers Code”).

41.  In about December 2006, Linklaters, in particular its MCD, began to act for CITIC and the intended corporate entity for making the general offer (“AsiaCo”).  Within the MCD, Ms Teresa Ma (“Teresa”) (Eric’s Supervising Partner and one of SFC’s witnesses), Ms Samantha Thompson (“Samantha”) (a Managing Associate and also a SFC witness), Mr James Cheung, Mr Terence Lau, and Ms Amy Chan (“Amy”) (who was the secretary of both Eric and Samantha, and a SFC witness) were in the team working on the transaction (“Team”).  Eric was not a member of the Team.

42.  Those in the team and Eric shared the same printers, photocopiers, and fax machines.  Eric’s office was close to those of Teresa and Samantha.

43.  Eric was subject to express and implied duties of confidentiality as well as loyalty to his employer and principals as pleaded in §§83 to 85 of the SOC.  Those pleas had been admitted in §§70 to 71 of the AD.

44.  By early February 2007, the Team was busy preparing various documents, including a Joint Announcement in the name of AsiaSat and AsiaCo to make public the Proposed Privatisation (“Joint Announcement”).  In the afternoon on 5 February 2007, the Team sent, by fax and by hand, a draft of the Joint Announcement to the SFC’s Corporate Finance Division, which administered the Takeovers Code.  The draft did not contain any price.  It also referred to AsiaSat by a codename “Aries”.  However, it contained a lot of details, eg, the names of its directors, such that the company’s identity was readily ascertainable.  It is unnecessary to go into these details because the point is not disputed by Eric.  

45.  On 8 February 2007 (afternoon), the Team sent by fax and by hand a second draft of the Joint Announcement to the SFC’s Corporate Finance Division.  This document did not contain any price.  It continued to refer to AsiaSat as “Aries” but again gave details such that the identity of the subject company was readily ascertainable.

46.  According to Betty and Eric, they met for dinner that night and afterwards Eric went to Betty’s home.  Shortly after midnight, Eric called Patsy.  The call lasted almost 10 minutes. 

47.  A few hours later, in the morning of 9 February 2007, before the market opened, Betty and Patsy (acting for herself and Stella) started placing orders to buy AsiaSat shares.  In the ensuing hour, they acquired a substantial number of such shares.

48.  There is also a helpful Chronology for the AsiaSat case supplied by the SFC.  Section III of that document sets out the details on the acquisitions of shares by Betty and Patsy as well as the source of information.

49.  Before the market opened on 9 February 2007, at 09:53 Betty placed via her online account with HSBC an order to buy 100,000 AsiaSat shares at HK$14.04 (the closing price of the previous day was HK$14). This order was not executed.  At 10:15, Betty placed another order to purchase 10,000 AsiaSat shares at HK$14.10 via the same route.  This order was only executed later.

50.  After 2 telephone calls by Eric to Betty (the first of which might not have been answered given its short duration of 14 seconds), she immediately called (at 10:19) and spoke with her broker at Dao Heng Securities Ltd, Ms Phoebe Leung (“Phoebe”) (one of SFC witnesses).  Their conversations were recorded and such records show that Betty gave instructions to match every available sell order until Phoebe told her that she had pushed up the market price by 8%.

51.  Whilst Betty was busy on the phone with Phoebe, Eric called her 9 times but was apparently unsuccessful in getting through to her.  However, he succeeded in calling her at 10:46.  Soon after that phone call, Betty continued to communicate with Phoebe on buying AsiaSat shares.

52.  At 11:19am, trading in AsiaSat shares was suspended[5]. In 1 hour and 19 minutes of trading, Betty and Patsy together accounted for 73% of the entire turnover that day of AsiaSat shares on SEHK.  Betty alone accounted for 69% of the turnover.  In total, she acquired 69,500 shares (including the 10,000 shares purchased through her HSBC account) for HK$1,033,500.  Patsy acquired 15,000 shares – 5,000 shares for herself and 10,000 shares for Stella at the aggregate price of HK$212,040.  In total, Patsy made 5 purchases during 10:02 and 10:26 on 9 February 2007. 

53.  On 14 February 2007, AsiaSat and AsiaCo published a Joint Announcement, stating the price of the Proposed Privatisation at HK$18.30 per share.  Trading then resumed.

54.  The offer price represented a premium of 29.8% over the closing price on 9 February 2007.  For Betty, this was 23% above the average price of her acquisitions (HK$14.87).  For Patsy and Stella, it was 29% above their average acquisition price (HK$14.136).  Patsy and Stella immediately sold their shares at HK$17.20, resulting in profits of respectively HK$14,594 and HK$29,188.  Betty waited a week and sold her shares at HK$18 to HK$18.10, making a profit of HK$173,476.

55.  Betty never sought approval from or reported to S&M her transactions in AsiaSat shares.

56.  The parties’ experts are in agreement that the Proposed Privatisation was not generally known in the market before its announcement, and that such information was specific and important information in that privatisations are normally at a premium to the market price, and if the premium was meaningful, such information would be price sensitive information.

57.  SFC’s expert, Ms Stella Fung, is of the view that knowledge of the Proposed Privatisation, even without the offer price, was price sensitive information[6]. The reason is that for the privatisation to succeed, the price had to be attractive to the shareholders, ie, at a significant premium to current market price.  Market experience well demonstrates this she said.

58.  In the course of the trial, Mr Sussex SC, appearing with Mr Chan for the defendants, has accepted the opinion of Ms Fung as contained in §29 of her report dated 2 May 2014 as follows :

“… before trading of the shares was suspended at 11:19 am on 9 February 2007, information about the proposed privatization of AsiaSat by the Offeror, with or without information on the offer price, was confidential material price sensitive information about AsiaSat shares, and constituted relevant information about AsiaSat shares as defined in the repealed section 285(2) of the Securities and Futures Ordinance.”

SFC’s Case

59.  SFC says that Eric, by virtue of being in close proximity to colleagues working on the Proposed Privatisation, learnt of it.  When Betty and Patsy placed their orders to acquire AsiaSat shares :

(1) each of the defendants knew about the Proposed Privatisation and knew it was CMPSI;

(2) Eric was the source of information for the other 3 defendants.  Each of those 3 defendants knew that Eric was the source.  Eric had passed the information to them directly or through Betty and/or Patsy; and

(3) Betty, Patsy, and Stella each knew that Eric was in breach of his fiduciary duties or was otherwise acting wrongfully in passing the information to any of them.

60.  In simple terms, Eric learnt about the Proposed Privatisation and tipped off Betty, Patsy, and Stella about it.

61.  SFC contends that this was in contravention of s.291 of the SFO.  Further, based on the defendants’ own version of events, Patsy and Stella followed Betty in speculating in AsiaSat shares.  Like the Hsinchu Bank case, as long as it is established that Eric passed the inside information to Betty, Patsy and Stella would be persons involved in the breaches of the law by Eric and Betty, and attendant legal consequences follow.

Defendants’ Case

62.  Betty’s case is that she purchased AsiaSat shares in the morning of the 9 February 2007 because she had been monitoring that company since the “Next Magazine” had commented on it positively in an article she read and she noticed that the turnover in AsiaSat shares suddenly increased significantly in the three prior trading days.  She did not receive any information about AsiaSat from Eric.

63.  Patsy’s case is that Betty mentioned to her AsiaSat and the sudden increase in the turnover of its shares during a phone conversation in the evening of 8 February 2007 (it actually took place at 00:16 on 9 February 2007[7]).  She shared this information with Stella the “next day” and decided to buy 15,000 AsiaSat shares for herself and her sister.  Stella simply left it to Patsy to purchase such shares for her at her discretion.  Neither Patsy nor Stella received any information about AsiaSat from Eric.

64.  Eric denies having any CMPSI in respect of AsiaSat at any material time and discussing AsiaSat with any of the other defendants. 

Overview of the Issues

65.  There is an Agreed List of Issues compiled by the parties pursuant to the directions of this court.  However, like most cases, the parties have further narrowed down the scope of dispute in the course of the trial.

66.  As in most litigation, there are factual as well as legal issues.  It has been indicated above that the legal disputes here are extensive.  The relevant statutory provisions which grounded the SFC’s causes of action will have to be construed and analysed to identify the ingredients which have to be proved.  The disputed facts will have to be resolved, and the established facts will have to be considered in light of the ingredients to see if the case of the SFC has been made out. 

67.  On the factual disputes, given that the basic facts are uncontroversial, the resolution here will depend on the inferences to be drawn and credibility of the defendants’ evidence.  In particular, their explanations on why they invested in the Hsinchu Bank shares and the AsiaSat shares in the manner they did.  In simple terms, did they do so with the benefit of inside information or were they acting solely upon their own investment decisions.

68.  There is a legal issue closely related to the resolution of the factual disputes, namely, whether the SFC is entitled to rely upon the similar fact evidence principle in proving its case. 

69.  I shall next set out the relevant provisions of the SFO.  In doing so, some observations will be made on what are uncontroversial, and the legal disputes will be identified. The evidential disputes of each case will then be addressed before dealing with the legal arguments.  This court is of course concerned with the version of the statutory provisions applicable at the material times.

Section 213

70.  The relevant parts of this section are as follows :

“(1) Where –

(a) a person has –

(i) contravened –

(A) any of the relevant provisions;

…

(ii) aided, abetted, or otherwise assisted, counselled or procured a person to commit any such contravention;

(iii) induced, whether by threats, promises or otherwise, a person to commit any such contravention;

(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or

(v) attempted, or conspired with others, to commit any such contravention; or

…

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

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

…

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

…

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

…

(4) The Court of First Instance shall, before making an order under subsection (1), satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person. …”

71.  As noted in para 3 above, these provisions underpin the SFC’s causes of action in this action.  The court’s jurisdiction under s.213 is triggered once it is satisfied that there has been a contravention of any “relevant provisions”.  That term is defined in Schedule 1 of the SFO.  Both ss.291 and 300 are included in the definition. Section 213 provides for the relief which may be granted by the court once the jurisdiction has been triggered.

72.  Some of these provisions were examined by the Court of Final Appeal (“CFA”) in SFC v Tiger Asia Management (2013) 16 HKCFAR 324.  In particular, there was a challenge by Tiger Asia as to the viability of the declaratory relief sought by the SFC to the effect that it had contravened the prohibition on insider dealing.  It was argued, inter alia, that such a relief was outside the ambit of s.213(e).  The challenge was rejected by the CFA whose judgment was given by Lord Hoffmann NPJ.  He held at p.333, §17 :

“… I find it hard to see why, if a court has found something to be the case, it should not make a declaration to that effect if it would be appropriate and useful to do so … [SFC] is seeking a declaration that [Tiger Asia] has done acts which found jurisdiction under s.213 but which also happen to be criminal offences. The question of whether Tiger has committed a criminal offence remains entirely a matter for the criminal court … The effect of a declaration by the Court of First Instance under s.213 that Tiger has contravened the prohibition on insider dealing is therefore no different from a finding by a civil court that Tiger is liable on the same grounds for damages under s.305.”

73.  There is no dispute here that if this court finds that there was a contravention of a relevant provision, it is entitled to grant the relief sought by the SFC.  There is, however, an issue whether relief should be granted against Patsy and Stella in the event that they are found to be unknowingly involved in the contraventions by Betty and Eric.    

Section 287

74.  This section defines how a person may be regarded as being connected with a corporation :

“(1) For the purposes of Division 2, a person shall be regarded as connected with a corporation if, being an individual –

…

(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, or a corporation of which he is a director, or a firm of which he is a partner; and

(B) the corporation, a related corporation of the corporation, or an officer or substantial shareholder of either corporation; …”

75.  There is a legal issue whether Eric was a person connected with AsiaSat by virtue of his employment with Linklaters and the latter’s engagement as solicitors for CITIC who was in the process of privatising AsiaSat.  This is a necessary ingredient of s.291(3).

Section 291

76.  The SFC relies on both s.291(3) and (5) in respect of the AsiaSat case in the alternative.  Section 291 is contained in Part XIV, Division 2 of the SFO which specifically relates to insider dealing criminal offences.  These sub-sections provide as follows :

“(3) A person connected with a listed corporation and knowing that any information is relevant information in relation to the corporation shall not disclose the information, directly or indirectly, to another person, knowing or having reasonable cause to believe that the other person will make use of the information for the purpose of dealing, or of counselling or procuring another person to deal, in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives.

…

(5) A person who has information which he knows is relevant information in relation to a listed 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 shall not –

(a) deal in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives; or

(b) counsel or procure another person to deal in such listed securities or derivatives.”

77.  Section 291(8) makes clear that any contravention of, inter alia, subsections (3) or (5) is an offence. 

78.  The elements of s.291(3) which the SFC must prove are :

(1) A person connected with a listed corporation (an insider)

(2) and knowing that any information is relevant information (CMPSI)[8] in relation to the corporation

(3) discloses that information directly or indirectly to another person

(4) knowing or having reasonable cause to believe that the other person will make use of that information for the purpose of dealing or of counselling or procuring another person to deal

(5) in the listed securities of the corporation (or a related corporation) or their derivatives.

79.  The elements of the s.291(5) offence are :

(1) A person who has information which he knows is CMPSI

(2) and which he received, directly or indirectly, from a person whom he knows is connected with the corporation

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

(4) deals in the listed securities of the corporation or a related corporation or counsels or procures others to so deal.

80.  Sub-section 291(5) is relied upon in the event it is found that Eric was not a connected person within s.291(3).

Section 300

81.  This section provides as follows :

“(1) A person shall not, directly or indirectly, in a transaction involving securities, futures contracts or leveraged foreign exchange trading –

(a) employ any device, scheme or artifice with intent to defraud or deceive; or

(b) engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.

(2) A person who contravenes subsection (1) commits an offence.

(3) In this section, a reference to a transaction includes an offer and an invitation (however expressed).”

82.  This court has been informed that there is no reasoned judgment in Hong Kong as to the scope and applicability of this section.  Unsurprisingly therefore, there are a number of arguments in relation to s.300.  Such arguments mainly revolve around 2 issues – the territorial scope of the section and the applicability of the section to the facts which may be proved by the SFC in the Hinschu Bank case. 

83.  I shall deal with the constituents of this section when it is analysed below.

Standard of Proof

84.  Pursuant to s.387 of the SFO, the standard of proof applicable in these proceedings is the civil standard.  This is not in dispute.

85.  In A Solicitor v Law Society (2008) 11 HKCFAR 117, Bokhary PJ explained at 145G-H as follows :

“Only two standards of proof are known to our law. One is proof beyond reasonable doubt and the other proof on a preponderance of probability. The strength of the evidence needed to establish such a preponderance depends on the seriousness and therefore inherent improbability of the allegation to be proved.”

86.  In light of the serious nature of these matters and the fact that 2 practising solicitors are alleged to be involved, this court has been urged by the defence to consider whether the evidence is of sufficient cogency to establish the alleged offences.  I shall bear this in mind.  

Drawing Inferences

87.  On drawing inferences from proven facts, both sides have referred this court to the dicta of Sir Anthony Mason NPJ in HKSAR v Lee Ming Tee & SFC (2003) 6 HKCFAR 336 at §72.  However, it is sufficient to cite a passage of the judgment of G Lam J in SFC v Wang Jian Hua & Ors, HCMP 745/2013 (29 October 2015), where the SFC applied for various orders under s.214 of the SFO.  Para 79 of the judgment stated as follows :

“… While under the civil standard of proof, an inference can be drawn without there being practical certainty, I bear in mind the principle referred to in paragraph 52 above, applicable where allegations of serious wrongdoing are involved. Although the standard of proof remains the civil one, I need to look for inferences that are ‘compelling’ and refrain from drawing damning inferences on a bare or ‘mere’ balance of probabilities.”

Circumstantial Evidence

88.  In R v Exall & Ors (1866) 4 F & F 922, it was held :

“It has been said that circumstantial evidence is to be considered as a chain, and each piece of evidence as a link in the chain, but that is not so, for then, if any one link broke, the chain would fall. It is more likely the case of a rope comprised of several cords. One strand of the cord might be insufficient to sustain the weight, but three strands together might be quite of sufficient strength.

  Thus it may be in circumstantial evidence – there may be a combination of circumstances, no one of which would raise a reasonable conviction, or more than a mere suspicion; but the whole taken together may create a conclusion of guilt with as much certainty as human affairs can require or admit of.”

89.  This court was also referred to the Report of the Insider Dealing Tribunal (“IDT”) in the case of Hong Kong Worsted Mills Ltd, where Shek Mei Ling (“Shek”) was found to have insider dealt with the shares of that company and have counselled or procured others to do so (see Chapter 5).  Against Shek’s background of share dealings (see chronology at pp.8-11) and her close relationship with her boss Ng (p.37), who was involved in takeover negotiations, the IDT found that the combined effect of various factors was compelling (pp.37-43), such factors included :

(1) her share trading on the material occasion was out of all proportion to her previous share trading;

(2) she kept her share trading secret;

(3) she borrowed large sums of money to finance the share trading, well in excess of her annual salary;

(4) she passed on the information to others who then immediately invested large sums as well.

90.  On p.44 of the Report, the IDT held :

“… It is simply not necessary for us to determine every exact detail of the information she had and precisely when she received it. Our determination, on this issue, is complete if and when we are satisfied to a high degree of probability on the whole of the evidence that by May 6^th she had discovered that the company that the Ngs and BITIC were going ahead with was HKWM. As we have already reported we are so satisfied.”

91.  In US v Larrabee 240 F3d 18, a US Court of Appeal decision, observations similar to those of the IDT were made at p.3 :

“After reviewing the record, ... we find that there was compelling evidence for a jury to determine that Larrabee possessed material, nonpublic information. We examine myriad factors, including (1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee.”

Similar Fact Evidence

92.  The SFC seeks to invoke the principle of similar fact evidence in this case.  It is convenient to set out here the law over which there is no dispute.  It is the application of the same on which the parties differ. 

93.  The leading authority on the admissibility of similar fact evidence is DPP v P [1991] 2 AC 447, which held that the essential feature of evidence to be admitted under the rule is that its probative force in support of the allegation being tried is sufficiently great to make it just to admit the evidence, notwithstanding that it is prejudicial to the accused in tending to show that he was guilty of another crime (at 460E-F).  Although DPP v P has relaxed the stringent test of “striking similarity”, it is clear that “mere coincidence” will not suffice to render similar fact evidence admissible: Archbold Hong Kong 2015, §13-8 which stated as follows :

“The unlikelihood of coincidence as the basis for the admission of similar fact evidence has recently been recognised by the Court of Appeal in R v Groves [1998] Crim L R 200. ‘Mere coincidence’ will not, however, suffice: see R v Musquera [1999] Crim L R 857, in which the Court of Appeal observed that whilst P had got rid of the necessity to identify a ‘striking similarity’, it was still necessary to invoke some identifiable common feature or features constituting a significant connection and going beyond mere propensity or coincidence.”

94.  In HKSAR v Zabed Ali (2003) 6 HKCFAR 192, the CFA adopted the test laid down in DPP v P, and held that in considering the question of admissibility, the relevance of the evidence to the issues in the case should first be considered (at 203J).

95.  This court has also been referred to Chong Wai Lee v Insider Dealing Tribunal (2011) 14 HKCFAR 875, where findings of insider dealing against the defendants by the IDT were quashed on the ground of grievous injustice occasioned by errors of law.  What was found by the CFA to be “the biggest problem” (§12) was that the IDT ruled that evidence gathered for another set of insider dealing inquiry against the defendants and one Mr Tse, who was alleged to be the tipper of the insider information in both cases, was admissible to “negative coincidence” (§§12-13).  Bokhary PJ explained why the admission of the similar fact evidence amounted to an error of law, at §§14-15 :

“14. What coincidence was there to be negative? And how could it be negatived by pointing to the Harbour Ring dealings unless and until one determined that those dealings involved insider dealing by the appellants in reliance on inside information provided by Mr Tse?

15. Just about every time insider dealing is alleged against an outsider it could be said that his or her denial of having acted on inside information raises a question of coincidence. But that is no reason to treat coincidence as a separate hare to be chased.  It is simply a matter of looking at the whole of the evidence, weighing it and coming to a conclusion as to whether or not insider dealing has been duly identified and proved.”

96.  The SFC says that Betty, Patsy and Stella traded in AsiaSat shares in February 2007, only a few months after they received the proceeds from the Tender Offer for Hsinchu Bank shares.  The 2 cases are similar in all key material respects, except that the roles of Betty and Eric were reversed.  It relies upon the following factors to bring the similar fact principle into play :

(1) Both Betty and Eric were solicitors and close friends with access to CMPSI in respect of takeover deals;

(2) In both cases, one leaked the information to the other, abstained from trading in his or her own name and counselled or procured the other to do so;

(3) In both cases, the same 4 people were involved;

(4) In both cases, each solicitor claims he or she did not leak the CMPSI, whereas the other claims he or she identified the stock and made the decision to trade, based on his or her own independent research and analysis;

(5) In both cases, the very stock which the other claims to have independently identified just happened to be the very same obscure stock that the first one was working on, or his colleagues were working on;

(6) In both cases, the timing of the buying of the stock took place immediately before the information was made public.

97.  On the other hand, Mr Sussex submitted that the facts demonstrate more dissimilarities than similarities, and that they do not show sufficient similarities constituting a significant connection between the 2 transactions that goes beyond mere coincidence.

98.  I have to say that the application of the similar fact evidence principle is never an easy exercise (see in particular the guidance in Zabed Ali, at 203F to 204C), and the court has to guard against relying on the evidence for propensity.  Whilst not ruling out that such principle can, in an appropriate case, assist the court in coming to a just determination on the factual disputes, I prefer to start off from the position suggested in §15 of Chong Wai Lee, notwithstanding that I find some force in the SFC’s contentions here.  In any case, I do not find it necessary to resort to this principle in resolving the factual issues in this case. 

Analysis of the Evidence

99.  Only 2 of the SFC witnesses were required to attend court to testify[9], namely, Mr Peter Brien and Amy.  The former is the senior partner of S&M’s Hong Kong office.  His evidence was explored in cross-examination regarding the likelihood or otherwise of Betty having been given a copy of the S&M Dealing Rules when she joined his firm.   

100.  Amy used to work at Linklaters as the secretary of Eric and Samantha.  Only a few general questions were asked of her in cross-examination.

Hsinchu Bank Case :

Betty and Eric

101.  I should start by saying a few things about Betty.  Her background as a solicitor trained in and later worked for city firms suggest that she is a highly capable and independent person.  This is consistent with the observation of this court of her in the witness box. 

102.  The SFC says that there are various facts which together point compellingly to the inference that Betty and Eric traded in Hsinchu Bank with the benefit of Betty’s knowledge of the Tender Offer. 

103.  Both Betty and Eric were cross-examined at length on their investment history. Neither of them had invested in overseas markets (with the exception of Hsinchu Bank).  The bank records of their accounts show, and each accepted in cross-examination, that they had never directly invested in an overseas stock before trading in Hsinchu Bank shares.  They had no prior experience in identifying takeover targets either.  Although Eric’s evidence is that he had identified Hsinchu Bank as an imminent target for takeover by Fubon Bank, he admitted in cross-examination that he had no prior experience in identifying takeover targets.  I should add that in his evidence Eric tried to impress on the court that he was an adventurous investor, but that is not borne out by his investment history (see below). 

104.  Mr Westbrook SC, appearing with Mr Li for the SFC, submitted that the timing of the investment was perfect.  Eric caused Patsy to open the TF Account on 20 September 2006.  This was just days after Betty had learned of the intended Tender Offer price and that the offer would be announced on 29 September 2006[10].  The acquisition of Hsinchu Bank shares then took place from 22 September 2006 up to the morning of 29 September 2006 (immediately before the announcement of the Tender Offer), as soon as funds were made available.

105.  According to the defence’s own evidence, Eric asked Patsy in the evening of 19 September 2006 to open the TF Account.  She did so the next morning.  There was evidently a sense of urgency.  Indeed, Patsy said in an interview with the SFC that she had deposited cash into that account because she wanted to use the money (for trading) right away.

106.  Mr Sussex disputes the suggestion that the timing of the purchases of Hsinchu Bank shares were perfect.  He submitted that given Betty’s knowledge of the takeover, the defendants, if they were acting with inside information, would have started buying the shares in August 2006 when the price was lower. 

107.  Whilst it can be argued that the defendants could have started acquiring the shares earlier if they were acting with inside information, on an objective assessment, it is right to say that the timing of the defendants’ acquisitions was indeed highly accurate.  This factor, and the trading history of Betty and Eric, are important matters which can assist the court in assessing the inherent probabilities of the evidence. 

108.  It is not possible or unnecessary for the court to resolve the argument that the defendants would have acted earlier if they were insider dealers.  It is possible that Betty only decided to embark upon an unlawful exercise shortly before the 20 September 2006.  She is a professional, and it would not be right to expect such a person to jump at every opportunity to breach her fiduciary duty.  The court needs not speculate on such matters.  There is a body of evidence concerning the Hsinchu Bank case, and this court has the evidence of the defendants.  The findings should be based on evidence.  This submission of Mr Sussex does not change the complexion of the evidence. 

109.  I agree with Mr Westbrook that there were efforts made to hide the connection between Betty and Eric and the acquisitions.  The defence case is that Eric wanted to invest for himself and Betty.  It is puzzling why he asked Patsy to open the TF Account and to acquire shares for him.  This had never happened before, except on 1 occasion many years ago when Eric did not have his own securities account.  At the material time, Eric had more than 1 such account and had for many years been doing his own trading.  Indeed, the defence’s evidence is that Eric was an experienced and a keen investor (eg, Patsy said that Eric was much better qualified than her about investing).  It is thus very odd for Eric to have asked Patsy to make his largest investment for him. 

110.  Further, Eric admitted that this was the only occasion where Betty had entrusted money to him for investment.  Evidently, efforts were made to create some distance between the trading and Eric and Betty.

111.  Both Eric and Betty invested very heavily in the Hsinchu Bank shares.  Eric invested a total of HK$3,280,000.  This was many times more than the highest amount he had ever invested previously in a single stock.  As his account statements show, and he admitted under cross-examination, he had never invested more than HK$300,000 in any one stock before.  Betty invested a total of HK$2,250,000.  This was also many times more than the highest amount of her own money she had ever injected into a single investment[11]. 

112.  At the time, Eric and Betty were earning monthly salaries of, respectively, HK$100,600 and HK$87,000.  Their investments in Hsinchu Bank shares translated to between 2 to 3 years’ salaries.  This shows that they were exceptionally confident about the investment.

113.  Further, the way in which Eric and Betty raised money for the investment speaks volumes.  Eric used up all the funds in his HSBC bank accounts and drew down an overdraft facility of some HK$665,000.  He drew down another overdraft facility in a dormant account at Dao Heng Bank for HK$100,000.  He borrowed HK$460,000 from Patsy.  Eric also liquidated practically his entire securities portfolio, and the bulk of the selling occurred during just 2 days (being 25 and 26 September 2006), which raised approximately HK$1,800,000.  He admitted in cross-examination that he liquidated his portfolio “suddenly” and it was the first time he had ever done so.

114.  Betty likewise exhausted the funds in her HSBC bank account and drew down on her overdraft facility of HK$879,000.  She borrowed HK$300,000 from her sister.  She also liquidated a large part of her securities portfolio to raise about HK$1 million, leaving behind around HK$769,000 in 2 unit trusts and HK$683,000 in 4 stocks.

115.  It is right to say that what Eric and Betty did was wildly out of line with their investment habits.  As their account statements show and each of them admitted in cross-examination, their practice was to buy and hold quite a few stocks, thereby spreading the risk.  By contrast, in liquidating his securities portfolio, Eric had effectively put all his eggs (including borrowed ones) in one basket.  To a lesser degree, Betty had acted likewise.  I should add that generally professional people tend to be careful in what they do.  The investment history of Eric and Betty suggest that they were no exception.  What they had done in this case must be regarded as highly unusual, and reflects that they knew something about this investment as a “very safe bet”. 

116.  Finally, I agree with Mr Westbrook that the coincidence that, of all the stocks and stock markets in Asia, the one chosen by Eric just happened to be the very stock which Betty was working on as the takeover target of her employer, is quite extraordinary.  Such extraordinary coincidence again speaks volumes for the case of the SFC. 

117.  All of the above factors point to a compelling inference, namely, Eric and Betty knew they were putting their money into, as Mr Westbrook put it, a “sure thing”; they had CMPSI about the Tender Offer; and they traded on it.

118.  Turning to the evidence of Eric and Betty, which I find difficult to accept as true.

119.  The lynchpin of their case is that the investment was based on Eric’s own research.  According to Eric, he was working on a Taiwanese corporate transaction in May 2006 which drew his attention to the Taiwanese market.  Through his own research, he saw that Fubon Bank had been increasing its shareholding in Hsinchu Bank in August 2006 and “speculated” that “a takeover could soon take place in a few months’ time”[12].  He adduced in evidence some news articles dated January to September 2006 and 1 stock analyst report dated 26 September 2005 as materials which he considered in reaching his investment decision.

120.  To begin, I have no doubt that there is an abundance of such financial material readily available to interested readers. A visit to a newsstand would confirm that there is a sector of the publication industry dedicated to producing such material.  In addition, if one keys in the right search parameters for Google, there is little doubt that a substantial volume of financial material relating to Hsinchu Bank will be identified.  The presence of such material is therefore of limited assistance to the court.  The real point is whether there is proper reason to believe that based on his reading of such material and his analysis, Eric invested not only everything he had, but also most of what Betty got, on this “speculation”.

121.  I agree with Mr Westbrook that these articles and the old analyst report could not have led a reasonable person (let alone a professional) to make the momentous move that Eric did.  Moreover, Eric’s story cannot explain the urgency and timing for the investment.

122.  During cross-examination, Eric said that by September 2006 he had found his previous strategy of spreading his investment over a number of stocks to be unsatisfactory because the profits and losses averaged each other out.  This is not incredible evidence.  As his account statements show, after disposing of the Hsinchu Bank shares, he returned to the same investment strategy as before.

123.  According to Eric and Betty, in early September 2006 Eric mentioned that he was planning to invest at least HK$1,000,000 in overseas markets in the region, ie, Asia.  On around 19 September he asked Betty whether she was seriously interested and, if so, to transfer funds to his accounts.  On both occasions, she asked him what investment he had in mind. However, because of his “self-imposed rule” not to mention the details to his corporate lawyer friends, he refused to tell her.

124.  During cross-examination, Betty said that she was content to trust Eric’s investment acumen; she did not want to exercise any personal judgment over the investment; no matter what the investment was, she would follow him.  When the investment yielded a very handsome return in a short time, Betty once again pressed Eric about what the investment had been but he would not reveal it and eventually said to her: “You got the money.  You should be happy.”

125.  I agree with Mr Westbrook that this evidence is not worthy of belief.  It is incredible that Betty would have entrusted all her available funds (and more) to Eric without even knowing what the investment was.  She said that she regard herself as an investor who took “measured risks”.  There was nothing “measured” in entrusting most of her assets blindly with Eric.  Indeed, she said that she was told by Eric that the investment involved risk.  However, Eric merely said that there could be upside and downside to the investment, and declined to indicate the extent of the downside.  Telling Betty about the downside of the investment could not be an infringement of his rule, and I cannot understand why Eric would not have done so. 

126.  Further, Eric’s self-imposed rule does not make much sense.  He said that he had such a rule in order to protect himself and his friends.  It is difficult to understand the logic of the rule.  During cross-examination, Eric admitted that it was not really for the protection of his friends.  At most, his rule could only serve to preserve his investment idea “just in case” his friends made a “slip of tongue” about what they were working on, which coincided with his investment idea.

127.  I do not believe that people conduct their affairs in the manner suggested by Eric.  This rule would make it meaningless for him to discuss his investment ideas with his lawyer and corporate financier friends.  Lawyers often discuss their cases with their colleagues, and they would be stopped when the listeners detected any conflict of interest.  I have little doubt that this self-imposed rule is a concoction to hide his wrongdoings. 

128.  I also find it incredible that Betty would have behaved in a submissive manner and simply accepted Eric’s stonewalling of her enquiries.  This is quite inconsistent with her position as an able professional, and unlike the person I observed for a whole day in the witness box.   

129.  There are inconsistencies in the evidence of Eric and Betty.  Notably, Eric’s evidence is that he told Betty that the investment would not be risky.  Betty in her evidence stressed that Eric did not invite her to invest.  Eric’s evidence is to the contrary.  However, what is considerably more powerful is that their overall story holds no water and makes little sense.

130.  It was submitted by Mr Sussex that Eric and Betty had voluntarily disclosed to the SFC their investment in Hsinchu Bank shares when they were being investigated on the AsiaSat transaction, and that is consistent with their innocent explanation.  I am not persuaded that there is real force in the submission in light of the above evidence.  They were forewarned about the SFC investigation (on the AsiaSat case).  No doubt as lawyers they would have acquainted themselves with the extensive investigatory power of the SFC.  It is perfectly conceivable that Eric and Betty took the view that there was a fair chance that the investigation would lead onto the Hsinchu Bank matter given the documentary trail and the large sums of money involved.  The better course was to reveal the matter themselves with a prepared story. 

131.  In conclusion, the circumstantial evidence against both Betty and Eric is compelling, and their story is implausible. 

132.  This court has been invited by Mr Westbrook to draw the following inferences against Betty and Eric, and I do so because they are well-grounded on the evidence :

(1) Betty had shared CMPSI, namely, knowledge of the Tender Offer, with Eric;

(2) They both decided to trade with the information;

(3) They decided to arrange for Patsy to open an account in Patsy’s name, so as to create some distance between themselves and the trading;

(4) They were solicitors and have admitted to knowing the obligations to maintain confidentiality and not to make secret profits. It must follow that they knew that Betty was acting in breach of her duties to S&M and SCB.

133.  I shall make further specific findings after dealing with the legal issues.

Patsy

134.  Although Patsy was further away from Betty (the source of CMPSI), the evidence also demonstrates a strong case that she was a knowing participant in the unlawful enterprise.

135.  Like Betty and Eric, Patsy had never traded in overseas stocks before.  At the material time, Patsy had a salary of about HK$10,000 per month.  In addition, she received rental income of HK$5,800 per month.  She had HK$500,000 in bank deposits and HK$600,000 in a mix of different stocks (in accordance with her strategy of spreading risks).  Betty’s account statements show, and she admitted in cross-examination, that her investment in Hsinchu Bank nearly doubled the highest amount she had ever previously invested in any other stock.  Viewed in context, her sudden investment of HK$351,000 in a single stock in an unfamiliar overseas market was an uncharacteristic and highly adventurous move. 

136.  Patsy’s story is as unbelievable as that of Eric and Betty.  She said in her evidence (consistent with Eric’s evidence) that Eric had asked her to open an account at Tai Fook.  This is the opposite of what she had said to the SFC in 2 interviews, namely, Eric did not specify the securities firm, and she learnt that Tai Fook could help to trade in Taiwanese stocks upon her own inquiry.

137.  Patsy did not have a convincing answer as to why it was necessary for her to open an account in her own name to trade for Eric.  She suggested that it was a matter of convenience and she happened to be free at the time.  However, that does not explain why she could not have simply assisted Eric to open an account in his name or why the account could not be in joint names so that Eric could do the trading himself. 

138.  In respect of the previous occasion when Patsy acquired shares for Eric, Patsy said that she was given an acquisition price for the purpose.  This is to be contrasted with the purchase of Hsinchu Bank shares, which was entirely left to her (likewise, Eric stated in his witness statement: “I was happy to leave to her initiative and judgment matters such as how many shares to buy, when to buy, and at what price.”).  Such evidence does not sit well with Patsy’s own evidence that Eric was a more able investor to whose judgment she deferred.  Much more likely, the truth is that she was instructed by Eric to buy Hsinchu Bank shares as soon as funds were injected into the TF Account (as demonstrated by the evidence).

139.  Patsy claimed not to have told Eric that she and Stella were both following him in buying Hsinchu Bank shares.  The reason was that she did not want to burden Eric with the possibility of guilty feeling if the investment turned out to be loss-making.  This makes little sense, and it does not fit with the picture painted by Patsy that she was very close to Eric and was quite happy to do the trading for him.  It would have been the most natural thing for the siblings to be discussing their common investment. 

140.  Patsy said that she never thought about how much loss her investment might potentially suffer.  She merely followed Eric.  I do not find that credible, especially for a lady like Patsy, who was middle-aged, single and had a modest income. 

141.  There is no direct evidence to link Patsy’s opening of the TF Account and trading in Hsinchu Bank shares with the abuse of confidential information on the part of Betty.  Indeed, there is no evidence of any dealing between Patsy and Betty in connection with the purchase of Hsinchu Bank shares.  However, in a case of this type, short of having a confession by one of the culprits or a secretly recorded discussion, there will always be lacuna in the evidence.  The issue is whether the established evidence justifies an inference on the matter on which there is no direct evidence.  In this case, the inferences that Patsy knew that Betty was the source of inside information and that it was fraudulent or deceptive for her to take advantage of such information received via Eric or directly from Betty, are justified :

(1) Patsy was a key member of the illicit enterprise; 

(2) She had an important role to play;

(3) Very substantial amount of money was injected into the TF Account within a short period of time.  It is unlikely that she would have believed that all the money came from her brother.

(4) In the premises, it is quite improbable for there to be no discussion on the essential features of the illicit enterprise. Between Eric and Pasty (at the very least), they must have discussed the quality of the inside information; that it came from Betty; and, because of the need to engineer a distance from her, that Patsy would have to carry out all the trading.

142.  Although Pasty was not a lawyer, it is plain that she must have appreciated that it was unlawful to trade on the inside information.  Hence, the need to hide their tracks.

Stella

143.  Stella was better off financially than Patsy. However, her investment history reveals that she had very little interest in stock trading.  Such interest was confined to subscribing for units in the Link REIT and joining a program to make a small monthly purchase of shares in HSBC and Hong Kong Exchange Ltd.  Viewed in context, her sudden investment of HK$500,000 in a single overseas stock, which on her own evidence she knew nothing about, was entirely out of character.

144.  Moreover, on the evidence of both Stella and Patsy, the two had never traded together before.  The SFC submitted that Stella must have been told that Eric was onto a “sure thing”, which could only have come from his using CMPSI.

145.  However, the case against Stella is only based on her trading in Hsinchu Bank shares via Patsy using the TF Account.  In fairness, her investment of HK$500,000 was made in 2 tranches of HK$100,000 (22 September 2006) and HK$400,000 (25 September 2006).  It could have been the case that Stella was only making a large investment when the “tip” given to her proved to be a good one (Hsinchu Bank shares closed at HK$16.75 on the 22^nd and opened at HK$17.5 on the 25^th).  This stands in contrast with Patsy who plunged into the investment in 1 go on 21 September 2006. 

146.  It is true that Stella’s own evidence is that she was told by Patsy about Eric targeting a Taiwanese bank as an investment, which she subsequently found out to be Hsinchu Bank.  Hence, she admitted to receiving certain information emanating from Eric.  However, there is no sufficient basis to infer that she must have known about the illicit enterprise.  There was no necessity for Stella to be told about the same.  Common sense suggests that generally such information would be kept to people who need to know.  It is possible that Stella was simply told that there was a good “tip” from Eric.  Given her lack of experience in stock trading, it is conceivable that she did not enquire about the details of the tip.  It is of course also possible that Stella had as much guilty knowledge as Patsy. However, I am not satisfied that such has been proved. 

147.  SFC has an alternative case in the event that it cannot meet the threshold for direct culpability in Stella’s (as well as Patsy’s) case.  It was submitted that she was nonetheless involved in the wrongful conducts of Betty, Eric and Patsy, such that an Order for relief should be made against her.  I shall deal with this below.

148.  I turn to the legal issues.

Territorial reach of s.300

149.  The SFC is relying on s.300 and not the insider dealing provisions under the SFO (ss.270 and 291) because of the extra-territorial feature in the Hsinchu Bank case – the bank’s shares were listed in the Taiwan Stock Exchange.  The defendants argued that s.300 has no extra-territorial application at all.  In other words, it does not apply to securities transactions that took place outside Hong Kong.  Hence, this argument does not concern the AsiaSat case. 

150.  This issue turns upon the proper construction of s.300.  I bear in mind that s.300 is a criminal provision and it has to be construed strictly : see R v Bloxham [1983] 1 AC 109, at 114E-F; Agassi v Robinson (Inspector of Taxes) (No 2) [2006] 1 WLR 2126, at 2143G; Bennion on Statutory Interpretation, 5th edn, at p.827 quoting Maxwell on the Interpretation of Statutes, 12^th edn.  I also bear in mind that the language of a statutory provision is to be construed having regard to its context and purpose : see HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at §§12 & 13.

151.  The SFC said that in s.300 “securities” are defined in wide terms as per Schedule 1 to the SFO and are not limited to any particular country or exchange, and thus the section applies to any stock whether listed overseas or not. 

152.  By contrast the application of s.291 is limited to those stocks traded on the SEHK.  It is worth noting that s.291 refers to “listed securities”.  “Listed” is defined in s.285 as meaning listed on a “recognised stock market”; and a “recognised stock market” is defined in Schedule 1 of the SFO as a stock market operated by an exchange company recognised under s.19(2) of the SFO, which essentially restricts the insider provisions to securities listed on Hong Kong recognised markets.

153.  It was submitted by the defendants that the absence of the word “listed” in s.300 simply means that it can apply to transactions in non-listed securities.  There is nothing to displace a strong presumption that the legislature did not intend to create an offence applicable to acts committed outside of the jurisdiction.  As stated by Lord Reid in Treacy v DPP [1971] AC 537 at 551F-H :

“It has been recognised from time immemorial that there is a strong presumption that when Parliament, in an Act applying to England, creates an offence by making certain acts punishable it does not intend this to apply to any act done by anyone in any country other than England. Parliament, being sovereign, is fully entitled to make an enactment on a wider basis. But the presumption is well known to draftsmen, and where there is an intention to make an English Act or part of such an Act apply to acts done outside England that intention is and must be made clear in the Act … I think that it would be both retrograde and likely to cause confusion in the law if any such intention were inferred without there being clear words to indicate it.”

154.  At 559B-C, Lord Diplock said :

“In view of the way in which the question is framed and the wide-ranging argument about ‘jurisdiction’ … I am prompted to state at the outset that the question in this appeal is not whether the Central Criminal Court had jurisdiction to try the defendant on that charge [one of blackmail] but whether the facts alleged and proved against him amounted to a criminal offence under the English Act of Parliament.”

155.  The rationale for this presumption was explained in Somchai Liangsiriprasert v United States [1991] 1 AC 225 at 244C-D in the following way :

“As a broad general statement it is true to say that English criminal law is local in its effect and that the common law does not concern itself with crimes committed abroad. The reason for this is obvious; the criminal law is developed to protect English society and not that of other nations which must be left to make and enforce such laws as they see fit to protect their own societies. To put the matter bluntly it is no direct concern of English society if a crime is committed in another country. It was for this reason that the law of extradition was introduced between civilised nations so that fugitive offenders might be returned for trial in the country against whose laws they had offended.”

156.  The above principles have been applied in Hong Kong : see HKSAR v Krieger [2014] 3 HKLRD 404, at §§78-80.  This court has also been referred to the Australian authority of Thompson v The Queen [1988-1989] 169 CLR 1 to see that the legal position is the same in Australia. 

157.  On behalf of the defendants, Mr Sussex advanced a powerful analysis as follows.  The legislature is free to create offences that have extra-territorial scope.  For example, s.4 of the Prevention of Bribery Ordinance, Cap 201 (“POBO”) provides for its applicability to “offers” of advantages to Hong Kong public officials “whether in Hong Kong or elsewhere”.  In contrast, s.9 of the POBO proscribes offers of advantages to agents in general but the provision does not contain the phrase “whether in Hong Kong or elsewhere”.  The significance of this was explained by the Court of Appeal (“CA”) in Krieger at §81 :

“The phrase in s.4(1) ‘whether in Hong Kong or elsewhere’ is directed at the place at which the offer is made. The concomitant absence of that phrase from s.9(2) tells us that the legislature did not intend to criminalise a s.9 offer made other than in Hong Kong. Conversely, if the offer is made in Hong Kong it matters not, for the purpose of s.9(2), that the offeree agent is a public official of a place outside Hong Kong or that the act or forbearance in respect of which the offer is made concerns duties outside Hong Kong … since s.9(2) ‘is directed against offers made here and targets the offeror only.’”

158.  Mr Sussex submitted that the SFO is structured in the same way.  For offences that are intended to apply to acts committed outside of Hong Kong, the phrase “in Hong Kong or elsewhere” is expressly provided for in the provisions – see ss.295, 296, 298 and 299 of the SFO[13].  Paraphrasing the CA in Krieger, the concomitant absence of that phrase in s.300 tells us that the legislature did not intend to criminalise a transaction involving securities conducted other than in Hong Kong.

159.  In respect of those offences where the SFO expressly provides to be applicable to securities transacted in overseas markets, it is provided in s.306(3) that a person cannot be convicted of those offences “unless the prosecution proves that in any place in which such relevant overseas market is situated the conduct would have constituted a criminal offence had it been carried out there.”.  That subsection serves to avoid the possibility of incompatibility with applicable laws of other countries in respect of those SFO provisions which have extra-territorial effect.  However, it does not apply to s.300, which can be said to be a further indication that s.300 was never intended to be applicable to transactions conducted in overseas markets. 

160.  Further, s.300 of the SFO is similar to s.9 of the POBO in that both offences are single actus reus offences, said Mr Sussex.  In s.9 of the POBO, the actus reus is the making of the “offer” of advantages; in s.300 the actus reus is prescribed in the alternative :

(1) the employment of a device, scheme or artifice in a transaction involving securities (s 300(1)(a)); or

(2) engaging in an act, practice or course of business in a transaction involving securities (s 300(1)(b)).

161.  Neither of the acts prescribed in s.300(1)(a) or (b) amounts to the actus reus of the offence unless they are committed in a transaction involving securities.  In other words, it is the commission of those acts in a transaction involving securities that is prohibited by the section.  Since s.300 does not have extra-territorial effect, the provision can only apply to securities transactions conducted in Hong Kong.

162.  This court is of course bound by Krieger. It is right to say that there is no clear words in s.300 which displace the presumption against extra-territorial application.  To the contrary, the distinction drawn with other sections where the words “in Hong Kong or elsewhere” can be found is a powerful one. 

163.  However, I believe that the answer here lies in the proper construction over the actus reus covered by s.300.  With respect, the fragility of the defendants’ argument lies in the proposition that the “transaction” must be a completed or executed securities transaction.  Put another way, the defendants’ case is that the actus reus caught by s.300 must include an executed securities transaction (in the Hsinchu Bank case, the execution took place outside Hong Kong). 

164.  When s.300 is examined, it is reasonably clear that the vice which it seeks to address is, in simple terms, fraudulent or deceptive conduct use in securities transaction.  It is true that such conduct alone is not prohibited in this section, it must be conduct employed in a transaction involving securities. 

165.  “Transaction” is widely defined in s.300(3) to include “an offer and an invitation (however expressed)”. It is therefore quite clear that the securities transaction needs not be a completed transaction. 

166.  Apart from the expansion of the word by s.300(3), “transaction” is not defined in the SFO.  I have been referred by Mr Westbrook to The New Oxford Dictionary of English which defines “transaction” as “an instance of buying or selling something; a business deal”.  I agree that there is no warrant or principle of construction to limit the meaning to the first definition of buying or selling something when the word also includes as a second meaning of a business deal, which obviously has multiple features to it. 

167.  In my view, fraudulent or deceptive conduct employed in making an offer to buy securities would be caught under s.300.  I believe that an analogy may be drawn with s.9(2) of the POBO where, as the CA held in Krieger, “if the offer is made in Hong Kong it matters not … that the offeree agent is a public official of a place outside Hong Kong or that the act or forbearance in respect of which the offer is made concerns duties outside Hong Kong” (see para 157 above).  Here, if fraudulent or deceptive conduct was employed in making an offer to buy securities, it matters not that the securities are traded outside Hong Kong, because s.300 targets the employment of such conduct in Hong Kong.  

168.  In the Hsinchu Bank case, the SFC’s case on the actus reus is the fraudulent or deceptive act or practice perpetrated on SCB in Hong Kong.  Mr Westbrook submitted that the trading in Taiwan merely provides the context and acts as a limitation on the type of fraud or deception caught by s.300.  In other words, it is only fraudulent or deceptive conduct in a transaction involving securities that is caught, not other types of such conduct.  I will have to consider later whether SFC’s case, as proven, satisfies s.300.

169.  However, as indicated above, insofar there was fraudulent or deceptive conduct used in offering to buy the Hsinchu Bank shares in question, it would amount to an offence under s.300.  The fact that the shares were traded overseas is not a critical feature.  Here, the defendants bought the Hsinchu Bank shares via the TF Account.  The buy instructions given to Tai Fook must have constituted an offer.  The fact that the offer had to be transmitted via Tai Fook to Taiwan for execution is not critical for purposes of s.300[14]. 

170.  Further, I accept the SFC’s submission that fraudulent or deceptive conduct used in accepting the Tender Offer, such acceptance having taken place in Hong Kong (it was accepted by Patsy in Hong Kong via Tai Fook), can also bring the Hsinchu Bank case within s.300.

171.  In the premises, I hold that s.300 does not have extra-territorial application.  However, I do not agree that applying s.300 in this case involves an extra-territorial application of the law.  

172.  I turn to the US authorities relied upon by both sides.  Firstly, I have been referred by Mr Sussex to a US Supreme Court decision in Morrison v National Australian Bank 561 US 247, 130 S Ct 2869, concerning the territorial scope of rule 10b-5 (“R.10b-5”) of the Securities and Exchange Act 1934 (“SEA”).  The origin of s.300 can be traced to this rule, which has been held to apply only to domestic transactions.  However, I believe that there are differences in the formulation of those provisions compared with s.300.  In particular, R.10b-5 does not contain an extended meaning of “transaction” found in s.300. The construction which this court has arrived at for s.300 is based on its wordings. 

173.  Further, it has been pointed out by Mr Westbrook that in a later Court of Appeal decision – US v Mandell 752 F3d 544 (2d Cir 2014), p.2, it was explained that it is a domestic transaction where the parties incurred irrevocable liability to carry out the transaction within the US or when title is passed within the US.  This resonates with the above analysis of s.300.   

174.  Mr Westbrook also relies upon a US District Court decision – Securities and Exchange Commission v Tourre (SDNY), 4 June 2013.  It was a case concerned with s.17(a) of the Securities Act of 1933 which proscribes the use of fraudulent conduct “in the offer or sale of any securities” (p.12).  The court rejected Tourre’s argument (p.14) that if the offer leads to a consummated sale, only the sale is actionable (pp.16 & 18)[15] :

“The problem with each of these arguments is their disregard of the statutory text. Section 17(a) does not distinguish between consummated and unconsummated offers, and the Court can find no other statutory basis from which to make that distinction. It would take especially compelling dicta, legislative history, and policy concerns to merit adding the word ‘unconsummated’ before the word ‘offer’ and thereby create a statutory distinction out of whole cloth. There is no basis for such judicial rewriting of the clear statutory language.

…

Section 17(a) prohibits neither offers nor sales of securities; it prohibits fraudulent conduct ‘in the offer or sale of any security.’… The ‘offer or sale’ language simply limits the scope of actionable fraudulent conduct. …

The Court’s interpretation of Section 17(a) is dictated by common sense.  It defies reason to adopt a construction of Section 17(a) that could permit the SEC to prove that each any every element of its claim occurred – and occurred in the United States – only to require dismissal because a separate ‘sale’ took place abroad.  The presumption against extraterritoriality does not require such a result; Morrison’s holding does not require such a result; and the Court sees no reason to interpret Morrison’s dicta to require it either.”

175.  With respect, I agree with the above analysis and the dicta also lend support to this court’s analysis of s.300.

176.  For completeness, I have been referred to the predecessors of s.300[16].  All of them referred to “in connection with any [securities transaction]” instead of “in a transaction involving securities”.  Mr Sussex submitted that the current formulation is a clear and deliberate departure from the wider language of the old provisions.  On the other hand, Mr Westbrook relies upon the Bills Committee papers on the Securities and Futures Bills which suggest that s.300 was intended to re-enact the existing law. 

177.  The concept of parliamentary intent is premised upon the objective meaning of the words used.  As stated in R v Environment Secretary, Ex p Spath Holme Ltd [2001] 2 AC 349 at 396G to 397A :

“Statutory interpretation is an exercise which requires the court to identify the meaning borne by the words in question in the particular context. The task of the court is often said to be to ascertain the intention of Parliament expressed in the language under consideration. This is correct and may be helpful, so long as it is remembered that the ‘intention of Parliament’ is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used. It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House. These individuals will often have widely varying intentions. Their understanding of the legislation and the words used may be impressively complete or woefully inadequate. Thus, when courts say that such-and-such a meaning ‘cannot be what Parliament intended’, they are saying only that the words under consideration cannot reasonably be taken as used by Parliament with that meaning. As Lord Reid said in A Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] AC 591, 613: ‘We often say that we are looking for the intention of Parliament, but that is not quite accurate. We are seeking the meaning of the words which parliament used.’”

178.  I do not find it necessary to resort to the predecessors of s.300 or Committee papers because the words used in s.300 are sufficiently clear. 

Scope of s.300

179.  Now I have to address whether the SFC’s proven case is caught by s.300.  The arguments here can be addressed under 2 headings – the fraud and deception which may fall within s.300 and whether the victim to the fraud or deception has to be a party to the “transaction involving securities”. 

180.  I start with some general observations about s.300 and the actus reus pleaded against the defendants.  As noted in para 82 above, this is unexplored territory insofar as Hong Kong jurisprudence is concerned.  

General Observations

181.  Section 300 is a fraud provision drafted in wide terms.  It outlaws, in the context of “a transaction involving securities”, “directly or indirectly” :

(1) “employing any device, scheme or artifice with intent to defraud or deceive”; or

(2) “engaging in any act, practice or course of business which is fraudulent or deceptive or would operate as a fraud or deception”.

182.  The language of s.300 in sub-paras (1) and (2) overlaps, so that a fraudulent or deceptive conduct may be described as a device, scheme or artifice or an act, practice or course of business, within the natural meaning of those words.

Actus Reus as pleaded

183.  I agree with Mr Sussex that s.300 cannot be contravened without a specified defendant having committed the actus reus.  It is therefore importance that the actus reus as pleaded by the SFC is accurately defined.

184.  The SFC’s pleaded case[17] is that the actus reus of s.300 (ie, the employment of a device etc, or engaging in acts or a practice) was committed by Betty, with “knowing assistance of [Eric, Patsy and/or Stella]”, in that she “traded in the shares of Hsinchu Bank using confidential … information for personal profit.”  In the Agreed List of Issues at §9, the device / scheme / acts / practice is particularised as the “misappropriation / misuse of inside information and illicit dealings”.  In the SFC’s Opening at §108, the actus reus is identified as the disclosing of CMPSI for the purpose of dealing in the relevant shares.

185.  Mr Sussex argued that there is a mismatch between the SFC’s pleaded case and the actus reus caught by s.300.  The “disclosing” of confidential information “for the purpose of dealing” must by necessary implication have occurred prior to the actual securities dealing. There could not therefore have been any “disclosure” of confidential information within the transaction itself. 

186.  I do not see any fundamental deficiency in SFC’s pleaded case.  I agree with Mr Westbrook that s.300 is not a “single actus reus” crime (see para 160 above), akin to stealing cars in Germany in R v Atakpu [1994] QB 69 (cited by the defendants).  Instead, s.300 proscribes (a) employing a scheme etc with intent to defraud or deceive or (b) engaging in any act or practice etc which is fraudulent or deceptive, either directly or indirectly in a transaction involving securities.

187.  The focus is on the fraudulent or deceptive scheme or act, albeit the ambit of the offence is limited to a transaction involving securities.  By their natural meaning, words such as “scheme”, “practice or course of business” clearly include conduct which goes beyond a single act.  The scheme or practice must take place in a transaction which involves securities, but the conduct comprising the scheme or practice is not limited solely to the purchase of the securities.

188.  There is also an attack on the SFC’s pleading in that the victim of the fraud or deception has not been pleaded.  I disagree. Para 45 of the SOC contains, inter alia, an averment of Betty’s “breach of fiduciary obligations … in that, without the knowledge or informed consent of her principals” she (with the knowing assistance of Eric, Patsy and Stella) traded in Hsinchu Bank shares with the use of CMPSI for personal profit.  In my view, the victim of Betty’s breach of fiduciary obligations, namely, her principal SCB, has been adequately identified in the SOC[18].

189.  I should mention that the SFC contends that it is not a requirement that there be a victim who had suffered loss or prejudice in order to constitute fraud.  A benefit to the fraudster is sufficient.  That issue of law will be addressed below. 

190.  Mr Sussex argued that the court should consider the scope of s.300 in light of that of s.291.  Such an exercise would put the former in its proper context (see HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568, §§12-13), and it can be seen that s.300 was never intended to have a wide scope. 

191.  I do not agree with the submission.  It is apparent from the terms of the sections that the scope of s.300 does not entirely coincide with the offence of insider dealing under s.291.  The former is a fraud and/or deception offence but fraud or deception does not need to be established under s.291.  Mr Westbrook gave a valid illustration of the difference between the 2 sections.  In a case under s.300 which is premised upon an insider’s abuse of confidential information for personal profit where it amounts to a fraud or deception, informed consent by the principal would negate liability under the section.  However, such conduct would still be caught by s.291 if the trading was in HK listed securities, because the principal’s consent is not a defence.

192.  Finally, there is another criticism of the SFC’s case which is associated with its pleading, namely, that Mr Westbrook has failed to adequately put his case to the defendants as a consequence of the lack of clarity of the pleading.  In my view, the modern approach to putting a party’s case to a witness is a matter of substance rather than form.  It is rarely, if ever, helpful to laboriously put one’s case to a witness knowing that it is going to be denied.  Nowadays, witness statements are invariably filed in advance of the trial so that the witness’s position on various issues is abundantly clear.  On the other hand, if there are matters upon which the witness may be in a position to advance an explanation, it would be unfair for the witness to be denied that opportunity in cross-examination.  I do not believe that there is such unfairness in this case. 

Fraud and Deception

193.  This court has been taken to a wealth of authorities on the concepts of fraud and deception.  I hope I can do justice to counsel’s industry by referring to the key authorities and deal with the difference between the parties.

194.  The meanings of “with intend to defraud” or “fraudulently” are discussed in Archbold Hong Kong 2015, at 16-45 to 16-47.  In HKSAR v He Pingsheng, CACC 98/2006, 22 November 2006, it was held, at §5 :

“An agreement between two or more persons to practice a fraud on another person with the dishonest intention to bring about a state of affairs which they realize will or may cause a victim to act or omit to act, with the result that his or her economic interests are put at risk, is sufficient to constitute the common law offence of conspiracy to defraud. Put in simple terms, a conspiracy to defraud simply means an agreement whereby it is intended by dishonest means to act to the detriment of another person. It is unnecessary to go through the various cases that make out these propositions. Among them are the recent cases of this court in HKSAR v Law Kam Fai & Another [2006] 2 HKLRD 879 and HKSAR v Mo Yuk Ping & Another, unreported, CACC26/2006, 14 November 2006.”

195.  The last mentioned case was subsequently further appealed and the offence of conspiracy to defraud was comprehensively reviewed by the CFA in Mo Yuk Ping v HKSAR (2007) 10 HKCFAR 386 where Sir Anthony Mason NPJ at 404D-E and 405E-G stated :

“… the offence is constituted by becoming a party to an agreement with another or others to use dishonest means: (a) with the purpose of causing economic loss to, or putting at risk the economic interests of, another; or (b) with the realization that the use of those means may cause such loss or put such interests at risk.”

“Dishonesty apart, conspiracy to defraud involves another state of mind – the intention or purpose of inflicting economic loss on another or the realization that the action agreed upon will or may put that person’s economic interests at risk, the element to which Lord Goff referred in The Queen v Wai Yu Tsang. This state of mind may well involve dishonesty. It is preferable, however, to treat it as a separate element. …”

196.  Further guidance can be found in the statutory offence of fraud under s.16A of the Theft Ordinance, Cap 210, which provides as follows :

“(1) If any person by any deceit (whether or not the deceit is the sole or main inducement) and with intent to defraud induces another person to commit an act or make an omission, which results either –

(a) in benefit to any person other than the second-mentioned person; or

(b) in prejudice or a substantial risk of prejudice to any person other than the first-mentioned person,

the first-mentioned person commits an offence of fraud and is liable upon indictment to imprisonment for 14 years.

(2) For the purposes of subsection (1), a person shall be treated as having an intent to defraud if, at the time when he practices the deceit, he intends that he will by the deceit (whether or not the deceit is the sole or main inducement) induce another person to commit an act or make an omission, which will result in either or both of the consequences referred to in paragraphs (a) and (b) of that subsection.”

197.  HKSAR v Cheung Chi Fai [2011] 3 HKLRD 193 is a case where the defendant was convicted of fraud contrary to s.16A, where he contravened his employer’s code of conduct by failing to disclose a conflict of interest.  Breach of such an internal code was sufficient to provide the element of deceit in the charge.

198.  The Privy Council in an appeal from New Zealand held that a director who traded on inside information can be guilty of fraud because of his dishonest concealment of the matter from the company : Adams v R [1995] 1 WLR 52, at 65E-F.

199.  Relying upon, inter alia, Mo Yuk Ping (see above), the defendants say that the concepts of fraud and deception in criminal law are based upon the actual and intended effect that certain acts have on another person (see also Wellham v DPP [1961] AC 103 at 123). 

200.  I am not inclined to accept that these concepts are so confined.  As pointed out by Mr Westbrook, s.300 catches conduct and intent which can be fraudulent or deceptive.  Deception is defined within the statutory offence of fraud – s.16A of Cap 210 – to include deceitful conduct which results in a benefit to the deceiver, not just loss or risk of loss to someone else. 

201.  In Wai Yu Tsang v R [1992] 1 AC 269, particularly at 275D-276A, it was held :

“… The House of Lords held [in Welham v DPP [1961] AC 103] that there was no warrant for confining the words ‘intent to defraud’ to an intent to deprive a person by deceit of an economic advantage or to inflict upon him an economic loss, and further that such an intent could exist where there was no other intention than to deceive a person responsible for a public duty into doing something, or failing to do something, which he would not have done, or failed to have done, but for the deceit. Lord Denning, who delivered the leading speech, rejected the argument that an intention to defraud involves an intention to cause economic loss. He referred to opinions of academic lawyers to that effect, and said, at p 131 :

‘I cannot agree with them on this. If a drug addict forges a doctor’s prescription so as to enable him to get drugs from a chemist, he has, I should have thought, an intent to defraud, even though he intends to pay the chemist the full price and no one is a penny the worse off.’

Later, at pp 132-133, Lord Denning referred to a passage in East’s Pleas of the Crown (1803 ed), vol 2, p 852, to the effect that forgery at common law denotes a false making – ‘a making malo animo’ – of any written instrument for the purpose of fraud and deceit. He then said, at p 133 :

‘That was written in 1803, but it has been always accepted as authoritative.  It seems to me to provide the key to the cases decided since it was written, as well as those before.  The important thing about this definition is that it is not limited to the idea of economic loss, nor to the idea of depriving someone of something of value.  It extends generally to the purpose of fraud and deceit.  Put shortly, ‘with intent to defraud’ means ‘with intent to practice a fraud’ on someone or other.  It need not be anyone in particular.  Someone in general will suffice.  If anyone may be prejudiced in any way by the fraud, that is enough.’”

202.  At 277F-G, the Privy Council further held that :

“… the cases concerned with persons performing public duties are not to be regarded as a special category … but rather as exemplifying the general principle that conspiracies to defraud are not restricted to cases of intention to cause the victim economic loss. On the contrary, they are to be understood in the broad sense described … in Welham v Director of Public Prosecutions …”

203.  It is common ground that the CFA in Mo Yuk Ping expressly left open the question whether the common law offence of conspiracy to defraud extends to cases of non-economic loss or prejudice to non-economic interests: see §§52-53.

204.  In my view, the terms of s.300 are reasonably clear, and I am guided by the law summarised above on fraud and deception.  I do not find any particular difficulty in the application of s.300 to this case. 

205.  In this case SCB was both defrauded and deceived by Betty’s conduct.  In particular, her acknowledgement of the dealing restrictions applicable to her as a person working within SCB on the Hsinchu Bank project must be a continuous representation by her that she would not deal in Hsinchu Bank shares.  Her decision and actions to misuse the CMPSI secretly constituted a scheme or act of deception[19]. 

206.  There can be little doubt that SCB was deceived by Betty.  SCB must have been labouring under the belief that Betty was abiding by her representation.  Thus, by Betty’s deception, SCB was deprived to its prejudice of the right to take action to protect its CMPSI.  Betty, Eric and Patsy had all benefited from SCB’s failure to protect its rights – the buying of Hsinchu Bank shares before the CMPSI became public and then accepting the Tender Offer shortly afterwards at a significant premium.

207.  Further, I agree with Mr Westbrook’s submission that if there is any need to go on to consider whether the conduct of the defendants had caused economic loss to, or put at risk the economic interests of another, it can be said that SCB acted to its economic detriment by paying the defendants via the Tender Offer for their shares, when, if they had known the shares had been bought in breach of fiduciary duties owed to it by Betty, they would obviously have refused to pay out to her and her tippees.  It should also be said that the defendants are liable to account to SCB for their profits made as a result of Betty’s breach of fiduciary duties. 

US “Misappropriate Theory”

208.  There is no controversy that the origin of s.300 can be traced to an adaptation of R.10b-5[20], which was made under s.10b of the SEA.  R.10b-5 has been referred to as 1 of the cornerstones of US regulation of securities fraud[21].  A large body of case law has been developed under R.10b-5. Unsurprisingly, the SFC has asked this court to draw upon such case law[22], in particular, the US Supreme Court decision in US v O’Hagan 521 US 642 (1997) 138 L Ed 2d 642.

209.  Rule 10b-5 was enacted in 1948 in these terms :

“It shall be unlawful for any person, directly or indirectly, by the use of … any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, … not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.”

210.  The facts of O’Hagan are not dissimilar to those in the present case.  Mr O’Hagan was a partner in a law firm retained by Grand Metropolitan PLC to advise on a potential tender offer for Pillsbury Company’s common stock.  Mr O’Hagan himself did not work on the transaction, but learned of it from his partners.  He began acquiring call options and shares in Pillsbury.  After the announcement of the takeover, he sold out and made a profit of US$4.3 million.  He was charged and prosecuted, inter alia, with violating R.10b-5 and was convicted and sentenced to 3½ years imprisonment.

211.  The Court in O’Hagan approved a “misappropriation theory” advanced by the prosecution as follows, on p.652 :

“The “misappropriation theory” holds that a person commits fraud “in connection with” a securities transaction, and thereby violates §10(b) and Rule 10b–5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. … Under this theory, a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information.”

212.  It is apparent that the SFC’s pleaded case is associated with the Misappropriation Theory.  This attracts a 2-fold criticism from the defence that liability under the US insider dealing law is premised upon two concepts which are not recognised in English criminal law :

(1) A breach of fiduciary duty is capable in itself of amounting to a “fraud”[23].  It is, however, accepted by Mr Sussex that non-disclosure in circumstances where there is a legal duty to disclose can form the basis of deceit; and

(2) Confidential information is capable of being “misappropriated”[24], and is a “right” recognised as capable of being “prejudiced” in the context of US law on fraud.

213.  I do not believe that these matters call for resolution in this case because this court does not intend, nor is it necessary, to import the US securities law in this case, in particular the Misappropriation Theory.  On the other hand, the US securities law can be quite helpful in assisting to resolve some of the issues under Hong Kong securities law, especially when the legislative provisions are similar (see below).  However, it should be noted that the criticism that confidential information cannot be misappropriated is really a matter of terminology.  It is not suggested that confidential information can be misappropriated in the sense prescribed under Cap 210.  Perhaps the more appropriate label is “misuse” of confidential information.

“In a Transaction Involving Securities”

214.  Under s.300, fraudulent or deceptive conduct would not by itself constitute the proscribed actus reus unless it was committed “in a transaction involving securities”.  This is the second limb of the defendants’ argument on the applicability of that section to the Hsinchu Bank case.

215.  With some force, Mr Sussex submitted that there must be a connection between the fraudulent or deceptive conduct and the transaction.  The proper construction is that such conduct must have been committed within the transaction itself.  Relying on the minority judgment of Justice Thomas in O’Hagan, it was submitted that a principled way to construe s.300 is that the victim of the deception or fraud has to be the other party to the transaction. 

216.  Mr Sussex argued that in a simple case of buying and selling listed securities over a stock exchange, it is difficult to see how the transaction would have taken place anywhere else other than at that stock exchange.  It cannot possibly include, eg, withdrawing (or even stealing) money from a bank in order to deposit the money into securities account for securities transactions.  It would be difficult to conceptualise these acts as having been committed “in connection with” (see para 176 above) the securities transaction, let alone “in” it.

217.  I agree with Mr Sussex that the old formulation of “in connection with” can be said to be wider than that of the current version if it is considered on its own or in isolation.  On the other hand, as indicated in para 178 above, I find the wordings of s.300 sufficiently clear and I am not convinced that the different formulation would produce different result in this case. 

218.  After careful consideration, I believe that the answer to the present argument can be found in the reasoning of the majority in O’Hagan at pp.655-657 :

“We turn next to the § 10(b) requirement that the misappropriator’s deceptive use of information be ‘in connection with the purchase or sale of [a] security.’ This element is satisfied because the fiduciary’s fraud is consummated, not when the fiduciary gains the confidential information, but when, without disclosure to his principal, he uses the information to purchase or sell securities. The securities transaction and the breach of duty thus coincide. This is so even though the person or entity defrauded is not the other party to the trade, but is, instead, the source of the nonpublic information. See Aldave, 13 Hofstra L Rev, at 120 (“a fraud or deceit can be practiced on one person, with resultant harm to another person or group of persons”). A misappropriator who trades on the basis of material, nonpublic information, in short, gains his advantageous market position through deception; he deceives the source of the information and simultaneously harms members of the investing public. See id, at 120-121, and n 107.

The misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities.  Should a misappropriator put such information to other use, the statute’s prohibition would not be implicated.  The theory does not catch all conceivable forms of fraud involving confidential information; rather, it catches fraudulent means of capitalizing on such information through securities transactions.

The Government notes another limitation on the forms of fraud § 10(b) reaches: ‘The misappropriation theory would not … apply to a case in which a person defrauded a bank into giving him a loan or embezzled cash from another, and then used the proceeds of the misdeed to purchase securities.’ Brief for United States 24, n 13.  In such a case, the Government states, ‘the proceeds would have value to the malefactor apart from their use in a securities transaction, and the fraud would be complete as soon as the money was obtained.’  Ibid.  In other words, money can buy, if not anything, then at least many things; its misappropriation may thus be viewed as sufficiently detached from a subsequent securities transaction that § 10(b)’s ‘in connection with’ requirement would not be met.  Ibid.”

219.  Although the Court was dealing with the misappropriation theory and R.10b-5 is not identical with s.300, the above reasoning can apply with equal force in the Hsinchu Bank case.  Betty’s misuse of SCB’s CMPSI (the deceptive scheme) was consummated when the information was deployed in the purchase of Hsinchu Bank shares.  Indeed, the whole purpose of the deceptive scheme was to gain an advantage in the acquisition of shares in that bank.  Hence, the connection between the deceptive scheme and the “transaction involving securities”.  It should be added that the reasoning deals with the theft example raised by Mr Sussex. 

220.  Further, in the analysis of the Supreme Court it was pointed out that the members of the investing public would be harmed if someone in the marker trades with an unlawful advantage.  Accordingly, it may be said in this case the sellers of Hsinchu Bank shares had suffered economic harm when they traded their shares without knowing that the purchaser (the defendants) had inside information on the price of the shares.  This goes some way to answering Mr Sussex’s point that the victim of the fraud or deception has to be the other party to the securities transaction (see para 215 above). 

221.  For these reasons, I hold that s.300 applies to the Hsinchu Bank case.  

Further Specific Findings

222.  In light of my conclusions on the law, I proceed to find, at the invitation of the SFC, that :

(1) Betty had employed a scheme with intent to defraud or deceive or engaged in an act or practice which was fraudulent or deceptive or would operate as a fraud or deception;

(2) Eric and Patsy had employed or engaged in the same[25];

(3) Further or alternatively, Eric and Patsy had aided and abetted in Betty’s conducts in (1) above.

AsiaSat Case :

Betty and Eric

223.  It is uncontroversial that AsiaSat shares were thinly traded.  There was little market interest.  None of the defendants profess to have been following it before.

224.  Betty plunged into the market to acquire AsiaSat shares in the morning of 9 February 2007, before the Joint Announcement was published on 14 February 2007.  She invested HK$1,033,500 in a little over the first hour of trading.  Whether by reference to her means, or in the context of the short period of time within which she invested, the amount was very large. She accepted in cross-examination that it was a large sum for her.  It should be noted that she attempted to buy 100,000 shares that morning, which would have cost over HK$1.4 million, but she was unable to do so (probably there was inefficient supply to meet that order).

225.  The manner in which Betty was in a hurry to “sweep up” the available shares is telling.  When her attempt to buy AsiaSat shares via her online HSBC account was unsuccessful, she called her broker at Dao Heng.  The recorded conversations show that Betty gave instructions to match (“掃晒佢” (sweep them all up)) every available sell order at higher and higher prices, until her broker told her that she had pushed up the price by 8%.  What could have been the cause for the frantic acquisition? 

226.  The sudden move to put a very large sum into a single stock is quite contrary to Betty’s practice of spreading the risk over different stocks.  She must be very confident of this investment.  Betty could not point to any example in her investment history which can be compared with the manner in which she acted in buying AsiaSat shares.  She said that it was the first time that she traded via a stock broker.  That is true, but by the same token one normally threads carefully in unfamiliar territory.  Betty’s trading was indeed highly unusual. 

227.  Eric himself did not buy any AsiaSat shares. Both sides are trying to rely on this factor as supportive of its case.  On its part, the SFC says that Eric’s abstention was to avoid any immediate connection between him and the inside information.  There can be other reasons, eg, the amount of shares acquired was too little for sharing.  It is unnecessary to speculate in the absence of evidence.  I believe that the lack of evidence of trading by Eric is a neutral factor.  It does not necessarily support a case of innocence.

228.  The SFC says that it cannot be a coincidence that Eric just happened to be working in the corporate department of the very law firm which was advising on the Proposed Privatisation.  His office was physically proximate to the offices of the partner and managing associate working on the transaction.  His secretary was also secretary to that managing associate and was helping her with documents for the transaction.  On Eric’s own evidence, he visited his secretary’s work station from time to time.

229.  Eric denies having seen any document for the Proposed Privatisation such as the draft announcement.  However, during cross-examination he accepted that he could have gone inside his colleagues’ unlocked rooms to look at documents.  He also accepted that it was possible for him to have seen a copy of the draft announcement at his secretary’s work station or in the partner’s room. Further, Eric had admitted to the SFC in an interview that he might have come across documents relating to projects which he was not involved in when he picked up documents from printers or around the photocopiers in the office (although he said that he had no specific recollection).

230.  On the other hand, Mr Sussex relies upon the existence of a “Chinese Wall” in Linklaters to militate against the possibility of accidental leaks of confidential information to people outside the team. However, the above evidence of Eric serves to highlight the fact that such measures were not (and perhaps will never be) fool proof.  There is also evidence from Amy which reveals the fragilities in Linklaters’ system, eg, she did not lock her filing cabinets as no keys were provided. 

231.  Even if there existed a good system to protect confidentiality, such a system would only constitute a small deterrence to a determined person.  Further, human nature is such that “unintentional” leaks can occur amongst colleagues.  Perhaps it was a moment of indiscretion induced by being off guard during a Friday night drink.  It is not possible for the SFC to prove in this case how, if that be the case, Eric had obtained inside information.

232.  However, in addition to the above circumstantial evidence, there was a timely contact between Eric and Betty.  According to them, they met for dinner the night before Betty plunged into the investment.

233.  Betty’s explanation of her investment as the result of independent research is implausible.  According to her, she read a magazine article in January 2007 about an earthquake in Taiwan breaking undersea fibre optic cables and thereby causing telecommunication problems. The article mentioned that satellite companies such as AsiaSat could benefit from users switching from cable to satellite services.  She also pointed to a newspaper article at around the same time to similar effect.

234.  These articles, Betty said, prompted her to read AsiaSat’s interim report and press releases, as well as to look at its share price and turnover.  She was convinced that “AsiaSat was a share to watch”.  On 8 February 2007, she noticed that the turnover of the stock had been higher for 3 consecutive days (the share price remained unchanged).  She interpreted this as increased investor interest, and she decided to begin purchasing the next day.  Betty said that she had never mentioned her idea of investing in AsiaSat to Eric, because they were no longer in a relationship, and “it was time for me to begin to develop my own ideas when investing”.

235.  I agree with Mr Westbrook that this story is unlikely to be true.  The magazine article is a 2-page document.  There was an inconspicuous and brief mention of satellite companies such as AsiaSat benefiting from the incident. Importantly, Betty accepted in cross-examination that the brief mention was general in nature and contained no suggestion that AsiaSat was a stock to invest in.

236.  The same can be said for the newspaper article. Betty said that she relied on the second paragraph thereof as a buy indication.  However, that paragraph actually quoted a stockbroker to have said : “the share price of most shares in the market had already risen too much in the midst of the recent communication problem in the Asia region …”.  AsiaSat’s interim report did not paint a rosy picture either.  During cross-examination, Betty conceded that her research did not indicate any immediate upside potential to AsiaSat.

237.  The materials relied upon by Betty do not stand up to scrutiny.  Further, even if her research story is taken at the highest, it is quite inconsistent with the manner in which she plunged into buying AsiaSat shares.  She accepted that it was the first time she invested as a result of observing “unusual” movement in turnover.  Yet, on this first occasion, she acquired more than HK$1,000,000 worth of shares in frantic trading within a little over an hour.  According to Betty, her target price for the acquisition was around HK$14.  By her buying spree, she pushed up the price to as high as HK$16.25. 

238.  Betty’s 2 reasons for not sharing her investment idea with Eric cannot be taken seriously.  On her own case, she had only a few months earlier blindly entrusted HK$2,250,000 to Eric for investment.  Their account statements show that they made identical investments (same time, same amount) in 4 IPOs and at least one stock between November 2006 and end of February 2007.  If she really had been watching AsiaSat, it would only be natural for her to have discussed her ideas with Eric.  I have little doubt that Betty has not been candid in her evidence, and she lied because she wants to conceal Eric’s involvement in her acquisition of AsiaSat shares.

239.  As stated in para 46 above, there was a timely phone call between Eric and Patsy a few hours before the latter started buying AsiaSat shares.  The evidence that Eric passed the phone to Betty after a short conversation, and then the 2 ladies started taking about Betty’s interest in AsiaSat is yet another concoction to hide the truth.  Bluntly, there are too many coincidences to be believable.

240.  As stated in paras 50 to 51 above, there were many calls between Eric and Betty during that morning of frantic trading.  The number of unsuccessful calls reflects the eagerness of the caller to make contact.  I reject the story that Eric simply wanted an answer to a legal issue from Betty as another unbelievable coincidence.  I believe that the truth is that Eric was keen to know about the acquisition of AsiaSat shares, and probably to give guidance to Betty. 

241.  All of the above factors point to a compelling inference: Eric knew about the Proposed Privatisation and told Betty, which is why she suddenly went into the market and aggressively swept up the available AsiaSat shares.  The inability of the SFC to prove how Eric came to know the inside information does not inhibit the court in coming to the above inference based on what can be established.

242.  Mr Sussex argued that the inside information about AsiaSat could have come from a difference source (not Eric).  I am not attracted by the argument because it is not supported by any evidence. Whereas, the evidence here suggests that Betty was trading on inside information, which was passed to her by Eric probably when they were having dinner together the night before her trading.  

243.  Finally, I also infer that Betty knew that what Eric had told her was CMPSI and that he had the information because his firm was working on the Proposed Privatisation.  This is reflected in the extraordinary confidence with which Betty swept up the AsiaSat shares.  The close relationship between Betty and Eric suggests that they would not have held back on the details of the information. 

244.  To sum-up, I agree with Mr Westbrook that the inferences to be drawn on the evidence are :

(1) Eric had acquired CMPSI, namely, knowledge of the Proposed Privatisation;

(2) He did so by virtue of working in Linklaters, ie, the information came from a connected person (see analysis below on connected person);

(3) He shared the information with Betty (and Patsy, see below), encouraging and intending that she (and they) would trade on it;

(4) Betty must have known it was CMPSI and she knew that Eric had it because his firm Linklaters was working on the transaction; and

(5) Betty traded on the information.

Patsy

245.  On 9 February 2007, starting from the opening of market and within the 1 hour and 19 minutes of trading, Patsy acquired 5,000 shares for herself and 10,000 shares for Stella at an aggregate price of HK$212,040, ie, around HK$70,000 for herself and HK$142,000 for Stella.  Whilst the amount of Patsy’s acquisition is comparatively small, more likely than not it is the combined result of limited share supply and a small window within which she made the purchase.

246.  I agree with Mr Westbrook that it is telling that Eric called Patsy after midnight on 8 February 2007, and she started her acquisition as soon as the market opened the next morning.

247.  Patsy described her investing strategy as based on local news and commentaries.  In this instance, however, she did not see any news or commentaries.  Patsy merely heard Betty mentioning in a casual conversation that the latter had noticed an increase in turnover.  She then checked some newspapers on the turnover.  On this basis, she was able to decide, before going to bed, to start purchasing the next morning.  Patsy said that Betty did not mention that the latter would be investing in AsiaSat.  Yet, she was so confident about it that she called Stella early in the morning and invited Stella to invest too.

248.  Patsy’s story does not stand up to scrutiny. She accepted that, at any given time, there would be many stocks with increased turnover, and some with decreased turnover.  The alleged basis on which she went ahead with this investment with confidence cannot be accepted.  Based on her circumstances (see para 140 above) and her investment history, I believe that Patsy was careful with her money.  On balance, I do not believe that the acquisition of AsiaSat shares by her was innocent. 

249.  In respect of the communication between Patsy and Eric on 9 February 2007, I have rejected the story that Patsy was mainly talking to Betty (see para 239 above).  I believe that it is a concoction to hide the connection with Eric.  In other words, I find that Patsy had a long timely telephone conversation with Eric.  I have also rejected Patsy’s evidence on how she came to purchase this obscure stock with confidence (see paras 247 and 248 above).  As a consequence of these rejections, there is no innocent explanation on how or why Patsy came to purchase AsiaSat shares.

250.  In addition, this court is entitled to consider the evidence on the AsiaSat case in its totality.  Within a matter of hours after the conversation with Eric, both Betty and Patsy had embarked upon the acquisition of AsiaSat shares.  That cannot be a matter of coincidence. Although there is less evidence against Patsy, I believe that the only reasonable inference is that she traded with CMPSI given to her by Eric.  The timing, confidence and eagerness with which she traded reflect the fact that she knew that what she was told by Eric was inside information he obtained from his office.  Given their admitted close relationship, it is unlikely for Eric not to have told Patsy, and she not to have asked the former, where the information came from. 

251.  In the premises, I agree with Mr Westbrook that the following inferences are justified by the evidence :

(1) Patsy learned in the small hours of the 9 February 2007, from Eric, about the Proposed Privatisation and therefore was in possession of CMPSI;

(2) She knew the information was CMPSI and knew Eric had it because his firm Linklaters was working on the transaction; and

(3) She traded on the information.

Stella

252.  The case against Stella is in no way stronger than that in the Hsinchu Bank case.  I therefore must reject the case that she knowingly participated in any insider dealing in respect of AsiaSat.

253.  As in the Hsinchu Bank case, the SFC has an alternative case based on lack of culpability (see para 61 above).  I shall deal with that below. 

Connected Person

254.  The SFC’s case in respect of AsiaSat is premised upon s.291(3) and (5) in the alternative.  For the application of these sub-sections, this court is required to resolve the “connected person” issues.

255.  For s.291(3) to apply, it must be proved that Eric was a “person connected with” AsiaSat.  In the factual circumstances of the present case, the SFC must prove, pursuant to s.287(1)(c)(i) of the SFO, that Eric occupied “a position which may reasonably be expected to give him access to relevant information in relation to [AsiaSat] by reason of … a professional or business relationship existing between” Linklaters and CITIC .

256.  The test is an objective one, namely, what other people may reasonably expect of that person by virtue of his position.  This objective test was discussed in Leung Chi Keung v Market Misconduct Tribunal [2012] 2 HKLRD 786 at §§29-35.  The limit that the definition places on the range of individuals who are connected persons is succinctly summarised in the following passage from Suter, The Regulation of Insider Dealing in Britain (1989) set out in the judgment of the CA in Leung Chi Keung at §33 :

“…this objective test narrows the range of individuals within the definition of insider. It excludes individuals such as employees or other individuals in specified professional or business relationship, who occupy positions that quite unexpectedly give them access to unpublished price sensitive inside information. Hence, an individual’s formal position prevails over the qualitative nature of the information.”

257.  There is considerably force in Mr Sussex’s submission that although Eric was in the position of an employee within Linklaters, he was not part of the Team.  As would reasonably be expected in any major law firm involved in corporate mergers and acquisitions work, Linklaters had a system in place to ensure that confidential information about any proposed deal that the firm was working on would be restricted only to those employees working on the deal[26].  An employed solicitor who was not a member of the team working on the deal would not be in a position “which may reasonably be expected to give him access to relevant information” about that deal.  It is clear from the evidence of both Teresa and Samantha that Eric was not expected to have access to confidential information about the Proposed Privatisation. 

258.  Valiantly, Mr Westbrook argued that the court should have regard to the “realities of a legal office” and highlighted the fragilities of Linklaters’ Chinese Wall.  Indeed, this court has found that such Wall did not prevent Eric from gaining CMPSI in relation to AsiaSat. However, it would not be a correct application of the objective test to hold that Eric was a connected person.  There is a particularly apposition passage in another textbook cited with approval in Leung Chi Keung at §34: Ashe and Counsell, Insider Trading: The Tangles Web (1990) pp.65-67 :

“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 insdie 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. …”

259.  Turning to s.291(5), there is no dispute that the SFC is entitled to rely upon this sub-section.  Mr Sussex agrees that this sub-section does not depend on Eric’s status as a “connected person”.   The key factual issues for this alternative case[27] are:

(1) Whether Eric was in possession of information relating to the Proposed Privatisation; and

(2) Whether Eric counselled or procured another to deal in shares of AsiaSat.

260.  It has been stressed by Mr Sussex that this alternative case is pleaded only against Eric.  Under this alternative case, it would not be open to this court to find that Betty or Patsy contravened s.291 of the SFO.

261.  I disagree with the criticism of the pleading. I have no doubt that all the material facts have been properly pleaded in respect of the AsiaSat case.  Although it may be said that the formulation of the claims against Betty and Patsy can be more explicit (compare §92 of the SOC (against Eric) and §94 (against Betty, Patsy and Stella)), I do not see this as a real inadequacy because it is a matter of law.  Any doubt as to the formulation of those claims must have dissipated when para 17 of the prayer, which set out the declaration sought against Betty, Patsy and Stella under s.291(5), was read.

262.  In its final submissions, and in response to a question from the court concerning the construction of the word “received” in s.291(5), the SFC has provided a number of authorities[28] in support of its case that the words “received, directly or indirectly …”, should be construed widely, and not to be confined to physical or knowing handover (of information) from 1 person to another bearing in mind the mischief aimed at by the statutory provision.

263.  In the absence of dispute, it is unnecessary to deal with this point.  However, out of deference to the work done by counsel, I should say that the submission is convincing and I agree with it.

264.  In the premises, I shall only uphold the SFC’s case based on s.291(5). 

Further Specific Findings

265.  By reason of the aforesaid, and at the invitation of the SFC, I find that :

(1) Linklaters and their solicitors working on the Proposed Privatisation were persons connected to AsiaSat under s.287(1)(c)(i)(A) of the SFO;

(2) Eric received information of the Proposed Privatisation (“relevant CMPSI”), directly or indirectly, from a person (being Linklaters staff or any of the people therein working on the same) whom he knew was connected to AsiaSat and whom he knew or had reasonable cause to believe held the information as a result of being so connected.  He therefore knowingly had information in relation to AsiaSat in the circumstances described in s.291(5);

(3) Eric disclosed the relevant CMPSI to Betty and Patsy, knowing or having reasonable cause to believe they would deal in the shares, in contravention of s.291(5)(b);

(4) Betty had the relevant CMPSI which she knew was such, and which she received, directly (from Eric) or indirectly (from Linklaters via Eric), from a person (Linklaters) whom she knew was connected to AsiaSat and whom she knew or had reasonable cause to believe held the information as a result of being so connected.  Therefore, her dealings in AsiaSat shares were in contravention of s.291(5)(a).

(5) Likewise, Patsy had the relevant CMPSI which she knew was such, and which she received, directly from Eric or indirectly from Linklaters, from a person whom she knew was connected to AsiaSat and whom she knew or had reasonable cause to believe held the information as a result of being so connected.  Therefore, her dealings in AsiaSat shares were in contravention of s.291(5)(a).

Mens rea

266.  For 2 reasons, it is unnecessary to deal specifically with this issue.  Firstly, there is no real dispute between the parties, save for some complaints arising from the alleged inadequacies in the SFC’s pleading and the failure to put its case to the defendants.  Those complaints have been dealt with above.  Secondly, and perhaps more importantly, the civil standard of proof applies in this case.  It is inconceivable that Betty, Eric or Patsy was not fully aware of what they were doing.

Involved “whether knowingly or otherwise”

267.  The SFC seeks to rely on s.213(2)(b) for relief against both Patsy and Stella in the alternative.  That subsection allows the court to make an order against a defendant who got involved in a tainted transaction “unknowingly” to “restore the parties to any transaction to the position in which they were before the transaction was entered into”. The power is to be exercised subject to s.213(4), ie, “it is desirable that the order be made, and that the order will not unfairly prejudice any person”.

268.  Section 213 was considered by Le Pichon JA in SFC v C [2009] 4 HKLRD 315 at 328 :

“33. … The regulatory objectives and functions and powers of the SFC are to be found in ss.4 and 5 of the Ordinance. One of its regulatory objectives is “to minimise crime and misconduct in the securities industry (s.4(d)) and one of its statutory functions is “to suppress illegal, dishonourable and improper practices in the securities industry” (s.5(n)).

34. It is noteworthy that the Ordinance conferred on the SFC an array of powers and provided the SFC with a range of remedies, no doubt, to facilitate the attainment of the SFC’s regulatory objectives and render more effective the discharge of its statutory functions.  Of its nature, proceedings involving the SFC are necessarily different from actions between private individuals because the SFC is a public body with statutory duties to discharge and there can be no private rights between the SFC and the defendants. 

35. It is against that backdrop that the range of remedies contained in s.213(2) has to be considered.  Indisputably, those remedies were created by statute and are intended or designed to provide substantive relief to address specific types of wrongdoing (identified in s.213(1)) the regulator may encounter in the course of discharging its statutory functions.  Section 213(1) empowers the court to make a range of substantive orders on the application of the SFC if the SFC is satisfied that the contravention of any of the relevant provisions (defined to mean the provisions of the Ordinance and certain provisions of the Companies Ordinance) “has occurred or is occurring or may occur”.”

269.  The SFC’s position is that a restoration order under s.213(2)(b) should be made against Patsy and Stella even if it cannot prove its primary case against them, and that such orders are desirable and not unfairly prejudicial to them or anyone.

270.  In light of this court’s findings against Patsy, it is unnecessary to make the order against her.  However, if I were wrong in such findings, I would not have hesitated to make a s.213(2)(b) order against her.  It must be right to compel her to return the profits obtained from tainted transactions in both the Hsinchu Bank case and AsiaSat case, even if she were unaware of the wrongdoings.  It has not been suggested in this case that any prejudice would be caused to anyone in the event that this court makes a restoration order.  The same analysis must apply to Stella.  She should also return the profits made from both the Hsinchu Bank and AsiaSat transactions.

Conclusions

271.  For the above reasons, I find that the SFC has established its case against Betty, Eric and Patsy in respect of both the Hsinchu Bank case and the AsiaSat case.  Notwithstanding that its case has not been proved against Stella, I will exercise the power under s.213(2)(b) against her. 

272.  The appropriate relief sought by the SFC should not be controversial (in light of the above findings).  As discussed with counsel at the conclusion of the trial, the parties should endeavour to agree the terms of relief and provide a draft judgment for the approval of the court.  Failing complete agreement, a succinct joint letter should be submitted to the court identifying the disagreement.  The matter may then be determined on paper if the court sees fit. As for costs, I make an order nisi that the costs of this action be to the SFC, to be taxed if not agreed, with a certificate for 2 counsel.

273.  Betty and Eric are members of the Law Society.  In light of the seriousness of these matters, I direct that a copy of this judgment be sent to the Secretary General of the Law Society.

274.  Last but not least, all counsel (and solicitors) involved in this trial deserve a note of gratitude from the court.  This case is both interesting and challenging.  Counsel’s industry and skill have reduced the difficult task of the court to more manageable level.