KOON WING YEE v. INSIDER DEALING TRIBUNAL

cacv 358/2005 AND CACV 360/2005

 cacv 358/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 358 of 2005

(ON APPEAL PURSUANT TO SECTION 31 OF THE
SECURITIES (INSIDER DEALING) ORDINANCE
(“THE ORDINANCE”), CAP. 395
FROM DETERMINATIONS OF AN INSIDER DEALING TRIBUNAL
IN RELATION TO
EASY CONCEPTS INTERNATIONAL HOLDINGS LTD. AND
EASYKNIT INTERNATIONAL HOLDINGS LTD.)

______________________

______________________

cacv 360/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 360 of 2005

(ON APPEAL PURSUANT TO SECTION 31 OF THE
SECURITIES (INSIDER DEALING) ORDINANCE (“SIDO”), CAP. 395
FROM DETERMINATIONS OF AN INSIDER DEALING TRIBUNAL
IN RELATION TO
EASY CONCEPTS INTERNATIONAL HOLDINGS LTD. AND
EASYKNIT INTERNATIONAL HOLDINGS LTD.)

______________________

______________________

______________________

J U D G M E N T

______________________

1.  These were applications for leave to appeal to the Court of Appeal on questions of fact from a determination of the Insider Trading Tribunal (“the Tribunal”) under section 31(1)(b) of the Securities (Insider Dealing) Ordinance Cap. 395 (“the Ordinance”).

2.  By a determination dated 7 October 2005 the Tribunal determined that Koon Wing Yee (“Koon”) was an insider dealer in respect of Sonny Chan’s purchase of 568,000 Easy Concepts International Holdings Ltd (“Easy Concepts”) shares on 31 January 2000 in breach of the provisions of section 9(1)(a) and 9(1)(c) of the Ordinance and that he also arranged and procured the purchase of 3.2 million Easy Concepts shares by Lam Ping Wan on 31 January 2000 in breach of the provisions of section 9(1)(a) of the Ordinance.

3.  In respect of Sonny Chan, the Tribunal held that he had been an insider dealer in respect of his purchase of 560,000 Easy Concepts shares and 1000 Easyknit International Holdings Ltd (“Easyknit”) shares on 31 January 2000 in breach of the provisions of section 9(1)(e) of the Ordinance.

Background

4.  The background to this case can be found in the introduction to the report.  Easyknit was a publicly listed company in Hong Kong.  At the beginning of 2000 it owned 75% of the shares of Easy Concepts.  Easy Concepts had itself been a publicly listed company in Hong Kong for some considerable time before the acquisition of the shares by Easyknit.  The principal business of Easyknit was the merchandising and export of garments.  On the other hand Easy Concepts was primarily involved in the operation and management of department stores and properties.  After 1997 Easy Concepts had been a loss-making subsidiary and Easyknit was anxious to sell control of that company.  It was considered that Easy Concepts was a prime candidate for what has been termed a back door listing.

5.  In late January 2000 a PRC-based conglomerate, Pollon Group, which had diverse interests in the energy sector and in the high-tech communications industry in the mainland, approached the management of Easyknit about acquiring Easy Concepts.  The management of Easyknit included Koon, who was the chairman of both Easyknit and Easy Concepts, and one Alan Tsang who was the vice-chairman and a practising accountant.

6.  There was a meeting on 28 January 2000 at Pollon Group’s Central Plaza office which took place at 4.15 on the Friday afternoon after the market had closed.  The Tribunal found that, in broad terms, what was proposed was that the Pollon Group would acquire 75% of Easy Concepts by a new share subscription leaving the remaining 25% of its shareholdings in the hands of Easyknit and the public.  During the weekend financial information relating to Easy Concepts was subjected to some form of preliminary due diligence examination on behalf of the Pollon Group and a draft joint announcement was circulated amongst the relevant parties.

7.  On the morning of Monday 31 January 2000 persons associated with Koon and Alan Tsang purchased a substantial number of Easy Concepts and Easyknit shares before trading was suspended at 10.47 and 10.48 am respectively due to a surge in the price.  Easyknit shares had dropped from $0.40 on 4 January 2000 to close at $0.275 on Friday 28 January but then increased to $0.36 in the 40 odd minutes of trading on 31 January whereas the shares of Easy Concepts went from $0.92 on 4 January to close at $0.34 on 28 January and increased to $2.10 before suspension on 31 January.  When trading resumed on 18 February 2000 the Pollon Group had taken a 75% interest in Easy Concepts.  The share price of Easyknit closed at $1.22 whereas Easy Concepts price had surged to $10.05 representing a massive percentage increase on its closing price on 31 January.

8.  The Tribunal found that the information concerning the contacts between the Easyknit Group and the Pollon Group at the meeting in the afternoon of 28 January and the other contacts over the weekend of 29 and 30 January 2000, whether direct or indirect, constituted sufficient price sensitive information which, so far as it existed by the start of trading on the morning of 31 January, was relevant information pursuant to the provisions of section 8 of the Ordinance.  This related both to the Easyknit shares and the Easy Concepts the shares.  Although the notice of appeal in respect of Koon raises this finding of fact as a ground of appeal I see no possibility of any appeal succeeding on that basis.  Furthermore, the Tribunal did not accept Koon’s evidence that he was disinterested in the Pollon Group deal.  For very sound reasons the Tribunal disbelieved his evidence in this regard.

Sonny Chan

9.  The case in respect of Sonny Chan turned upon the purchase of 568,000 Easy Concepts shares of which 470,000 were purchased on his Luen Fat account and 90,000 were purchased on his South China account.  In respect of those purchased on his Luen Fat account he took up only 450,000 of them and the remaining 20,000 were booked to the account he had opened for his secretary Chan Sin Yau.  In respect of the South China purchases, Sonny Chan ultimately took up only 18,000 shares, 10,000 had been booked to the account of one Eddy Lee and 70,000 to the account of Silver City China Ltd, a company owned by one Lai Leung.  He also purchased 100,000 Easyknit shares through his South China account.

10.  Perhaps the most crucial evidence in respect of Sonny Chan and Koon was that there were a series of at least eleven telephone calls made between the two of them in the period between 28 January and the evening of 31 January.  These were phonecalls made between mobile phones and records could be obtained.  Whether there were other phonecalls made on land lines is unknown.  What is significant is that these eleven telephone calls were made commencing at about 8 pm on Friday 28 January and also took place on the Sunday, there was a 6 minute telephone call shortly prior to the market opening on 31 January 2000.  There were two very short further calls before the market opened and then further of phonecalls later in the day of 31 January 2000.  Mr Lam, who appeared on behalf of Sonny Chan, argued that this was the only primary fact that had been proved at the Tribunal in respect of Sonny Chan.  He emphasised the fact that the contents of the communications was not proved.

11.  However, it is clear that this was not the only relevant fact that that was proved.  For example the Tribunal examined the records of phonecalls between the two on their mobile phones between 1 January and 10 March 2000 which were the only records that were placed before them.  From that they could conclude that the volume of calls on 31 January 2000 was by far the highest.  In relation to the telephone calls, it is further highly important that when Sonny Chan and Koon were questioned by the SFC Koon denied having contacted Sonny Chan at the material time whereas Sonny Chan said he could not remember any phone calls at that time because he thought he was in Canada.  It was only later, presumably when the records were put in front of them that they had no option but to admit them.

12.  What is also significant are the dealings by both the public in general and Sonny Chan in relation to Easy Concepts shares and Easyknit shares.  Sonny Chan had never previously dealt with Easy Concepts shares.  The records of trading of that company show that there was no turnover whatsoever in December 1999.  At the beginning of January there was a very minimal turnover showing a drop of nearly 50% in the price of the Easy Concepts shares until the 12 January after which there was no further trading until 28 January when there was a very minimal turnover amounting to a mere $18,500.

13.  All these matters were put to Sonny Chan and Koon in the proceedings before the Tribunal.  They were unable to explain Sonny Chan’s purchases to the satisfaction of the Tribunal.  In my view the conclusion that Sonny Chan had been “tipped off” by Koon is, quite simply, inescapable.

14.  Mr Lam criticised the decision of the Tribunal on the basis that Sonny Chan had been a market dealer using his own funds and had given evidence that he had carefully watched the market.  He said that the Tribunal should have accepted Sonny Chan’s evidence that Easy Concepts was a target which he had identified as a possible entry into the high-tech area.  These are matters entirely for the Tribunal.  It is certainly not an indication that inside information has not been used simply because the person purchasing the shares had used his own money. 

15.  Criticism was also made of the Tribunal’s observations in respect of the fact that Sonny Chan had allowed part of the contracts which he entered to be put into the accounts of others, thus, in effect, giving those others presents.  In my view the Tribunal’s observations in this respect were entirely justified and they were certainly not the crucial facts upon which they found insider dealing.  Such seeming generosity on Sonny Chan’s part clearly called for substantial believable evidence not only from Sonny Chan himself but also from the recipients.

16.  Clearly, there was no direct evidence as to the contents of the telephone calls and to that extent the Tribunal was drawing conclusions based on primary facts, but those conclusions, albeit inferences in the strict sense, were the only conclusions that could sensibly be arrived at, given the detailed background.  In short I can see no possibility that the Court of Appeal would disturb these findings of fact since those findings were made upon substantial facts found by the Tribunal. 

17.  It appears that the whole of the appeal Sonny Chan is an appeal as to fact.  Although paragraph 2 of the grounds of appeal might appear to be directed to a question of law it is not evident as to a how that impinges upon the findings in respect of Sonny Chan since the Tribunal came to the conclusion as to Sonny Chan’s dealings irrespective of Lam Ping Wan and Alan Tsang.  In respect of paragraph 1 of the grounds of appeal it also appears to me that this to related to a finding of fact and no arguments were presented on this application.  In those circumstances Sonny to Chan’s notice of appeal must be struck out.

Koon Wing Yee

18.  At the hearing of this application indication was given that leave to appeal on the question of fact would be granted in respect of the finding that Koon had arranged and procured Lam Ping Wan to purchase 3.2 million Easy Concepts shares on 31 January 2000.  Because this is an application for leave to appeal it is undesirable to say more, at this stage, than is strictly necessary.  The Tribunal held that it was not satisfied that Lam had been passed or was in possession of the relevant information.  On that footing the only basis upon which the Tribunal could express itself as being satisfied that Lam purchased the 3.2 million Easy Concepts shares as a result of being encouraged or procured by Koon was that he was “…not simply a minor business associate of Koon but some form of employee or agent…” as the Tribunal expressed on page 122 of the Report. 

19.  The finding in this regard may be arguably have been influenced by the Tribunal’s approach to various invoices which were paid on 2 February 2000 by Easyknit Enterprise Co. Ltd and Nice Progress Investments Ltd, both being subsidiary companies of Easyknit and the cheques being signed by Koon.  It is said that Koon has grounds for challenging the Tribunal’s approach in respect of this on the basis that the Tribunal may have misunderstood that the receipts to which they referred were produced as a “tear off” part of the invoices themselves and hence the date on the receipt may have reflected the date on the invoice.  In those circumstances it could be argued that although it is clear that the sum of $3,799,980 was transferred to Lam at the instance of Koon, the initial payments may well have been in respect of legitimate debts.  In those circumstances if Lam, or the intermediary C Y Chan, a nebulous figure who refused to take any part in the proceedings before the Tribunal, were using their own money that might be an indication that Lam was acting on his own account and not at the instance of Koon.  Although that would leave open the possibility that Koon had passed relevant information to Lam, albeit indirectly, that is not what the Tribunal found.

20.  In those circumstances the grant leave to appeal in respect of the matters of fact raised in paragraphs 8, 10, 11, 12 and 13 of the grounds of appeal.  In respect of the other grounds of appeal which raised issues of fact namely paragraphs 1 to 5 and 18 to 20 leave is not granted.  Although grounds 14 to 17 have not been struck out, the only ground comprised in those paragraphs amounts to the question as to whether the Tribunal should have drawn an adverse inference in relation to the withdrawal of the $6.5 million from the bank in respect of which Lam assisted.  I would simply comment that this hardly constitutes a discreet ground of appeal.  In respect of the facts raised in paragraph 9, I consider that Koon is fortunate that the Tribunal limited its findings in the way it did.  It would not have been surprising if a conclusion had been reached that the telephone calls with C Y Chan had been the conduit for the passage of relevant information.  As it is I see no basis for making this a separate ground of appeal.