HKSAR v. DU JUN

CACC 334/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 334 OF 2009

(ON APPEAL FROM DCCC NO. 787 OF 2008)

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J U D G M E N T

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Hon Stock VP (giving the judgment of the Court):

Introduction

1. China Resources Holding Limited (“CRH”) is a diversified energy and natural resources investment company with interests in oil, aluminum smelting, coalmining, import and export of commodities and manganese mining and processing.  It is publicly listed.

2. Citic Group (“Citic”) is a Mainland state-owned entity and is the controlling shareholder of CRH.  As of 31 December 2006 Citic owned 60.46% in CRH but after a share placement in February 2007, its shareholding was 54.61%.[1]

3. In October 2006, CRH announced its acquisition from Citic of an option to purchase the latter’s interest in certain oil assets in Kazakhstan.  The announcement triggered a substantial increase in its share price. 

4. In 2006 Morgan Stanley Asia Limited (“Morgan Stanley”) commenced a ‘pitching’ exercise by which to market its financial advisory services to Citic and CRH in relation to the proposed acquisition.  Two Morgan Stanley projects were launched: the first called Project Colorado designed to demonstrate to CRH the benefits of oil hedging; the second, Project Jumbo, which related to an alternative form of finance for the acquisition, namely, a bond offering.  In early February 2007, the pitch was successful in that Morgan Stanley was, together with Bear Stearns, appointed joint book runner for the bond issue.

5. At all material times, Du Jun was a managing director of the Fixed Income Department of Morgan Stanley.  He was a member of the Project Colorado team.  He was brought in because he had established a valuable relationship with persons in high positions at Citic.

6. With other high ranking officers of Morgan Stanley, Du was made privy to details of the pitching exercise and to developments related to the Kazakhstan acquisition.  As a core group member, he attended many project-related meetings within Morgan Stanley and with senior Citic and CRH officers and was part of a small Morgan Stanley circle of recipients of frequent e-mails related to the CRH-Kazakhstan project.

7. On 9 February 2007 CRH announced a top-up placement of shares and a proposed issue of new shares for the purpose of financing the acquisition of the oilfield interest.  Trading was suspended for a few days and the share price rose about 13% on resumption of trading.

8. On 13 February 2007, Du and other senior officers of Morgan Stanley attended a meeting with senior management of Citic in relation to the project.  On the same day Du made soundings within Morgan Stanley’s internal control system whether he might be permitted to trade in CRH’s shares.  The integrity of those soundings and of the representations made by Du when he applied for permission to trade in CRH shares is a matter in issue.

9. 15 February 2007 is the key date in this case.  On that day, Shane Zhang, a managing director of Morgan Stanley’s Investment Banking Division, had breakfast with Peter Kwok, the Chairman of CRH.  Kwok revealed (or perhaps confirmed) to Zhang that CRH intended to acquire an oilfield in Mainland China. That intention was known to very few within Citic and CRH and was certainly not public knowledge.  At 9:33 am that day, Zhang sent an e-mail to a handful of persons in Morgan Stanley, including Du, stating what had been said by Kwok at the breakfast meeting.  The e-mail was exhibit P1.  One paragraph read as follows:

“Confidentially, CRH will issue equity again, likely in March, in exchange for ~ 100mm barrels of oil in China. Obviously this will have impact on the rating. They are working hard to do dd on these assets now.”

10. The evidence established that Du read that e-mail.

11. That same day, 15 February, Du signed a form submitted to his designated manager, in connection with a request for approval to trade in CRH shares, by which he certified that he was not in possession of any material non-public information regarding CRH and that, further, he was not aware of unpublished research in the security or of any planned firm or client activity in the security.  Following approval given in consequence of those representations, he purchased 5 million CRH shares at a price of $3.0648 per share.  After that date and before the end of February he purchased CRH shares on four separate occasions, totalling another 5 million shares.

12. In March 2007, Du continued to trade CRH shares: two purchases totalling 5 million shares.

13. In the first week of April 2007, a presentation was made by Morgan Stanley to rating agencies for the purpose of the proposed bond issue and the presentation included a reference to a possible acquisition in Mainland China.

14. In late April, through two separate purchases, Du acquired 11.7 million more CRH shares.

15. Those nine purchases of CRH shares formed the basis of the first nine charges for which Du was tried in the District Court by Judge Andrew Chan in 2009.  Each of those nine charges alleged an act of insider dealing contrary to section 291 (1) (a) and (8) of the Securities and Futures Ordinance, Cap 571 (“the Ordinance”).

16. There was a 10^th charge which alleged that on 27 February 2007 Du counselled and procured his wife, Li Xin, to deal in the listed securities of CRH, when he was possessed of information which he knew was relevant information in relation to CRH.

17. The information alleged by each charge to be relevant information within the meaning prescribed by the Ordinance, which he was said to have possessed and to know was relevant information in relation to CRH, was the proposed acquisition by CRH of oilfield assets in the People’s Republic of China.

18. On 10 September 2009, Du was convicted by Judge Andrew Chan in the District Court of each offence and sentenced to a total of seven years’ imprisonment.  He now seeks leave to appeal those convictions as well as the individual and cumulative sentences.

The statutory provisions

19. The offence-creating provisions relevant to this case are sections 291(1) (a) and (b) and (8) of the Ordinance.

20. Subsection (8) states that: “Subject to sections 292… a person who contravenes subsection (1) … commits an offence.”

21. Subsection (1) provides that:

“A person connected with a listed corporation and having information which he knows is relevant information in relation to the corporation shall not –

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

(b)  counsel or procure another person to deal in such listed securities or derivatives, knowing or having reasonable cause to believe that the other person will deal in them.”

22. “Relevant information” is defined by s 285 as

“ … specific information about –

(a) the corporation;

(b) a shareholder or officer of the corporation; or

(c) the listed securities of the corporation or their derivatives,

which is not generally known to the persons who are accustomed to or would be likely to deal in the listed securities of the corporation but which would if it were generally known to them likely to materially affect the price of the listed securities.”

23. Section 292 provides for a number of general defences.  In particular, s. 292(3) stipulates that :

“Where a person is charged with an offence under section 291(8) in respect of a contravention of section 291 taking place through his dealing in or counselling or procuring another person to deal in listed securities or derivatives or his disclosure of information, it is a defence to the charge for the person to prove that the purpose for which he dealt in or counselled or procured the other person to deal in the listed securities or derivatives in question or disclosed the information in question (as the case may be) was not, or, where there was more than one purpose, the purposes for which he dealt in or counselled or procured the other person to deal in the listed securities or derivatives in question or disclosed the information in question (as the case may be) did not include, the purpose of securing or increasing a profit or avoiding or reducing a loss, whether for himself or another, by using relevant information.”

The issues

24. It is as well at the outset to lay to rest one of the submissions advanced before us on behalf of the applicant, namely, that it was incumbent upon the prosecution at trial to prove not only that the information particularised by the charges – the proposed acquisition of an oilfield in Mainland China – was relevant information as defined by the Ordinance and that the applicant knew it to be relevant information but, further, that it was the possession of that relevant information that motivated him to trade in the security.  This is not correct.  All that the relevant provisions require is proof that the information in question was relevant, as defined; that the applicant possessed that information; that he knew it to be relevant information and that whilst possessed of that information, knowing it to be relevant information, he dealt in the listed security.  Once those facts are proved the prosecution has discharged its burden and it matters not for the purpose of that burden why the person who deals does so.  The question of motivation may come in as a defence under subsection (3) of s 292 by which there is a persuasive burden placed upon an accused to show that the purpose for which he dealt did not include the purpose of securing a profit (or reducing a loss) by using the relevant information.  If, in the face of prosecution proof that he has dealt in a listed security whilst in possession of information which he knows to be relevant, he fails to raise that defence or, if raised, to discharge that burden, then the case against him remains proved.  In this particular case, the applicant did not testify and although the absence of testimony by an accused dealer does not necessarily preclude discharge of the defence burden, the absence of the applicant’s evidence in this case rendered that discharge difficult.

25. It was not an issue in the case that the 15 February information was information about a listed corporation and that it was then information not generally known to persons accustomed or likely to deal with the listed securities of that corporation.[2]  Nor was it an issue that the applicant was a person to be regarded as connected with the corporation for the purpose of the Ordinance: for he was clearly a person who, by reason of his professional relationship with CRH, occupied a position at the material time which might reasonably be expected to give him access to relevant information in relation to the corporation (see s 287(1) of the Ordinance).  And, further, it was proved (and not contested) that in the course of the morning of 15 February he was in possession of that information.

26. So the issue was whether the information was relevant information; most particularly whether it was sufficiently advanced or precise to constitute “specific information” and, at the heart of the trial contest, whether, if it was generally known to those accustomed likely or accustomed to deal in the security, it was “likely to materially affect the price of the listed securit[y]” and, if so, whether it was proved that the applicant knew it to be information with those characteristics.

Witnesses

27. The prosecution called a number of witnesses, including:

(1)  Several from Morgan Stanley who spoke of the applicant’s role, his intimate involvement with the CRH projects, the fact that he was a member of a core group between whom sensitive e-mails relating to CRH and its plans passed on a frequent basis in and after October 2006 and into the summer of 2007; the circumstances in which he was made aware of the fact that he was “over the wall” ( treated as the possessor of confidential information by reason of which he was not to trade in the securities of CRH); his applications for permission to trade and the circumstances in which approval was given; and their own view of the sensitivity of the information in exhibit P1.  These witnesses included:

(i)   Shane Zhang of the Investment Banking Division, and Vinay Jayaram an executive director of Global Capital Marketing, both of whom were leading players in the team which engaged in the pitching exercise and later in providing advice to CRH in relation to the Kazakhstan acquisition;

(ii)  Liu Jialin of the Fixed Income Division and Du’s immediate superior in that Division, who on more than one occasion expressed deep concern to Du about the fact and extent of his trading in CRH shares; and

(iii)   Ho Sheng Ching and Samantha Ng of the Compliance Control Group which monitored employee trading and to whom Du made relevant applications to trade in CRH shares.

(2)  From the Citic Group, Mr Peter Kwok, the Chairman of CRH, and Ms Zhang Dongmei, Citic’s project manager in relation to the Kazakhstan acquisition.  Mr Kwok spoke of the importance of the China oilfield acquisition.  It was transformational, he said, in the sense that this further acquisition would constitute the company an ‘oil company’; and he spoke also of the need to keep knowledge of the proposed acquisition in the hands of very few.  Ms Zhang’s testimony was particularly significant in relation to a telephone conversation between herself and Du on 3 April 2007.

(3)  Ms Stella Fung, an Associate Director of the Securities and Futures Commission and a chartered financial analyst was called by the prosecution as its expert witness.  It was her opinion that the information in the public announcement on 9 May 2007 of the China oilfield acquisition was, prior to that announcement, not generally known by the investing public.  The oilfield was to be acquired in Bohai Bay and its acquisition would greatly enhance CRH’s status as a major oil producer in the PRC.  Although, prior to the announcement in May, there had been some reports about the possible acquisition of the oilfield by CRH, they constituted unconfirmed news and her opinion was that the price rise on 9 May 2007 was mainly attributable to the option announcement in relation to the Bohai Bay acquisition.  She also provided evidence of the notional profit gained by Du as a result of his insider dealing, namely, HK$23,324,121.

28. As for the defence, the applicant himself did not testify.  One defence witness was called, Mr David White, a qualified certified practising accountant who has for many years been employed by banks, stock and commodity exchanges or securities regulators and who has, amongst other posts held, been an executive director and Commissioner with the Hong Kong Securities and Futures Commission.  He was the defence expert witness whose opinion was that the information in P1 was not relevant information as defined by the Ordinance; that there was, by that time, information in the market for an investor to assess that CRH was likely to purchase further oil assets and that the facts disclosed in P1 were non-specific and not such as were likely – materially, at least – to affect the share price if publicly revealed.

The history

29. The introductory paragraphs of this judgment reveal the key events in the history of this case but it is necessary to put flesh on that skeleton.

30. In about early 2006, an approach was made by Citic to a company called Nations Energy for the purchase of its interest in a Kazakhstan oilfield.  The idea was that the Citic Group would acquire the asset and CRH would in turn acquire the asset from the Group.  Funds were to be raised by CRH for this acquisition and CRH first turned to Bear Stearns for the fund raising exercise but it was decided to seek an additional banker for long-term assistance.

31. Morgan Stanley was anxious to play a role and in the pitching exercise to that end which was to be conducted, it was considered important to include in the Morgan Stanley team individuals who already had useful contacts with senior level members of the Citic Group.  It was for this reason that Du Jun was brought into the team in the first half of 2006.  At first, the Morgan Stanley team had in mind a structured loan backed by a hedge of the oil that was being produced at the Kazakhstan oilfield[3]. In due course that gave way to a straightforward high yield bond issue to professional investors.[4] As far as Mr Jayaram was concerned Du was brought “over the wall” in the second half of 2006 because “that was the time when our involvement in these projects began to intensify and we started to become in receipt of potentially price sensitive information” and because Du’s “ role as a key relationship facilitator” meant that he may “come in contact with material non-public information and price sensitive information.”[5]  Du was a person with whom other members of the team communicated openly about such price sensitive information concerning the Kazakhstan project.

32. On 26 October 2006 CRH made an announcement, at the request of the Stock Exchange, stating that it was in discussion with the Citic Group regarding the possible injection of the potential assets which the Group had agreed conditionally to acquire from Nations Energy.  Trading was suspended for two days and on 1 November 2006, CRH made a further public announcement, this time to the effect that it had entered into a memorandum of understanding with the Citic Group pursuant to which the Group had granted to CRH the right to purchase the Kazakhstan assets.  This announcement was followed by a rise in the share price of CRH on 2 November of 14.2% to $1.93 per share.

33. The e-mail flurry between members of the Morgan Stanley team concerning Morgan Stanley’s proposed role continued unabated and we can move to early February 2007.

34. In February 2007 there was drawn a proposed confidential agreement between Morgan Stanley and the Citic Group, copied to Du, by which Morgan Stanley was to give certain confidentiality undertakings in respect of the confidential information necessarily to be disclosed by Citic for the purpose of the proposed hedging and financing arrangements.

35. On 2 February 2007, Liu Jialin e-mailed members of the Colorado group that Citic “has chosen Bear Stearn and Morgan Stanley as their bond financing adviser. … The good news is now we are in.  We have a chance to make it a big win.”

36. On 4 February, Jayaram sent an e-mail to Du copying an e-mail he had sent to Shane Zhang in which he said: “If we can pull this off this could be one of the top five trades for MS ever – I’m not kidding.”

37. On the same day, he sent another e-mail to Du saying in relation to the Citic deal: “Be the man Jun, be the man.  We need to move fast.  You never worked on anything this big.  Trust me, you will be covered in gold if we pull this off.  This is the biggest hedge in commodities history, at 100mm barrels.”

38. Much time was expended in the court below and before us on the question whether the applicant was placed “over the wall” by the Morgan Stanley control division and, if so, whether he was informed that he was placed “over the wall”.  The point is, in our judgment, academic not only because any person occupying the position occupied at the material time by the applicant can safely be taken, by reason of training and experience, to be able to recognise that which is non-public price sensitive information and to appreciate his preclusion from dealing in securities affected thereby but also because, by e-mail dated 8 February 2007, he was informed in terms that he and other members of the Colorado team “are all logged with the Control Group as insiders” in relation to CRH and the Kazakhstan acquisition, the financing for which acquisition was by that stage to be secured by a bond issue.

39. On 8 February there was an 11% increase in the price of the stock.  Trading was suspended on 9 February and on that day CRH issued a public announcement of a top up placement of shares and a proposed issue of new shares for the purpose of financing future acquisitions including acquisition of the Kazakhstan oil assets referred to in the announcement of 26 October 2006. The placement offer was oversubscribed 23 times.  The share price rose 13.13% on 12 February, the day trading resumed, to HK$2.93.

40. On 13 February, there took place a meeting between senior officers of the Citic Group (President Chang Zhenming of the Citic Group and President Zhang Yichen of Citic Capital) and six members of the Morgan Stanley team, including the applicant.

41. On or about 13 February, the applicant spoke to Ms Ho Sheng-ching, the Morgan Stanley Chief Operating Officer for the Fixed Income Division, Asia Pacific, apparently a largely administrative role.  He asked her for approval to trade in CRH[6] and told her that he had been involved in a “pitch” but that the bond deal was now a matter of public knowledge.  She asked him to speak to the Compliance Division which was better placed to perform checks and to assess questions of conflict.  She relied upon his integrity to make full disclosure to that Division.

42. Accordingly, the applicant held a telephone conversation with Samantha Ng at about 4:15 pm on 13 February.  Ms Ng was a compliance manager of the Control Group.  We have a transcript of that conversation, as did the judge in the court below.  The applicant told Ms Ng that he wished to buy shares of an energy company which was probably going to raise debt, a fact that was public information and that “our firm is trying to pitching on that bond” and that he was not sure whether he could buy the stock or not.  He was asked whence he derived the information and he said it was from the newspaper, which reported that “everybody” was trying to pitch for the business.  He named the company in question (Citic Resources) and also said: “They may [sic] to acquire oilfields from their parent’s company” and that “I think Morgan Stanley we are .. are .. actively pitching on the deal… and so does everyone else in the market.”  He said he wanted to buy because “if Morgan Stanley get a mandate … then I cannot buy.”  If the mandate was acquired then the name of the company would be put on the restriction list and he could not sell the shares until the restriction was lifted.  He was then asked this question by Ms Ng:

“So you know about this Morgan Stanley’s pitching just because of your normal day-to-day work or how did you find out?

The applicant answered:

“Number one is the public information, right … number two is, I just know we are working on this project.”

43. One may state at once that the applicant’s representations to Ms Ng were, on any view of the facts, less than frank.  It was not merely a question of Morgan Stanley “trying to pitch” for a role in the bond issue, knowledge of which he had happened in passing to acquire and which was confirmed by that which he read in the newspapers.  Rather, he had for long himself been intimately engaged in the pitching exercise, a fact which he failed to reveal.  Further, he represented that he did not know whether the mandate would be acquired by Morgan Stanley whereas he knew full well as early as 2 February that Morgan Stanley had, to all intents and purposes, secured its role.  And he breathed not a word of the fact that he had been told only days previously that he was logged in as an insider.  It is relevant to note as well that never before had the applicant dealt in CRH shares.

44. This lack of candour repeated itself in the second conversation that day between the applicant and Ms Ng.  She asked him specifically whether he was working on anything in relation to the company as part of his day-to-day work; and he said “It’s not my day-to-day job.  I think GCM or either IBD, they asked me to help in the, if I do have a personal relationship, to help them to get a mandate.”  “Oh, I see,” said Ms Ng, “… so someone in IBD contacted you?”  “We just talked,” came the reply, “It was just saying if you have a relationship you can leverage, they want leverage my relationship.”  In truth there was no “think” about it and there was much more to it than “we just talked”.  

45. The dissembling which is evidenced by these telephone conversations does not render the applicant guilty of the offences with which he was charged, but it is revealing in terms of his mindset at the relevant time.

46. His role in the CRH – Kazakhstan oilfield exercise was described by Shane Zhang in his testimony as an important role: Du was someone who had had contact with people at CRH throughout the project and about the project; and Liu Jialin said that the applicant was not only responsible for setting up meetings with appropriate people at Citic but it was also for the applicant to use the knowledge which he gained from the client (Citic and CRH) to ensure that Morgan Stanley was using the appropriate products when it talked to Citic.[7] Mr Jayaram described Du as a key member of the team[8]; and Ms Zhang Dongmei of Citic described him as someone who possessed “much confidential information” for which reason she thought it was “impossible for him to trade [CRH shares]”[9]; and, as we shall see, the applicant himself, even while he traded in CRH shares, represented to several persons that he was privy to inside information.

47. At 10.50 pm on 14 February, the applicant sent an e-mail to Ms Ho seeking permission to purchase 10 million CRH shares.  He also sent an e-mail to Mr Shum, an in-house broker who handled the applicant’s trading account (Morgan Stanley employees are, on pain of dismissal, not permitted to use outside brokers) seeking an update on the applicant’s cash position.  Mr Shum sent him that update at 9:23 am the following day.

48. In response to the previous night’s request for permission to buy 10 million shares, Ms Ho sent the applicant an e-mail at 9:01 am on 15 February which asked the applicant to ensure that he completed the trading pre-clearance forms and, in reply at 9:53 am, the applicant undertook to do so.  P1 had been sent at 9:33 am and the evidence established that the applicant scrolled his Blackberry at 10:35 am.  It is important to note that the prosecution case that the applicant read P1 before he placed his first order to buy CRH shares was not and is not contested.  It was only three minutes after he had read it that the applicant asked the in-house broker, Mr Shum for the price of CRH shares to be notified to him once the market opened.  Mr Shum replied that it was $3.09.  The applicant instructed Shum to buy five million CRH shares on his behalf.[10] The order was executed that afternoon at a price of $3.0648 per share, a total cost of $15,323,795. 66. (Charge 1)

49. The pre-clearance form which the applicant signed that day is a standard form with a list of facts to be certified by the employee who seeks permission to trade.  On this occasion, as on all subsequent occasions on which the applicant traded in CRH shares, he certified, by placing a tick next to each representation, that the proposed transaction was permitted under the company’s code of ethics and conduct; that he was not in possession of any material non-public information regarding the security; and that he was not aware of any planned firm or client activity in the security.

50. On 16 February 2007 the applicant purchased 712,000 CRH shares at a cost of $2,179,396.44. (Charge 2)

51. On 21 February 2007 the applicant purchased 52,000 CRH shares at a cost of $159,169.77. (Charge 3)

52. On 22 February 2007 he purchased 3,530,000 CRH shares at a cost of $10,626,772.12. (Charge 4)

53. On 26 February 2007, the applicant purchased 706,000 CRH shares at a cost of $2,160,589.06. (Charge 5).

54. It is relevant to note that on 26 February 2007, UBS through its investment research arm, in a publication containing the sub-heading “further acquisition should be the driver” raised its price target for CRH shares to HK$4 per share, “from HK$3 to reflect our belief in the company’s ability to conduct value – accretive deals in the future.  We believe the company is actively looking for another deal. … We expect [the next deal] will take at least six months to identify and complete.  As a ‘Chinese oil company’ it is also very likely that the company might be able to obtain approval from the government to do E+P business in China, where the network and relationship of their parent could make a significant difference in our view.”

55. The relevance of that report and its assessment is that at that very point in time the applicant had sound reason to believe that CRH was not merely in search of such an acquisition but had identified one and was engaged upon a due diligence exercise in respect of it.  The effect of other reports was also that a future deal would add to the share price.

56. At about this time, the applicant’s extensive trading in CRH shares came to the attention of Liu Jialin.  Liu was very concerned, so much so that he spoke to the applicant and asked him: “How can you touch this stock?”  The applicant replied that he liked the stock, that everything was based on his own research and on public knowledge and, further, that the trading had been approved by the Compliance Department.[11]

57. The applicant’s attitude to this remonstration is revealed by a conversation he had on 27 February with He Ning, a colleague at Morgan Stanley.  The applicant revealed to He that he had acquired margin facilities to speculate and that he intended to do so in relation to CRH.  In a reference to Liu who handled the applicant’s trading account, the applicant said that his designated manager had taken him to the office “in a very serious manner” and had spoken to him about dealing in CRH.  The applicant reported Liu as saying: “You’ve violated company policy.  How come you have done such things?”  He Ning answered with a question: “It’s insider (dealing)?”  The applicant replied: “Right.  I said … I have told you that we are not allowed to buy it either.”  The applicant went on that he had told Liu that he had approval and that Liu said that in that case there would not be any problem.  He Ning wondered aloud how come Liu knew about the trading.  The applicant replied that it was from somebody in the Compliance Department.  Normally, said He, Liu just signed (a review sheet or document) without reviewing: “Who would give it a real good look?”  The conversation then turned to the other security in which the applicant intended to (and indeed did) speculate, namely, China Trust in Taiwan and revealed inside information about the stock to which he was privy.  “You’ve made profits ‘inside and outside’,” commented He.  “Yap, yap, yap, right,” answered the applicant.  And he sought to encourage He to buy CRH shares as well.

58. On the same day, the applicant telephoned his wife and encouraged her to buy CRH shares, offering the opinion that it would reach $4 per share in a month (Charge 10).  The following day she purchased 50,000 CRH shares at $3.03 per share.

59. On 5 March the applicant purchased 4,900,000 CRH shares at a cost of $14,259,008.52 (Charge 6) the substantial proportion of which was purchased on margin.  This was the first time the applicant had ever bought on margin – at least the first time whilst employed by Morgan Stanley. All but a small proportion of future purchases of CRH were also purchased with margin facilities.

60. On 6 March the applicant purchased 100,000 CRH shares at a cost of $290,037.51 (Charge 7).

61. On 7 March, the day upon which the applicant’s margin loan was increased to US$7 million, there was a telephone conversation between Mr Jayaram and the applicant in the course of which the applicant made the remark that “ … since we are on the CRH bond deal we have a lot of inside information even though we may not feel it is really inside but we definitely know much more than a lot of people in the street….  That’s the advantage we have.”  The suggestion is – and the respondent does not take issue with this – that by “the street” the applicant was referring to Wall Street.  Be that as it may, it is noteworthy that despite this acknowledgement by the applicant, he nonetheless continued to sign pre-clearance forms prior to every purchase order, certifying that he was not in possession of any material non-public information.  Indeed, in an e-mail of 19 March, less than two weeks after the telephone conversation of 7 March, when he sought approval to buy 5 million more shares in CRH, Ho Sheng Ching approved the purchase “subject to your confirmation that you can tick all the representation boxes on the employee trading request form.”  The applicant acknowledged the e-mail and ticked the boxes.

62. As for the inside information which the applicant possessed – the Bohai Bay matter aside – Jayaram said that “ … by being a book runner on the Citic Resources bond deal we would obviously be provided with a certain amount of information in order to write our disclosure document, the offering memorandum, liaise with the rating agencies and produce the rating agencies’ presentations, etc.  And that is a degree of information that would not be available to, let’s say, another party that was not involved in the Citic Resources bond deal but was attempting to make an intelligent proposal before Citic Group or Citic Resources on this transaction in any form.”[12] It is a question why, in these circumstances, the prosecution restricted itself to the information in P1 but, in the event, the information in P1 was the basis of the charges.

63. On 20 March, Ms Ho sent an e-mail to the applicant saying that Liu Jialin had spoken to her that morning and “have noticed that you’ve been acquiring some fairly significant positions in … [CRH].  He suggested that we discuss. …”  The applicant responded that Liu had spoken to him “some time ago and I cleared his doubt on [CRH].”

64. Liu was not himself privy to the details of the Morgan Stanley – Citic project, but clearly his doubts had not been assuaged for there then followed another warning from Liu who was alarmed by the fact and size of Du’s trading, although it is not clear from his testimony that his concern was directed at any perception of insider trading as opposed to the volume and frequency of his trading which was likely to set a bad example, particularly given the applicant’s senior position in the organisation.[13] The effect of what he said to the applicant was, according to his evidence: “ Look… you cover this account.  I want you to stay away.  I’ve already warned you.”[14]  It would appear from his evidence that the applicant was by this stage the subject of investigation by the Compliance Department[15] .

65. An event upon which counsel for the applicant places some emphasis is the statement attributed to Peter Kwok by the Sing Tao Daily on 21 March 2007 that : “ ‘We are exploring other acquisition opportunities.  If any good items come up, money would not be a problem.’  He stressed that in acquiring assets, the company would not further dilute shareholders’ interests.  Hence, it would not further issue any new shares but be inclined to try other ways of financing such as bond issues etc.”  This report is relied upon as relevant to such positive reaction of the market as may be attributed to the ultimate disclosure in May of the Bohai Bay acquisition which reaction may well, it is said, not have been positive had the equity issue postulation in P1 still been a live one.

66. On 2 April, the applicant e-mailed the Colorado team reporting the content of a discussion he had held that day with Zhang Jijing and Zhang Dongmei.  Citic had decided to “go ahead to issue the bonds that is … they will not go for hedging for now. … We need [to] discuss strategies and action plan for next step.”

67. On the same day, 2 April, there was a significant exchange of e-mail messages between the applicant and Jayaram.  Under the subject heading “CITIC”, Jayaram said to the applicant: “They are looking at acquiring a Chinese field (or an interest in the Chinese field).  If you can get the reserve report, I can see what we can do against that field.”  The applicant, perhaps surprisingly, said in reply “You mean Yiyang the one we just go through.” Jayaram responded: “No – I don’t know – some other field.”  We say “perhaps surprisingly” because Yiyang had nothing to do with Citic and the respondent’s suggestion is that the reference to Yiyang was a ploy by the applicant to play down his awareness of the intended Bohai Bay acquisition.  It is also suggested on behalf of the applicant that this exchange and the absence of other exchanges at the time about the proposed Bohai Bay acquisition is evidence of the fact that the proposed acquisition had not registered as significant in his (the applicant’s) mind or in the minds of any member of the Colorado or Jumbo teams.

68. However, the evidence of Mr Jayaram undermines that contention and it is not suggested that his testimony was unreliable.  He said that there was a presentation to certain credit rating agencies scheduled for 2 and 3 April and that it was necessary for Morgan Stanley to understand certain details of the proposed acquisition.  Hence the request to the applicant on 2 April for research[16]. At the time of this e-mail, the team members, including the applicant, were, he said, actively trying to glean more information about the proposed acquisition[17]. The China oilfield acquisition was a matter that needed to be fully investigated and understood[18].

69. It is no coincidence therefore that the possible acquisition of the Bohai Bay oilfield was included in the presentations to the credit agencies.  A draft of the presentations said that “CRH is about to announce the acquisition of an oilfield in China at a purchase price of US$150 million.  The said oil field, which is under construction, has an estimated reserve of 100m bbl.  The transaction will be subject to CRH’s satisfactory due diligence and is expected to be financed by CRH’s internal resources and equity funding.”  The final presentation was more cautious and said: “CRH is currently in discussion regarding an intention to review a possible investment in an oilfield in China. The said oil field, which is under construction, has an estimated reserve of over 100m bb.  Any transaction will be subject to CRH’s satisfactory due diligence and is expected to be financed by CRH's internal resources or equity funding.”  Although the applicant did not attend the presentations, he attended a dinner on 2 April in connection with the presentations, hosted by Peter Kwok.

70. The following day, 3 April, he telephoned Zhang Dongmei and suggested that she buy CRH shares.  The price of the shares at that stage was said by the applicant to be destined to rise further; further than $4.  The market had become crazy, he said, “given the various rumours in the Hong Kong stock market”.  Ms Zhang expressed reluctance to buy saying that the price was too high but the applicant expressed confidence, adding: “Unfortunately I cannot make a purchase, you know that.”  However, not only had he already made substantial purchases but it was not long before he made yet further purchases.

71. On 20 April, CRH published its Annual Results for the year ended 31 December 2006; results which showed a threefold increase in profits over the previous year. Insofar as it has been suggested that it was this revelation that drove the upward trend in the price in early May, it should be noted that as early as January 2007, research reports had already assessed that profit[19]. Play is also made of the fact that the results did not mention the prospect of the Bohai Bay acquisition.

72. On 23 April, Dow Jones International News reported that : “[CRH] may rise 1-3% in afternoon … .  Source says company close to buying a stake in an oilfield in [northern China ] with proven reserves no less than 100 million barrels; price tag, stake size unknown for now.”  Later that day, Dow Jones reported that: “[CRH] is close to buying a stake in the field in… north-eastern China to further expand its upstream business, two industry people familiar with the situation said [today]. … Shares of [CHR] ended 2.3% higher… after rising as much as 5.6%... about an hour before the market closed.  Traders said investors are happy with the new deal, which indicates the company is expanding into energy faster than earlier indicated.  The stock was trading lower than the previous close for most of the morning, before the report was out. … If [CRH] can ink the deals in China and Kazakhstan, its crude output will jump. … The target oilfield in [China] has proven oil reserves of no less than 100 million barrels, one of the persons said.  …  The region is … the second largest production base of Petro China Co. in terms of output. … The target block is Petro China’s largest open to overseas investors so far .. .”  There were other reports to the same effect.

73. It is argued – and Mr White made much of the point – that the relatively modest increase in the share price on 23 April (an increase of 2.25%) provides evidence of the caution with which the market responded to the news.  It should however be noted that the day showed a dramatic increase in the volume of shares traded (49.266 million) and Stella Fung’s opinion was that the price movement pattern that day suggested a markedly favourable reaction when the news was first made public, with later profit-taking.[20]

74. Reports in the next few days said that with both the Kazakhstan and Chinese oilfield acquisitions, CRH was likely to become China’s fourth-largest oil refiner.

75. On 27 April 2007, the applicant purchased 7,200,000 CRH shares on margin at a cost of $25,576,911.21 (Charge 8).

76. On 30 April 2007 the applicant purchased 4,500,000 CRH shares, again on margin, at a cost of $16,554,012.48 (Charge 9).

77. On 2 May, CRH suspended trading before the market opened.  Trading resumed on 9 May.

78. On 3 May, Petro China issued a public announcement that it had discovered a large oilfield in the area of Bohai Bay: this was in fact a major revision to the estimate of recoverable oil from a discovery originally announced in March 2007[21]. On 4 May Petro China's shares jumped 14%.

79. On 9 May, CRH issued three public announcements:

(1)  that the company had conditionally agreed to acquire from Citic Group its entire interest in the Kazakhstan oilfield.  This was categorised in the announcement as a “Very Substantial Acquisition”;

(2)  that the company proposed to issue Notes in connection with the Kazakhstan deal; and

(3)  that the company had entered upon an option agreement for the right to purchase, for US$150 million, a 90% interest in the Tincy Group Energy Resources Ltd, the owners of the Bohai Bay oilfield.[22]

80. On 9 May, trading resumed and the share price increased by 13.86%.

81. On 17 May CRH announced that it had completed the issue of the Notes in the aggregate amount of US$1 billion.

82. On 22 May 2007, the applicant was suspended from his employment and on 5 June 2007 he was dismissed.

The expert evidence

(1) Stella Fung

83. Ms Fung was of the opinion that the information contained in P1 was specific to CRH; came from a reliable source; was not generally known to the investing public; was price sensitive and was likely to lead to a significant increase in the share price if such information were made known to the public.[23]

84. She was of the view that the fact that due diligence had been carried out indicated that the acquisition of the asset in China was at an advanced stage.  The fact that P1 referred to the likely issue in March of equity in exchange suggested that the acquisition would materialise soon and that in all the circumstances the reference to the impact on rating itself indicated materiality of the information; an impact which in her view was likely to be “on the upside.”[24]

85. She noted as well various research reports in February and March the effect of which were to predict that further acquisitions by CRH were likely to be “the driver for CRH’s share price.”[25] She noted that after the May announcement UBS “maintained its BUY recommendation and believed that the … oilfield would add one dollar per share to CRH.”[26]

86. Much was made by both sides at trial and before this Court of the significant rise in the price of the share on 9 May: whether it was wholly or partly or not at all attributable to publication of the news of the new acquisition.  In this regard, it was her view that the announcement on 9 May in relation to the Kazakhstan interest brought no surprise to the market for the information contained in the announcement was already in the public domain and would not, therefore, lead to material increase in the share price[27]. As for the Notes announcement of the same date, the proposal for a bond issue was known to the market in the second half of April: at least there was “strong speculation in the market that CRH finance its acquisition by issuing bonds”, speculation bolstered by Mr Kwok’s statement on 21 March that the company would not issue or place new shares and by reports later in March that CRH had mandated Bear Stearns and Morgan Stanley for a US$1 billion bond issue.[28] By contrast there had been nothing before 9 May in relation to the Tincy acquisition[29], save the unconfirmed report by the Dow Jones newswire on 23 April.  That acquisition was, in her view, one which would greatly enhance the status of CRH as a major oil producer in the PRC and her opinion was that the price rise on 9 May was mainly attributable to the option announcement[30] .

(2) David White

87. It was Mr White’s opinion that such information as was possessed by the applicant between 15 February and 30 April 2007 that CRH was likely to acquire oil assets in China was “wholly non-specific in nature, incapable of assessment as to its accretive value, the non-specific nature of the information also is information that an investor had been alerted to in press comment that CRH was likely to seek mainland oil assets backed by company officials in press commentary”; that the information was not likely materially to affect the share price “as it was incapable of value assessment”; and that Ms Fung’s conclusion that the China oil asset acquisition was the main reason for the share price movement on 9 and 10 May 2007 was over-simplistic because it did not give sufficient consideration to the many other factors impacting on CRH at the time – namely, the other two CRH announcements that day; the Petro-China announcement of 3 May; and the intrinsic volatility of CRH shares[31].

Reasons for Verdict

88. The Reasons for Verdict contain a careful summary of the key evidence.  The judge noted that the applicant has a clear record.

89. The judge found that the applicant was involved in Project Colorado almost from its inception but, whatever the precise date, he was satisfied that by the second half of 2006 the applicant “was extensively and deeply involved in the project”,[32] and was one of the inner members of the core e-mail group not only for the Colorado Project but also for Project Jumbo.  He was privy to the details of the oil hedging and structure finance proposals as well as for the bond issue.

90. Further, it was clear that the applicant was at all material times “exposed to highly confidential information and regarded as an insider by members of the project team,”[33] and that he was the recipient of P1 which passed confidential information to him.  He found that by 9 February 2007, whatever internal failings there were in the control system[34], the applicant must have realised that he was “over the wall” and an insider.[35]  P1, in any event, by its content and express reference to confidentiality, put the matter beyond doubt.[36]  And in a passage which has received criticism on behalf of the applicant, the judge said that: “Having heard all [the] evidence, I am sure [the applicant] was exposed to all kinds of material non-public information.”[37]

91. The judge further concluded that the applicant was aware that he had been in receipt of material non-public information and indeed had said as much in a number of recorded conversations.  It follows that the declarations he regularly made in the pre-clearance forms were plainly untrue.[38]

92. Whatever approvals were given on 13 and 14 February the judge was “of the view that the arrival of exhibit P1 clearly changed the whole scenario.  I would have thought that any employee who was given prior approval and intended to trade, by the time the receipt of exhibit P1, the e-mail, would have to pause, to think, to evaluate the situation afresh.”[39]

93. “All in all,” said the judge “I come to the conclusion that when the [applicant] decided to trade on 15 February 2007 he was already in possession of all kinds of material non-public information, thus over the wall. Further, his tradings on Citic Resources share, commencing on 15 February 2007 and ending on 30 April 2007, were obtained dishonestly and fraudulently.”[40]

94. As to whether the dealing on the specified occasions amounted to insider dealing, the judge was satisfied that the applicant was a person connected with the corporation.  He then addressed the question whether the information in issue was relevant information, as defined; and for this purpose he turned specifically and exclusively to the information contained in exhibit P1.[41]

95. He was satisfied that the information in exhibit P1 was specific information: it related to a specific company and to specific activity, namely, the acquisition of an oilfield in China with approximately 100 million barrels of oil reserve.  It was known that one of the Vice-Presidents of CRH was highly experienced in oil exploration and the judge was of the view that the information imparted by exhibit P1 was not an expression of vague hope or rumour but, rather, concrete information of a proposal resulting from negotiations that had taken place.  Further, the information was far from generally known: to the contrary, it was known to but a handful of individuals.  It was important and sensitive information which had been provided by Peter Kwok to Shane Zhang because it would facilitate the bond issue and prospectively lower the cost of financing.[42]

96. The fact, said the judge, that the oil reserve subsequently turned out to be less than 100 million barrels was not to the point: that fact could not render the information imparted in February non-specific.  Similarly the fact that the information in P1 allowed for further particulars did not render the information general as opposed to specific.[43]

97. The judge noted that up to 15 February 2007 there was nothing in any media or other report about any specific CRH acquisition.

98. As for the expert evidence, he found the opinions expressed by Ms Fung “to be logical and, most importantly, accord with common sense.  I accept her evidence in its entirety without any reservation.”[44] To this we must later return since its suggested broad-brush approach is a central ground of appeal.

99. In relation to Mr White’s opinion, the judge said that: “… an ordinary average investor might not need all the particulars such as what Mr White expressed about the dynamics of the underlying oil assets, to place a trade.”[45] This was a comment on the highly detailed and analytical approach of Mr White’s report.

100. Then there is a conclusion that the “major increase in share price on 9 May is not due to volatility or indeed any technicality as described by Mr White but the announcement of the Tincy deal.”[46]

101. The judge was not impressed by the suggestion that the applicant’s investments as from 15 February flowed from his own research and “his love for Citic Resources” as opposed to inside information.  The suggestion was no more than a mere assertion and, in any event, motivation was beside the point once it was shown that at the time of trading the dealer was possessed of relevant information[47].

102. Then, in passages which have received some attention upon appeal, the judge said:

“479. It is clear that prior to 13 February 2003, [Peter Kwok] had already disclosed the potential Chinese oilfield acquisition to [Shane Zhang], albeit not in much details.

480. In addition, Mr Zhang Jijing was aware of this piece of information. We also know that the [applicant] happened to have a high-level meeting with Mr Zhang on that day.

481.  Although there is no direct evidence to show that the [applicant] knew of this potential acquisition as of 13 February 2007, all the circumstantial evidence put together, considered together, leave me with no doubt this in fact is the case.”

103. In support of this finding, the judge referred to the fact that between February and April 2007 the applicant spent no less than HK$87.1 million – an extraordinary sum on any view – acquiring CRH shares, a stock in which he had never previously invested, a substantial part on margin trading.  Given the fact that the applicant was a highly educated individual, well versed in investment matters and risk management, such sudden extensive trading in the stock was compelling circumstantial evidence.

104. In the light of these findings, the applicant was convicted upon all charges.

Relevant information?

105. A prime thrust of the appeal is that the judge erred in holding that the information in exhibit P1 was relevant information for the purposes of section 285 of the Ordinance.  It is suggested that the information was not sufficiently attractive to a reasonable investor because the reference to the further issue of equity and to the impact on the ratings suggest a negative rather than a positive impact.  It is further argued that the information was insufficiently specific to a reasonable investor.

(a) The common sense issue

106. Much has been made in argument before us of the judge’s preference for the opinion expressed by Ms Fung on the basis, so the judge said, that it accorded with logic and common sense; and the contention by Mr Griffiths SC was that the judge carried his analysis or based his preference upon no more than a sweeping embrace of common sense which, Mr Griffiths suggested, was far too simplistic an approach.

107. There is much to commend the value of the common sense approach in this case because we feel bound to say that on its face the contents of P1 strike us as important information likely to be of interest to the ordinary reasonable investor – not passing interest, but interest of a kind that would, were the information released to the public, be likely to lead to investment such as would effect a material change in the price of the security.  With no disrespect whatsoever to Mr White’s expertise, the intricacy of his analysis and of the arguments before us tends, in our judgment, to obfuscate what at the end of the day is in truth not so complex; for the issue is not whether an expert analysis would necessarily result in a positive assessment of the news.  Rather, the issue is the likely impact upon the ordinary reasonable investor.  And insofar as argument was expended in the court below and before us on the possible negative effect of a further issue of equity – and although the gravamen of the prosecution case was that the information in P1 was likely to cause a material increase in the price of the security – it matters not for the purpose of the statutory definition of “relevant information” whether the likely material effect on the price is negative or positive; a point of which some sight seems to have been lost.

108. But, be that as it may, it is not correct to suggest that the judge brushed aside evidence in favour of nothing more than his assessment of the commonsense of the matter.  Further, there was ample evidence to support his conclusion that the information in P1 was relevant information as that concept is defined. And, beyond that and importantly, there was in truth not a great deal between the two experts on the central issue.  What was at issue between them, in essence, was whether the dramatic rise in price on 9 May 2007 was mostly attributable to news of the Tincy deal or was only partly attributable to that news.  It seems to us to matter not which it was, for the question is the likelihood of a material effect on the price and there are passages in Mr White’s testimony which in their effect constituted an acceptance that the information in P1 was relevant information.

109. As for the suggestion that the judge merely relied on his view of the commonsense of the matter, that is just not so.  He referred to various indicia, including the opinion of Shane Zhang that the information would, as the judge summarised it “have a lot of impact on stock price movements”[48]; the view of Mr Jayaram that the issue of equity was highly price sensitive information; that even when announcements were made in October and November 2006 about only potential acquisition of the Kazakhstan oilfield, with little or no detail, the share price jumped significantly; that the evidence established that the market had by May 2007 largely absorbed the information contained in the other two announcements of 9 May; that whilst he accepted that the more information made available to a prospective investor the better, the “ordinary investor might not need all the particulars such as what Mr White expressed about the dynamics of the underlying oil assets” before placing a trade[49]; and he referred also to the upward trend of oil prices in 2007.  In other words, his analysis, looked at in the round, went far further than a mere reference to common sense.

110. The contention that the information in P1 was not relevant information as defined by the Ordinance is in effect a contention that the judge reached a conclusion in that regard that no tribunal properly directing itself could reasonably reach and, to this extent, has involved us in a highly detailed examination of the evidence.

(b) The experts

111. When we say that there was little between the experts on the central issue, namely, the question whether knowledge of the fact of the Tincy deal was likely materially to affect the price of the listed security, we have in mind, amongst other passages, the following evidence from Mr White himself:

(1)  There was first the following exchange:

“Q: … you seem to be saying on the one hand the news of the Tincy deal contained in the May announcements would not have made the market react because there was insufficient detail.

A: No, I’ve not said that at all. What I did say was that I could not determine the impact of separating the Tincy deal by itself as to how much of that price movement was.

Q: But can we be agreed that some of it was due to the Tincy deal?

A: Yes. I’m not saying that it’s not. I said it was indeterminable as to breaking it down between the components. And those components not only relate to the announcements that were made, but they relate also to the discovery of oil and what happened in the market from other stocks in the marketplace and from economic conditions, etc. So there is a whole range of factors that will come to play when the stock recommences as trading after a suspended period, particularly a long suspension.

Q: But some of that price rise when the stock began trading again was due to the announcement of the Tincy deal, wasn’t it?

A: Absolutely.”[50]

(2) Mr White spoke of the difference between, on the one hand, what the analyst may be looking at upon which to base a valuation and a prediction and, on the other, “noise in the marketplace” which includes the noise created by speculators and he accepted that the announcement on 9 May about the oilfield deal was “just the kind of news which many punters would speculate on.”[51]

(3) As at 9 May there was, he conceded, every reason to suppose that the Bohai field acquisition was a good acquisition; given the earlier announcements of discoveries in the area by Petro China, the news of the CRH acquisition “certainly would have added to the fever or fervour if you like once the share recommenced trading again.”[52]

(4) It was put to him that the acquisition by CRH of this field had a special caché – it was an acquisition that was particularly favourable because it was located in China, CRH had links to the Citic Group which in turn had obvious links to the Mainland Government and a senior officer of CRH was a specialist in oil exploration – these all were advantages “over the competition.” Certainly, Mr White accepted, “they would be factors that investors would take into account”. Assuming that Peter Kwok decided to go on television or call a press conference and announce “we are going to buy an oilfield in China, a big oilfield in China”, against that background, such an announcement clearly would lead to speculation in the stock.[53]

(c) The issue of equity

112. There was advanced before us the argument that the information in P1 that “CRH will issue equity again” was information which was likely to have a negative rather than a positive impact on the share price and that this was a material fact against the conclusion that the information in P1 was information which, if publicly known, was likely materially to affect the price of the share.  It was likely to have a downside impact, so the argument ran, because an issue of equity would dilute the interest of existing shareholders and an issuance of new shares would cause Citic Group’s stake in CRH to fall below 50%.

113. Insofar as it might be thought that this concern is belied by the positive price movement in May 2007, Ms Wong for the applicant points to the fact that on or about 20 March 2007 there was at least one report of Peter Kwok saying that there would be no further issues of equity in relation to new acquisitions.  So we bear this in mind.

114. There are a number of points to be made in relation to this argument, the cumulative effect of which is to show that the applicant’s contention has potential traction only if viewed out of the context of the whole of the information imparted by P1:

(1)  The enthusiasm with which the applicant traded between 15 February and 20 March in the stock, itself illustrates that it was not a piece of information which he viewed negatively.  After receipt of the e-mail of 15 February and before 20 March, the applicant spent a few dollars short of HK$45 million buying CRH shares, having increased his margin limit in early March and, when necessary, purchasing on margin.  This undermines his contention that this was information of such a kind as to cancel the benefits of the balance of the information.  Note too that he placed the first order to buy after he read the e-mail, not before.  Furthermore in his conversation with He on 27 February, that is well before Peter Kwok’s comments of late March, the applicant expressed great confidence in the stock.

(2)  Apart from China Trust shares, he was buying none other than CRH. 

(3)  The issue of equity in February 2007 was itself very well received; the issue was 23 times oversubscribed.

(4)  There was much more information in P1 than the reference to the issue of equity.  It was the further acquisition of an oilfield that was the major news – so it is that in February and March the analysts were of the view that a further acquisition by CRH would be the driver for an upward trend in the share price[54]. These predictions were not qualified by suggestions that if such an acquisition were to be funded by a fresh equity issue, the outlook would be different.

(5)  There is force in the submission by Ms Draycott SC that it is unrealistic to suggest that “punters” would fear a dilution to such an extent as to deprive Citic Group of its control of CRH, for the prospect of such a dilution would in truth be illusory.

(6)  The information in P1 was positive; not speculative.  The phraseology was resonant of a firm intention, soon to come to fruition.

(7)  In any event even if viewed in isolation, an equity issue was of itself price sensitive and it matters not for the purpose of the statutory provision whether the sensitivity is negative or positive.[55]

(d) The response to the Dow Jones report of 23 April

115. Reference has earlier been made[56] to the Dow Jones report of 23 April that CRH was close to buying a stake in a field in an oil-rich region of northeastern China.  The point made by the applicant is that the insignificance of the Tincy deal is illustrated by the relatively flat response of the market to the Dow Jones report.

116. The point is not strong.  There was in fact a marked reaction evidenced by the dramatic rise in the volume of shares traded on that date: 49.266 million shares traded as opposed to 11.149 million and 25.268 million traded on the two previous trading days.  It is correct that by the end of the day, the price rise had been relatively modest (2.25%) but this was explained by Ms Fung. The Dow Jones newswire came out in Hong Kong at about lunchtime on 23 April 2007.  There was a “big reaction” to the report in the early afternoon before the price slipped back again in late trading.  The late fall back in price, she said, may well have been attributable to profit taking: not at all unusual.  Furthermore, market analysis reports by both Citigroup and UBS published on 9 May 2007 credited the Tincy acquisition with having a material impact on the share price.  Citigroup reported that it valued the oilfield acquisition at $1.93 per share, raising the target price to $4.80, while UBS Investment Research was of the opinion that the acquisition added $1.00 per share.

117. In any event, the report was speculative.  The information in P1 was not.

(e) The other May announcements

118. Much effort was expended before us, as in the court below, upon an analysis of whether the increase in the price of CRH shares on 9 May was attributable to the Tincy deal, a question to which the trial judge also directed his attention.  In this regard, it is to be remembered that whatever happened in May could not be decisive of the key issue but might, in the context of all the prevailing circumstances, be indicative of the relevance of the information the subject of the charges.

119. There can be no realistic suggestion that the Tincy deal played no role in the May price increase.  The applicant’s own expert did not so suggest.  The true question in relation to May was the degree to which revelation of the Tincy deal impacted upon the price.  Mr White said that the primary mover of the share price in Mainland oil shares between 4 – 14 May 2007 was the announcement made by Petro China of a major revision of recoverable oil from its site in Bohai Bay.  On 4 May 2007, the day after that announcement, the price of Petro China shares jumped 13.9%.  On the date of the announcement, CRH shares were still suspended from trading but when they became available again for trading on 9 May 2007, the day of the announcement of the Tincy acquisition, they too jumped in price, gaining 13.86% on the day.  It was Mr White’s opinion that, after the period of suspension, CRH shares were in the main simply catching up with the price rise of Mainland oil shares occasioned by the news of the Petro China discovery.

120. Yet, as Ms Fung pointed out, not all Mainland oil shares rose in unison.  Although the share price of other oil stocks also increased during that period (particularly the share price of Petro China as a result of its major discovery) the rise in CRH share price was much larger than that of its peers.  Between 2 to 9 May 2007, CNPC rose 5.5%, Sinopec rose 6.1%, Petro China rose 11.6% while CRH, on 9 May 2007 alone, rose 13.86% on a trading volume of 207.475 million shares.  On the following day, 10 May 2007, CRH shares rose a further 2.63% on a turnover of 94.464 million shares while on that same day CNPC dropped 0.27%, Sinopec rose 1.10% and Petro China dropped by 1.81 %; evidence that CRH and its peers continued to rise and fall on their own news.

121. It was Ms Fung’s opinion[57] that a one-day price surge of 13.9% on a massive turnover (for CRH) of 207.475 million shares could not be attributed simply to CRH playing “catch up” with its peers.  The effect of her testimony was that whilst Petro China’s announcement of 3 May 2007 no doubt contributed to the attractiveness of CRH’s announcement of the Tincy acquisition, it was the announcement of the acquisition itself, and the fact that it contributed to changing the nature of CRH into an ‘oil company’, that was the true dynamo for the price rise.  This was a view supported by contemporary market analysis reports, for example, Citigroup’s report that it had valued the Tincy acquisition at $1.93 per share.[58]  It seems to us not feasible to gainsay the conclusion that the Tincy announcement was a material contributing factor.

(f) Inaccurate information

122. The suggestion was made – indeed it is a discrete ground of appeal – that the information in P1 was inaccurate and that inaccurate information cannot constitute relevant information as defined by section 285 of the Ordinance.

123. The information was said to be inaccurate in that an issue of equity transpired not, in the event, to be required; the size of the oilfield originally mentioned was considerably larger than later announced; and further, the production potential was in fact much less than that mentioned in P1.

124. For the proposition that inaccurate information cannot constitute relevant information we were referred, inter alia, to Charles Chan Sing-chuk and others v Innovisions Ltd[59]. That was a case in which the plaintiff alleged that representations made about the prospects of a company, which representations were said to induce the purchase of shares, were untrue and made fraudulently or, at least, recklessly or negligently.  One of the defences relied upon was that if the representations were made, they comprised “relevant information” and that it would be therefore be contrary to public policy for the plaintiff to maintain the action.  The Court was of the opinion that the definition of relevant information did not, prima facie, contemplate information which was not genuine.  Similarly, in the Insider Dealing Tribunal report in Tingyi Holding Corporation[60] it was said that misinformation could not be relevant information so that, for example “to describe a company as prosperous and stable when it is in the throes of a financial crisis is to provide no information about the company at all.”[61]

125. It is unnecessary for us to consider the full effect of that judgment or of that Report save to say that neither is of meaningful application to this case.  The information in P1 constituted a statement of intention based upon belief currently held as to facts.  There can be no suggestion that as of 15 February 2007 that there was not an intention to acquire the oilfield with a very substantial oil reserve; that there was no intention to issue equity; that no-one was working hard “to do [due diligence)”; or that it was not considered that the news would have an impact on the rating.  The point is bereft of merit.

(g) A hearsay issue

126. In the course of canvassing the question whether the information in P1 was information likely materially to impact upon the price, one of the matters mentioned by the judge was a comment attributed in a Deal Sheet by Samantha Ng to a person called Richard Fielder of Morgan Stanley, a comment apparently made by him on the evening of 9 May 2007 to the effect that the “Bohai Bay transaction ... has moved the price significantly.”  The complaint on behalf of the applicant is that this was inadmissible hearsay which the judge ought not to have taken into account.  We think that the complaint is justified but since it was one of a host of factors taken into account by the judge, it can in our judgment have had no material impact upon his conclusion.

Conclusion

127. It is clear that the information in P1 was not public knowledge and we are satisfied that the judge was correct in his conclusion that the information in P1 was relevant information.

Du’s knowledge that he had information that was relevant information as defined

(a) Indicia

128. It was suggested that the applicant decided to trade in the stock when he did because of the benefits of his own research.  He gave no evidence to that effect – indeed, he gave no evidence at all.  But the inference is said to be available from the evidence, including his expression of interest in the stock before receipt by him of P1.

129. The first point is that, subject only to the defence available under s 292(3) – as to which more later – it matters not why he decided to trade in the shares when he did.  What matters for the purpose of proving the offence is that he traded whilst in possession of relevant information – which clearly he did – and the sole question that remained was whether it was proved that when he traded he knew that the information which he possessed was relevant information, as defined.

130. There is a host of indicia to support the judge's conclusion that Du was trading in CRH shares when he did because of the information in P1 and that he knew full well that it was relevant information:

(1)  It is easy to lose sight of the wood for the trees in a case such as this but it is a prominent fact that the first time the applicant traded in CRH shares was on the very day of P1.

(2)  In this context, it is noteworthy that the applicant did not choose to purchase CRH shares after the public announcements made in October and November 2006 to the effect that CRH was expanding its interests into oil by purchasing the Kazakhstan assets.

(3)  The applicant’s share trading records going back to early 2003 revealed that he had had all times limited his portfolio to a select number of shares and that CRH had never before been part of that portfolio.

(4)  If he thought himself to be trading legitimately, it is strange that he told several people that he was not in a position to deal in the shares because he was possessed of inside information.  Indeed, in this regard we have noted that on 7 March he told Jayaram that “we have a lot of inside information”, yet he had purchased significant quantities of CRH shares on the two previous days.

(5)  The manner in which he conducted himself when seeking permission to trade was less than open, itself an indication of a guilty mind.

(6)  P1 itself described the information of the oilfield acquisition as “confidential”.  Even had it not been thus expressly described, it is difficult to imagine that someone with Du’s experience as well as knowledge of CRH affairs would have thought it other than confidential and sensitive. 

(7)  The fact that he dealt in such substantial quantities and on margin suggests a remarkable degree of confidence.

(8)  It was Mr Jayaram’s testimony that, once the intended acquisition of the Chinese oilfield became known, it was essential that the full impact of the acquisition on CRH be understood as it may material influence the terms of the bond offer.  He therefore instructed the core group members of the Morgan Stanley team responsible for due diligence to investigate the matter and to this end brought in the applicant to assist in obtaining the necessary information from CRH and the Citic Group.  Mr Jayaram said that due diligence continued into May.  In short, during the period when he purchased CRH shares, the applicant was part of a team responsible for due diligence in respect of the Tincy deal.

(b) The ‘Yiyang’ issue

131. We have referred to the e-mail exchange of 2 April 2007 by which Mr Jayaram asked the applicant to “... get the reserve report, I can see what we can do against that field”; and the applicant asked in reply: “You mean Yiyang the one we just go through”.[62]  This has been deployed on behalf of the applicant as suggestive of the scant store placed by him on the information in P1.

132. As we have earlier remarked[63] Mr Jayaram’s testimony undermined that contention.  At the time, the team members, including the applicant were actively engaged upon seeking information about the proposed acquisition.  Moreover, the misunderstanding – if that is what it was – is understandable because, again according to the testimony of Jayaram, “ ... around that time [the applicant] and I were also discussing other situations that had nothing to do with Citic Group or Citic Resources, pertaining to other clients of the firm or other clients of Du Jun’s that might affect interests in oil fields to see what potential financing alternatives existed for them.  So I believe that the Yiyang situation was one that he and I had recently sat down and discussed but I’m not sure that it was one that had anything to do with Citic Group or Citic Resources, although I can’t say that with certainty.”[64]

133. It seems to us, therefore, in all the circumstances and in the light of this uncontested evidence about a terse and non-specific request which was part of an ongoing dialogue, that the Yiyang point carries little traction.

(c) The reaction of others

134. The further suggestion was made in argument (as in the court below) that no one else at Morgan Stanley treated the information in P1 as significant and that one can therefore suppose in the applicant’s favour that the information about Tincy in P1 did not “register” with him.  In this regard it is to be noted that:

(1)  The applicant did not testify.  He did not at any stage assert that he had not read the e-mail and there is no basis upon which to conclude in the face of the uncontradicted testimony that he scrolled his Blackberry after P1 was sent to him and before his first purchase of CRH shares that the relevant information in it did not register with him.

(2)  It is not correct to imply that the information was of no significance to others – unless one were to judge the matter by the fact that they did not trade having come into possession of the information; but then one would not expect them to trade.  In any event, there is uncontradicted evidence that ongoing enquiries by the team into the information were undertaken and we note too that it was a significant enough piece of information to find its way into the presentations to the rating agencies in early April 2007.

(d) The 13 February issue

135. It is said that the judge erred in concluding that Du knew already on 13 February of the relevant information.  Counsel for the respondent has taken the stand that the evidence was not sufficient from which to draw an irresistible inference to that effect.  But we can well understand why the judge came to the conclusion he did.  It is a conclusion that flows naturally from a combination of facts.  The information was certainly in the hands of Morgan Stanley, including the applicant, on 15 February.  The applicant did not trade in CRH shares in response to earlier non-Tincy information (e.g. in October and November 2006).  He traded in CRH voluminously on 15 February and thereafter.  One can also safely assume that the decision by CRH to acquire the field was made before 15 February and one notes that there were before that date regular meetings between senior personnel of CRH and Morgan Stanley. There was such a meeting at a high level, attended by the applicant, on 13 February, the very day upon which his trading enquiries began.  Small wonder, in the absence of contrary evidence from the applicant, that the judge drew the inference which he did.

136. But, even if the concession by the respondent be correctly made, it matters not at the end of the day for the question, we repeat, is whether on and after 15 February 2007 he possessed relevant information knowing it to be relevant information and whether when possessed of such information he dealt in the shares.

137. In this regard, some play has been made of the suggested error by the judge in relation to the identity of the person from Citic with whom the applicant held a meeting on 13 February.  The judge said at one stage in his Reasons for Verdict[65] that Mr Zhang Jijing (President of Citic Capital) and the applicant met on that day; the significance of which lies in the fact that Mr Zhang obviously possessed the relevant information by that date.  This is said to be an error in that it is said that the person with whom the applicant met was not Mr Zhang but rather with Mr Chang Zhen Ming of the Citic Group.  It is not necessary to go into the question of who met whom on that day – we note for example that at a much earlier stage of the Reasons the judge had the applicant meeting with Mr Chang on 13 February[66] – for even assuming for immediate purposes that Mr Chang was not possessed of the relevant information the point is not one of significance for not only, we repeat, is the ultimate material date 15 February, but the judge has made it clear that the inference which he drew in relation to knowledge as of the 13 February was knowledge drawn from “all the circumstantial evidence put together, considered together”; and we have explained why in our judgment that inference was there for the judge to draw.

(e) Openness

138. It is said as well that an indication against the conclusion that the applicant knew the information in P1 to be relevant information is the openness with which he dealt in the shares.

139. It is true that there is absent from this case the secrecy or covering of tracks to be found in other cases of insider trading and that that in itself is, on its face, a factor in the applicant’s favour.  But the suggested openness of trading does not stand by itself.  There is evidence, to which we have already referred, that in acquiring permission to trade (a permission upon which he subsequently sought to rely in his defence and, indeed, in argument upon this appeal) he was not frank.  There is also evidence which suggested that monitoring procedures were less than tight and that the applicant (and He) were surprised that the extent of his trading in this particular share was noticed by his superior.  It is suggested that the course for the applicant to adopt, if he had a guilty mind, was to trade through a nominee.  But as Ms Draycott SC remarked, a point of some force, that would have required an extraordinary amount of trust in the face of an investment to the tune of about $87 million.  It is not possible to be sure how the applicant perceived matters in terms of the risk he was taking.  It may be that he thought that the fact of his applications and the subsequent grant of permission and the lax monitoring which he expected reduced the risk of subsequent questions or trouble to a level which was, in the light of the gains to be made, acceptable.  

The s 292(3) Defence.

140. Early in this judgment[67] we rejected the submission that it was incumbent on the prosecution not only to prove that the applicant was in possession of information which he knew to be relevant information when he purchased the shares but that it was the possession of this information which motivated him to trade.

141. Although not an express ground of appeal, the provisions of s 292(3) were prayed in aid as an extension of that submission on the basis that, even if it was not incumbent on the prosecution to prove causation, the section nonetheless provided a defence based on causation; namely, that it is a defence to the charge if an accused is able to show that the purpose for which he dealt did not include the purpose of securing a profit (or avoiding a loss) by use of the relevant information.

142. A similar provision in the repealed Securities (Insider Dealing) Ordinance, Cap 395[68] was considered by this Court, differently constituted, in Lisa Lam Lai San and another v Insider Dealing Tribunal[69].  The Court rejected the suggestion of the Tribunal that the provision based upon an implicated person the burden of showing that circumstances compelled him to sell “regardless of whether or not he had come into possession of the relevant information”; that, said the Court, was too restrictive approach although “of course, if a person can establish that he had no choice but to sell securities he will, no doubt, be in a strong position to establish a defence under section 10(3) on the basis that there was not an intention to make a profit or avoid a loss by use of the relevant information.  However the subsection is clear.  What has to be determined is whether there was any desire or intention to make a profit or avoid a loss by use of the relevant information.  The section does not incorporate any test as to whether the person was compelled to or had no choice but to sell securities.”[70]

143. If the defence was to be run and, if run, succeed it was incumbent upon the applicant to show that his purpose in expending some $87 million to purchase CRH shares between 15 February and 30 April 2007, inclusive, was divorced from any intention to secure a profit by use of the Tincy deal information.  

144. Whilst it is, of course, possible for a defendant to discharge a burden without himself giving evidence, it is difficult to see how, on the facts of this particular case it was possible for him to discharge the burden imposed by s 292(3) without testifying, for the indicia against him on the question of motivation were significant.  On the available evidence, it is not possible reasonably to conclude that his motivation was other than to profit by use of the relevant information.

Conclusion as to conviction

145. For the reasons which we have provided, the application, in relation to each charge, for leave to appeal against conviction is dismissed.

Sentence

The sentences imposed

146. Section 303 of the Ordinance provides that a person who commits an offence under Part XIV of the Ordinance (which includes the offences contrary to Section 291(1) of the Ordinance) is liable upon conviction on indictment to a fine of $10 million and to imprisonment for 10 years.

147. Between 15 February and 30 April 2007, the applicant, whilst in possession of relevant information, purchased a total of 26.7 million CRH shares at an average price of $3.2625 per share: a total purchase costs therefore of $87,109,693.  This ignores Charge 10 which reflects the offence of counselling his wife to deal in shares.

148. The approach of the sentencing judge to the profit gained as a result of this insider dealing was that suggested by Lord Nicholls in The Insider Dealing Tribunal v Shek Mei Ling[71], albeit not in relation to criminal proceedings, to the effect that the relevant profit is that gained by the insider dealer when the information has been made public and the market has had a reasonable opportunity to digest the information.  On this basis, the profit gained was assessed at $23,324,121.[72]

149. What the judge did in relation to each offence was to impose a term of imprisonment to reflect the size of the deal on each occasion and to impose a fine in addition to reflect the profit made in relation to each deal, calculated in accordance with the approach suggested in Shek Mei Ling.  The sentences and fines[73] were as follows – we have placed in parenthesis the offence date, the quantity of shares purchased and their total cost on each occasion:

Charge 1: (15 February – 5 million shares costing $15.323m) – 5 years’ imprisonment and a fine of $4,367,813;

Charge 2: (16 February – 712,000 shares costing $2.179m) – 2 years’ imprisonment and a fine of $ 621,976;

Charge 3: (21 February – 52,000 shares costing $159,172) – 6 months’ imprisonment and a fine of $45,425;

Charge 4: (22 February – 3.53 million shares costing $10. 62m) – 4 years’ imprisonment and a fine of $3,083,675;

Charge 5: (26 February – 706,000 shares costing $2.16m) – 2 years’ imprisonment and a fine of $616,735;

Charge 6: (5 March – 4.9 million shares costing $14.25m) – 5 years’ imprisonment and a fine of $4,280,456;

Charge 7: (6 March – 100,000 shares costing $290,049) – 6 months’ imprisonment and a fine of $87,356;

Charge 8: (27 April – 7.2 million shares costing $25.57m) – 6 years’ imprisonment and a fine of $6,289,650;

Charge 9: (30 April – 4.5 million shares costing $16.53m) – 5 years’ imprisonment and a fine of $3,931,031;

Charge 10: (27 February the counselling offence) – 6 months’ imprisonment.

150. The judge then ordered three months of each term imposed in respect of Charges 2 to 10 inclusive to run consecutively to that imposed in respect of Charge 1 and to each other, making a total of seven years and three months but, by reason of the provisions of section 82 of the District Court Ordinance, Cap. 336, sentenced the applicant to a total of 7 years’ imprisonment.  The total of the fines was $23,324,117.

151. Further orders were made that :

(1)  the applicant do pay to the Securities and Futures Commission investigation costs in the sum of $933,340;

(2)  any body which may take disciplinary action against the applicant as one of its members, be recommended to take disciplinary action against him[74];

(3)  the applicant shall not, without the leave of the court, “be continued” [sic][75] to be a director or manager of the property or business of any listed corporation or in any way, whether directly or indirectly, be concerned or take part in the management of any listed corporation for a period of 5 years[76]; and

(4)  the applicant shall not, without the leave of the court in Hong Kong, directly or indirectly in any way acquire, dispose of or otherwise deal in any securities, futures contracts or leveraged foreign exchange contract, or an interest in any securities, future contracts leveraged foreign exchange contract or collective investment scheme for a period of 5 years[77].

The judge’s approach

152. The judge referred to sentencing considerations adumbrated in R v McQuoid[78] (to which we shall shortly turn) and then to guideline cases for theft in breach of trust as a helpful measure, the judge suggesting however that the person who was an insider dealer was “slightly less” culpable “then the perpetrator [who commits] theft in breach of trust.”[79]  But, he said, the insider dealer was nonetheless a criminal whose conduct threatened the integrity of financial markets.  He emphasised that the information utilised by the applicant had been imparted to Morgan Stanley in strict confidence and that the applicant had deliberately and dishonestly breached that confidence by betraying not only his colleagues but also Morgan Stanley’s client.  His conduct had constituted a serious breach of trust.  The level of planning and sophistication was not high; no hidden account was used and the period of trading was confined to two months in respect of only one listed security.

153. That said, the scale was “unprecedented” and the potential financial benefit but for the financial downturn in 2008 and 2009 was “phenomenal.”[80]  As for the approvals which he had obtained from his designated manager and the compliance department, those approvals had been secured dishonestly.

154. The judge recognised the grave consequences of the convictions to the applicant in terms of his professional reputation; but he noted that the applicant had ignored warnings given to him by his immediate superior, Mr Liu Jialin.

The grounds of appeal in relation to sentence:

155. It is contended on the applicant’s behalf that:

(a)  the starting point taken for each offence, save in respect of those for which six months’ imprisonment was imposed, was manifestly excessive;

(b)  the judge erred in ordering partially consecutive sentences in relation to charges 1 to 5 inclusive, since those offences reflected a continuous course of conduct, namely, execution of one instruction to buy $10 million; and a similar point is taken in relation to charges 6 and 7;

(c)  it was inappropriate to consider the guidelines laid down in R v Clarke[81], since McQuoid[82] had not been “introduced” (which we understand to mean “ adopted”) in Hong Kong at the time when the present offences were committed;

(d)  the judge failed to have proper regard to the totality principle;

(e)  the judge failed to have sufficient regard to the mitigation advanced;

(f)  the judge imposed sentences much longer than those imposed for similar offences in other jurisdictions, in particular in the United Kingdom;

(g)  the judge was wrong, as to the fines, to utilise the concept of notional profit and that in a case of a sentence to a lengthy term of imprisonment, such financial penalty as is imposed should only be directed at disgorging actual profit realised by the offender;

(h)  the orders in relation to disqualification as a director or manager and as to dealing in securities and like instruments were manifestly excessive; and

(i)  no order should have been made in relation to disciplinary action, since it was not shown that the applicant was a member of a body which might take disciplinary action against him.

The nature of insider dealing

156. There is at the outset a point that requires emphasis for the digestion of those who might be tempted to engage in insider dealing; for those who might think it part of a game in which to indulge, if only one is so lucky as to come by inside information, persons possibly emboldened by the misconception that because others indulge in it, it is somehow acceptable; and for those who justify it to themselves or to others as semi-illicit or as not truly criminal behaviour.  Such notions must be dispelled.  Insider dealing is a crime.  It is a crime of dishonesty.  It is cheating; and we respectfully endorse its categorization by the Lord Chief Justice of England and Wales, Lord Judge, in McQuoid[83]:

“Those who involve themselves in insider dealing are criminals: no more and no less. The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is undermined by market abuse. …

We… emphasise that this kind of conduct does not merely contravene regulatory mechanisms.  If there ever was a feeling that insider dealing was a matter to be covered by regulation, that impression should be rapidly dissipated.  The message must be clear: when it is done deliberately, insider dealing is a species of fraud; it is cheating.”

157. In another passage, which happens to be apposite to this case, he said:

“Those who are entrusted with advance knowledge are entrusted with that knowledge precisely because it is believed that they can be trusted. When they seek to make a profit out of the knowledge and trust reposed in them, or indeed when they do so recklessly, their criminality is not reduced or diminished merely because they are individuals of good character.”[84]

Relevant considerations

158. It does not avail the applicant to point to sentences passed in other jurisdictions.  This jurisdiction has its own circumstances in the context of which insider dealing – especially insider dealing by persons in a position of trust – is to be viewed.  It is not a mere soundbite to talk of the importance of the integrity of this particular market.  It is a self-evident importance not devalued by the fact that the point is so often made.  We start from the premise that the legislature has seen fit to provide for a maximum term of 10 years’ imprisonment for an offence of insider dealing.  The range of culpability will be wide and the circumstances of each offence different, for which reason it is neither prudent nor possible to stipulate guidelines but, in so far as it was said in McQuoid that some assistance can reasonably be provided by the theft in breach of trust cases, we fail to see the fault in that logic and the fact that that was a judgment delivered after the commission of the offences in this case is, in our opinion, of no help to the applicant; it was an expression of the common-sense of the matter.

159. We respectfully adopt and endorse the considerations said by the Lord Chief Justice in that case to be relevant to sentencing in cases of insider dealing:

“(1) the nature of the defendant’s employment or retainer, or involvement in the arrangements which enabled him to participate in the insider dealing of which he was guilty;

(2) the circumstances in which he came into possession of confidential information and the use he made of it;

(3) whether he behaved recklessly or acted deliberately, and almost inevitably therefore, dishonestly;

(4) the level of planning and sophistication involved in his activity, as well as the period of trading and the number of individual trades;

(5) whether he acted alone or with others and, if so, his relative culpability;

(6) the amount of anticipated or intended financial benefit or (as sometimes happens) loss avoided, as well as the actual benefit (or loss avoided);

(7) although the absence of any identified victim is not normally a matter giving rise to mitigation, the impact (if any), where proved, on any individual victim; and

(8) the impact of the offence on overall public confidence in the integrity of the market; because of its impact on public confidence, it is likely that an offence committed jointly by more than one person trusted with confidential information will be more damaging to public confidence than an offence committed in isolation by one person acting on his own.”[85]

160. In relation to the point made that some of the charges reflected a single course of conduct, in other words execution of one instruction but in stages calling, it is said, for concurrent sentences within each group, there are conflicting submissions as to fact which it is not, for practical purposes in this case, necessary at this appellate stage to resolve.  For example, the respondent suggests that there was not one order for the purchase of 10 million shares in February 2007 but several different e-mailed instructions.  We do not think it necessary to resolve the details of this issue because in such a case the logical consequence of the applicant’s approach might call for a higher starting point for the first of such a group’s offences than for the remainder. The judge has taken individual starting points to reflect the number of shares and expenditure on each occasion and the important question is whether on that basis, the sentence for each offence, the totality for each phase of illicit trading, and then for the whole, was manifestly excessive.

161. In application of the factors referred to in McQuoid[86], we note that the applicant enjoyed a high position in the financial industry, for which he was very well rewarded indeed and he came into possession of the relevant information precisely because he occupied a trusted position – trusted by his employers, by his colleagues and by the client; so in these regards his culpability is severe.  He acted deliberately rather than recklessly and to secure permission to trade, he advanced representations which were dishonest.  The intended profits were very large indeed, as evidenced by the enormous amounts he was prepared to spend on these illicit purchases.  We have been presented with figures which suggest that given the timing of his sales in July 2007, December 2008 and January 2009, all at a time when he knew the game was up, his actual profit turned out to be, it is said, less than HK$2 million.  In this regard, the amount ventured and the intended profit is more a measure of criminality than the amount in fact gained or the loss in fact avoided though the amount in fact gained or loss avoided is not to be ignored.  How much is in fact gained or the degree to which a loss is in fact avoided depends upon a host of circumstances, many of which will be outside the control of the insider dealer and those within his control – such as the timing of a subsequent sale of the shares purchased through insider dealing – depend upon a decision quite separate from the unlawful act of insider dealing.  This is an echo of the sentiment expressed by Barr J in R v Doff[87] that :

“It seems to me that the amount invested is a more important indicator of criminality than the amount ultimately realised from criminal activity concerned. One would not regard as trivial the criminality of an insider trader who ventured much but lost.”

162. As against those factors, the applicant acted alone and the process engaged was not sophisticated.  In particular, his dealings were transparent, hoping that weaknesses in monitoring would not reveal what was going on.  He did not deal through an outside broker or establish secret accounts or act with or through others.  These are factors to which the judge did not, we think, accord quite the weight which was justified.

163. The question of how one assesses the intended or anticipated profit – referred to in McQuoid as a material factor – is not easy to resolve, though the notional profit is a helpful guide.  One has in relation to the individual offences, given the maximum of ten years’ imprisonment, to allow room for greater amounts and for offences of greater sophistication.  In relation to the 8^th and 9^th charges, the anticipated profit is likely to have been affected by the fact that by that date, rumour was afoot and the cost of acquisition quite a bit higher than in February and March.

164. We have concluded that in all the circumstances the individual sentences for each offence cannot justifiably be said to be excessive, save as to charges 8 and 9 which we would set aside and for which we shall substitute sentences of 5 years and 4 years’ imprisonment respectively.

165. As for totality, it is our view that the totality of 7 years was clearly excessive and we propose to make orders that will effect a totality of 6 years’ imprisonment.

The fines

166. Submissions were made as to principle; namely, whether it was appropriate to impose a fine to disgorge notional profits or whether on the other hand to impose a fine to disgorge actual profits.  To this end we were taken to a few Hong Kong cases (there has thus far been but a handful of prosecutions pursuant to 291 of the Ordinance, since criminalization is a relatively recent development) where the practice appears to have been that fines have been directed at disgorging actual profit but where the point does not appear to have been argued.  Since the imposition of a fine where there is imposed a heavy sentence of imprisonment is prima facie designed to ensure that profit should not be permitted to be made out of wrongdoing and given the further principle that a fine must always be within the capacity of an offender to pay[88], the applicant’s contention that fines should be directed at actual profit made (or loss avoided) has force, but for the reason to which we now turn it is for the purpose of the present case unnecessary to decide the issue.

167. It is unnecessary to engage in this debate because, so it seems to us, the effect of what was done in this case – the imposition of fines totalling $23.324 million – is to deprive the applicant’s trading counterparties of the amounts which might be available to them pursuant to the provisions of s 213 of the Ordinance, in respect of which provisions proceedings have been launched by the Securities and Futures Commission (“SFC”) but are adjourned pending the determination of this appeal.  It may be that the fact of those proceedings was not drawn to the attention of the sentencing judge.

168. Insofar as is presently relevant, section 213 of the Ordinance,[89] Cap 571 provides that :

“(1) Where-

(a) a person has-

(i) contravened-

(A) any of the relevant provisions;

(B) any notice or requirement given or made under or pursuant to any of the relevant provisions;

(C) any of the terms and conditions of any licence or registration under this Ordinance; or

(D) any other condition imposed under or pursuant to any provision of this Ordinance;

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

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

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

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

(b) it appears, whether or not during the course or as a result of the exercise of any power under Part VIII, to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,

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

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

(a) …;

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

….

(g) any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).

….

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

….

(6) Where the Court of First Instance considers it desirable to do so, it may grant such interim order as it considers appropriate pending the determination of an application made pursuant to subsection (1).

….

(8) Where the Court of First Instance has power to make an order against a person under subsection (1), it may, in addition to or in substitution for such order, make an order requiring the person to pay damages to any other person.”

169. By originating summons dated 28 July 2007, as subsequently amended, the SFC seeks orders against the applicant for damages to his trading counterparties.  The amount of loss to those counterparties, so we are informed, is calculated at $23,964,440.  The proceedings have, as we have said, been adjourned.

170. We were told by counsel for the respondent that, in those proceedings, the SFC has stated that, if the total amount of the fines remains at the level imposed by the judge, the application in favour of the counterparties will be confined to the damages arising from the transactions on 27 and 30 April 2007.  We were informed that should the fines be reduced by this Court, the application will be adjusted accordingly so as to seek recompense for the benefit of the counterparties to the full extent of the increased fund thereby made available.

171. We note also that section 305 of the Ordinance renders a person in the position of this applicant “liable to pay compensation by way of damages to any other person for any pecuniary loss sustained by the other person as a result… ” of the offence.  It would therefore appear that this too presents itself as for the possible benefit of a losing counterparty.

172. Following the applicant’s arrest, assets of his to the tune of $46,595,033 were seized and these were made the subject of an injunction in the s 213 proceedings.  If one deducts from that amount the figure of $933,340 (the SFC investigation costs) and the fines imposed totaling $23,964,440 as well as the amounts thus far released to him to fund his legal representation, there remains, we were told, the sum of $6,400,000.

173. It seems to us that the laudable objective of the s 231 proceedings (or of other remedies such as those conferred by s 305) would in the particular circumstances of this case be defeated if fines were imposed at the expense of counterparties entitled to damages.  We did not understand Ms Draycott to disagree.  

174. Accordingly, we take the view that the fines imposed by the judge should each be set aside and we shall substitute fines totaling HK$1,688,000 which is the figure put forward as the applicant’s actual eventual loss.  Given that the objective of these fines is to ensure that profit should not be made from wrongdoing, we considered whether it was in this case appropriate to impose any fine at all, on the basis that the profit actually made could be said to be an amount of which the applicant is likely to be deprived by the section 213 proceedings.  But those proceedings are in the future, their final outcome not a matter to which certainty necessarily attends and, further, those acting for the applicant have concentrated their argument as to the appropriate fine upon the distinction between actual and notional profit; not, as we understand it, suggesting that no fine at all should have been imposed.

175. We see nothing inappropriate in any of the ancillary orders[90] made and, accordingly, shall not interfere with them.

Sentence : Result

176. We grant the applicant leave to appeal against sentence, treat the hearing of the application as the appeal and allow the appeal to the following extent only:

(1)  The sentences in respect of charges 8 and 9 are set aside and in their place we impose sentences of imprisonment of 5 years and 4 years respectively.

(2)  We set aside that part of the judge’s order by which he directed that 3 months of each term in respect of charges 2 to 10 inclusive run consecutively to the term imposed in respect of charge 1 and to each other; and instead we direct that all sentences shall run concurrently, save that one year of the sentence imposed in relation to charge 8 shall run consecutively to the 5 years’ sentence imposed in relation to charge 1; so that the total sentence will be 6 years’ imprisonment.

(3)  The fines imposed in the court below are set aside and we impose in their place a fine of $200,000 in relation to each of charges 1 to 8 inclusive and a fine of $88,000 in respect of charge 9; a total of $1,688,000.

Costs

177. By far the most substantial part of the argument was devoted to the question of conviction.  In the light of that fact and of the applicant’s success in relation to sentence, we make an order nisi that the applicant shall pay the respondent 90 % of the respondent’s costs of the appeal.

[1] Stella Fung’s report 27 August 2008, paras 13 and 14.

[2] The applicant did however contend that there were reports that CRH was likely to seek Mainland oil assets: see para 87 below.

[3] Jayaram evidence at transcript p 531.

[4] ibid p 534.

[5] ibid p 537-8.

[6] Transcript p 226.

[7] Transcript p 152

[8] ibid p 540.

[9] ibid p 211.

[10] see exhibit P 58.

[11] Transcript 942 -944.

[12] ibid. 582.

[13] Transcript pages 945-947.

[14] ibid. 947.

[15] ibid. 948.

[16] ibid. 570.

[17] ibid. 567.

[18] ibid. 669.

[19] See for example the Citigroup Report of 10 January 2007.

[20] Transcript p 1116.

[21] See Mr White’s report 3 May 2009, para 8.10.

[22] Throughout these proceedings the Mainland oil acquisition by CRH has been referred to as the “Tincy deal” or the “Tincy acquisition”.

[23] Report 29 April 2009 para 18.

[24] ibid para 9.

[25] ibid paras 14 and 15.

[26] ibid para 17.

[27] Report 27 August 2008 para 19.

[28] ibid paras 21 and 22.

[29] See footnote 22 above as to the appellation “Tincyacquisition”.

[30] ibid paras 27 and 28.

[31] Report 3 May 2009, paras 4.3 and 4.5.

[32] Reasons for Verdict para 339.

[33] ibid para 361.

[34] As to which, see the Reasons for Verdict at paras 419 and 420.

[35] ibid para 374.

[36] ibid para 393.

[37] ibid para 398.

[38] ibid paras 412 and 413.

[39] ibid para 433.

[40] ibid para 435.

[41] ibid para 440.

[42] ibid paras 442 – 452.

[43] ibid para 454 – 456.

[44] ibid para 469.

[45] ibid para 474.

[46] ibid para 475.

[47] ibid para 477-8.

[48] Reasons for Verdict, para 465.

[49] ibid para 474.

[50] Transcript p 1231; see also to the same effect at p 1244F – I.

[51] ibid pp 1242 and 1243; and also 1246 R to the same effect.

[52] ibid p 1249D.

[53] ibid p 1252.

[54] See, for example the UBS Report of 26 February 2007: “Further acquisition should be the driver”; and Citic Group Report of 14 March 2007: “A lack of drivers … the market has clearly started to build expectations of another value accretive acquisition and while we expect another acquisition, we think it is unlikely in the near term. … lacking drivers, we are downgrading it to hold.”  Xinhua Financial Network on 15 March said that a major upside risk would be an earlier than expected announcement of more acquisitions.

[55] See for example the evidence of Mr Jayaram that such information was “perhaps about the most price-sensitive information that can exist in the marketplace” (transcript p 565) and the opinion of Ms Fung that in the circumstances of the particular proposed issue – because it was “for the acquisition of the asset in China, thus will be positive to the company’s prospect in the long term … so even if it issue new shares [the news] will be well received by the market” (transcript p 1019).

[56] See para 72 above.

[57] Ms Fung’s Fifth Statement, para 11.

[58] See para 116 above.

[59] [1992] 1 HKLR 254.

[60] July 2000.

[61] at p 38.

[62] Para 67 above.

[63] Para 68 above.

[64] Transcript 571-572.

[65] At paragraph 480.

[66] At paragraph 28.

[67] Paragraph 24 above.

[68] Section 10(3): “A person who enters into a transaction which is an insider dealing shall not be held to be an insider dealer if he establishes that he entered into the transaction otherwise than with a view to the making of a profit or the avoiding of a loss (whether for himself or another) by the use of relevant information.”

[69] CACV 334 of 2004, 3 November 2005, unreported.

[70] ibid para 28.

[71] [1999] 2 HKCFAR 205.

[72] See Ms Stella Fung’s Second Statement, paras 7-12 and exhibit P 92 which took a re-rated trading price for a reasonable period after public dissemination of the relevant information as against the average purchase price paid by Du, deducting transaction costs from the gross profit.

[73] It would seem that the amount individual fines were aligned to the judge’s application, to each impugned transaction, of Ms Fung’s method of calculating notional profit using re-rated trading price and average purchase price (as explained in footnote 72 above).

[74] section 303(2)(c) of the Ordinance.

[75] This must have been intended to read “be or continue to be”.

[76] section 303(2)(a).

[77] section 303(2)(b).

[78] [2010] 1 Cr App R(S) 269.

[79] Reasons for Sentence para 8.

[80] ibid para 22.

[81] Sentencing guidelines for theft involving breach of trust; as applied most recently to Hong Kong circumstances by HKSAR v Ng Kwok Wing [2008] 4 HKLRD 1018.

[82] McQuoid is persuasive authority for the proposition that the Clarke guidelines may be valuable assistance to sentencing for insider dealing on information imparted in trust.

[83] at paras 8 and 9.

[84] ibid para 8.

[85] ibid at para 14.

[86] para 159 above.

[87] [2005] NSWSC 50 at para 31.

[88] See HKSAR v Ho Siu Man [2004] 2 HKC 147 at 153; HKSAR v Yau [1999] 2 HKLRD 633 at 641; and R v Garner (1987) 7 Cr App R (S) 285at 291-292.

[89] For a discussion of the interplay between this provision and criminal proceedings, see Securities and Futures Commission v Tiger Asia Management LLC and others CACV 178 of 2011, 23 February 2012, unreported.

[90] Those referred to at para 151 above.