SECURITIES AND FUTURES COMMISSION v. CHAN SHUI SHEUNG IVY

HCMA 630/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 630 OF 2014

(ON APPEAL FROM ESS NO 21819-21821 OF 2012)

_______________________

_______________________

JUDGMENT
_______________________

Introduction

1. This is an appeal by way of case stated pursuant to section 105 of the Magistrates Ordinance, Cap 227, (MO), brought by the Securities and Futures Commission (the SFC) against the acquittal in the Magistrate’s Court of three summonses preferred by it against Chan Shui Sheung Ivy (the respondent) under sections 384(1) and (6) and 390 of the Securities and Futures Ordinance, Cap 571 (SFO). 

2. Put simply, section 105 empowers a party aggrieved by a decision of a magistrate to question it by way of an appeal on the ground that “it is erroneous in point of law, or that it is excess of jurisdiction”.  The magistrate states and signs a case setting forth the facts and the grounds on which the decision is questioned for the opinion of a judge.

3. In the present case stated five questions of law have been presented for my opinion.  I have answered each of them in the negative and the reasons for doing so are set out below.

Background

4. The respondent was an executive director of PME Group Ltd (PME), a company listed on the Main Board of the Stock Exchange of Hong Kong Ltd (SEHK).  It was alleged against the respondent that she provided false or misleading information to the SFC by way of three public announcements of PME dated 15, 18 and 20 February 2008, knowing that the announcements were false in a material particular or being reckless as to whether they were or not.  The three announcements were made in purported compliance with section 7(1) of the Securities and Futures (Stock Market Listing) Rules, Cap 571V (SMLR) pursuant to which a listed company is obliged to file with the SFC a copy of any announcement issued by it pursuant to the Rules Governing the Listing of Securities on the SEHK (the Listing Rules).

5. The three summonses were in the same terms except for the date of announcement.  It was alleged against the respondent in each summons that she aided and abetted or counselled and procured the commission of the offence by PME or that the commission of the offence was attributable to her recklessness.  The particulars of the offence as contained in the first summons were averred in the following terms:

“Information has been laid THAT [PME], on 15 February 2008 in Hong Kong did, in purported compliance with a requirement under section 7(1) and pursuant to section 7(3) of the Securities and Futures (Stock Market Listing) Rules, provide to [the SFC] via the Stock Exchange of Hong Kong Limited a copy of an announcement dated 15 February 2008 containing information which was false or misleading in a material particular in that PME stated that save as disclosed in PME’s announcement dated 15 January 2008, there were no other negotiations or agreements relating to the intended acquisitions or realizations which were discloseable under rule 13.23 of the Listing Rules, neither was it aware of any matter discloseable under the general obligation imposed by rule 13.09 of the Listing Rules, and PME knew or was reckless as to whether the information was false or misleading in a material particular, and THAT YOU, [the Respondent], being a director of PME did aid, abet, counsel, procure, induce by, consent to or connive at the commission of such offence by PME or that the commission of such offence was attributable to your recklessness.”

6. The trial of the respondent commenced on 13 March 2013 and concluded on 8 November 2013 after 12 days of hearing before Ms Ho Wai Yang, a Magistrate sitting at Eastern Magistrates’ Court, who acquitted the respondent of the offences that she faced.  On 19 December 2013, she ordered the SFC pay the respondent’s costs.

7. On 22 November 2013, the SFC appealed by way of case stated which was eventually signed by the Magistrate on 8 October 2014 after an application for amendment was made to this Court for the inclusion of additional questions of law which was partially successful.[1]

Statutory provisions and listing rules

8. The relevant offence provisions and Listing Rules that the allegations against the respondent were based are set out below.

9. So far as material section 384 reads:

“(1) Subject to subsection (2), a person commits an offence if-

(a) he, in purported compliance with a requirement to provide information imposed by or under any of the relevant provisions, provides to a specified recipient any information which is false or misleading in a material particular; and

(b) he knows that, or is reckless as to whether, the information is false or misleading in a material particular.

…

(6) A person who commits an offence under subsection (1) is liable-

(a) on conviction on indictment to a fine of $1000000 and to imprisonment for 2 years; or

(b) on summary conviction to a fine at level 6 and to imprisonment for 1 year.

…”

10. So far as material section 390 reads:

“(1) Where the commission of an offence under this Ordinance by a corporation is proved to have been aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of, any officer of the corporation, or any person who was purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and is liable to be proceeded against and punished accordingly.”

11. Rule 13.09 reads:  

“(1) Without prejudice to rule 13.10, where in the view of the Exchange there is or there is likely to be a false market in an issuer’s securities, the issuer must, as soon as reasonably practicable after consultation with the Exchange, announce the information necessary to avoid a false market in its securities.

Notes: 1. This obligation exists whether or not the Exchange makes enquiries under rule 13.10.

2. If an issuer believes that there is likely to be a false market in its listed securities, it must contact the Exchange as soon as reasonably practicable.

(2) (a) Where an issuer is required to disclose inside information under the Inside Information Provisions, it must also simultaneously announce the information.

  (b) An issuer must simultaneously copy to the Exchange any application to the Commission for a waiver from disclosure under the Inside Information Provisions, and promptly upon being notified of the Commission’s decision copy the Exchange with the Commission’s decision.”

12. Rule 13.23 reads:  

“(1) An issuer must announce details of acquisitions and realisations of assets and other transactions required by Chapters 14 and 14A and, where applicable, must circularize holders of its listed securities with their details and obtain their approval of them.

(2) The issuer shall comply with the Takeovers Code and the Code on Share Buy-backs.

Note: Where the consideration under an offer includes securities for which listing is being or is to be sought, the offer document(s) will constitute a listing document.”

An overview

13. By way of overview, the substantive issue at trial was whether the information contained in three announcements published by PME on 15, 18 and 20 February 2008 was false.  The SFC alleged that the three announcements contained the same “negative statement” where the company confirmed that there were no other negotiations or agreements relating to intended acquisitions or realisations which were discloseable under Rule 13.23, and that Board was not aware of any matter discloseable under the general obligation imposed by Rule 13.09 which was or might be of a price-sensitive nature.

14. The SFC contended that there was an ongoing acquisition by PME through its subsidiary, Richcom Group Ltd (Richcom) of the shares of another company called Betterment Enterprises Limited (Betterment) which was discloseable under Rules 13.23 and 13.09.  The SFC argued that the significance of the Betterment acquisition laid in its 50.28% shareholding of another publicly listed company known as ZZNode Technologies Co Ltd (ZZNode), which represented around 43% of the value of PME’s total net assets.  The SFC argued that the statement in the three announcements was false and misleading in a material particular because it effectively stated that there was nothing to disclose under either of the two rules. 

15. It was not disputed that PME ultimately acquired Betterment and that the transaction was discloseable.  On 28 February 2008, trading in the shares of PME was suspended at PME’s request.  PME then issued a public announcement on 12 March 2008 that on 11 February 2008, Richcom entered into a Subscription Agreement with Betterment and a Convertible Bond was issued to Richcom on 15 February 2008, under which, on 19 and 25 February 2008, Richcom exercised the conversion rights and converted it into 51 and 9,898 shares of Betterment respectively.  It was acknowledged that the Subscription Agreement and the conversion constituted discloseable transactions by PME.  Trading in PME’s shares resumed on 13 March 2008. 

16. It was the respondent’s case at trial that there was no intention to acquire Betterment prior to 20 February 2008.  The respondent argued that the exercise of conversion rights prior to 20 February 2008 was PME acting to protect its security for an unrepaid loan and on that basis there was nothing discloseable prior to 20 February 2008 and hence there was no false statement contained in the three announcements. 

17. How this matter eventuated was that in January 2008, Richcom had lent initially $15 million to Betterment’s sole director and shareholder which was repaid but increased by a $64 million loan to Betterment. In addition, Richcom was also obtaining finance for Betterment.  Part of the loan arrangement included a Convertible Bond over the shares of Betterment which was exercised because of Betterment’s failure to make payments under the loan agreement.  The respondent’s case was that she did not know and was not reckless as to whether the three announcements were false or misleading as the conversion rights were exercised out of necessity because of the financial arrangements between Richcom and Betterment. 

18. The Magistrate found that PME’s subsidiary, Richcom, did not manifest its intention to convert the shares until a resolution was passed to that effect on 18 February 2008 and she went on to conclude that the conversion was liable to disclosure under the relevant rules only after that date.  The Magistrate also found that the respondent did not have the requisite mental element prescribed by section 390.  On this latter issue, the Magistrate reasoned that unless the respondent had personal knowledge that the matters were discloseable, she would have fulfilled her duties so long as she had kept the company secretary, who was PW3 at the trial, informed of the matters to ensure that he had all necessary information to make that decision.  She found that he was the person to decide whether or not a public announcement needed to be made.  She concluded that there was no evidence the respondent had such knowledge or to show that she actively made a decision not to disclose the matter despite knowing that the matters were discloseable. 

19. It is argued by the SFC that even though the company secretary knew of the conversion of the Betterment shares at the time of the earlier announcements, the respondent did not tell him that the acquisition of Betterment brought with it the ZZNode shares, worth over $300 million, which was a significant matter in deciding whether there was a need to disclose, and therefore by not doing so she did not put the company secretary in an informed position to properly make that decision.  This seemed to be the key issue at trial as it is now in this appeal.

20. It is necessary to briefly examine the nature of the offence that the respondent faced and what needed to be proved to establish it.  It was alleged that PME in purported compliance under the SMLR provided to the SFC via the SEHK a copy of the three announcements which were false or misleading in a material particular, in that the announcements should have disclosed the ongoing acquisition by PME through Richcom of Betterment shares under Rule 13.23 or Rule 13.09 and that PME knew or was reckless as to whether the information was false or misleading in a material particular.  It was further alleged that the respondent, as an officer of PME, “did aid and abet, counsel, procure, induce by, consent to or connive at the commission of such offence by PME or that the commission of such offence was attributable to her recklessness”.

21. It was necessary for the SFC to show that the information in the three announcements was false or misleading and that the respondent knowingly assisted PME to commit the offence or that the commission of the offence by PME was attributable to the respondent’s recklessness. 

Proven facts

22. The following facts were stated as proved at the hearing of the summonses in the stated case. 

23. At all material times, PME was and still is a publicly listed company, trading on the Main Board of the SEHK.  Upon its application for listing of its securities, PME undertook and complied with the Listing Rules in force from time to time.

24. At all material times, Richcom was a wholly owned subsidiary of PME.  The respondent and Yeung Sau-han Agnes (PW1) were two of the four executive directors of PME and were the only two directors of Richcom.  Li Chak Hung, Samuel (PW3) was the company secretary of PME.  The Magistrate found PW1 and PW3 to be honest and reliable witnesses. 

25. At all material times, Betterment was incorporated as a vehicle to purchase and hold 198,624,108 shares or a 50.28% shareholding in the listed company ZZNode.  Betterment needed financing of $135 million to complete the purchase of ZZNode shares.  Prior to this transaction, Christian Emil Toggenburger (PW2) was the sole director and shareholder of Betterment.  The Magistrate found PW2 to be an unreliable witness and did not accept his evidence.

26. On or about 8 October 2007, Betterment resolved, subject to availability of adequate financial resources, to enter into certain transactions whereby Betterment would acquire in aggregate of around 198,604,108 shares of ZZNode.  The consideration was agreed at $0.7074 per share (amounting to around $140.5 million) representing approximately 51.28% of the issued capital of ZZNode at the time. 

27. On 17 January 2008, PW2 and Richcom entered into agreement for Richcom to lend $15 million to PW2.  It was a term of the loan agreement that PW2 would mortgage his 3 million shares in PYI Corporation Ltd (PYI) to Richcom as security.  On the same day, Betterment passed a written resolution that (i) the respondent and PW1 be appointed directors of Betterment with effect on 23 January 2008; (ii) Richcom be appointed as Betterment’s sole and exclusive agent to obtain a loan of not exceeding $135 million; and (iii) the respondent be appointed as attorney of Betterment for the purpose of obtaining finance of not exceeding $135 million for Betterment.

21 January 2008

28. On 21 January 2008, at a directors’ meeting of PME, attended by the respondent, PW1 and PW3 (appointed secretary of the meeting), it was resolved to approve a draft loan agreement for Richcom to lend $64 million to Betterment.  The minutes of the meeting showed that the respondent reported the purpose of the loan was to “partly finance” Betterment’s acquisition of 50.28% of the issued shares of ZZNode.  It was further resolved that the respondent and PW1 be authorised to execute the loan agreement and related documents.  The relevant parts of the minutes read:

“LOAN PROPOSAL

A draft loan agreement between the Company’s wholly-owned subsidiary Richcom Group Limited (“Richcom”), as lender, and Betterment Enterprises Limited (“Betterment”), as borrower, in relation to a proposed loan of not more than HK$64,000,000.000 at an interest rate of 12% per annum for a period of not more than six months.

Ms Ivy Chan reported that the purpose of the loan is to partly finance the Borrower’s acquisition of 50.28% issued shares of ZZNode Technologies Company Limited (stock code:2371). Ms Ivy Chan further reported that the loan will be secured by personal guarantee of Mr Christian Emil Toggenburger, the sole shareholder and sole director of Betterment, and 3,000,000 shares of PYI Corporation Limited (stock code: 498, and with current market value of approximately HK$8 million) owned by Mr Toggenburger. The detailed terms of the loan agreement and the securities are yet to be finalised with Betterment and Mr Toggenburger.

It was also noted that both Betterment and Mr Toggenburger were independent third parties to the Company.

IT WAS RESOLVED THAT subject to the principal terms set out above, the draft loan agreement be hereby approved and that any one director of the Company is hereby authorised to further negotiate with Betterment and Mr Toggenburger to finalise the draft loan agreement and the securities.

IT WAS FURTHER RESOLVED THAT Ms Ivy Chan and Ms Agnes Yeung be hereby authorised to execute the loan agreement and all necessary documents in relation to the loan agreement on behalf of Richcom.”[2]

29. PW1’s evidence was that the respondent, and to a less extent, she, negotiated and brokered the loans and were the directors at PME responsible for the project.  She said the respondent was the director who mainly arranged the loan; negotiated the terms; spent most of the time on the project; was in charge of the project; and gave instructions to Richcom’s and PME’s solicitors, Messrs Hau Lau Li Yeung (HLLY).  PW1 testified that:

“… In this project [the respondent] was the main one who was responsible for the project and she also knew the details of the project and she was also clear about the progress of this project, if there was something she wanted to report to us she will regularly reported to us …”[3]

30. On 21 January 2008, Richcom passed a resolution signed by the respondent and PW1, which approved (i) a draft loan agreement for Richcom to lend $64 million to Betterment; (ii) a draft “Subscription Agreement” between Richcom as the subscriber and Betterment and; (iii) draft mortgage agreements over PYI shares and over PW2’s entire shareholding in Betterment, between Richcom as chargee, and PW2 and Betterment, as chargors. 

31. The Subscription Agreement provided that prior to the maturity of the $64 million loan, if so demanded by Richcom, Betterment would issue a $64 million Convertible Bond, convertible into 9,949 Betterment shares in lieu of repayment of the $64 million loan (the Convertible Bond). 

32. The $64 million loan agreement dated 21 January 2008 and signed by the respondent for Richcom and by PW2 for Betterment included in its terms, amongst other things, that (i) PW2 would mortgage his 51 shares in Betterment and his 3 million shares in PYI to Richcom, and (ii) part of the loan would be used to repay the previous $15 million loan.[4]  

33. The Betterment resolution signed by PW2 stated:

“Reference was made to the following loans application of the Company.

1. A loan of HK$70 million from AMS Capital Limited.

2. A loan of HK$64 million from Richcom Group Limited (“the Richcom loan”). And

3. A loan of HK$15,044,383.56 to the sole director, Christian Emil Toggenburger, for him to settle the loan he owed to Richcom Group Limited.

AFTER CAREFUL CONSIDERATION, IT WAS RESOLVED that:-

(I) The above 1 & loan applications be approved and that

1. The loan agreement to be entered into with AMS Capital Limited and tabled before the meeting be approved;

2. The loan agreement to be entered into with Richcom Group Limited and tabled before the meeting be approved;

3. The sole director Christian Emil Toggenburger be authorized to sign all loan documents required therefor and to affix the common seal of the Company thereon if necessary.

(II) The above 3 loan to the sole director Christian Emil Toggenburger be approved.”[5]

34. On the same day, PW2 signed the Subscription Agreement on behalf of Betterment and it remained undated and unsigned on behalf of Richcom.  Also on the same day, another loan agreement was executed between a company called AMS Capital Ltd (AMS) and Betterment whereby AMS agreed to lend $70 million to Betterment (the $70 million AMS loan). 

35. Betterment purchased 198,604,108 ZZNode shares or 50.28% of the issued share capital of ZZNode on 22 January 2008 at $0.7074 per share, at a total cost of approximately $140 million.  On the same day, the ZZNode shares were deposited into Betterment’s securities trading account with President Securities (Hong Kong) Ltd (the President Account).  An extra 24,000 shares were purchased several days later, bringing Betterment’s total holding in ZZNode shares to 198,628,108.  The purchase was financed by the $64 million loan and the $70 million AMS loan. 

23 January to 5 February 2008

36. On 23 January 2008, the respondent and PW2 signed a written resolution of Betterment appointing the respondent in place of PW2 as the authorised person of the President Account and giving her exclusive control over Betterment’s ZZNode shares.  With effect from 24 January 2008, the respondent and PW2 were appointed executive directors of ZZNode.

37. At this time, PW2 failed to deliver his PYI shares to Richcom pursuant to the $64 million loan agreement. 

38. On 5 February 2008, HLLY, solicitors for PME and Richcom, forwarded a letter to Messrs D.S. Cheung & Co (DS Cheung & Co), solicitors for PW2 and Betterment, putting on record that PW2’s 3 million shares in PYI had not been delivered to Richcom and demanding that they be delivered forthwith, otherwise failure to do so would amount to a breach of the $64 million loan agreement. 

11 February 2008

39. On 11 February 2008, Richcom executed and dated the Subscription Agreement which had already been signed by PW2 on behalf of Betterment.  The respondent signed the agreement on behalf of Richcom. 

40. The same day, HLLY, on behalf of Richcom, sent a letter to DS Cheung & Co, acting for Betterment, and demanded issue of the Convertible Bond pursuant to the Subscription Agreement, in lieu of repayment of the $64 million loan on or before 14 February 2008.  The demand notice read:

“Notice is further given to your client that our client hereby exercises its rights under cl.2.1 of the subscription agreement to demand for the issue of the Bond referred therein in lieu of repayment of the Loan of HK$64 million. Your client is therefore requested to issue the Bond on or before 14^th February 2008, accordingly.”[6]

41. Also on the same day, the respondent, acting as the director of Betterment, issued a notice of meeting of Betterment’s directors to be held on 14 February 2008 for the purpose of considering the issue of the Convertible Bond and a mandate to the directors for the issue of the conversion shares pursuant to the Convertible Bond, and thereby giving the requisite three days notice of a meeting.  PW2 asked to delay the meeting but it was refused. 

42. The Magistrate at trial had regard to the ongoing dispute between PW2 and Richcom concerning the validity of the conversion of shares and she noted that there was no provision in the Listing Rules adduced to show that the disclosure of information, in particular, under Rule 13.23, was subject to a company’s decision to hold off announcements pending legal advice or resolution of a dispute.  She held that it was clear that under Rule 13.09, the general position is that the companies are liable to disclose relevant information, and if there was any doubt then the company involved was expected to consult the SEHK.  She rejected the contention that the transactions were not discloseable until the dispute was resolved or that there was any legitimate justification that permitted disclosure to be withheld pending resolution of a dispute. 

43. The Magistrate was correct in her ruling and to have held otherwise would make the Listing Rules unworkable.

14 February 2008

44. The respondent and PW1 held a directors’ meeting at Betterment on 14 February 2008 pursuant to the notice that had been issued on 11 February 2008.  The respondent took the chair and reported on the development of the project.  PW2 did not attend.  The minutes referred to the notice of Richcom contained in the letter of HLLY dated 11 February 2008 for the issue of the Convertible Bond in lieu of repayment of the $64 million loan. The minutes signed by the respondent noted that (i) PW2’s attempt to remove the respondent and PW1 as directors of Betterment was not valid as it was not carried out in accordance with the Articles of Association of Betterment; (ii) AMS had on 13 February 2008 demanded repayment of the $70 million loan that it had previously advanced to Betterment; and (iii) it was resolved that (a) the Subscription Agreement be confirmed and ratified; (b) Betterment was to issue the Convertible Bond pursuant to the Subscription Agreement; (c) Betterment was to issue conversion shares to Richcom pursuant to the Convertible Bond as required; (d) any one of the directors could execute the Convertible Bond and issue the conversion shares; and (e) Betterment would sell ZZNode shares in order to repay its loan from AMS. 

45. So far as material the minutes stated:

“5. Reference was made to a subscription agreement for convertible bonds to be issued by the Company to Richcom Group Limited and signed by Mr. Christian Emil Toggenburger acting as a sole director of the Company and the notice of Richcom Group Limited dated 11^th February 2008 for the issue of Bond in lieu of repayment of the Loan of HK$64 million and to a letter from Messrs. D.S.Cheung & Co of even date with a letter from Mr. Christian Emil Toggenburger purported to act on behalf of the company claiming to repay the said Loan together with interest thereon on 19^th February 2008. After due consideration it was resolved that,

i. The subscription agreement entered into and signed by Mr. Christian Emil Toggenburger was hereby contained and ratified;

ii. As Richcom Group Limited had given due notice, the Company should issue the convertible bond(s) to Richcom Group Limited in accordance with the terms of the subscription agreement;

iii. The Company should issue the conversion shares to Richcom Group Limited in accordance with the terms of the convertible bond(s) as and required; and

iv Any one of the directors to be authorized to execute the convertible bonds, to issue the conversion shares for and on behalf of the company and all other documents incidental thereto and to affix the Common Seal thereon if required.

6. It was further noted that AMS Capital Limited had by a notice in writing dated 13^th February 2008 demanded for repayment of the loan of HK$70 million together with interest thereon. As the company did not have sufficient cash to meet the call, it was resolved that the company should sell the shares of ZZNode Technologies Company Limited and utilize the proceeds to settle the said loan.”[7]

46. The Convertible Bond was signed by the respondent and PW1 on behalf of Betterment and was dated 14 February 2008. 

47. On the same day, PW2 wrote to Richcom, care of the respondent, purporting to give notice of early termination of the $64 million loan pursuant to Clause 3.2 of the Loan Agreement and promising payment of all outstanding sums by 19 February 2008.  A similar letter was sent by DS Cheung & Co, acting for PW2, to Richcom, care of the respondent.  On the same day, HLLY replied to DS Cheung & Co, where early termination and repayment of the loan was refused.  It stated that Richcom by notice in writing dated 11 February 2008 had already exercised its rights under Clause 2.1 of the Subscription Agreement to call for the issue of the Convertible Bond in lieu of repayment of the loan.  It also reported on the issue of the Convertible Bond by Betterment and the failure of PW2’s attempt to remove the respondent and PW1 as Betterment’s directors. 

48. So far as material the letter read:

“2. Without prejudice to the aforesaid, the appointment of our firm as the registered agent and the appointment of Ivy Chan and Agnes Yeung to the board of directors of Betterment are part and parcel of the securities provided by Betterment to secure its performance under the loan documents. As long as the performance of Betterment under the loan documents is not completed we are entitled to remain as its registered agent and that Ivy Chan and Agnes Yeung are entitled to remain on the board of directors of Betterment.

3. Further, as you may well aware, a shareholders’ meeting is not entitled to due with matters relating to the management of the company such as appointment of registered agent. As such, without prejudice to our stances as per para.1 hereinabove, para. 6-8 of the purported resolution of the shareholders of Betterment dated 13^th instant is invalid and of no effect.

AS for Betterment’s purported notice dated 14^th February 2008 to repay the loan of HK$64 million together with interest thereon to Richcom Group Limited (“Richcom”), we would like to draw your attention to the fact that Richcom has, by notice in writing dated 11^th February 2008, already exercised its rights under c1.2.1 of the above Subscription Agreement to call for issue of the convertible bonds in lieu of repayment of the loan.

Betterment is therefore obliged to issue the convertible bonds to Richcom in accordance with the subscription agreement.

Further, as AMS Capital limited has demanded repayment of the loan of HK$70 million together with interest thereon, we are instructed that the other directors, namely, Ivy Chan and Agnes Yeung have resolved to sell the shares of ZZNode Technologies Company Limited held and to be held by Betterment to meet the call on the said loan.”[8]

15 February 2008

49. On 15 February 2008, the share price of PME closed at $0.475, representing a 21.7% increase over its closing price the previous day.  The volume of trading in PME’s shares increased to around 73.5 million.  By comparison the trading over the previous ten days had remained below 12 million shares per day. 

50. As a consequence, the SEHK made inquiries of PME in relation to the unusual increases in the price and trading volume of its shares pursuant to Rule 13.10 of the Listing Rules.  In response, PW3 and his assistant, made inquiries with all of PME’s directors, including the respondent, in relation to SEHK’s inquiries.  Each director was asked if they knew the cause of the fluctuations in price. 

51. PW1 said that if the director had any doubt about whether something should be disclosed they would ask PW3 to check it out.  She testified that:

“… if there are some big projects going on and if during the course of the projects, if some announcements like this to be released, the -if I did not specifically tell the company secretary, the company secretary would remind us to tell him or to inform him of such matters. So I believe that before release of this announcement, the company secretary would checked – would have checked thoroughly what was going on.”[9]

52. In the case of the three announcements, each director replied in the negative.  Each director was informed of the content of the proposed announcement to be issued by PME prior to its publication and all directors agreed to its publication. 

53. PW3 was questioned about the public announcement on 12 March 2008 when he gave his evidence. It was summarised in the case stated as follows:

“In his examination in chief, when asked questions relating to exhibit P40 and the classification of the transaction is disclosed in that announcement as a disclosable transaction, PW3 stated that it was not the 2^nd Defendant [the respondent] who decided whether a transaction was disclosable or not. He explained that he would do the calculations and he would decide whether the transaction was disclosable or not after communications with the SEHK. In cross examination PW3 admitted that he could not remember the detailed situation regarding whether he spoke to the 2^nd Defendant regarding the contents of the announcement. This was further confirmed during re-examination where PW3 admitted when the draft announcements were passed to the 2^nd Defendant a comment, he could not remember what exactly the 2^nd Defendant had said regarding whether the transactions were disclosable.”

54. The evidence of PW3 on this matter was the subject of close examination in argument before me and whether it was open to the Magistrate to find on the basis of PW3’s evidence that it was he and not the respondent who was responsible for the contents of the announcement.  This issue arises under Question (v) and I will say more about it when addressing that question.

55. On 15 February 2008, PME issued and filed with the SEHK a public announcement pursuant to Rule 13.10 of the Listing Rules, a copy of which was also published on the website of the Hong Kong Exchanges and Clearing Ltd.  The announcement noted the recent increase in trading volume of the price of the shares of PME and stated that PME was not aware of the reasons for such increases.  It read:

“This statement is made at the request of The Stock Exchange of Hong Kong Limited.

The directors of PME Group Limited (the “Company”) have noted the recent increase in the trading volume and the price of the shares of the Company and wish to state that we are not aware of any reasons for such increases.

Saved as the announcement dated 15 January 2008, we confirm that there are no other negotiations or agreements relating to intended acquisitions or realisations which are discloseable under Rule 13.23 of the Listing Rules, neither is the Board aware of any matter discloseable under the general obligation imposed by Rule 13.09 of the Listing Rules, which is or may be of a price-sensitive nature.

Made by the order of the Board of the Company, the directors of which individually and jointly accept responsibility for the accuracy of this statement.” [10]

56. At the close of the market on 15 February 2008, the share price of ZZNode was $1.9.  The market value of Betterment’s holdings in ZZNode had thus increased to around $377 million, or around 43% of the value of PME’s total net assets of approximately $875 million. 

18 February 2008

57. The respondent and PW1 signed resolutions as directors of Richcom on 18 February 2008 that: (i) the company would exercise the conversion rights under the Subscription Agreement to convert and to subscribe for 51 shares of Betterment; and (ii) any one director of the company was authorised to execute necessary documents on behalf of the company for the subscription of 51 shares of Betterment.  The resolution stated:

“NOTED THAT:

(i) A loan agreement dated 21 January 2008 between the Company as Lender, and Betterment Enterprise Limited (“Betterment”) as Borrower;

(ii) A subscription agreement dated 11 February 2008 between the Company (as Subscriber) and Betterment.

FURTHER NOTED THAT Betterment has failed to perform its obligations under the loan agreement to deliver 3,000,000 PYI Shares and to mortgage the PYI Shares to the Company as securities under the loan agreement.

RESOLVED THAT:

(1) The Company shall exercise the conversion right under the subscription agreement to convert and to subscribe for 51 shares of Betterment;

(2) Any one director of the Company be hereby authorized to execute all necessary documents on behalf of the Company for the subscription of 51 shares of Betterment.”[11]

58. Formal notice was given in relation to the conversion to be signed by the respondent and accordingly Betterment issued 51 shares to Richcom. 

59. PME’s acquisition of 51 Betterment shares through Richcom by means of the Subscription Agreement and the Convertible Bond meant that PME through Richcom and Betterment had acquired an indirect interest in the ZZNode shares.

60. On 18 February 2008, the share price of PME closed at $0.66, a 38.9% increase over its closing price of $0.475 the previous trading day.  Turnover in PME shares increased to around 156 million shares on 18 February 2008.  Turnover on the previous day had been 73 million shares.  By comparison, the daily turnover for the 10 trading days prior to 15 February 2008 was less than 12 million shares.  The closing price of ZZNode shares had risen to $1.98. 

61. The SEHK again made inquiries with PME in relation to unusual increases in price and trading volume of PME’s listed shares pursuant to Rule 13.10 of the Listing Rules.  In response to the inquiries from the SEHK and pursuant to Rule 13.10 of the Listing Rules, PME issued and filed with the SEHK a public announcement, a copy of which was also published on the website of the Hong Kong Exchange and Clearing Ltd on 18 February 2008.  The announcement was made in similar terms to that on 15 February 2008 and contained the same negative statement.[12] 

19 and 20 February 2008

62. On 19 February 2008, the respondent, on behalf of Betterment, opened a securities trading margin account with Hong Tong Hai Securities Ltd (the Hong Tong Hai Account).  The respondent was the sole authorised person in relation to this account from 19 to 25 February 2008. 

63. On 20 February 2008, 198,426,000 ZZNode shares held by Betterment in the President Account were transferred to the Hong Tong Hai Account.  The respondent then gave directions to sell a total of 80 million of the ZZNode shares in the Hong Tong Hai Account.  The 80 million of the ZZNode shares were sold at between $1.25 and $1.59 per share.  The proceeds from the sale totalled around $114.9 million.  These shares were sold in accordance with Betterment’s resolution passed on 14 February 2008 to repay Betterment’s $70 million loan from AMS.  After the sale of 80 million ZZNode shares, Betterment remained holder of 118,624,000 ZZNode shares which represented around 29.29% of ZZNode’s issued capital at the time. 

64. On 20 February 2008, the share price of PME closed at $0.71, a 16.4% increase over its closing price of $0.61 the previous day.  Turnover increased to around 192 million shares. 

65. The SEHK again made inquiries with PME in relation to unusual increases in price and trading volume of PME’s listed shares pursuant to Rule 13.10 of the Listing Rules.  In response, PME issued and filed with the SEHK a public announcement, a copy of which was also published on the website of the Hong Kong Exchanges and Clearing Ltd on 20 February 2008.  The announcement was made in similar terms to the announcements on 15 and 18 February 2008 and contained the same negative statement.[13]

66. On 20 February 2008, the share price of ZZNode closed at $1.64. 

22 February 2008

67. Richcom passed a resolution on 22 February 2008 further exercising the conversion right under the Subscription Agreement to convert and to subscribe for 9,898 shares of Betterment.  The resolution stated:

“NOTED THAT:

(i) A loan agreement dated 21 January 2008 between the Company as Lender, and Betterment Enterprise Limited (“Betterment”) as Borrower;

(ii) A subscription agreement dated 11 February 2008 between the Company (as Subscriber) and Betterment.

(iii) A written resolution of the directors of the Company dated 19 February 2008 in relation to subscription for 51 shares of Betterment.

RESOLVED THAT:

(1) The Company shall further exercise the conversion right under the subscription agreement to convert and to subscribe for 9,898 shares of Betterment;

(2) Any one director of the Company be hereby authorized to execute all necessary documents on behalf of the Company for the subscription of 9,898 shares of Betterment.”[14]

28 February 2008

68. On 28 February 2008 trading was suspended in PME’s shares at its request.

12 March 2008

69. On 12 March 2008, PME made a public announcement in relation to discloseable transactions and resumption of trading.[15] 

70. The Board announced that on 11 February 2008 the Subscriber entered into the Subscription Agreement and the Convertible Bond was issued to the Subscriber on 15 February 2008.  On 19 and 25 February 2008, the Subscriber exercised the conversion rights under the Convertible Bond and converted the Convertible Bond into 51 and 9,898 shares of Betterment respectively.  It went on to state:

“The Subscription Agreement and the Conversion constitute discloseable transactions on the part of the Company under Rule 14.06 of the Listing Rules. A circular containing, among other matters, further details of the Subscription Agreement and the Conversion, will be despatched to the shareholders of the Company as soon as practicable and in compliance with the Listing Rules.

The Directors have noted the recent increase in the price and trading volume of the shares of the Company and wish to state that the Directors are not aware of any reasons for such increase. Save as the announcement dated 15 January 2008, the Directors confirm that there are no other negotiations or agreements relating to intended acquisitions or realizations which are discloseable under Rule 13.23 of the Listing Rules, neither is the Board aware of any matter discloseable under the general obligation imposed by Rule 13.09 of the Listing Rules, which is or may be of a price sensitive nature.

At the request of the Company, trading in the shares of the Company was suspended with effect from 2:40 p.m. on 28 February 2008 pending the release of this announcement. Application has been made by the Company to the Stock Exchange for the resumption of trading in the shares of the Company with effect from 9:30 a.m. on 13 March 2008.”

71. The notice set out detailed particulars of the Subscription Agreement and the conversions as well as information the Board had about Betterment and ZZNode.  The Board went on to address the disclosure of the matter and stated in relation to the implication of the Listing Rules the following:

“… In view of the limited access to the update financial information of Betterment and disputes set out below, the disclosure of the Subscription Agreement was made after the execution of the Subscription Agreement.

Notwithstanding the Directors are of the view that the Subscription Agreement and the Conversion constitute discloseable transactions under the Listing Rules, the Stock Exchange indicates that it has concern on the classification of the transaction in relation to the Conversion.

The Directors understand that the Subscription Agreement should have been disclosed on a timely basis. The delay in the announcement of the Subscription Agreement was due to dispute by the Then Shareholder to the Subscription Agreement prior to the issue of the Convertible Bond. Upon receipt of notice from the Subscriber to subscribe the Convertible Bond, certain directors of Betterment decided to call a board meeting (“Board Meeting”) to be held on 14 February 2008 to consider the same. However, before the Board Meeting, the Then Shareholder claimed, among others, that these directors had been removed from their office at a shareholder’s meeting (“Shareholder’s Meeting”) conducted before the Board Meeting and that the Board Meeting was cancelled. On the contrary the legal adviser of the Subscriber was of the view that the conduct of the Shareholder’s Meeting would be in breach of the articles of Betterment and would be considered as void. Hence, the Board Meeting was conducted as scheduled. After the Subscriber’s legal advisor informed the Then Shareholder’s legal adviser that the Board Meeting had been carried out. The Then Shareholder, through its solicitors declared the Board Meeting as null and void and had no binding effect upon Betterment. On 19 February 2008 the Subscriber exercised the conversion rights under the Convertible Bond and converted the Convertible Bond into 51 Betterment Shares which was also disputed by the Then Shareholder. As such, the Subscriber decided to pend for further legal advice to the validity of the Subscription Agreement before disclosing the Subscription Agreement pursuant to the Listing Rules.

On 22 February 2008, a board meeting and a members’ meeting of Betterment was held and it was resolved by the Then Shareholder and the Subscriber, among others, to issue 9,898 Betterment Shares to the Subscriber. On 25 February 2008, the Subscriber came to the knowledge that 40,000 Betterment Shares may have been issued to a company (“Related Company”) related to the Then Shareholder on 14 February 2008 without proper authority from the board of Betterment. On 26 February 2008, the Subscriber was advised by the BVI processing agent of Betterment that the 40,000 Betterment Shares have been allotted. The Subscriber immediately requested for cancellation of such Betterment Shares on 27 February 2008. On 28 February 2008, the Subscriber received a confirmation from the Related Company that the allotment of the 40,000 Betterment Shares was cancelled. Upon the full conversion of the Convertible Bond and after clarification to the latest shareholding structure of Betterment as at 28 February 2008, the Subscriber is interested in 99.49% of the issued share capital of Betterment.

Notwithstanding there has been dispute to the subscription and conversion of the Convertible Bond, there has been never dispute to the repayment of the Loan. The Directors do not consider the dispute to be price sensitive so far the Loan repayment was not disputed. The Directors believed it would be more appropriate to inform the Division or the shareholders till there is concrete outcome or judgment to the dispute. Shortly after the issue of the 40,000 Betterment Shares was clarified, the Company has duly issued the announcement.”

72. Trading resumed in PME’s shares on 13 March 2008.

Questions of law

73. As listed in the stated case, the questions of law signed by the Magistrate for the opinion of the Court are:

On the admissibility of the four letters

(i) Did I err in law in finding the four letters to be inadmissible in that no reasonable magistrate properly directed could have come to that conclusion?

On the substantive issue

(ii) Is it correct that no reasonable magistrate properly directed could have made the finding on the evidence that PME and its subsidiary, Richcom, had not manifested an intention to exercise its conversion rights to Betterment shares by 14 February 2008?

(iii) Did the Convertible Bond come within the definition of an “option” under Rule 14.72 of the Listing Rules?

(iv) Was the $64 million loan, the Subscription Agreement or the Convertible Bond, either individually or collectively, a discloseable transaction pursuant to Rules 13.23 and/or 13.09 of the Listing Rules?

(v) Is it correct that no reasonable magistrate properly directed could have acquitted the respondent of any of the three summonses laid against her?

74. I will address each question in turn.

Question (i): Admissibility of four letters sent to the SEHK

75. The question is whether the Magistrate erred in law in finding the four letters to be inadmissible on the basis that no reasonable magistrate properly directed could have come to that conclusion. 

76. I previously refused an application by the SFC for the inclusion of a series of questions in the case stated relating to the issue of a “person in authority”.  I held that the law on the issue is well settled and whether or not the SEHK was a person in authority in the present case did not raise an error or issue of law to warrant the additional questions in the case stated. 

77. For the SFC, Mr Simon Westbrook, SC, with Mr Derek CL Chan, essentially argues that the Magistrate was wrong to find on the evidence and in law that the SEHK was a “person in authority”.  Mr Peter Duncan, SC, with Mr Jonathan Kwan, for the respondent, submits that the finding by the Magistrate that the SEHK amounted to a “person in authority” was a question of fact and it was a matter for her as to whether the SEHK fell into this category.

78. At trial, the SFC sought to adduce into the evidence four letters sent by PME to the SEHK between 23 September 2008 and 20 May 2010.  The respondent signed three of these letters on behalf of PME.  The four letters were sent by PME to the SEHK in response to four inquiry letters from the SEHK. 

79. It was the SFC’s case that the contents of the letters, in particular the first one, went to the issue as to whether the respondent did consider the Betterment transactions to be disclosable at the material time.  The SFC submitted that the letters revealed that she had actually decided to issue an announcement from as early as 14 February 2008 but had positively decided not to disclose the transactions because of an ongoing dispute with PW2.

80. The respondent objected to the admissibility of the letters at the trial on the basis that the statements made in the letters could not be established to have been made voluntarily because they had been made to a person in authority under a threat of disciplinary proceedings and in violation of the privilege against self-incrimination.

81. The SFC argued that the answer given by PME in the letters were made voluntarily and the letters were admissible, on the basis, that both PME and the respondent had agreed, in being listed as a company and being a director of a listed company respectively, to provide information to the SEHK when requested; that there was no legal obligation on either PME or the respondent to respond to the SEHK inquiries, as the Listing Rules were contractual in nature and did not have any statutory backing; that neither PME nor the respondent elected to remain silent at the time despite knowing that as a matter of normal procedure, any answers they have to the SEHK might be passed on to the SFC; that the SEHK inquiry letters were directed at the respondent, and any director of PME could have signed the letters on behalf of PME, but the respondent voluntarily elected to do so; and that failure to answer the SEHK queries would at worst result in disciplinary proceedings leading to possible sanctions of a reputational nature only without any penal consequences.  The SFC further argued that it could not be found that the answers provided in the letters were made involuntarily on the basis that they were made to a “person in authority” because the SEHK was not a person in authority as it was not acting on behalf of the SFC or in any control over the proceedings commenced by the SFC.

82. This required the SFC to prove beyond reasonable doubt on the evidence that the statements were made voluntarily by the respondent.  If, for any reason, it was not made voluntarily, it is inadmissible.  It is an established principle that an admission or confession would be involuntary if it was made as result of hope of advantage or fear of prejudice held out or exercised by a person in authority.  As I said in my previous decision, whilst there is no exhaustive definition of a person in authority, it is well settled that it would include “anyone who has authority or control over the accused or over the proceedings or prosecution against him.”  See Deokinanan v R [1969] 1 AC 20.  See also Archbold Hong Kong, 2015, paras 15-61 and 15-62.[16]

83. In S for J v Lam Tat Ming (2000) 3 HKCFAR 168, Li CJ (with whom the other judges agreed), at 177H-I cited with approval Deokinanan for the proposition that an accused must actually perceive the person in question to be a person in authority, and he went on to state at 177J that the rule of voluntariness “is an essential safeguard for the accused against the coercive power of the law enforcement agencies” which had as its underlying rationale the need to ensure the reliability of confession, as well as the right of silence.

84. The Magistrate found that the letters were inadmissible on the basis that they were made involuntarily under threat of possible disciplinary proceedings; that the SEHK was “a person in authority”; and that there had been no waiver by the respondent of the privilege against self-incrimination.  She found that the four letters were clearly made pursuant to the obligations under the Listing Rules to answer inquiries made by the SEHK.  She properly directed herself as to the law and noted in particular that if there were any threats made or fear of prejudice held out by a person in authority then a confession would be held involuntarily and therefore inadmissible.  She explained her ruling in the case stated in the following paragraphs:

“57. Although there were no explicit reminders by the SEHK about threat of disciplinary proceedings in the first two letters, all letters required the answers to be truthful and threatened criminal proceedings if they were false. Moreover, all letters contained a reminder about the undertaking to the SEHK. Hence, all answers were made with the knowledge that any failure to comply might subject the person or the company to disciplinary proceedings.

58. This was confirmed by PW1 in the voir dire hearing (i.e. Samuel Li, PW3 in the substantive hearing) and the statement of Joanne Hui in that there was an obligation to reply, failure of which would result in disciplinary proceedings.

59. I considered the prosecution’s submissions that the sanctions of any disciplinary proceedings were negligible and such that it would not be a real threat in the Respondent's mind. However, I did not accept those submissions. I was of the view that any possible sanction, even a censure, could affect the reputation of the Respondent or the company and this damage could be irreparable.

60. Hence I found that the threat of disciplinary proceedings could amount to a real threat in the mind of the letter recipient and, in this case, it was the Respondent.

61. As to whether the SEHK was a person in authority, although the answers in the letters were not provided to the SFC, they were provided to the SEHK. The SEHK must have been a person in authority in the mind of the Respondent as they were the ones who could issue disciplinary proceedings against her. Moreover, according to Joanne Hui, the SEHK had power to refer the matter to SFC for possible consideration of criminal offences. Hence, objectively and subjectively, the SEHK must have been a person in authority.

62. As to the waiver of privilege against self-incrimination, the SFC submitted that the Respondent must have waived the privilege. According to the listing agreement submitted by Joanne Hui at JH-5 and a director’s undertaking at exhibit P50, there was no clause in which the Respondent had unequivocally agreed to waive her right against self-incrimination in respect of criminal proceedings. I also noted that there is no statutory provision allowing such answers provided under compulsion to be used in criminal proceedings.

63. Although there was a Memorandum of Understanding between the SFC and the SEHK (“the MOU”) in respect of the exchange of information for investigation purposes, the MOU was not binding on any other party except for the SFC and the SEHK. Moreover, the MOU was not legally binding even as between the parties themselves.

64. Authorities in the Court of Final Appeal have clearly stated that, in cases where answers are provided under compulsion in various civil proceedings, the court must still consider the voluntariness of those answers for the purposes of criminal proceedings. Hence, there is no automatic waiver of the right against self-incrimination when it comes to criminal proceedings and any waiver of such right must be unequivocal.

65. There was nothing in the letter of request that indicated the SEHK would pass the material on for criminal investigation and nothing to remind them of their right to silence. From the letters, the recipient of the letter could not have anticipated the use of the same material in criminal proceedings. Therefore, I did not accept the Respondent waived her right against self-incrimination for the purposes of the present criminal proceedings.

66. I also considered the prosecution’s submission that, since the Respondent claimed legal professional privilege in the third letter, her failure to claim privilege in the other letters amounted to a waiver of the privilege against self-incrimination. However, I did not accept that submission.

67. Hence, having regard to the matters above, I found that the prosecution was unable to prove the admission made in the Four Letters were admissible or were voluntary and, therefore, on that basis, I ruled that the Four Letters were inadmissible.”

85. As noted by the Magistrate in her reasons, on the special issue, she received evidence from PW3 and a statement from an officer of the SEHK, Joanne Hui and had submitted to her documents describing the relationship and cooperation between the SEHK and the SFC.

86. It is a requirement that upon the listing of a company on the SEHK and a person being appointed as the director of a listed company, both must undertake to comply with the Listing Rules and to cooperate in any investigations conducted by the SEHK. 

87. It is pointed out by the SFC that the undertaking is contractual in nature and not part of any statutory requirement.  Whilst that may be so, it is clear that the SEHK, even though operating under a regime of rules, also has an important role, in conjunction with the SFC, in regulating the market place.  To this end, it has a close working relationship with the SFC which is fashioned by a body of statutory provisions and regulations and a memorandum of understanding between them. 

88. The specific undertaking given by the respondent in respect of her directorship in PME contains the recognition that a failure to cooperate in any SEHK investigation into possible breaches of the Listing Rules may result in disciplinary proceedings being brought in respect of such failure.  However, it would appear that it goes further, as is apparent by the first letter issued by the SEHK on 18 August 2008 which listed a detailed set of questions in relation to an investigation of possible breaches by the company of various rules which included the disclosure of information or inaccuracy of such information in public announcements.[17] 

89. The SFC argues that there was no statutory compulsion on the respondent.  The respondent submits that there does not have to be because compulsion can arise by virtue of a regulatory requirement and just because the respondent has a contractual obligation with the SEHK as a director of a listed company did not obviate the need for the SFC to prove that the letters had been written in the absence of a real threat.  The respondent submits that the mere mention of the undertaking to cooperate in a SEHK investigation was capable to communicate to the recipient that the consequence of a failure to cooperate was the institution of disciplinary proceedings. 

90. The Magistrate found that the threat of disciplinary proceedings could amount to a real threat in the mind of the recipient of the letter which was the respondent.  The SFC submits that the letter was not addressed specifically to her but that matters little as it was clearly directed to the director involved in the transaction to address the matters and answer the queries that were contained in the letter.

91. On the point that the letters from the SEHK were addressed to PME and to its Chairman, and not to the respondent, the respondent says that the first letter dated 18 August 2008 stated that not only was it investigating any possible breach by the company but also any possible breach of the undertaking by the directors by the company in connection with the same subject matters.  The notices in the letter contained the following:

“We hereby remind you that you have undertaken to the Stock Exchange to co-operate in any investigation conducted by the Listing Division or the Listing Committee, including answering promptly and openly any questions and promptly producing the originals or copies of any relevant documents.

…

As noted, the contents of this letter are private and confidential, and are subject to the secrecy provision. However, you should disclose the contents of this letter to the other Directors of the Company and any other officers of the Company, in sofar as it is necessary to do so to provide the information and documents requested herein, and remind them of the secrecy obligations imposed on them under section 378 of the Securities and Futures Ordinance.”[18]

92. Similar messages were contained in the later letters as shown in the letter dated 4 November 2009.

“The Division repeats the notices under the “Notices” section set out in our letter of 18 August 2008. We reiterate that the Directors must cooperate with the Division’s investigation by answering promptly and openly any questions and promptly producing the originals or copies of any relevant documents, failing which the Division may consider bringing disciplinary proceedings against the relevant Directors for breach of their Undertaking.”[19]

93. As to whether the SEHK was a person in authority, the Magistrate found that the SEHK must have been in the mind of the respondent as it was the body that could issue disciplinary proceedings against her and according to the evidence the SEHK had power to refer the matter to the SFC for possible consideration of criminal offences. 

94. Notwithstanding my decision refusing the inclusion of questions relating to the issue of “a person in authority”, the SFC questions the legal principles as applied here in Hong Kong in relation to this concept. 

95. Mr Westbrook cited Australian and Canadian authority in support of the contention that a more restrictive approach to the concept of “a person in authority” should be taken.  He argues that the two jurisdictions mentioned limit the concept to those persons who as perceived by the accused, are able to influence the course of the criminal prosecution.  And in the present case this distinction is relevant because there was no evidence adduced at trial to show that the respondent had or might have perceived the SEHK to somehow have the power to influence the course of criminal prosecution against her.  He further argues that at the time of the four letters there was no suggestion that criminal proceedings were being or might be contemplated. 

96. In submissions before me, Mr Westbrook cited the Supreme Court of Canada’s decision in R v Hodgson [1998] 2 RCS 449, and the High Court of Australia’s decision, where a similar view was taken, in Tofilau v The Queen [2007] 231 CLR 396, which he submitted stood for the proposition that the concept of a “person in authority” was someone who was perceived by the accused to be able to influence or control the course of a criminal prosecution.  The latter case was not cited to the Magistrate when this argument was presented before her. 

97. Tofilau was concerned with whether undercover police officers were “persons in authority”. Mr Westbrook relies on the joint reasons of Callinan, Heydon and Crennan JJ of the majority, where it was  explained:

“320. Whether the basis of the inducement rule be reliability, preventing improper state coercion, disciplining the police, or avoiding unfair reductions in the choice of suspects to speak, a perception by the suspect that the coercive power of the state is being used is central: ‘most criminal investigations are undertaken by the state, and it is then that an accused is most vulnerable to state coercion’. Where that perception does not exist, the basis of the inducement rule is not present. It is true that the coercive power of bodies or persons other than the state can be as coercive in particular cases as that of the state, but to select that fact as a reason for devising a new inducement rule would be to create a rule wider than that which the appellants are seeking. It would be to abandon the ‘person in authority’ requirement. It would be to compel the prosecution to establish the voluntariness of every statement again interest made by an accused to any person. To require that is to impose ‘an overwhelming burden’.”

98. And further in the joint reasons it was emphasised:

“323. … a person to whom an accused has made admissions cannot be a person in authority at least unless that person is perceived by the accused, on reasonable grounds, to have the lawful authority of the state to investigate the circumstances. …”

99. It is submitted by Mr Westbrook that in the context of the present case, the SEHK inquiry letters were investigating possible breaches of the Listing Rules and cannot be said that the SEHK was acting on behalf of the SFC or had any control over the proceedings commenced by the SFC.  He further submitted that the SEHK was not investigating possible breaches of the SFO and this must have been clear to the respondent.

100. He submits that objectively it could not be said that the coercive power of the state had been engaged, nor was there any evidence that the respondent perceived the SEHK inquiry letters as such.  He argues that any threat of disciplinary proceedings was in relation to the SEHK’s own disciplinary proceedings, leading only to possible reputational consequences and thus could not have been made by the SEHK as a person in authority for the purposes of the exclusionary rule. 

101. That in my view is to focus on the issue too narrowly and that is not how the Magistrate addressed it.  She had before her the statement of Joanne Hui which set out the regulatory role and function of the SEHK and its relationship with the SFC.  Clearly from the material, the two bodies work closely together in relation to their regulatory responsibilities which often overlap in policing the market place.  It was apparent from the first letter of the inquiry that a comprehensive set of questions were being asked that were directed not only to a breach of Listing Rules but also possible criminal prosecution. 

102. Under the Memorandum of Understanding between the SEHK and the SFC it is provided that if it is apparent that there has been a breach of the SFO, the SEHK will refer the matter to the SFC for their investigation and action.  As would be expected, there are clear statements of principle between the two bodies that they cooperate and share information in fulfilling their regulatory responsibilities.  More importantly, information and materials that are obtained by the SEHK in its inquiries or investigation may be passed on to the SFC for their investigation and action.

103. Mr Westbrook argues that based on the legal principles as enunciated by the Canadian and Australian authority, no reasonable magistrate properly directed could conclude that the four letters were made as a result of the threat of disciplinary proceedings by a person in authority.  Whether the SEHK was a person of authority in the circumstances of the present case was a question of fact for the Magistrate to decide on the evidence before her. 

104. For the respondent, Mr Duncan submits that the statements contained in the four letters were not made voluntarily.  He submits that it was for the SFC to prove beyond reasonable doubt that the four letters were made voluntarily in the sense that they were not obtained by fear of prejudice or hope of advantage exercised or held out by a person in authority, and that it was not for the respondent to establish that no such fear or hope existed.  Accordingly, it was open to the Magistrate to find that the SFC had not discharged this burden and standard of proof.  He also submits that the SEHK was clearly a body which had authority or control over the respondent and that as a director of PME she was obliged to cooperate in an investigation conducted by the SEHK, failing which disciplinary proceedings could be instituted against her.  Accordingly, each of the findings of the Magistrate was open to her to make and they were not perverse. 

105. I agree with the respondent’s submissions.  It cannot be said that on the evidence before the Magistrate and within the parameters of the law that no reasonable magistrate properly directed could have come to the conclusion that the four letters were inadmissible, and in particular that the SEHK in the circumstances of this case was a “person in authority”.

Question (ii): PME’s intention by 14 February 2008

106. This question challenges the Magistrate’s finding that PME and its subsidiary, Richcom, had not manifested an intention to exercise its conversion rights to Betterment shares by 14 February 2008 on the basis that no reasonable magistrate properly directed could have made such a finding.  In other words, it was not open to the Magistrate to make such a finding on the evidence. 

107. It was the SFC’s case at trial that PME through Richcom had manifested an intention to acquire Betterment, and therefore ownership in Betterment’s substantial shareholding in ZZNode from 14 February 2008 onwards.  The Magistrate found that Richcom did not manifest its intention to convert to shares of Betterment until the resolution was passed on 18 February 2008. 

108. The SFC’s case was that at least from 14 February 2008, PME’s sole intention was to acquire the shares in Betterment and therefore ownership of the ZZNode shares.  The SFC submits that, therefore, these matters should have been disclosed in the three announcements. 

109. The Magistrate disagreed and explained her finding in the case stated as follows:

“71. Having considered the evidence and submissions, I found that I was unable to draw the irresistible inference that, from 14 February 2008, PME’s intention was to acquire Betterment’s shares. The documents showed that Richcom was entitled to exercise its security in the manner it did as PW2 failed to hand over the 3 million PYI shares as part of the $15M loan agreement. There was no dispute that PW2 had failed to hand over the shares on time, though he explained that it was because of the restrictions on the Swiss account. Once in default of a condition in the loan agreement, Richcom was entitled to exercise its rights.

72. I considered the SFC’s submissions as to why Richcom insisted on exercising its rights under the subscription agreement. However, I found those submissions to be speculative. There may have been many factors that influenced Richcom’s decision to exercise the conversion rights.

73. Although the SFC’s submission as to the intention behind the exercising of the conversion rights was one possible inference to be drawn from the facts, it was not the only inference, much less the only irresistible inference. In the absence of any concrete evidence pointing to any ulterior motive behind the exercising of the conversion rights, I found I was unable to draw an irresistible inference that the conversion rights were exercised pursuant to a pre-existing intention to acquire Betterment’s shares.

74. In respect of the SFC’s submission that PME intended to acquire Betterment’s shares since, at least, 14 February 2008, I was unable to accept that submission. Although I noted, by 14 February 2008, Betterment had passed various resolutions and agreed to issue the Convertible Bond, the resolution of Richcom itself to convert the shares was not passed until 18 February 2008. Up until the actual conversion of shares, Richcom had no actual controlling interest in Betterment.

75. There were no documents before 18 February 2008, save and except a solicitors’ letter dated 11 February 2008, which indicated Richcom had decided to convert the shares. However, in respect of the letter dated 11 February 2008, there was no explanation as to why the letter was written before the resolution was passed by the board of directors and no explanation as to under whose instructions or whose authority the solicitors wrote the letter.”  [Emphasis added]

110. It should immediately be noted that the Magistrate was unable to accept the SFC’s contention because it was not the only reasonable inference that could be drawn from the evidence. 

111. It is submitted by the SFC that PME’s positive announcements on 15 and 18 February 2008, the subject of the first two summonses, that there were no negotiations or agreements relating to intended acquisitions or realisations were therefore false and misleading in a material particular.  It is argued that no reasonable magistrate properly directed with a correct understanding of the evidence could have made such a finding. 

112. It is pointed out by the SFC that part of the Magistrate’s reasons for her finding were that there were no documents before 18 February 2008 except for a solicitors’ letter dated 11 February 2008 which indicated Richcom had decided to convert the shares but the Magistrate gave little or no weight to it because there was no explanation as to why the letter was written before the resolution was passed by the board of directors and no explanation on whose instructions or authority the solicitors wrote the letter. 

113. Mr Westbrook submits that the Magistrate erred in evaluating the documentation produced before her.  But as I have already said, it is not enough to show that it was open to the Magistrate to come to another view on the evidence, it has to go much further than that by showing that no reasonable magistrate properly directed could have made the finding that she did.  The SFC presents its argument on a reappraisal of the evidence.

114. Firstly, it is argued that the solicitor’s letter placed on the record that Richcom had executed the Subscription Agreement and demanded the issue of the Convertible Bond in lieu of repayment of the $64 million loan on or before 14 February 2008.  It is further argued that there was evidence from PW1 that it was the respondent who gave instructions to the solicitors in respect of PME’s transaction with Betterment and what was stated in the letter was entirely consistent with what eventually happened.  But there was no evidence as to who specifically gave instructions in relation to the letter.  These arguments were presented to the Magistrate which she addressed in her reasons and she came to her conclusion upon an assessment of the evidence which she had the benefit of seeing and hearing.

115. Secondly, it is argued that the effect of Richcom executing the Subscription Agreement on 11 February 2008, and then Betterment issuing the Convertible Bond on 14 February 2008 was not appreciated by the Magistrate.  The SFC points to the solicitors’ letter and the Subscription Agreement and argues that the issue of the Convertible Bond was not security to ensure repayment of the $64 million loan.  It is argued that once the Subscription Agreement was entered into and a Convertible Bond was issued, the $64 million loan was regarded as fully paid.  That is not accurate.  There was no repayment of the loan.  The debt continued as stated within the terms of the Convertible Bond.  The SFC argues in its place would be a Convertible Bond with a face value of $64 million convertible at the will of the bond holder into 9,949 shares of Betterment which represented 99.49% of Betterment, which owned the ZZNode shares.  This is also not accurate.  The Convertible Bond still had within its terms that the debt of $64 million at which 12% was to be paid for the period of 12 months with a right to convert into equity.

116. Thirdly, it is argued that the Magistrate was wrong to say that there was no documentation other than the solicitors’ letter before 18 February 2008 that indicated Richcom had decided to convert to the shares.  The SFC points to the notice of the Betterment meeting on 14 February 2008 issued on 11 February 2008 by the respondent as a director of Betterment. The purpose of the meeting was to authorise the issuance of the Convertible Bond to Richcom and for Betterment to give a mandate to the directors for the issue of conversion shares pursuant to the Convertible Bond.  The minutes of the Betterment meeting held on 14 February 2008 that was signed by the respondent, recorded that Betterment had resolved to issue the Convertible Bond to Richcom and that the company should issue the conversion shares to Richcom in accordance with the terms of a Convertible Bond as and when required and that any one of the directors be authorised to execute the Convertible Bond to issue the shares for or on behalf of the company.  It is also pointed out that some of the ZZNode shares were to be sold off to meet the repayment obligations of the AMS loan in the sum of $70 million.  It is submitted that the minutes clearly showed the intention of the Betterment to treat the sole asset of the company, the ZZNode shares, as their own to do with as they pleased, and this was consistent only with acquisition and ownership of the asset.  It was equally consistent with the respondent as a director of Betterment addressing the company’s repayment obligations of the AMS $70 million loan.

117. It is also argued by the SFC that the issue of the Convertible Bond on 14 February 2008 legally extinguished the $64 million loan and replaced it with a legal entitlement to be issued with 9,949 Betterment shares.  The SFC notes the solicitors’ letter of Richcom dated 14 February 2008, in which it referred to the request by PW2 to immediately repay the $64 million loan and stated that since the Subscription Agreement had been executed, Richcom had already exercised its rights in that regard and Betterment was therefore obliged to issue the Convertible Bond to Richcom in accordance with the Subscription Agreement. 

118. The SFC argues that these are all clear indications that Richcom was taking over Betterment and its assets as opposed to looking for mere repayment of the $64 million loan. 

119. Again this was a matter that was argued before the Magistrate which she addressed in her reasons.  It was open to her to reject this view of the evidence and it cannot be said that she was unreasonable or plainly wrong by doing so.  She found on the evidence that the conversion did not crystallise until the resolution was passed and this was a finding that she was perfectly entitled to make on the evidence.

120. Fourthly, it is submitted by the SFC that the Magistrate did not pay sufficient regard to the documents which needed to be understood in light of three pieces of evidence.  First, the fact that by the close of market on 14 February 2008 the price of ZZNode shares had risen to $1.58 per share.  Betterment’s holding of 198 million of shares in ZZNode then had a market value of over $300 million, through the $64 million loan that Richcom had previously extended to Betterment.  Secondly, the minutes of the Betterment meeting held on 14 February 2008 recorded that the directors were authorized to sell part of the Betterment’s holding in ZZNode shares to repay the AMS Loan.  However, as Mr Duncan has submitted this was the respondent acting as a director of Betterment to repay a loan that the company had outstanding.  Thirdly, the 12 March 2008 announcement where it was expressly accepted that the directors understood that the Subscription Agreement should have been disclosed on a timely basis and that the delay in the announcement was due to the dispute by the then shareholder to the Subscription Agreement prior to the issue of the Convertible Bond.  As pointed out by Mr Duncan, the announcement provides a detailed account of the matter but it does not state the date of when the directors came to the view that the Subscription Agreement was discloseable or the date that the Subscription Agreement actually became discloseable.

121. The SFC argues that the huge increase in the market value of the ZZNode shares at the time was highly significant relative to the size of PME and was an issue that should have had been taken into account.  From PME’s annual report the year ending 31 December 2008, it was reported that the Convertible Bond had been restated to its fair value of $217,795,000 before the conversion.  After deducting the $64 million loan, the recognised fair value going in the Convertible Bond was $153,750,000.  In order to put the transaction in context, it is pointed out that PME’s turnover for 2008 was around $298 million and that it had incurred a net loss of around $268 million. 

122. It is therefore argued by the SFC that any reasonable magistrate having analysed these matters correctly would have concluded that PME through Richcom had manifested an intention at least by 14 February 2008 to acquire the Betterment shares thereby rendering the statements in the announcements false and the true situation discloseable.

123. The respondent submits that it was open to the Magistrate on a consideration of  the totality of the evidence before her to come to the conclusion that she was unable to draw the irresistible inference that from 14 February 2008 PME’s intention was to acquire the Betterment shares. 

124. The respondent submits that this needs to be assessed against the nature of the relevant documents, the occurrence of relevant events and various steps that were taken between 21 January and 18 February 2008.  The starting point is the loan agreement dated 21 January 2008.  The advancement of the loan was conditional amongst other things upon “satisfaction of the further condition set for in Schedule II as security of repayment of the Loan”.  As pointed out by the respondent, one of the items of security referred to in Schedule II was the Subscription Agreement (scheduled to which was the Convertible Bond) and a further item of security was the mortgage of PYI shares.  Although the loan was advanced, PW2 subsequently failed to deliver to PYI shares.  And it was on 11 February 2008, that Richcom executed the Subscription Agreement which had been previously signed by Betterment.  By virtue of the Subscription Agreement, Richcom, the lender, was entitled in lieu of the repayment of the loan, to require Betterment to issue a Convertible Bond.  Like the loan agreement, the Convertible Bond provided, amongst other things, for interest to be paid on the principal outstanding, as the principal in the loan agreement became the principal in the Convertible Bond.  The Convertible Bond gave Richcom the right, but not the obligation, to convert the amount under it into shares of Betterment.  As stressed by the respondent, this was a matter entirely separate and distinct from the issue of the Convertible Bond. As to whether or not such a right would be exercised, was a matter for Richcom, and entirely separate from the decision to require the issue of the Convertible Bond. 

125. On 11 February 2008, the solicitors for Richcom wrote to the solicitors for Betterment requiring the issue of the Convertible Bond on or before 14 February 2008.  The letter made no mention of the existence of Richcom’s conversion rights or any possible exercise of them. Other documentation which existed at about this time and referred to by the SFC, showed that Richcom was taking steps to ensure that if the right to convert was exercised, then necessary shares would be issued.  The respondent argues contrary to what is asserted by the SFC, these documents did not establish that Richcom had by 14 February 2008 decided to convert the shares.  As pointed out by the respondent, the minutes of the Betterment meeting on 14 February 2008 made it clear that Betterment should issue the conversion shares to Richcom as and when required. 

126. The respondent submits therefore that it was only on 18 February 2008 that Richcom resolved to exercise its rights to convert part of its principal outstanding into 51 Betterment shares.  The respondent further submits that it is significant that Richcom did not exercise its conversion rights with regard to the total principal outstanding as 51 shares was the same number of shares held by PW2 and simply ensured that his shareholding did not exceed Richcom’s, thereby ensuring that Richcom could not be outvoted at any shareholders’ meeting of Betterment.  It is submitted by the respondent that this point was not lost on the Magistrate, who explained in the case stated that by 20 February 2008 Richcom had converted only part of the principal into 51 shares, and that the compelling inference being that Richcom had not made any decision to acquire Betterment but rather that the conversion was to protect the interests of Richcom.

127. It is submitted by the respondent that actions of Richcom between 11 and 18 February 2008 were not consistent only with an intention formed by 14 February 2008 to acquire Betterment’s shares but were equally consistent with Richcom taking steps at various times to invoke the security which had been provided for in the loan agreement and to which the Magistrate had averted to in her reasons.  This highlights the issue at hand.  There were two possible scenarios to draw from the facts and it was open to the Magistrate to draw the latter.  It cannot be said that it was unreasonable for her to do so.

128. The question the Court’s opinion is being sought is whether no reasonable magistrate properly directed would have made the finding or the conclusion that she did.  That is why questions of this type should only be asked by way of case stated when it is a clear and obvious case that the Magistrate was plainly wrong.  The Magistrate has had the benefit of seeing and hearing the evidence and also having an overall appreciation of all the evidence that was before her, and just because another finding or conclusion could have been made on the evidence does not mean that the finding or conclusion that the Magistrate has come to was wrong.  It has to be perverse in that no reasonable magistrate properly directed would have made the finding or come to the conclusion in question. 

129. The respondent further refers to the evidence of PW1 who testified that at the time of the loan agreement there was no intention to acquire Betterment and that the Subscription Agreement was just one of the items of collateral to better secure Richcom’s position in respect of the loan of $64 million and the repayment of it by Betterment.  She also testified that the conversion of 51 shares was prompted by the failure of PW2 to provide the necessary security and was exercised to protect Richcom’s interests.  This was also endorsed by the evidence of PW3, who said that the Subscription Agreement was one of the security documents signed in the course of a loan under normal circumstances.

130. The respondent submits that the matters put forward by the SFC did not constitute the basis for the only reasonable inference being that by 14 February 2008 Richcom had decided to exercise its conversion rights and accordingly the Magistrate’s decision on this matter could not be said to be perverse.  I agree.

Questions (iii) and (iv): Nature of the transaction prior to the conversion

131. The two questions were dealt with together and concern whether the Convertible Bond came within the definition of an “option” under Rule 14.72 of the Listing Rules and whether the $64 million loan, the Subscription Agreement or the Convertible Bond, either individually or collectively, are discloseable transactions pursuant to Rules 13.23 or 13.09. 

132. The SFC’s case at trial was that the intended acquisition of Betterment was discloseable under Rule 13.23 on the basis that the transaction crossed the specified percentage ratio thresholds, or Rule 13.09 by 14 February 2008 at the latest, with the exercise of Richcom’s rights under the Subscription Agreement and the issue of the Convertible Bond to it. 

133. In respect of Rule 13.09, the Magistrate found that PME’s control over the ZZNode shares after the conversion on 18 February 2008 was something which might have been expected to be price sensitive in nature and liable to disclosure under Rule 13.09.  At trial, the SFC saw it differently and argued that given the progress of the transaction and the market value of the ZZNode shares relative to PME’s size, the intended acquisition was discloseable under Rule 13.09 by 14 February 2008 at the latest and before the three announcements were made.

134. The Magistrate explained her findings in the case stated as follows:

“78. I dealt first with the loan agreements, that is, the $15 million loan and the $64 million Loan. In respect of the $15 million and the $64 million Loan agreements, I accepted the defence counsel’s submissions that the governing provision is rule 13.13. I did not agree with the SFC’s submissions that those loan agreements were discloseable by virtue of rule 14.08 and that this court was required to look at all percentage ratios. It is clear that rule 14.08 is only meant to be a general guide and specifically states in the rule, and I quote, “However, listed issuers should refer to the relevant rules for the specific requirements.”

79. Hence, in respect of the loan agreements, I found that the relevant ratio to consider was the assets ratio as set out in rule 13.13.

80. Exhibit P41F (Checklist Size Tests for Notifiable Transactions and Connected Transactions (Main Board and GEM) dated 17 December 28 2009) showed that the assets test conducted on the $64 million loan was under the 8% threshold and, therefore, was not discloseable. In respect of the $15 million loan there was no assets test done to show that it was discloseable according to rule 13.13 or rule 14.08.

81. Having considered the evidence, I found that the loan agreements in themselves did not constitute acquisitions and realizations of assets. Hence, I found that the $15 million loan and $64 million loan agreements were not required to be disclosed under rule 13.23.

82. In respect of the Subscription Agreement, I accepted defence counsel’s submission that it could not be considered to be a realization of assets until it has been exercised. This was supported by the evidence of PW3. Hence I did not find the subscription agreement to constitute an acquisition and realization of assets under rule 13.23.

83. As to whether the Subscription Agreement constituted “other transactions” which were discloseable under chapter 14 and chapter 14A, I considered the definition of “transactions” under rule 14.04 and 14A.10(3). Having considered the relevant provisions, I found that the Subscription Agreement did not fall within the definitions set out in those provisions.

84. I also considered the definition of “options” under rule 14.72. However, I found that the Subscription Agreement did not fall within that definition.

85. I noted that paragraph (d) of the preamble of the Subscription Agreement clearly states that the exercise of conversion rights and subsequently the issuance of shares are “in lieu of repayment of the loan”. Having read the Subscription Agreement as a whole, I found that the Subscription Agreement could not be classified as a “right to buy or sell something”. I, therefore, found that it was not discloseable under Chapters 14 and 14A.

86. Having considered the evidence and relevant provisions in the Listing Rules, I found that the Subscription Agreement in itself was not discloseable under rule 13.23.

87. As for the conversion, I noted the following matters.

88. First of all, the solicitors for Richcom gave notice on 11 February 2008, purporting to exercise its right to convert the 51 shares of Betterment under the Subscription Agreement. However, Richcom did not pass the requisite resolution until 18 February 2008. As previously stated, it is unclear what authority the solicitors had or were acting under prior to the passing of this resolution when they sent the letter purporting to give notice.

89. According to PME’s interim report of 2008 at exhibit P48, the group exercised its right to convert the shares on 19 February 2008. It was also stated in the report that: “These transactions have been deemed as a purchase of assets and related liabilities.”

90. The third point I noted was that this was reiterated in PME’s annual report at 2008 (exhibit P49) under note 39, which stated that: “The acquisition has been accounted for using the purchase method. The amount of goodwill arising as a result of the acquisition was, approximately, $148,191,000.”

91. From the above evidence, it could be seen that PME deemed the conversion to be an acquisition and that Richcom clearly intended to exercise the conversion rights by passing a resolution on 18 February 2008. As previously stated, based on the prosecution’s evidence, I was unable to draw the irresistible inference that Richcom had manifested its intention to convert the shares prior to the resolution of 18 February 2008.

92. Having considered the evidence, I found that the conversion was liable to disclosure after the passing of the resolution on 18 February 2008, pursuant to rule 13.23 of the Listing Rules.

93. I also considered whether the documents were discloseable under Rule 13.09.

94. The SFC alleged that the statement in the announcement that “Neither is the board aware of any matter discloseable under the general obligation imposed by rule 13.09 of the Listing Rules which is or may be of a price-sensitive nature” was false or misleading in a material particular. Hence, the SFC was required to prove that the documents were discloseable under rule 13.09 and were price-sensitive in nature.

95. I first considered the loan and the subscription agreements collectively.

96. I have considered the evidence and submissions of senior counsel. According to the evidence of PWI, the loans were made as part of PME’s ordinary course of business. There was no evidence to explain how a loan made in the ordinary course of business would reasonably be expected to be of a price-sensitive nature. There was no evidence to suggest that the loan agreements and the Subscription Agreement would themselves be reasonably expected to materially affect market activity. Having considered rule 13.09 and the three categories set out in the rule, I found that the loan agreements did not fall within that rule.

97. In respect of the Subscription Agreement, I noted that this was a security for the loans made. I found that it did not fall into the categories set out in rule 13.09.

98. Therefore, having considered the evidence, I found neither the loan agreements nor the Subscription Agreement to be discloseable under 13.09 of the Listing Rules.

99. In respect of the conversion, as previously stated, it is clear that PME classified the conversion as an acquisition. The prosecution adduced a table (exhibits P44 and P45) showing the fluctuation of share prices of PME and the ZZNode shares from 1 January 2008 to 31 March 2008. However, there was no evidence to explain whether the fluctuation in the share prices could be regarded as “material” as per rule 13.09. There was no evidence to suggest that the differences in the share price were caused by the conversion or whether there were other matters which could have caused the fluctuation.

100. Hence, I was unable to draw the irresistible inference that the conversion, “might be reasonably expected to materially affect market activity and price of shares”, as per rule 13.09(c). However, I found that the conversion might be of a price sensitive nature such that it was information necessary to enable third parties “to appraise the position of the company” as per rule 13.09(a).

101. It can be seen that, once the conversion rights for 51 shares in Betterment were exercised, Richcom would, effectively, have control over Betterment’s ZZNode shares and this was 198,624,108 ZZNode shares as at 19 February 2008. As at the close of 19 February 2008, that is, the purported date on which the shares were converted, the shares were worth $1.93 per share. Hence, this meant that, after the conversion rights were exercised, Richcom had control over ZZNode shares worth $383,344,528.44.

102. I was of the view that the PME group’s control over these assets after conversion was something which might have been expected to be price sensitive in nature and liable to disclosure under rule 13.09(a) of the Listing Rules (see also, notes 3 and 4 of that rule).

103. Hence, in all the circumstances, I found the conversion to be discloseable under rule 13.09 of the Listing Rules.

104. I had regard to defence counsel’s submissions regarding the ongoing dispute between PW2 and Richcom regarding the validity of the conversion of shares. However, I noted that there was no provision in the Listing Rules adduced to show that the disclosure of information, in particular, under rule 13.23, is subject to a company’s decision to hold off any announcement pending legal advice or resolution of disputes. It is clear that, under rule 13.09, the general position is that the companies are liable to disclose the relevant information. If there was any doubt, companies were expected to consult with the Exchange.

105. I therefore did not accept defence counsel’s submissions that the transactions were not discloseable until the dispute was resolved or that there was any legitimate justification that permitted disclosure to be withheld pending resolution of disputes.”

135. In respect of Rule 13.23, the Magistrate again found that only the conversion itself after the passing of the resolution on 18 February 2008, and not the execution of any of the various documents beforehand, was discloseable under this rule.  The Magistrate held that the documents executed and put into effect before the conversion did not constitute an acquisition or realisation of an asset and therefore there was no transaction to disclose under the rule. 

136. The Magistrate also found that the Subscription Agreement did not fall within the definition of an “option” under Rule 14.72 but did not consider the position of the Convertible Bond. 

137. Disclosure under Rule 13.23 is determined primarily by the disclosure requirements as provided for in Chapter 14 and 14A of the Listing Rules.  Chapter 14 deals primarily with disclosure requirements on the basis of the relative size of the transactions and Chapter 14A deals with connected transactions.  “Transaction” includes the acquisition of assets and any transaction involving a listed issue of writing, accepting, transferring, exercising or terminating an option to acquire or dispose of assets or to subscribe for securities.  “Option” is defined in Rule 14.72 as meaning “the right, but not the obligation, to buy or sell something”. 

138. It is argued by the SFC that in the present case, the Convertible Bond did not give Betterment shares to Richcom for nothing, and that the Convertible Bond had a face value of $64 million and the conversion reduced the face value of the Conversion Bond.  It is also argued by the SFC that the Convertible Bond was an option as it entitled PME through Richcom to subscribe the Betterment shares at the cost of the face value of the Convertible Bond.  In these circumstances, it is submitted that the finding of the Magistrate in the subsequent conversion of the Convertible Bond into Betterment shares was discloseable pursuant to Rule 13.23 which also applied to the Convertible Bond issued to Richcom on 14 February 2008.  It is further argued that the ongoing transaction with Betterment was discloseable on 14 February 2008 at the latest and therefore the contents of the three announcements were all false and misleading in a material particular when they effectively stated that there was nothing to disclose.

139. The question is whether the Convertible Bond came within the definition of an “option” under Rule 14.72.  The respondent submits that the SFC relies on the existence of “option…to subscribe for securities” and points out that this is different from the submission that was advanced at trial where it was submitted that “a transaction includes the acquisition of assets and options to acquire assets”.  The respondent is correct to argue that the SFC is arguing a new point and one that was not taken at trial.  It is submitted by the respondent in any event that “option to convert”, that is debt into equity, does not equate to a right to “buy or sell something” as contained in the definition in Rule 14.72 which limits the meaning of an option for the purpose of Rule 14.04.  The respondent also notes that in its closing submissions at trial the SFC referred to the Convertible Bond as constituting “an actual acquisition of an option to convert”, and not an option to buy or sell.  On this basis the respondent submits that the question should be answered in the negative. I agree.

140. The question as to whether the agreements mentioned were disclosable transactions was central to the issue as to whether there was an intended acquisition by 14 February 2008 at the latest. Accordingly, the answer to this question is very much dependent upon the finding or conclusion that there was an intended acquisition by 14 February 2008 at the latest.  The respondent submits that the conclusions of the Magistrate as to the loan agreement were fully supported by the evidence.  The Magistrate was entitled on the evidence to reach the conclusion that the Subscription Agreement was a form of security provided for the $64 million loan and to protect Richcom’s interests. 

141. I agree with the submissions of the respondent that the Convertible Bond did not constitute a “transaction” for the purposes of the Listing Rules and it was a question of if and when the conversion rights were exercised.  The Magistrate concluded that under Rule 13.09 it was the actual conversion which was discloseable.  As she correctly observed, the SFC was required to prove that the documents were discloseable under Rule 13.09 because they were price sensitive in nature.  But this all turned on whether the only reasonable inference was that by 14 February 2008 Richcom had manifested an intention to exercise its conversion rights.  The Magistrate did not make such a conclusion which on the evidence was a course that was open to her to take. 

Question (v): The respondent’s mens rea

142. The question posed is whether the Magistrate erred in acquitting the respondent of the three offences on the basis that no reasonable magistrate properly directed could have done so.  It appears by this question, the SFC more specifically seeks to challenge the Magistrate’s finding in relation to the respondent’s knowledge to disclose the Betterment transaction.

143. The SFC advances its argument on this issue by pointing out that the officer purportedly responsible for making public announcements for PME, PW3, the company secretary, worked part time for the company, amongst other companies, and submitting that the respondent as the director in PME responsible for the Betterment transaction, deliberately or recklessly withheld information that she should have disclosed to ensure the announcements were not false or misleading. 

144. The Magistrate addressed this matter in the case stated as follows:

“107. I also addressed whether the Respondent knew or was reckless as to the information being misleading or false in a material particular and whether she aided, abetted, counselled, procured, induced by, consented to or connived at the commission of offence by PME or that the commission of the offence was attributable to her recklessness. The SFC essentially alleged that the Respondent, being a director of PME and having been actively involved in the various loan transactions, had full knowledge of the progress of the matters; since she did not disclose these matters to PW3, that is, the company secretary, and she did not ensure that the matters were disclosed in the three announcements, she was liable under the summonses.

108. It was not disputed that the Respondent’s duty was to ensure compliance with the Listing Rules. However, defence counsel submitted that there was no evidence to show that Richcom all along intended to acquire the 51 shares in Betterment and that the Respondent was justified in not disclosing the matters by reason of their ongoing dispute.

109. As previously stated, I did not accept the SFC’s submissions that this court could irresistibly infer Richcom had the intention from the very beginning, or even before the resolution on 18 February 2008 was passed, to acquire the shares of Betterment. I have also stated that I did not accept that there was any provision in the Listing Rules that allowed PME to delay disclosure because of ongoing disputes. I shall not repeat those reasonings.

110. Moreover, the submission relating to the subjective intention of the Respondent or her thoughts at the time, that is, the Respondent was justified in delaying the disclosure by reason of the ongoing dispute, was made in the absence of any evidence from the Respondent and hence I found those submissions to be speculative of the Respondent's actual intention.

111. However, I was obliged to consider, based on the SFC’s evidence as it stood, whether I could draw the irresistible inference that the Respondent had the necessary mens rea. When considering whether I could draw the necessary inference, I was obliged to consider the whole factual matrix including the fact that there was such a dispute at the time.

112. PW3 (the company secretary) claimed that he was not aware of the loan agreements at the time of 18 February 2008 and could not remember when he became aware of the Subscription Agreement. However, I noted that he admitted, in his evidence, that he drafted the following documents:

(i) the minutes of the PME group meeting of directors, dated 21 January 2008, (at exhibit P7) in which the Respondent had reported matters relating to the $64 million loan to Betterment and the security to be provided by PW2; PW3 attended at that meeting, as well;

(ii) the resolution of Richcom, dated 18 February 2008, in which Richcom resolved to exercise the conversion rights and subscribe for 51 shares of Betterment (exhibit P30);

(iii) the resolution of Richcom, dated 22 February 2008, where Richcom further exercised its right to subscribe for 9,898 shares of Betterment (exhibit P33);

113. I further noted that PW3 conceded the following in his evidence:

(i) that the usual practice of the company was that, if a director was working on a significantly-sized project, the director would keep the company secretary informed and this was done in the case of this loan;

(ii) it was not for the directors to decide whether a transaction was discloseable or not, it was PW3 who would decide after calculating the amount of the transaction and other relevant matters; PW3 specifically said that it was he who decided whether the transaction was discloseable or not and it would be decided after communicating with the Stock Exchange; although PW3 stated that the final draft of the announcements were circulated and approved by the board of directors, he could not remember what his own personal view on the disclosability of the transactions were;

(iii) he conceded that, when he gave his witness statement to the SFC, he said that because the subscription agreement merely provided 36 for rights, unless those rights were exercised, the subscription agreement was not discloseable; this meant that he knew that the exercising of the rights might give rise to disclosure obligations.

114. From the above evidence, PW3 must have known about the exercise of the conversion rights since he drafted the resolution and knew that it was possible that it would give rise to disclosure obligations. Yet, for some reason, those matters were not disclosed despite the fact that, according to PW3’s own evidence, it was he who decided whether a matter was discloseable or not. Further, there was no information or evidence to show that the Respondent had in any way made an active decision not to disclose the documents despite knowing that it was discloseable.

115. I considered the SFC’s submissions that the drafting of the resolution did not necessarily mean that PW3 had read the relevant documents and that the responsibility rested on the Respondent to ensure that the matters were disclosed. However, the evidence from PW3 was uncertain as to whether the Respondent had failed to disclose the necessary information to him.

116. On one hand, PW3 claimed that he did not remember if it was disclosed to him; on the other hand, he conceded that he was present at the meeting and drafted the minutes at exhibit P7 where the Respondent explained the loan and the security documents, to the board of directors. He further conceded that he drafted the resolutions to exercise the conversion rights in which the resolutions specifically mentioned the Subscription Agreement.

117. Hence, I did not accept the submission that PW3 had no knowledge of the relevant documents. His evidence, in this respect, was uncertain and the documents prima facie showed otherwise.

118. In respect of the Respondent’s responsibility, it was not disputed that the Respondent, as a director of PME, had the responsibility to ensure PME’s compliance with the Listing Rules. However, as stated above, PW3, in effect, conceded that the directors informed him of the matters surrounding the loan agreements and that he was the one who decided what was discloseable or not. On the evidence of PW3, it seems that the directors were relying on him, the company secretary, to determine what was discloseable.

119. Unless the Respondent herself had personal knowledge that the matters were discloseable, she would have fulfilled her duty so long as the Respondent had kept PW3 informed of the matters to ensure that PW3 had all necessary information to make that decision. However, there was no evidence of such knowledge. As stated, there was no evidence to show that the Respondent actively made a decision not to disclose the matters despite knowing full well those matters were discloseable.

120. Moreover, based on the evidence of PW3, there was a doubt as to whether the Respondent had aided, abetted, counselled, procured, induced, consented to or connived the commission of the offence since PW3 admitted that it was not for the Respondent to decide whether a transaction was discloseable or not.

121. As to whether the commission of the offence was attributable to the Respondent's recklessness, as previously noted, it was for PW3, not the Respondent, to decide whether a transaction was discloseable or not. Moreover, as previously stated, PW3's evidence was uncertain as to whether the Respondent had failed to disclose the relevant matters. I was therefore unable to find that the commission of the offence was due to the Respondent's recklessness in all the circumstances.”

145. It is pointed out by the SFC that the Magistrate acquitted the respondent based on the following matters.  On the evidence of PW3, she had a doubt as to whether the respondent had aided and abetted in the commission of the offence since he had admitted that it was not for the respondent to decide whether a transaction was discloseable and that she was unable to find that the commission of the offence was due to the respondent’s recklessness in all the circumstances. 

146. The SFC submits that in coming to that conclusion, the Magistrate relied primarily on the following matters. 

147. First, on her understanding of PW3’s evidence that it was not for the directors to decide whether the transaction was discloseable or not, it was he who would decide after calculating the amount of the transactions and other relevant matters and he specifically said it was he who decided that the transaction was discloseable or not and that would be decided after communicating with the SEHK. 

148. Secondly, that PW3 must have known about the exercise of the conversion rights since he drafted the resolution and knew that it would possibly give rise to disclosure obligations and yet those matters were not disclosed despite the fact that according to his own evidence it would be he who decided whether a matter was discloseable or not. 

149. Thirdly, unless the respondent had personal knowledge that the matters were discloseable she would have fulfilled her duties so long as she kept PW3 informed of the matters to ensure that PW3 had all necessary information to make the decision but there was no such evidence to show that the respondent actively made a decision not to disclose the matters despite knowing those matters were discloseable. 

150. It is submitted by the SFC that the Magistrate made a set of errors in her understanding of the effect of the evidence in her application of the law.  They are as follows. 

151. First, she was wrong in the concession she attributed to PW3 that it was for him to decide whether something was discloseable or not.  It is argued that it was not as wide as the Magistrate appeared to have understood it to be.  It is submitted that PW3 did not state that it was for him to decide whether the transactions should be discloseable or not and that he was limiting his comments to calculations of the ratios relating to disclosure under Rule 13.23.  As Mr Duncan points out it was open to the Magistrate to come to that conclusion from an overall examination of the evidence of PW3.  From my reading of the transcript of the evidence of PW3 I agree with him.  Whilst I acknowledge that the interpretation of PW3’s evidence that the SFC seek to make is available on the evidence, so too is the interpretation made by the Magistrate who had the benefit of seeing and hearing PW3 testify.

152. Secondly, the finding by the Magistrate that PW3 knew about the relevant loan and conversion rights that Richcom had acquired was not enough to attribute full knowledge about the matter to him, as he would not have appreciated the significance of those conversion rights, absent knowledge as to the value of the underlying rights as represented by Betterment’s interests in the ZZNode shares.  The SFC makes the point that PW3 denied that he was aware of Betterment’s interests in ZZNode shares at the material time but as highlighted by Mr Duncan he earlier had drafted the minutes of the meeting on 21 January 2008 in which the loan proposal was set out which stated that the loan was partly to finance the Betterment acquisition of a little over 50% of the issued shares in ZZNode.  It seems to me that the Magistrate was aware of these matters and she was entitled to make the finding that she did.

153. Thirdly, there was evidence that the respondent had taken a positive decision not to disclose.  This was a reference to the 12 March 2008 announcement where it was stated that the directors understood that the Subscription Agreement should have been disclosed on a timely basis and that the delay in the announcement was due to the dispute with PW2.  The Magistrate was aware of this evidence and as pointed out by Mr Duncan it was equivocal as to when the matter was discloseable. 

154. Fourthly, the Magistrate found that the respondent’s duties were to ensure compliance with the Listing Rules which makes it clear that it is not a non-delegable duty. 

155. It is acknowledged by the SFC that the directors can seek and obtain advice so as to comply with their duty.  Although the SFC argue that the Magistrate accepted that this approach would in any event depend on the director ensuring that the advisor was in possession of all the facts and information relevant to the decision which they say was not the case here, since PW3 testified that he was not aware of Betterment’s interests in the ZZNode shares nor the value of them, which was critical information in making the disclosure decision.  The SFC further argued that it was not open to the Magistrate to find that the respondent had discharged her duties. 

156. It is clear from the Magistrate’s reasons that she harboured a doubt as to the respondent’s knowledge that the matters were disclosable because of the evidence of PW3 that it was he and not the respondent who decided whether a transaction was disclosable or not.  I cannot say that the Magistrate was wrong for having come to this conclusion.

157. It is finally submitted by the SFC that the Magistrate applied the wrong test when deciding to acquit the respondent.  It is noted that she said there was no evidence to show the respondent actively made the decision not to disclose the matters despite knowing full well the matters were discloseable.  It is noted that the offence charged is committed where a person knowingly or recklessly provides information to the SEHK or the SFC which is false or misleading in a material particular and that the Magistrate correctly concluded that the acquisition of conversion rights which gave PME control over the ZZNode shares was obviously price-sensitive information which should have been disclosed under the Listing Rules.  It is argued that the respondent obviously knew this when she agreed to the publication of the three announcements that there was nothing to disclose.  As argued by the SFC, at the very least, the respondent was reckless as to whether it was discloseable.  The SFC point to the absence of evidence from the respondent about the non-disclosure and question how the Magistrate could have possibly reached the conclusions that she did.  She reached these conclusions on the evidence before her which were not unreasonable for her to make even though another and different view may be taken.

158. The question as framed is whether it is correct that no reasonable magistrate properly directed could have acquitted the respondent of any of the charges laid against her.  It focuses on the issue as to whether the SFC has proven to the requisite standard that the respondent knowingly assisted in the provision of information to the SFC which was false or misleading in a material particular or was reckless in the provision of such information.  This may be as a result of an act or omission by the respondent. The issue turns on whether it was open to the Magistrate on the evidence to have a doubt as to whether the respondent knew that the provision of the information to the SFC was false or misleading in a material particular.  It seems that the Magistrate on the basis of the evidence of PW3, the company secretary, that the accepted practice within the company was followed in this instance whereby the directors would keep the company secretary informed and he would decide whether the transaction was discloseable or not. 

159. The Magistrate concluded that there was no evidence that the respondent knew that the matters were discloseable and it was a question of whether she was reckless in this matter.  It is submitted by the respondent that by virtue of the Listing Rules, the issue as to whether a matter is discloseable or not is not straightforward and therefore not surprising that such a practice would be followed, or there would be a need to seek assistance or advice on the issue.  To some extent this was accepted by the SFC in its submissions.  The respondent submits the fact that she had a duty to ensure PME’s compliance with the Listing Rules takes the matter no further as far as criminal liability is concerned because neither the duty nor a failure to carry out that duty bestows a director with the knowledge or recklessness required to be proved for a criminal offence to be established. It is submitted that the Magistrate was entitled to take the view that it was not unreasonable for the respondent to rely on the company secretary for the decision as to whether the information was discloseable, the Magistrate having found that the respondent having kept him informed. 

160. Quite an effort was made by the parties to evaluate the evidence of PW3 and interpret it in a particular way.  This highlights again the issue that confronts an appellate court when having to decide whether a finding or conclusion made by a magistrate was a reasonable one to make.  The Magistrate has the benefit of having seen and heard the witnesses and being very familiar with all the evidence which would no doubt be taken into account and considered when making a particular finding or conclusion.  The respondent submits that PW3’s evidence as a whole was not restricted to him being involved in making a ratio calculation but was in fact more general and dealing with whether or not a matter should be disclosed.  This is how the Magistrate saw it.

161. It is submitted by the respondent that there was nothing to prevent the company secretary from assessing whether information was discloseable by virtue of Rule 13.09 and that the company secretary would check the matter of disclosability was supported by the evidence of PW1. 

162. The respondent submits that the 12 March announcement took the matter no further.  This is where it was stated in the overview that the Subscription Agreement and the conversion constituted discloseable transactions and the issue had been done on timely basis and the delay in the announcement of the Subscription Agreement was due to the dispute by the then shareholder to the Subscription Agreement prior to the issue of the Convertible Bond.  It is submitted that the announcement reflects the directors’ understanding, whether it be correct or not, of the situation as of the date of the announcement and takes the matter no further.  The respondent takes issue with the SFC submissions that she obviously knew that the acquisition of the conversion rights was price-sensitive information which should have been disclosed under the Listing Rules when she agreed to the publication of the three announcements is contrary to the finding of the Magistrate on the evidence that she had personal knowledge that the matters were discloseable and there was no evidence to show that she actively made the decision not to disclose the matters despite knowing that they were discloseable matters. 

163. I come to the conclusion that it was open to the Magistrate to make a finding that the obligation of ensuring that the announcement was true and accurate fell on the company secretary and the respondent did not knowingly or recklessly cause PME to make public announcements which were false or misleading in a material particular.

164. Whilst it was open to the Magistrate to make such a finding and it was not unreasonable for her to do so, I also see the force of the SFC’s alternative view of the evidence.  The respondent was the director in charge of the Betterment transactions.  She had full knowledge of the transactions and the ramifications of them on the share price or share trading of PME.  Admittedly, the contractual arrangements were to ensure that Richcom had appropriate security for the loan advance but as events unfolded the situation changed and instead of a repayment of the loan the company was to receive a substantial windfall through the conversion in the value of the shares of Betterment as a result of its shareholding in ZZNode.  The situation became crystal clear when the resolution was passed on 18 February 2013 that Richcom would exercise its conversion rights.  Yet the announcement on 20 February 2008 had the negative statement.

165. It has to be acknowledged that it was a fluid situation and transactions were taking place quickly, but still the rapid rise in share price and substantial share trading brought about an inquiry from SEHK, and on more than one occasion, which should have put all officers of the company on notice.  As acknowledged by the Magistrate there was no dispute that the respondent was under a duty to ensure compliance with the Listing Rules.

166. The regulatory responsibilities of the SEHK and the SFC are of vital and critical importance for an honest and fair marketplace for securities and futures.  The regulatory bodies of these markets rely on the timely provision of information that is full and accurate.  The securities offence provisions, in particular section 390, seek to ensure that officers of corporations fulfil their responsibility for the provision of full and accurate information to the regulatory bodies by making them criminally liable for secondary participation in a crime committed in relation to this responsibility by the principal corporation.  The timely provision of such information is not only an essential requirement to inform the regulatory authorities of relevant matters or events but also the participants in the markets, in particular the investing public. 

Conclusion

167. I have set out fully the Magistrate’s reasons as summarised in the case stated, which reflect the very comprehensive and detailed reasons that she provided when she handed down her verdict in this case, in order to show the approach taken by her in addressing the various matters that are now being posed as questions of law in this appeal.  The major challenge of the Magistrate’s decision on these various matters is premised on the notion that no reasonable magistrate properly directed would have come to the finding or conclusion that the Magistrate made. 

168. I repeat the comments that I made when dealing with the application by the SFC to incorporate further questions in the case stated where I said that in cases where the point of law is that no reasonable magistrate properly directing himself or herself could make a particular finding, that such challenge should not simply rest on the premise that the party aggrieved would have come to a different finding from the magistrate.  If the finding was open to be made, and it was reasonable to make, then there is no error of law on which to challenge by way of case stated.[20]

169. I refer to these comments because now that the case stated has been fully argued before me, and as I have tried to set out in the foregoing analysis, a large part of this appeal has focused on rearguing or retrying the case by way of a general appeal.  Given the basis of the challenge by the SFC of the Magistrate’s findings or conclusions as contained in the various questions as posed, it does not matter that the appellate court considers that it would have reached a different finding or conclusion to the one reached by the Magistrate because the issue is whether the finding or conclusion is one that no reasonable magistrate could have reached.  Put simply, in order to show that there has been an error of law as to a magistrate’s finding or conclusion, an appellate court has to be satisfied that the finding or conclusion cannot reasonably be explained or justified.[21]

170. Most of the matters complained about by the SFC are by their nature a question of fact to be decided within the parameters of the law by the Magistrate as the tribunal of fact and it has not been shown what principle of law the Magistrate has got wrong for which the Court’s opinion is required.  As I said, there has been a challenge on her findings or conclusions on the basis that a different view could have been taken but that is not the test that has to be satisfied.  It is whether the finding or conclusion was not open to be made and it was not reasonable to make it.  As I have said, I can see the force of the SFC’s argument on the finding by the Magistrate that the respondent did not have the requisite mens rea but I cannot say it was not open to her to make such a finding. 

171. As to the questions of law that I have been asked to provide an opinion, I give the following answers for the foregoing reasons.

  Question (i) : I cannot say that the Magistrate has erred in law because of her finding that the four letters were inadmissible as it cannot be said that no reasonable magistrate properly directed on the evidence before the Magistrate could have come to that conclusion.  The answer is no.

  Question (ii) : I cannot say that the Magistrate erred in her finding that PME and Richcom had not manifested an intention to exercise its conversion rights by 14 February 2008, as it cannot be said that no reasonable magistrate properly directed could have made the finding on the evidence.  It was open to the Magistrate on the evidence within the parameters of the law to make such a finding.  The answer is no.

  Questions (iii) and (iv) : The answer to both questions is no.  It was open to the Magistrate to find that the Convertible Bond did not come within the definition of an “option” under the Listing Rules.  It was also open to the Magistrate in the context of the question to find the $64 million loan, the Subscription Agreement or the Convertible Bond, either individually or collectively, were not discloseable transactions pursuant to the Listing Rules.

  Question (v) : On the basis of the evidence before the Magistrate, I am unable to say that no reasonable magistrate properly directed could acquit the respondent of the charges she faced.  The answer is no.

172. The end result is that the SFC has been unsuccessful in this appeal, and accordingly I make an order nisi that it pays the respondent’s costs in these proceedings, including the application by the SFC to amend the stated case.