SECURITIES AND FUTURES COMMISSION v. YIK FONG FONG AND OTHERS

HCA 2524/2016

[2022] HKCFI 450

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2524 OF 2016

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J U D G M E N T  O N   R E L I E F[1]

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1.  By Judgment dated 9 November 2021 (“Main Judgment”), this Court held inter alia that (1) Yik committed the offence of insider dealing in contravention of ss.270(1)(a)(i) and 291(1)(a) of the SFO; (2) D2/D3 committed the offence of insider dealing in contravention of s.270(1)(e)(i) and s.291(5)(a) of the SFO; and (3) the orders sought by the SFC will not unfairly prejudice any person. The parties were directed to file evidence and submissions on the relief sought in prayers (4), (6) and (7) of the ASOC (i.e. Relief Issue).

2.  The SFC filed 4 substantive affirmations on 14 December 2021 on the Relief Issue: the 11^th affirmation of Wong Mei Po (“Wong 11^th”), the affirmation of Fung Chi Yeung (“Fung 1^st”) and 2 affirmations made by Wong Kwai Wah and Lee Suk Man, who sold their TeleEye shares to D2/D3 during the Relevant Period. 

3.  No evidence has been filed by Yik or D2/D3. 

4.  Yik is absent at the hearing.  D2/D3 attend the hearing.  In their submissions, D2/D3 assert that the SFC fails to disclose how they dealt with Ds’ assets in the amount of $38.8 million which have been frozen and fails to pursue any investigation or claim against Yik.  Neither assertion is correct. 

 (1)  As pointed out by Ms Lam SC, the so-called $38.8 million frozen assets was based on an incorrect press report.  Although the SFC obtained a Mareva injunction against Yik for over HK$25 million, the only identifiable assets within Hong Kong are monies deposited in her bank accounts, and the total current balance is less than HK$100. 

 (2)  As is clear from the Main Judgment[2], the SFC carried on extensive investigations against Yik’s dealings and has  claimed substantially the same reliefs against her in this action. 

5.  There are 2 main issues which require determination of the Court:

(1)  What reliefs can be ordered given that the SFC’s claim under s.213 of the SFO is in the nature of a statutory tort; and

(2)  Whether it is appropriate to grant the order in the form proposed by the SFC.

What reliefs can be ordered

6.  When the SFC applied for leave to serve the writ out of jurisdiction on D2/D3, it relied on 2 gateways under O.11 r.1(1) of the Rules of the High Court (Cap. 4A) viz., the “injunction” gateway (under O.11 r.1(1)(b)) and the “tort” gateway (under O.11 r.1(1)(f)).

7.  Ms Lam submits that in considering the nature of the claims made by the SFC under s.213 of the SFO, one should look at the conduct sued on and decides whether the claims founded on such conduct is in the nature of a tort.  This must be right given the width of s.213, which covers a wide range of conduct (s.213(1)), the types of orders which may be made by the Court (s.213(2)), the requirements where the order is sought against the entities or persons specified in s.213(3)-(3A), the types of orders which may be made against them (s.213(3B)-(3C)) and other general provisions governing the orders which may be made by the Court (s.213(4)-(9)). 

8.  In SFC v Isidor Subotic [2021] 3 HKLRD 777[3], Au-Yeung J held that a claim brought by the SFC under s.213 based on false trading in contravention of ss.274 and 295 of the SFO, for the purpose of service out, is a claim founded on tort.  In my view, the same reasoning applies to a claim under s.213 based on insider dealing in contravention of ss.270 and 291 of the SFO given that:

(1)  it is a claim created by statute (cf. SFC v Isidor Subotic, §65(2));

(2)  ss.270 and 291 of the SFO create a statutory duty prohibiting any person from engaging in insider dealing (cf. §65(4)-(5));

(3)  the claim is one which can be redressed by unliquidated damages (cf. §65(7));

(4)  it does not matter that SFC has not personally suffered any loss but is pursuing the claim for the benefit of the persons dealing in the market who have been injured by the market misconduct (cf. §§66-76, 80; SFC v Tiger Asia Management LLC (2013) 16 HKCFAR 324, §16); and

(5)  the mere fact that other discretionary remedies such as injunction or declaration may be available does not alter the characterisation of the claim being a tort (cf. §§65(8), 87).

9.  Although the claim is tortious in nature, the reliefs which may be granted by the Court are not limited by common law principles governing a claim founded on tort.  The Court has very wide power under s.213(2)(b) and may make any order to restore the parties to the position prior to the impugned transaction.  The principles have been explained by the Court in the following cases:

(1)  In SFC v Tiger Asia Management LLC and others (2013) 16 HKCFAR 324 §16, Lord Hoffmann NPJ explained that the remedies under s.213 are provided for the benefit of the parties involved in the impugned transactions:

“…. the remedies provided under s 213 serve a different purpose from the penalties which can be imposed by a criminal court or the MMT. The latter are imposed in the general public interest, avowedly to punish in the case of criminal sanctions and, in the case of the MMT, as near as one can get to punishments without running the risk of the proceedings being categorized as criminal for the purposes of arts 10 and 11 of the Hong Kong Bill of Rights: see Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170. Section 213, on the other hand, provides remedies for the benefit of parties involved in the impugned transactions. They include injunctions and the appointment of receivers to secure property with a view to recovery by the victims of market misconduct, orders that particular transactions be unwound, orders declaring particular transactions to be void or voidable. In these proceedings the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct. Proceedings under s 213 are the public law analogue of actions for damages by individuals under s 305 rather than a substitute for a criminal prosecution or proceedings before the MMT. They are plainly civil proceedings and therefore do not attract the protection accorded to criminal defendants.” (underlined added)

(2)  In SFC v Tsoi Bun [2014] 2 HKLRD 1, Godfrey Lam J (as he then was) described the width of the power under s.213:

“12. The breadth of this language is striking and while the nature of the steps that may be required may be limited by the spirit and intendment of the statute and the content and purpose of the application under s.213, I see no reason why they are confined to making full restitution in specie. There appears to me to be no basis for reading such restriction into the provision. As Mrs Justice Le Pichon said in Securities and Futures Commission v C [2009] 4 HKLRD 315, [36], this point is not being affected by the decision of the Court of Final Appeal in that case:

Section 213(2)(b) enables an order to be made that would restore all the parties to the transaction to their respective former positions. In other words, it is restitutionary in nature and, in conjunction with an order under section 213(2)(c) would provide compensation to those who have sustained losses through the wrongdoing in question, in the present case, insider dealing.

  13.     In my view, the section permits an order to be made requiring restoration of the parties to their relevant financial position prior to the transaction impugned….”

(3)  In SFC v Qunxing Paper Holdings Co Ltd and others [2018] 1 HKLRD 1060, Godfrey Lam J (as he then was) further explained that s.213 creates a substantive cause of action which may be invoked by the SFC for the benefit of the investors, and the restoration order can be made against any persons involved in the impugned transactions:

“49. There is a very real risk that the purpose of the legislature in enacting s.213(2) would be defeated if it was regarded as providing merely a machinery for enforcing rights already vested in the investors under the common law or other provisions and that each and every constituent element of these causes of action (such as reliance and inducement) was required to be separately proved for each investor. Accordingly, I accept the submission of counsel on behalf of the Commission, that in making provision for remedies for the benefit of investors, s.213 is not merely procedural.

50. Instead, s.213 creates a substantive cause of action which is vested in the Commission. The purpose is to provide a statutory regime whereby the Commission, as regulator, can take action to obtain civil remedies for the benefit of investors, who may otherwise be deterred by cost and other considerations from instituting legal proceedings individually to obtain redress for their relatively small losses….

….

54. This does not necessarily mean that an order for restoration under s.213(2)(b) can only be made against a party to the transaction to be undone in effect. The section does not contain any such express restriction, but is ‘open-textured’. The width of the section and of the powers it confers on the court are ‘characterised by their extreme flexibility’ and ‘should not be judicially cut down’ (Securities and Investments Board v Scandex Capital Management A/S [1998] 1 WLR 712, 723B, 726B). Its terms permit an order to be made against a person if he has been involved in any of the matters referred to in s.213(1)(a)(i)-(v) – these categories of persons are not necessarily themselves parties to the transactions in question. They may be persons who have aided or abetted a contravention or simply a person who has been involved in it” (underlined added).

10.  As the SFC has established the statutory tort against Yik and D2/D3, it is open to the Court to grant the reliefs sought in the ASOC, including a restorative order under s.213(2)(b) and appointment of an administrator to pay the Profits to the counterparties who sold their TeleEye shares to D2/D3 during the Relevant Period. 

Specific reliefs proposed by SFC

11.  In Wong 11^th, the SFC confirms that there are 63 counterparties who sold a total of 22,540,000 TeleEye shares to D2/D3 during the Relevant Period (collectively “Counterparties”).

12.  I note that the number of shares sold by the Counterparties is less than the 22,720,000 shares purchased through D2/D3’s accounts during the Relevant Period[4]. According to Fung 1^st, amongst the 22,720,000 shares purchased, 180,000 shares were purchased by D3 from D2’s account at $0.435 per share on 1 April 2016, and the same should be excluded from the calculation of the amounts to be restored to the Counterparties.  I agree. 

13.  Accordingly, for the purpose of distributing the Profits to the Counterparties, it is appropriate to adopt 22,540,000 shares as the shares sold by the Counterparties to D2/D3 during the Relevant Period (“Relevant Shares”). 

14.  In the affirmations of Wong Kwai Wah and Lee Suk Man, who are 2 of the Counterparties, they confirm that when they sold their TeleEye shares, they did not know about the proposed Takeover. They further confirm that had they known of the proposed Takeover at the relevant times, they would not have sold their shares as they would have expected the price to rise following the release of the Announcement. 

15.  The above evidence has not been challenged by D2/D3.   

16.  At the hearing, Ms Lam confirms that the SFC only seeks (1) a restoration order requiring the Profits together with interest accrued thereon, which amounts to HK$13,139,875 (“Funds”), less the remuneration and costs of the administrators in the amount of HK$190,000, that is, HK$12,949,875 (“Net Funds”), be distributed pro rata to the Counterparties who sold their shares to D2/D3; and (2) an order appointing administrators to distribute the Net Funds to the Counterparties.    

17.  Insofar as the restoration order is concerned, Ms Lam submits that the proposed distribution of the Net Funds to the Counterparties, if effected, would substantially restore the Counterparties to the position before they sold their TeleEye shares to D2/D3.  The need to make pro rata distribution of the Net Funds to the Counterparties stems from the fact that although the number of Relevant Shares sold by the Counterparties is 22,540,000 shares, the SFC only claims the Profits derived from the sale of 15,650,000 TeleEye shares during the period from 15 April 2016 to 20 May 2016[5].

18.  In support of the proposed pro rata distribution, the SFC filed Fung 1^st as expert evidence.  Mr Fung is a Senior Manager who works at the Surveillance Department of the Enforcement Division of the SFC.  He has 18 years’ experience in conducting research on financial market quality metrics, trading algorithms and their market impact, anomalies in market behaviour, risk factors of market misconduct, and liquidity provision for derivatives warrants in Hong Kong. 

19.  Mr Fung reviewed the trading prices of TeleEye shares following the publication of the Announcement.  He observes that during the 3-day period following resumption of trading, there was a very substantial increase in the prices of TeleEye shares as compared to the very modest change in HSI index during the same period as follows:

Date	Closing Price	% change vs last trading day	HSI index % change
15/4/2016	$0.99	+70.69%	-0.10%
18/4/2016	$1.16	+17.17%	-0.73%
19/4/2016	$1.39	+19.83%	+1.30%

20.  On this basis, Mr Fung opines that the price movement of TeleEye shares in the 3-day period was attributable mainly to the “price discovery process subsequent to the Announcement”. 

21.  Mr Fung then takes into account the trading volume of TeleEye shares during the 3-day period and came up with an average traded price of $1.151 which, he says, could be taken as the “re-rated price” of TeleEye shares after the market had digested the information disclosed in the Announcement (“Re-rated Price”). He considers that the Counterparties could have been able to sell the Relevant Shares at the Re-rated Price. 

22.  Mr Fung then used the Re-rated Price times the Relevant Shares to calculate the nominal amounts which could have been received by each of the Counterparties (“Nominal Amounts”) and subtract the Nominal Amounts by the “executed trade amounts” (which are the actual amounts received by the Counterparties) (“Actual Amounts”) to arrive at the “difference in trade amounts” (“Difference”), being:

 (1)  Nominal Amounts: HK$25,943,540

 (2)  Actual Amounts: HK$9,648,250

 (3)  Difference: HK$16,295,290.

23.  The SFC proposes the distribution to be made in the following manner:

“[the Profits], being the total realized profits made by the Defendants from their contravention as set out in the [Main Judgment], be paid to each of the [Counterparties] as set out in the Schedule annexed hereto (the ‘Counterparties’), with a view to restoring the Counterparties, to the extent possible, to the positions which they were in before the relevant sale transactions were entered into by paying the Profits to the Counterparties pro rata in proportion with the amounts set out in the ‘Difference in trade amounts (HK$)’.”

24.  However, as the Difference is much higher than the Net Funds, it appears that the intention is for the administrators to effect the pro rata distribution by making their own calculation. 

25.  While I agree that a pro rata distribution of the Net Funds to the Counterparties is right as a matter of principle, I do not think the exercise undertaken by Mr Fung is necessary or appropriate, for the reasons explained below. 

26.  The exercise is unnecessary because the Profits were derived from the sale of 15,650,000 TeleEye shares purchased through D2/D3’s accounts during the Relevant Period.  The average price at which the shares were sold is known ($1.259[6]) and represents the actual price at which these 15,650,000 shares were sold by D2/D3.  No reason has been articulated by the SFC as to why it is necessary for Mr Fung to come up with the Re-rated Price when the actual price is available.

27.  The exercise is also inappropriate. The relief sought by the SFC is in effect an order requiring Ds to disgorge the Profits made from insider dealing.  This can be done by ordering the Net Funds to be paid to the Counterparties.  It does not require one to resort to the Re-rated Price, which is an artificial construct based on the various assumptions adopted by Mr Fung.  The SFC has not proffered any reason to explain why the Re-rated Price should be adopted in place of the actual price.   

28.  As stated in §144 of the Main Judgment, I am satisfied that it is desirable for the Court to grant the orders sought by the SFC under s.213(2) of the SFO and that the orders will not unfairly prejudice anyone[7]. This includes an order to distribute the Net Funds to the Counterparties so as to restore their positions to the positions they were in prior to the impugned transactions to the extent possible.  This can be achieved by distributing the Net Funds to the Counterparties in proportion to the number of shares they sold to D2/D3 during the Relevant Period.  Such distribution is fair given that between the Counterparties, their position is exactly the same: at the time they sold their shares to D2/D3, they did not know about the proposed Takeover, and they would not have sold their shares had they known about the proposed Takeover. Each of the Counterparties should receive the amount calculated in this way:

 (1)  Net Funds x Number of shares sold by Counterparty divided by the Relevant Shares.

 (2)  By way of example, for the first Counterparty listed in the Table appended to the draft order submitted by the SFC, it should receive distribution in the amount of HK$540,057, being HK$12,949,875 x 940,000 shares / 22,540,000 shares. 

29.  The SFC should submit a revised Table setting out the precise amounts to be distributed to the Counterparties based on the principle discussed above.    

30.  It is appropriate to appoint joint and several administrators (together “Administrators”) with consequential directions proposed by the SFC so as to facilitate the distribution of the Net Funds to the Counterparties in the manner described in §28 above. 

31.  As Mr Tsui Chi Chiu and Mr Chan King Wai Leonard, both of Ernst & Young Transactions Limited, are willing to act as the Administrators at the fixed fee of HK$150,000, which is lower than the fee proposed by the other candidates, it would be in the interest of the Counterparties to appoint them as Administrators.  The SFC estimates that the Administrators will incur expenses and disbursements in discharging their duties up to the amount of HK$40,000.  It is appropriate to apply the Funds for the purpose of paying the remuneration and expenses of the Administrators.   

Disposition and costs

32.  For the above reasons, I make the following orders:

 (1)  Pursuant to s.213(2)(b) of the SFO, the HK$12,949,875.00 paid into Court by the 2^nd and 3^rd Defendants pursuant to their Undertaking given to the Court (as recorded in the Order dated 27 January 2017) currently in the amount of HK$13,139,875 (“Funds”), less HK$190,000 (“Net Funds”) be paid to the counterparties whose names and the amounts to be paid are listed in the Schedule hereto (collectively  “Counterparties”).

 (2)  The Funds (including any further interest accrued thereon) be paid out of Court to the “Administrators” (as defined in §(3) below) within 28 days of this order for the purposes of:

(a)  payment of the Net Funds to the Counterparties as referred to in paragraph (1) above; and

(b)  settlement of the remuneration, costs and expenses incurred by the Administrators for the purposes of the administration as referred to in paragraph (5) below.

 (3)  Mr TSUI Chi Chiu and Mr CHAN King Wai Leonard, both of Ernst & Young Transactions Limited be appointed as administrators (“Administrators”) from the date hereof for the following purposes, namely:

(a)  to receive, hold and administer the Funds;

(b)  to distribute the Net Funds to each of the Counterparties in accordance with paragraph (1) above;

(c)  to ascertain, confirm and verify the identity of each of the Counterparties as set out in the Schedule hereto;

(d)  to implement and administer the distribution of the Net Funds to the Counterparties in accordance with paragraph (1) above; and

(e)  to perform all incidental and necessary duties as may be directed by the Court.

 (4)  The Administrators shall have the powers and duties to take all necessary steps as follows:

(a)  to receive, hold and administer the Funds for the purposes identified in paragraph (2) above, including to exercise, in relation to the Funds, or any part thereof, all such powers, authorities and things as the Administrators would be capable of exercising if they were the absolute beneficial owners of the same and to use the names of the Defendants as necessary for such purposes;

(b)  the Funds, when received by the Administrators pursuant to paragraph (2) above, shall be held in a designated bank account or accounts opened in the joint names of the Administrators, and such account(s) shall be interest bearing pending distribution or payment contemplated under this Order;

(c)  subject to paragraph (5) below, to settle the remuneration, costs and expenses incurred by the Administrators themselves for the purposes of the administration, out of the Funds;

(d)  to calculate, transmit and make pro rata distribution of the Net Funds to the Counterparties in accordance with paragraph (1) above, at such time(s) and in such manner as may be determined by the Administrators as they deem appropriate;

(e)  to carry out their functions and duties expeditiously and use all reasonable efforts to pay the Counterparties in accordance with paragraph (1) above within 6 months from the date of the appointment of the Administrators (or such other time as may be agreed by the Plaintiff or approved by the Court);

(f)  to correspond with any persons and advertise and make announcements as the Administrators deem fit for the purposes of the administration;

(g)  to do all acts, take all measures and/or execute any documentation in relation to the Funds as the Administrators see fit;

(h)  to keep proper accounts of all payments received and made pursuant to this Order, report and provide supporting documents to the Plaintiff on the progress of the distribution from time to time, and report to the Court, the Plaintiff and the Defendants upon conclusion of payment and distribution of the Funds pursuant to sub-paragraph (c) and (d) above; and

(i)  to do all other things incidental to the exercise of the foregoing powers. 

 (5)  The remuneration of the Administrators is fixed at HK$150,000, and they are entitled to charge all reasonable out-of-pocket expenses and disbursements properly incurred in receiving, holding and administrating the Funds up to a sum of HK$40,000.  The Administrators shall maintain records and accounts of all costs, expenses and disbursements and provide the same to the Plaintiff upon its request. 

 (6)  The balance of the Funds (if any) remaining in the hands of the Administrators after making the distribution and payment in accordance with paragraphs (1), (4) and (5) above (including any balance of the Net Funds which remain unclaimed after the expiry of 6 months from the date of this Order or any extension thereof), shall be paid by the Administrators into Court to the credit of this action, subject to paragraph (8) below. 

 (7)  The Plaintiff and the Defendants shall provide all reasonable assistance to the Administrators in the performance of the exercise of their powers and duties.

 (8)  The Plaintiff, the Defendants and the Administrators be at liberty to apply for the purpose of carrying out the terms of this Order.

33.  As for costs, I make a costs order nisi that there be no order as to costs in respect of the Relief Issue. As stated in §§145-146 of the Main Judgment, the Relief Issue could not be dealt with at the trial as the SFC had not filed evidence or made submissions on the reliefs sought in prayers (4), (6) and (7) of the ASOC.  In any event, as the SFC accepts, the principles applicable to the reliefs which may be granted by the Court in the context of a claim based on insider dealing has not been considered or determined by the Court, it would not be fair to require Ds to bear the costs incurred on a novel issue which is a matter of public interest.