AA AND ANOTHER v. THE SECURITIES AND FUTURES COMMISSION

HCAL 41/2016

[2019] HKCFI 246

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO 41 OF 2016

_______________

_______________

____________________

J U D G M E N T

____________________

Introduction

1.  The global financial system operates primarily through an internet of domestic markets.  It is therefore imperative that each domestic jurisdiction properly regulates its domestic markets, and that domestic regulators connect and cooperate with each other in order to ensure that financial markets throughout the world operate honestly and fairly.

2.  The Securities and Futures Commission (“the SFC” or “the Commission”) is entrusted with the very important responsibility of protecting and maintaining the integrity of the financial markets in Hong Kong.  To this end, the SFC has both domestic and international responsibilities.  This judicial review examines the legal obligations and requirements that fall on the SFC in dealing with overseas regulators.

3.  These proceedings concern a series of share transactions in September 2013 by the 1^st Applicant of a Japanese company listed on the Tokyo Stock Exchange, and the subsequent investigation of the transactions by the relevant regulators in Hong Kong and Japan.  During the course of the Hong Kong investigation, information and materials were obtained from the Applicants under compulsion by the SFC (“the compelled materials”) which were provided to and used by the Japanese regulators in proceedings in Japan.

4.  In essence, there are two issues that have been raised by the Applicants in these proceedings.  The first issue concerns the compelled materials, and whether they were unlawfully obtained by the SFC from the Applicants and, whether the SFC unlawfully provided them to the Japanese regulators.  The second issue concerns the action taken by the Japanese regulators in Japan against the Applicants, and whether the Japanese regulators unlawfully used the compelled materials in criminal proceedings.

Case overview

5.  The 1^st Applicant is a licensed corporation pursuant to section 116 of the Securities and Futures Ordinance, Cap 571, (“the SFO” or “the Ordinance”).  The 2^nd Applicant is the majority shareholder of the 1^st Applicant, holding 95% of its issued shares, and one of its responsible officers in accordance with section 126 of the SFO.

6.  The Applicants claim that in September 2013, it was announced that a Japanese company would become a constituent member of the Nikkei Index, and in consequence the 1^st Applicant performed an “index rebalancing” exercise by conducting a series of trades of the securities in the company.  There followed a series of inquiries by the SFC of the 1^st and 2^nd Applicants in relation to this share trading activity, for which it invoked its investigative powers for the provision and disclosure of information and materials. 

7.  In furtherance of the investigation, an interview notice was served on the 2^nd Applicant, stating that the SFC had received a request for assistance from the Japanese Financial Services Agency (“the FSA”) and the Securities and Exchange Surveillance Commission (“the SESC”) (“the Japanese regulators”) in relation to this matter and that it was of the opinion that the requirements referred to in section 186(1) and (5)(a) and (b) of the SFO were satisfied.  The SFC conducted an interview with the 2^nd Applicant, at which representatives of the Japanese regulators were present.  Subsequently, the SFC supplied the compelled materials it had gathered during its investigation to the Japanese regulators. Soon after receipt of the compelled materials, the Japanese regulators made an announcement on 5 December 2014 to issue an administrative monetary penalty against the 1^st Applicant for market manipulation in relation to its share trading activity.  Following the announcement, the 1^st Applicant commenced civil proceedings against the Japanese regulators for damages in Japan.  At the same time, the Applicants brought judicial review proceedings against the SFC in Hong Kong.

Case history

8.  On 12 February 2016, an anonymity order was granted to the Applicants by Au J (as he then was).  As a result, the 1^st and 2^nd Applicants are referred to as “AA” and “EA” respectively. 

9.  On 21 April 2016, this Court gave the Applicants leave to file an amended Form 86 which they did on 27 April 2016 in order to incorporate in the application further information and materials arising from action that had been taken against them by the Japanese regulators.

10.  On 5 May 2016, this Court granted the Applicants leave to judicially review the decision of the SFC to transmit compelled answers, testimony and documents obtained from them to the Japanese regulators.  

11.  The Applicants contend that they are aggrieved by (1) the unconstitutional demands for information from them under section 181 of the SFO; (2) the SFC’s provision of answers, testimony and documents, given to the SFC by the Applicants under compulsion, to the Japanese regulators without any proper protection against their use in criminal proceedings; and (3) the wanton leaking and breaches of secrecy in the course of the investigation and the SFC’s failure to ensure appropriate secrecy and due process by the Japanese regulators before making disclosure to them of confidential materials. 

12.  The decision in respect of which relief is sought is the decision by the SFC to transmit compelled answers, testimony and documents to the Japanese regulators.

13.  The relief sought by the Applicants includes (1) a declaration that the SFC acted unlawfully in transmitting compelled answers, testimony and documents to the Japanese regulators absent a binding prohibition against their use in criminal proceedings and/or proper assurance against their (or their contents) being leaked to the media and otherwise made public; and (2) a declaration that section 181 of the SFO contravenes Article 10 of the Hong Kong Bill of Rights Ordinance, Cap 383, (“the BOR” and “BOR 10”) and is unconstitutional.

14.  Prior to and during the substantive hearing of the judicial review, there were various applications that this Court was required to address. 

15.  On 8 August 2016, this Court granted the Applicants’ application for substituted service of the court documents on the FSA and SESC, the interested parties, by way of international courier to their offices in Japan.  This Court also directed, by agreement of the parties, that the SFC’s application to set aside the ex parte leave granted to the Applicants by this Court on the grounds of delay and lack of reasonable arguability of the grounds for judicial review be heard together with the substantive judicial review.[1]

16.  On 13 January 2017, this Court granted an application by the Secretary for Justice (“the SJ”) to be joined as an Intervener in the proceedings, and made appropriate consequential directions.  This Court also addressed the SFC’s application for a retrospective order in relation to the prior disclosure of court documents to the Department of Justice (“the DoJ”) while an anonymity order was in force. Although the application for a retrospective order was refused, this Court found that no prejudice or inconvenience had been caused as a result of the provision of the court documents to the DoJ.[2]

17.  On 16 January 2017, this Court partially granted the Applicants’ application for disclosure of certain categories of documents as specified in their summons.[3] 

18.  On 15 June 2017, this Court refused the Applicants’ application to amend the Amended Form 86 to raise a new ground.[4]

19.  Subsequent to the substantive hearing of the judicial review, the FSA imposed an administrative monetary penalty order in the sum of JPY 684,240,000 against the 1^st Applicant on 11 June 2018.

20.  On 16 and 23 July 2018, the Applicants and the SFC filed further written submissions as to the nature of the Japanese action in light of the penalty imposed. 

Background facts

21.  The 1^st Applicant is a company registered in Hong Kong and was licensed by the SFC to carry on Type 9 regulated activity (asset management) on 24 August 2010.  The 1^st Applicant is the investment manager of a hedge fund (“the Fund”), which is incorporated in Cayman Islands.  The subscribers of the Fund are mainly institutional investors. 

22.  As required under the SFO, the 1^st Applicant has two responsible officers, namely the 2^nd Applicant and another person who hold 95% and 5% of the issued shares in the 1^st Applicant respectively.  A responsible officer of a licensed corporation is available at all times to supervise the business of the regulated activity and is subject to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. 

23.  The Fund was launched in September 2010 with the intention that it would employ long-short and event-driven strategies to deliver an annual target return averaging 20% per annum.  A basket of 70 to 100 stocks, including Japanese companies that were constituent stocks in the Nikkei 225 Stock Average, were to be the focus of the Fund. 

24.  According to the 2^nd Applicant, the 1^st Applicant is a catalyst-driven investment advisory firm, which was established to invest principally in publicly traded equity securities, futures and options.  It seeks to maximize investors’ capital by buying securities with trading values materially lower than their intrinsic values and by selling short securities with trading values materially higher than their intrinsic values, and realising them through a near to mid-term catalyst.  It aims to achieve high absolute rates of return while minimizing the risk of capital loss.[5]

25.  The FSA is a national governmental agency of Japan.  According to published information, the head of the FSA is the Commissioner, who is appointed by the Prime Minister of Japan. The FSA is responsible for ensuring stability of Japan’s financial system, protecting depositors, insurance policy holders and securities investors.  The FSA can delegate supervisory authority governing securities transactions to the SESC, which is an organ within the ambit of the FSA and is subject to the same rules and regulations as the FSA.  The SESC monitors compliance with the rules governing securities markets and financial futures markets, and carries out on-site inspections of securities companies, daily market surveillance activities, and investigation of criminal offences which would impair the fairness of securities and derivatives transactions. 

Suspected market manipulation

26.  The subject of the regulatory inquiry in the present case is a Japanese company, Nitto Denko Corporation (“Nitto Denko”), that has been listed on the Tokyo Stock Exchange since 1962. 

27.  The Nikkei 225 Stock Average (“the Nikkei” or “the Nikkei 225”), is a major stock index for the Tokyo Stock Exchange.  The constituent stocks of the Nikkei are the top 225 blue-chip companies listed on the Tokyo Stock Exchange and are reviewed periodically in terms of their liquidity in the market and sector balance. 

28.  According to the 2^nd Applicant, in 2013, it was expected by the market that there would be considerable interest in the review of the Nikkei.  He states that the Nikkei had been particularly volatile in 2013.  It started in 2013 at near 10,600 and hit a peak of 15,942 in May 2013.  However, shortly afterwards it dropped by almost 10% before rebounding, making it the most volatile stock market index among the developed markets.[6]

29.  The shares of Nitto Denko were trading below JPY6,000 on the Tokyo Stock Exchange during the period from 16 July 2013 to 6 September 2013 (except for 18 July 2013). 

30.  On 6 September 2013, it was announced by Nikkei Inc. that, with effect from 26 September 2013, Nitto Denko would become a constituent stock of the Nikkei (“the Nikkei Announcement”). 

31.  On the next business day, 9 September 2013, the share price of Nitto Denko closed at JPY6,240 representing a 9.6% increase from the previous closing price of JPY 5,690 on 6 September 2013. 

32.  The 1^st Applicant actively traded in Nitto Denko shares after the Nikkei Announcement.  As at 24 September 2013, the Fund held 3,570,000 Nitto Denko shares in its portfolio. 

33.  From 24 September 2013 to the afternoon of 25 September 2013, the 1^st Applicant received guaranteed close orders (“Guaranteed Close Orders”) for a total of 15,173,100 Nitto Denko shares from five brokers.  Such orders specify that a trade is to be executed at the close of the market and as near to the closing price as possible. 

34.  On 25 September 2013 (i.e. the last trading day before Nitto Denko became a constituent stock of the Nikkei), the 1^st Applicant placed a combination of direct market access orders (i.e. orders for trade that are placed online, the order is sent directly to the stock exchange for execution) and program trading orders (i.e. orders generated by computer program after having data entered into that program), and purchased 7,886,900 Nitto Denko shares in the 30 seconds between 14:59:30 to 15:00:00 hours.  The share price jumped from JPY6,710 to JPY7,540 representing a 14.6% increase from the market open price of JPY6,580. 

35.  The 1^st Applicant bought 10,721,200 Nitto Denko shares on 25 September 2013, which represented 46.7% of the market turnover that day.  The Guaranteed Close Orders were executed by way of off-market cross trades after trading hours.  A cross trade is a practice where buy and sell orders for the same stock are offset without recording the trade on the exchange.  Most of the Guaranteed Close Orders were executed at or near the closing price of JPY7,540.  The 1^st Applicant made a profit of at least JPY6,312,000 on that day.

The Nitto Denko transactions

36.  According to the 2^nd Applicant,[7] where there is a change in the constituent stocks of an index, such as the Nikkei, funds and other institutional investors that maintain portfolios that track the index need to rebalance them to match the change in the index.  The objective is to achieve that rebalancing (which may involve a substantial number of securities) at the closing price of the stock or stocks in question on the trading day before the index rebalancing takes place.  This means that there is likely to be a substantially higher volume of trading in the stocks in question on the index-rebalancing day with significant price movements, with particularly high volumes and price movements at or near the close of trading. 

37.  On such index-rebalancing days, there may also be substantial arbitrage activity and speculative trading.  Arbitrage trading may therefore result in even higher volumes of trading, including increased levels of sales at or near the close of trading. 

38.  The 1^st Applicant anticipated that it would be invited by a number of major international broker-dealers to facilitate trading on 25 September 2013 by institutional investors in Nitto Denko with a view to the rebalancing of investment portfolios intended to mirror or track passively the Nikkei. 

39.  It was envisaged that the Fund would facilitate such index-rebalancing by institutional investors by executing over-the-counter (“OTC”) cross-trades or swaps in shares of Nitto Denko with major broker-dealers and would simultaneously hedge its short exposure by buying up to (or having already previously bought) the same amount of stock in the market.

The SFC’s investigation

40.  On 25 April 2014, the SFC received a report from a licensed corporation regarding suspected market manipulation activities conducted by its client, the Fund, in Nitto Denko shares. 

41.  The report was made under paragraph 12.5(f) of the Code of Conduct for Persons Licensed by or Registered with the SFC.  Under this paragraph, a licensed or registered person, as a firm, should report to the SFC immediately any material breach, infringement or non-compliance of market misconduct provisions of the SFO that it reasonably suspects may have been committed by its client, giving particulars of the suspected breach, infringement or non-compliance and relevant information and documents.

Information gathering

42.  On 5 May 2014, the SFC issued a letter under section 181(1) of the SFO (“the section 181 Letter”) to the 1^st Applicant, care of the attention of the other responsible officer, requiring the 1^st Applicant to provide the following information about its client, the Fund:

“1. Particulars of the Client(s) such as fund manager(s) and authorized person(s) to trade;

2. Month-end holding summary of all Nitto Denko Corporation shares or warrants held by the Client(s) and any other funds managed by you for each month from August 2013 to September 2013;

3. Particulars (including the share price, quantity, and execution brokers) of ALL trades in Nitto Denko Corporation shares or warrants executed by you or by other dealers on your behalf for the Client(s) and any other funds managed by you during the period from 2 September 2013 to 30 September 2013.”

43.  The SFC requested that the information be returned by 9 May 2014 and if there were any questions to contact the signatory of the letter.  The letter concluded with the following notifications:

“You must answer this demand for information

If you do not comply with this demand for information, or you give us false or misleading information, you may commit an offence under section 181(7), (8) or (9) of the Ordinance.

Please also note that you are obliged to keep records of your “ultimate clients”, and to give us information about them when requested. Please refer to paragraph 5.4 of the “Code of Conduct for Persons Registered with the SFC” and the “Client Identity Rule Policy”. These documents can be viewed on our website: www.sfc.hk, “Codes and Guidelines”.

This demand is confidential

You are a person assisting the Commission in the performance of its functions. Section 378 of the Ordinance imposes obligations of secrecy upon you. You must not disclose anything about this demand to anyone about this demand to anyone. It is a criminal offence to fail to comply with section 378.

Please note, however, that you may consult a lawyer about this matter without breaching your obligation of secrecy.

The Personal Data (Privacy) Ordinance

Your answers to this demand may include personal data as defined in the Personal Data (Privacy) Ordinance. This Ordinance authorizes the Commission to collect and use personal data to perform its functions as a financial regulator. In this regard, we draw your attention to the attached Personal Information Collection Statement which sets out the Commission’s policies and practices with regard to any personal data provided by you to us.”[8]

44.  It is to be noted the Applicants complain that the letter did not contain any reference to 1^st Applicant’s right to silence or warning against self-incrimination. 

45.  By letter dated 8 May 2014, the 1^st Applicant responded to the section 181 Letter and provided the requested information to the SFC.[9] It was signed by the responsible officer on behalf of the 1^st Applicant, who as to item (1) stated that the client was the Fund and the authorized person and fund manager was the 2^nd Applicant; as to item (2) stated that the holding of Nitto Denko shares at August month-end was Short 47,400 shares and at September month-end was Short 1,381,000 shares; and as to item (3) listed in 64 pages the trades in Nitto Denko shares in table form under the headings, Execution Time, Side, Execution Quantity, Execution Price and Execution Brokers. 

46.  By emails dated 13 and 14 May 2014, the SFC requested the 1^st Applicant to provide order information it submitted to each broker in relation to the trades conducted on 25 September 2013.[10]

47.  On 20 May 2014, the former solicitors for the 1^st Applicant (“the former solicitors”), after referring to the section 181 Letter, the subsequent email and the telephone exchanges between the SFC and their client, provided to the SFC the information requested in a spreadsheet, detailing the individual transactions.  The solicitors did not make any claim of the privilege against self-incrimination on behalf of the 1^st Applicant in relation to the information provided to the SFC.[11]

48.  By email dated 28 May 2014, the SFC requested the responsible officer to clarify the meaning of certain orders.[12] The next day, the former solicitors provided the information requested and again did not make any claim of the privilege against self-incrimination on behalf of the 1^st Applicant.[13]

49.  I observe that the information requested and obtained by the SFC is the type of routine trading information that a responsible person is obliged to record and disclose under the SFO.  In the section 181 letter, the responsible officer was referred to her obligation to keep records of clients and to give information about them when requested and to the compliance provision in paragraph 5.4 of the Code of Conduct for Persons Registered with the SFC and the Client Identity Rule Policy. 

Direction to investigate

50.  On 14 July 2014, the Director of Enforcement for the SFC issued a direction to investigate the matter under section 182(1) of the SFO, which so far as material stated:

“I have reasonable cause to believe that on or around 25 September 2013:

(a) offences of false trading and/or price rigging and/or stock market manipulation may have been committed in respect of dealing in shares of Nitto Denko Corporation, contrary to section 295 and/or section 296 and/or section 299 of the Ordinance; and/or

(b) persons may have engaged in false trading and/or price rigging and/or stock market manipulation in respect of dealing in the shares of Nitto Denko Corporation, contrary to section 274 and/or section 275 and/or section 278 of the Ordinance.

I also have reason to inquire whether, [the 1^st Applicant] and/or persons connected with it, are or were guilty of misconduct, or are not a fit and proper person, for the purpose of considering whether to exercise any power under section 194 of the Ordinance.”[14]

51.  On 16 October 2014, the Director of Enforcement issued a further direction to investigate under section 182(1)(g) of the SFO, which so far as material, stated:

“The Securities and Futures Commission (“the Commission”) has received from the Securities and Exchange Surveillance Commission (“SESC”) and Financial Services Agency of Japan (“FSA”) a request for assistance in relation to an investigation into suspected market manipulation by [the 1^st Applicant] involving the shares of Nitto Denko Corporation (“NDC”) listed on the Tokyo Exchange, in violation of Articles 159(2)(i) and 174-2 of the Financial Instruments and Exchange Act of Japan. The SESC and FSA are the competent authorities in Japan to enforce or administer the aforesaid legislation and the suspected contraventions relate to transactions regarding any securities, collective investment scheme or other similar transactions as are regulated by the SESC and FSA.

The Commission is of the opinion, pursuant to section 186 of the Securities and Futures Ordinance (“the SFO”), that:

• the SESC and FSA satisfy the requirements referred to in section 186(1) and 5(a) and (b) of the SFO; and

• in accordance with section 186(3)(b) of the SFO, the assistance will enable or assist the SESC and FSA to perform their functions and it is not contrary to the interest of the investing public or to the public interest that the assistance should be provided.

I, as delegate of the Commission, am of the opinion pursuant to section 182(1)(g) of the SFO, that the matters being investigated by the SESC and FSA, in relation to their investigation into the suspected market manipulation by [the 1^st Applicant] involving the shares of NDC, are of nature similar to the matters described in section 182(1) of the SFO, in that acts tantamount to the commission of offence involving false trading, and/or price rigging, and/or stock market manipulation contrary to section 274, 275, 278, 295, 296, 299 of the SFO may have been taken place on 25 September 2013, and/or whether [the 1^st Applicant] and any person connected with it, have been guilty of misconduct and/or whether they are a fit and proper person to remain to be licensed under section 194 of the SFO.”[15]

Conduct of the investigation

52.  On 8 August 2014, the SFC issued a notice under section 183(1) of the SFO (“the first section 183 Notice”) to the 1^st Applicant, directed to the attention of the responsible officer, requiring the 1^st Applicant as a “person under investigation” to produce documents and provide written answers regarding:

(a)   the 1^st Applicant and the Fund (e.g. list of shareholders of the 1^st Applicant and the Fund; monthly performance of the Fund; balance sheet of the Fund; investment management agreement, investment advisory agreement and offering memorandum showing the relationship between the 1^st Applicant and the Fund, etc);

(b)   trading in Nitto Denko shares between 1 September 2013 and 31 October 2013; and

(c)   the cross trades conducted off-market on 25 September 2013. 

53.  The notice enclosed copies of sections 182, 183, 184, 185 and 187 of the SFO for the recipient’s information, and contained, as required by section 187(1), a reminder of the limitations imposed by section 187(2) on the admissibility in evidence of a statement or answer where the privilege against self-incrimination has been claimed.

54.  The relevant notifications were set out as follows:

“You must comply with this notice

If you do not comply with the notice, you may commit an offence under section 184 of the Ordinance.

Use of incriminating evidence in proceedings

You must answer every question, but section 187(2) of the Ordinance limits the admissibility in evidence of a question and your answer if your answer might tend to incriminate you.

If, before you answer a question, you claim that your answer might tend to incriminate you, then the question and your answer will not be admissible in evidence against you in criminal proceedings except proceedings in respect of your answer for:

• an offence under section 179(13), (14) or (15), or section 184 of the Ordinance;

• an offence under sections 219(2)(a), 253(2)(a) or 254(6)(a) or (b) of the Ordinance;

• an offence under Part V of the Crimes Ordinance (Cap. 200); or

• perjury.

This investigation is confidential

You are a person assisting the Commission in the performance of its functions. Section 378 of the Ordinance imposes obligations of secrecy upon you. You must not disclose anything about this investigation to anyone. It is a criminal offence to fail to comply with section 378.

Please note, however, that you may consult a lawyer about this matter without breaching your obligation of secrecy.”[16]

55.  The responsible officer on behalf of the 1^st Applicant responded to the first section 183 Notice and provided the information requested to the SFC by letter dated 27 August 2014.[17] The letter had been copied to the former solicitors.  The responsible officer set out in the letter additional background information “on a voluntary basis”, providing a detailed explanation of the trades conducted on 25 September 2013, including the underlying reasons and trading strategy for the index rebalancing exercise.  The responsible officer denied that the 1^st Applicant had done anything improper or unlawful, and in providing the information requested by the SFC made no claim of the privilege against self-incrimination.  In fact, the responsible officer intimated that she had no objection to provide all relevant information in relation to the matter.  It was stated in the letter that:

“Accordingly, we welcome the opportunity to provide not just the information requested by your notice but also additional information, with a view to assisting you conclude your investigation as soon as possible. We would encourage you to ask as many additional questions relating to the trading on 25 September 2016 as you may wish, so that we can facilitate you in concluding your investigation.”

The letter went on to conclude that if the SFC had any further comments or questions, to inform them or their solicitors. 

56.  On 26 September 2014, the SFC issued a second notice under section 183(1) of the SFO (“the second section 183 Notice”), to the 1^st Applicant, directed to the attention of the responsible officer and the former solicitors, requiring the 1^st Applicant as a “person under investigation” to produce further information and documents in relation to the trades in Nitto Denko shares during the period from 2 September 2013 to 31 October 2013.[18]  The notice contained the same notifications as before in relation to the obligation to comply with the notice and the limits on the use of incriminatory evidence.

57.  By two letters dated 8 and 17 October 2014 respectively, the responsible officer on behalf of the 1^st Applicant responded to the second section 183 Notice and provided to the SFC the information requested.  The letters were headed “Section 182(1) Investigation – Notice to produce documents and answer written questions”.  The responsible officer gave full and detailed answers to the numerous questions that had been asked and again made no claim of the privilege against self-incrimination.[19]

58.  On 22 October 2014, the SFC issued a third notice under section 183(1) of the SFO (“the third section 183 Notice”) to the 2^nd Applicant, care of the former solicitors, requiring the 2^nd Applicant as a “person under investigation” to attend an interview at the SFC on 6 November 2014 (“the Interview”).  The third section 183 Notice stated that:

“The Commission has also received from the Securities and Exchange Surveillance Commission (“SESC”) and Financial Services Agency of Japan (“FSA”) a request for assistance in relation to an investigation into suspected market manipulation by [the 1^st Applicant] involving the shares of NDC listed on the Tokyo Exchange, in violation of Articles 159(2)(i) and 174-2 of the Financial Instruments and Exchange Act of Japan. The SESC and FSA are the competent authorities in Japan to enforce or administer the aforesaid legislation and the suspected contraventions relate to transactions regarding any securities, collective investment scheme or other similar transactions as are regulated by the SESC and FSA. The Commission is of the opinion, pursuant to section 186 of the Ordinance, that:

· the SESC and FSA satisfy the requirements referred to in section 186(1) and (5)(a) and (b) of the Ordinance; and

· in accordance with section 186(3)(b) of the Ordinance, the assistance will enable or assist the SESC and FSA to perform their functions and it is not contrary to the interest of the investing public or to the public interest that the assistance should be provided.

Karen Ngai, as delegate of the Commission, is of the opinion pursuant to section 182(1)(g) of the Ordinance, that the matters being investigated by the SESC and FSA, in relation to their investigation into the suspected market manipulation by [the 1^st Applicant] involving the shares of NDC [Nitto Denko Corporation], are of nature similar to the matters described in section 182(1) of the Ordinance, in that acts tantamount to the commission of offence involving false trading, and/or price rigging, and/or stock market manipulation contrary to section 274, 275, 278, 295, 296, 299 of the Ordinance may have taken place on 25 September 2013, and/or whether [the 1^st Applicant] and any person connected with it, have been guilty of misconduct and/or whether they are a fit and proper person to remain to be licensed under section 194 of the Ordinance.

Karen Ngai, as delegate of the Commission, has therefore decided, pursuant to section 186 of the Ordinance, to provide assistance to the SESC and FSA to investigate the matters mentioned above.”[20]

59.  The third section 183 Notice, included a reminder of the limitations under section 187(2) on the admissibility in evidence of a question and answer if the 2^nd Applicant claimed the privilege before answering the question.  It also enclosed copies of sections 182, 183, 184, 185 and 187 of the SFO for the 2^nd Applicant’s information. 

60.  Also, on 22 October 2014, the SFC sent a letter to the former solicitors to seek the 2^nd Applicant’s consent for officers of the FSA and SESC to be present at the Interview, or view or listen to the Interview simultaneously.  It was stated that the giving of consent was voluntary and that the 2^nd Applicant could choose not to give it.[21]

61.  By email dated 31 October 2014, the former solicitors informed the SFC that, provided that the 2^nd Applicant’s Japanese lawyers could participate to the same extent, i.e. as observers, in the Interview, the 2^nd Applicant agreed that representatives of the FSA and SESC could be present at the Interview.[22]  They also stated that their client wished to cooperate as fully as possible with the investigation process and minimize any delay to it.

62.  To allow the 2^nd Applicant sufficient time to engage and obtain advice from Japanese lawyers, the Interview was re-scheduled for 27 and 28 November 2014.

63.  The Interview took place on the scheduled days between 14:57 and 17:50 hours on 27 November 2014 and between 13:27 and 18:14 hours on 28 November 2014.  In attendance at the Interview were two officers from the SFC; an officer from the FSA and SESC; the 2^nd Applicant and four lawyers representing him (both Hong Kong and Japanese lawyers); and an interpreter provided by the SFC.  The Interview was conducted in Cantonese with simultaneous Japanese interpretation. 

64.  At the outset of the Interview, the SFC informed the 2^nd Applicant that:

(a)   The Interview was conducted by the SFC in relation to its own investigation under section 182 of the SFO.

(b)   The FSA officer attended the Interview in the capacity of an observer and would not ask the 2^nd Applicant any question during the Interview. 

(c)   Answers given by the 2^nd Applicant during the interview over which he claimed privilege against self-incrimination could not be used as evidence against him in criminal proceedings in Hong Kong or Japan. 

(d)   The SFC would not provide a copy of the record of the Interview to the FSA and SESC unless they made a request.

(e)   The SFC was not obliged to inform the 2^nd Applicant prior to providing a copy of the record of the Interview to the FSA and SESC.[23]

65.  According to the 2^nd Applicant, at the beginning of the interview, his legal advisors raised queries as to the extent of the use of the information and answers provided during the Interview in the investigation and proceedings in Japan.  He said the SFC confirmed that the Interview was conducted in relation to its own investigation pursuant to its investigative powers under the SFO, and that the SFC accepted the request for assistance from the SESC and the FSA as:

“(1) The SESC and the FSA satisfied the requirements set out in section 186(1), (5)(a) and (b) of the Ordinance;

(2) the [SFC] was satisfied that granting assistance will assist SESC/FSA to perform their functions and it is not contrary to the interest of the investing public or in the public interest under section 186(3)(b) of the Ordinance; and

(3) the subject matter of the SESC/FSA investigation is similar to the offences under the Ordinance in Hong Kong such that the [SFC] can render assistance to the SESC/FSA.”[24]

66.  The 2^nd Applicant in his affirmation stated that certain assurances were given by the SFC in relation to the use of the Interview by the Japanese regulators.  He said:

“61. At the Interview, the Commission emphasized to me and my legal advisers that the FSA officer was only attending the Interview in a capacity of an observer given the Interview was conducted pursuant to the Commission’s investigative power. The Commission clarified that the answers given during the Interview, over which I claim privilege against self-incrimination cannot be used as evidence against me in the criminal proceedings in Hong Kong or Japan. The Commission indicated that it will not provide a copy of the transcript of the Interview to the SESC/FSA unless they make such a request, but the Commission would have no control over whether they will use the transcript for any subsequent proceedings (other than criminal proceedings) in Japan such as administrative proceedings. My legal advisors asked if the Commission would notify the person under investigation if it was to provide the transcripts to the SESC upon request. The Commission’s investigator answered that it would not do so and it was entitled to provide the transcripts to the SESC without notifying or consulting the person under investigation.”[25]

67.  It is accepted by the SFC that before the Interview, the 2^nd Applicant’s legal advisors made it clear that he claimed privilege against self-incrimination in respect of each and every one of his answers. 

68.  Subsequent to the Interview on 12 December 2014, the 2^nd Applicant, upon the SFC’s request by email, copied to the former solicitors, provided the SFC with additional information concerning the particulars of investors of the Fund, the persons who placed orders on 25 September 2015, further transaction details, and the management and advisory fees arrangements concerning the Fund.[26] 

Assistance provided by the SFC to the FSA and SESC

69.  By email dated 26 June 2014, the SFC informed the FSA that it had received a suspicious transaction report from a licensed corporation suspecting its client, the Fund, which was managed by the 1^st Applicant, to have manipulated the shares of Nitto Denko.  The SFC asked whether the FSA and SESC were aware of the suspected market manipulation.  The SFC reminded the FSA and SESC that the information was passed to them pursuant to section 378 of the SFO and that they should not disclose the information to any third party other than in accordance with the International Organization of Securities Commission (“IOSCO”) Multilateral Memorandum of Understanding (“MMoU”).[27] 

70.  The FSA and the SESC responded by email the same day and agreed not to disclose the information to anyone outside the FSA and SESC without the SFC’s prior consent.[28] 

71.  The IOSCO MMoU is a multi-lateral memorandum of understanding to allow regulators who are signatories to the MMoU to provide mutual investigatory and other assistance, and the exchange of information for the purpose of enforcing and securing compliance with their respective laws and regulations.  Paragraph 10 of the MMoU prescribes the permissible uses of information provided by one signatory to the other under the MMoU.  Paragraph 11 of the MMoU contains provisions on confidentiality in relation to information exchanged under the MMoU.[29] 

72.  By letter dated 4 July 2014, the FSA and SESC requested the SFC’s assistance in relation to their investigation of possible market manipulation in Japan by the 1^st Applicant (“the Letter of Request”).  They sought from the SFC its assistance in obtaining from the 1^st Applicant: (1) transaction records of Nitto Denko shares in the Fund and, if any, other funds the 1^st Applicant managed; (2) information on contracts/memoranda of the fund, etc.; and (3) the 2^nd Applicant’s answers in written form signed by him in response to their questions.  They confirmed that:

(a)   They would use information provided by the SFC and maintain confidentiality of it in accordance with the terms of the Statement of Intent signed by the SFC and the FSA on 5 May 2005 (“the SOI”)[30] and the IOSCO MMoU.  The SOI is a bilateral arrangement between the SFC and the FSA for regulatory co-operation, consultation and exchange of information between the two regulators.  It would appear that the FSA can make a request for assistance under both the SOI and the IOSCO MMoU. 

(b)   The information provided by the SFC would be used by the FSA and SESC for administrative or regulatory purposes only. 

(c)   The information provided by the SFC would not be used by the FSA and SESC for criminal investigation or criminal proceedings.  It was noted that before the SESC took any enforcement action, such as recommending the FSA to take any administrative action, staff of the SESC would consult staff of the SFC.[31]

73.  The Letter of Request was made pursuant to the SOI and the IOSCO MMoU. 

74.  On 9 July 2014, Mr Ronald Pong of the SFC informed the FSA by email that it had an on-going investigation in Hong Kong against the 1^st Applicant into alleged manipulation of Nitto Denko shares and requested the FSA and SESC to alert the SFC before taking any administrative action against the 1^st Applicant in Japan.  He requested the FSA to:

“… please alert us before you take any administrative actions against [the 1^st Applicant], so that the SESC and the SFC can work together to ensure that each other’s action (both actual and contemplated) do not adversely impact or prejudice the other’s actual and potential actions”.

75.  He went on to conclude:

“Please also keep us fully and timely informed if, at any stage, you become aware that there may be misconduct or issues that may have an impact on the fitness and properness of [1^st Applicant/2^nd Applicant], or any issues that may be of any interest to us in Hong Kong;”[32]

76.  The FSA replied to the SFC on 10 July 2014, agreeing to what have been requested.[33]

77.  The Applicants query why the SFC would apprehend that the taking of administrative proceedings by the FSA have an adverse or prejudicial impact on the SFC’s investigation, if the SFC was not concerned that the administrative proceedings might be challenged for being criminal in nature.  I do not see anything inappropriate or untoward in the exchange of communications between the SFC and the Japanese regulators. The SFC simply sought, as one would expect, to ensure that the concurrent investigations did not adversely impact on each other and that they appropriately kept each other informed as to the progress of their respective investigations.

78.  By letter dated 3 September 2014, the SFC provided to the SESC the information and documents obtained from the 1^st Applicant pursuant to the section 181 Letter and the first section 183 Notice.[34] The SFC reminded the SESC that the contents of the letter were confidential and were passed to the SESC under section 378 of the SFO.  The SFC informed the SESC not to onward disclose the information to any third party, other than in accordance with the IOSCO MMoU, without the SFC’s prior written consent. 

79.  By letter dated 22 October 2014, the SFC provided to the FSA and SESC information and documents obtained from the 1^st Applicant pursuant to the second section 183 Notice.  As before, the SFC reminded the FSA and SESC of the confidential nature of the information and the obligations of disclosure in relation to it.[35] 

80.  On 27 November 2014, the FSA and SESC provided a written undertaking to the SFC pursuant to section 186 of the SFO (“the Undertaking”).  It was stated in the Undertaking, amongst other things, that:

“3.   Under section 186(6) of the Securities and Futures Ordinance (“SFO”), if:

(i)   a person is required by the SFC to give an explanation or further particulars as required by, or to give an answer to any question as raised by, an investigator exercising a power under section 183; and

(ii)   the explanation or statement, the explanation or further particulars, or the answer might tend to incriminate him and he so claims before providing or making the explanation or statement, giving the explanation or further particulars, or giving the answer (“Privileged Information”);

then the investigator shall not provide the Privileged Information to an authority, regulatory organisation of companies inspector outside Hong Kong for use in criminal proceedings against him in the jurisdiction of the authority, regulatory organisation or companies inspector.

4.   In consideration of the assistance given or to be given by the SFC and recognising the provisions of the IOSCO MMoU and the statutory limitations placed on the SFC regarding the use of Privileged Information, the FSA and SESC undertake to the SFC that:

(i)   in the event that any testimony or statements of an interviewee disclosed by the SFC to the FSA and SESC under sections 186(6) and 378(3)(g)(i) of the SFO contains Privileged Information, the FSA and SESC will not use such Privileged Information in any criminal proceedings against that interviewee; and

(ii)   any testimony or statements of an interviewee disclosed by the SFC to the FSA and SESC under sections 186(6) and 378(g)(i) of the SFO will be subject to the requirement that the FSA and SESC shall not disclose the testimony or statements of the interviewee, or any part thereof, to any other person unless the SFC consents to the disclosure.”[36]

The SESC Announcement

81.  On 5 December 2014, the SESC published an announcement on the website of the FSA that it had made a recommendation to the Prime Minister of Japan and the Commissioner of the FSA to issue an administrative monetary penalty in light of its findings of the 1^st Applicant’s market manipulation concerning the trades of Nitto Denko shares on 25 September 2013 (“the SESC Announcement”). 

82.  So far as material, the English translation of the SESC Announcement stated as follows:

“Recommendation for Administrative Monetary Penalty Payment Order for Market Manipulation by [the 1^st Applicant]

1. Contents of the Recommendation

The Securities and Exchange Surveillance Commission, today, made a recommendation to the Prime Minister and the Commissioner of the Financial Services Agency (“FSA”) that an administrative monetary penalty payment order be issued in regard to market manipulation by [the 1^st Applicant] pursuant to Article 20(1) of the Act for Establishment of the FSA. This recommendation is based on the findings of the investigation into the market manipulation, whereby the following violation of laws and ordinances was identified.

2. Summary of the Findings Regarding the Violation of the Laws and Ordinances

…

These constituted a series of sale and purchase of securities and entrustments that would mislead others into believing that sale and purchase of the shares were thriving and would cause fluctuations in prices of the shares.

The above acts by [the 1^st Applicant] were recognized as “a series of Sale and Purchase of Securities, etc.” and “Entrustment, etc.” conducted “in violation of Article 159(2)(i)” as stipulated under Article 174-2(1) of the Financial Instruments and Exchange Act (“FIEA”) before the amendment by Act No. 45 of 2013.

3. Calculation of the Amount of the Administrative Monetary Penalty

Pursuant to the FIEA before the above amendment, the amount of the administrative monetary penalty applicable to the above violation is 430,740,000 yen.[37]

Details of the calculation are presented in the Attachment.

4. Others

We appreciate assistance of the Securities and Futures Commission of Hong Kong in this matter.

Attachment

• Calculation Method for the Amount of the Administrative Monetary Penalty

1. Pursuant to Article 174-2(1) of the FIEA before the amendment by Act No. 45 of 2013, the amount of the administrative monetary penalty shall be calculated as a total of the following amounts:

(1) Amount pertaining to a Matching Volume of Sale and Purchase (Note 1): (Value pertaining to the sale of securities on its own account) – (Value pertaining to the purchase of securities on its own account)

Note 1: Matching Volume of Sale and Purchase: Whichever is smaller, volume of securities sold or volume of securities purchased concerning the violation.

(2) In case the volume of the purchase of the securities on its own account exceeds the volume of the sale of the securities on its own account, the amount shall be calculated as follows: (Value obtained by multiplying the highest price of the securities, which shall be the highest after the completion of the act of violation among the highest prices on each day until one month has passed as set forth in Article 67-19 of the FIEA before the above amendment, by the exceeded volume) – (Value for the purchase of the securities pertaining to the exceeded volume)

(3) In case where, during the period between the time of the commencement of the act of violation and the time when one month has passed thereafter, the violator has conducted the act of violation, etc. on the account of others: the amount of fees, remuneration or any other type of consideration of the act of violation, etc.

…”[38]

83.  The Applicants complain that the SESC Announcement and its alleged findings were widely publicized by the press in Japan. 

84.  Following the SESC Announcement, the FSA commenced administrative proceedings against the 1^st Applicant for the alleged market manipulation.

85.  The Court was informed that on 29 October 2015, the 1^st Applicant commenced proceedings in the Civil Division of the Tokyo District Court, by way of a “State Compensation Claim Case” against the Government of Japan.  In the Japanese proceedings, the 1^st Applicant is seeking monetary compensation from the Government of Japan in the sum of JPY 100,000,000 (plus interest) on the basis that:

(1)   The statements in the SESC Announcement amount to defamation against the 1^st Applicant under Japanese law.

(2)   The SESC was not legally entitled to publish the SESC Announcement under Japanese law, namely the SESC was only allowed to make a recommendation to the FSA, and the SESC did not have the legal standing to publicise a determinative finding that the 1^st Applicant had violated Japanese law. 

(3)   The SESC Announcement contained grave factual errors. 

86.  The SESC informed the SFC of its intention to publicly disclose the case the day before the SESC Announcement. 

87.  The Applicants contend that what was said by the SESC to the SFC should be understood as being “information” only, and not as a tacit or actual request for permission or consent.  They point out that in earlier correspondence, the FSA said it would not disclose the information without the SFC’s consent.  I note that the SFC were informed by the SESC of the public announcement and no objection was raised in them doing so.  The view taken by the SFC was that the public announcement was in relation to administrative or regulatory proceedings. 

88.  By two letters dated 18 December 2014,[39]the FSA and SESC referred to the SESC Announcement and requested the SFC to provide them with a copy of the record of the Interview and all the documents submitted or expected to be submitted by the 1^st Applicant to the SFC in relation to it.  In the letter, the FSA and SESC confirmed that:

(a)   The SESC would use information provided by the SFC and would maintain confidentiality of the information in accordance with the terms of the SOI and the IOSCO MMoU. 

(b)   The information provided by the SFC would be used by the FSA and SESC for administrative or regulatory purposes only.

(c)   The information provided by the SFC would not be used for criminal investigation or criminal proceedings.

89.  By letter dated 26 March 2015,[40] the SFC acknowledged receipt of documents from the FSA and SESC in relation to its investigation and provided them with two discs containing the audio recording of the Interview together with the additional information, concerning particulars about the Fund and the placement of the orders on 25 September 2013, provided by the 1^st Applicant subsequent to the Interview.  The SFC reminded the FSA and SESC that the contents of the letter were confidential and were passed to the FSA and SESC pursuant to section 378 of the SFO.  The SFC also informed the FSA and SESC not to onward disclose the information to any third party, other than in accordance with the IOSCO MMoU, without the SFC’s prior written consent. 

90.  On 7 January 2015, the former solicitors met with officers of the SFC and made representations to them about the investigation.[41] In their submissions, the former solicitors set out a brief chronology of events leading up to and following the SESC Announcement.  They complained of contact by the media prior to the announcement and the effect it had on the 1^st Applicant’s business.  They responded to the allegation of market manipulation by the 1^st Applicant, and concluded that in relation to the SFC’s ongoing investigation, the 1^st Applicant had indicated previously that it wished to work with the SFC “to achieve a closure of the SFC’s investigation in a fair and reasonable manner”. 

91.  At this stage, the Applicants appeared to have been concerned about the release of information in relation to the investigation to the media and the action taken by the Japanese regulators as a result of the SFC’s investigation.

92.  It was much later, by letter dated 13 October 2015,[42] that the current solicitors for the Applicants (“the current solicitors”) wrote to the SFC setting out a series of grievances as generally contained in the papers filed by the Applicants in bringing the present judicial review proceedings.  There followed an exchange of correspondence between the current solicitors and the SFC, and on 12 February 2016, the Applicants made an application for leave to commence judicial review.[43]  Leave was granted by this Court on 5 May 2016, preserving the right to the SFC to argue that leave should be set aside on the ground of delay.[44] 

The constitutional provisions

93.  The constitutional challenge against section 181 focuses on a violation of the privilege against self-incrimination under Articles 10 and 11(2)(g) of the BOR (“BOR 10” and “BOR 11(2)(g)”).

94.  So far as material, BOR 10 provides:

“…In the determination of any criminal charge against him, or of his rights and obligations in a suit at law, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law. …”

95.  So far as material, BOR 11 provides:

“(1) Everyone charged with a criminal offence shall have the right to be presumed innocent until proved guilty according to law.

(2) In the determination of any criminal charge against him, everyone shall be entitled to the following minimum guarantees, in full equality-

…

(g) not to be compelled to testify against himself or to confess guilt.

…”

96.  The extracted provisions of BOR 10 and 11(2)(g) are in the same terms as the corresponding provisions in Article 14(1), (2) and (3)(g) of the International Covenant on Civil and Political Rights.  By virtue of Article 39 of the Basic Law (“BL 39”), the articles of the BOR are given constitutional force and cannot be restricted unless as prescribed by law.

The statutory regime

97.  Under the SFO, any person carrying on regulated activities has to be licensed or registered with the SFC unless specific exemption is provided.  It is a criminal offence to carry out regulated activity in Hong Kong or actively market to the investing public of Hong Kong any services which constitute a regulated activity without the required licence or registration. 

98.  The SFO establishes a single licensing regime where a person only needs one licence or registration to carry on different types of regulated activities as defined in Schedule 5 to the SFO provided that he is fit and proper to do so. 

99.  The SFC has issued “fit and proper” guidelines where it explains that a fit and proper person is someone who is financially sound, competent, honest, reputable and reliable. Consequently, if a person is found to be guilty of market misconduct, either by a relevant regulatory body in Hong Kong or overseas, that person is likely to be regarded by the SFC as not a fit and proper person to be so licensed or registered. 

100.  There is an extensive range of regulatory requirements and obligations on a licensed corporation and its responsible officers in relation to the business of the regulated activity, including the obligation to keep records and disclose information to the SFC on request. 

101.  The regulatory objectives of the SFC are set out in section 4 of the SFO and includes to maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry. 

102.  The statutory functions and duties of the SFC are set out in sections 5 and 6 of the SFO respectively. A key aspect of its functions is to cooperate with and provide assistance to regulatory authorities or organisations, whether formed or established in Hong Kong or elsewhere.  A key aspect of its duties is to have regard to the international character of the securities and futures industry and the desirability of maintaining the status of Hong Kong as a competitive international financial centre as well as the importance of acting in a transparent manner, having regard to its obligations of preserving secrecy and confidentiality. 

103.  It therefore falls on the SFC to investigate allegations of misconduct of a regulated person or entity and if a case is made out to take appropriate civil or criminal action as provided under the SFO. 

The SFC’s investigative powers

104.  Part VIII of the SFO is entitled “Supervision and Investigations” and as the title indicates, this Part sets out the SFC’s supervisory and investigatory powers.  It is broken up into five divisions.

105.  Division 1 is entitled “Interpretation”.  It consists of a single provision, section 178, within which an “investigator” and a “person under investigation” are defined.

106.  Division 2 is entitled “Powers to require information, etc.”  It consists of sections 179, 180 and 181 which delineate the SFC’s powers in relation to the production of information and materials.  

107.  For present purposes, I will only mention the headings of sections 179 and 180 as they are self-explanatory, “Power to require production of records and documents concerning listed corporations, etc.” and “Supervision of intermediaries and their associated entities”, respectively.

108.  The heading of section 181 is “Information relating to transactions”.  This is the section under challenge by the Applicants and it is therefore necessary to provide a brief description of the section.  It empowers the SFC, in the exercise of its functions under the SFO, to require and compel disclosure of information about a client, details of a transaction, and instructions relating to the transaction, from a licensed person or registered institution through whom a financial product the SFC regulates was traded, or a person who holds an interest in such a financial product, or a person who has traded in such a financial product. 

109.  The SFC may seek information in relation to securities, futures contracts or leverage foreign exchange contracts, or in relation to any interest in any of these products or any interest in a collective investment scheme.  Such information that the SFC may require, includes particulars of the product involved and the consideration paid and instructions given in relation to the holding or transaction.  The SFC may require verification of the information furnished, or verification of the reason for not furnishing any of the information required.  It is an offence to fail to comply with a requirement imposed under the section or to knowingly or recklessly give false or misleading information.

110.  Division 3 is entitled “Commission’s Powers of Investigation”.  It consists of sections 182, 183 and 184 which have as their headings “Investigations by Commission”, “Conduct of investigations”, and “Offences in relation to investigations”, respectively. 

111.  In general terms, section 182 empowers the SFC to direct any of its employees or appoint any person to investigate a matter in connection with any offence or misconduct which the SFC has reasonable cause to believe may have been committed. 

112.  Under section 183, the SFC may compel a person to provide information or produce documents or records.  A person who is served with a section 183 notice has a statutory obligation to answer every question asked by the SFC investigator and to provide any document or information as requested.  Failure to do so may result in criminal prosecution as provided by section 184. 

113.  A person’s statutory obligation to give an explanation or further particulars or to give an answer to any questions under section 183 overrides his privilege against self-incrimination.  However, by virtue of section 187(2) where a person makes a claim of privilege then such explanation or further particulars or the question and answer shall not be admissible in evidence against the person in criminal proceedings.

The statutory provisions

114.  In order to appreciate the wording of the main statutory provisions that feature in this challenge, I have set them out in the following order.  The first is section 186 because this provision deals with the requirements for and the nature of the international cooperation by the SFC with overseas regulators.  Next are the sections that deal with the investigative powers of the SFC, section 179 (the provision requiring the production of records or documents concerning listed corporations, etc.), section 181 (the provision requiring information relating to transaction), section 182 (the provision setting out the powers of investigation by the SFC), and section 183 (the provision setting out the conduct of investigation by the SFC).  It is to be noted that section 184 sets out offences in relation to investigations and section 187 addresses the use of incriminating evidence in proceedings.

115.  Section 186 reads:

“(1) Where the Commission receives, from an authority or regulatory organization outside Hong Kong which in the opinion of the Commission satisfies the requirements referred to in subsection (5)(a) and (b), a request for assistance to investigate whether a person specified by the authority or regulatory organization has contravened or is contravening legal or regulatory requirements which-

(a) the authority or regulatory organization enforces or administers; and

(b) relate to such transactions regarding any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, collective investment scheme or other similar transactions as are regulated by the authority or regulatory organization,

the Commission may, where it is of the opinion that the condition specified in subsection (3) is satisfied, provide the assistance to investigate the matter by directing that any of the powers under sections 179, 181, 182 and 183 be exercised.

(2) Where the Commission receives, from a companies inspector outside Hong Kong who in the opinion of the Commission satisfies the requirements referred to in subsection (5)(a) and (b), a request for assistance to investigate whether a person specified by the companies inspector has contravened or is contravening legal or regulatory requirements which relate to transactions regarding any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, collective investment scheme or other similar transactions, the Commission may, where it is of the opinion that the condition specified in subsection (3) is satisfied, provide the assistance to investigate the matter by directing that any of the powers under sections 179, 181, 182 and 183 be exercised.

(2A) Where the Commission receives, from an authority or regulatory organization outside Hong Kong, a request for assistance in relation to a licensed corporation, the Commission may provide the assistance by directing that the power under section 180(4A) be exercised if-

(a) in the opinion of the Commission-

(i) the authority or regulatory organization satisfies the requirements referred to in subsection (5)(a) and (b); and

(ii) the condition specified in subsection (3) is satisfied; and

(b) the authority or regulatory organization has provided to the Commission a written statement that conforms with subsection (2D) and a written undertaking that conforms with subsection (2E).

(2B) In subsection (2A), a reference to assistance in relation to a licensed corporation is a reference to assistance to ascertain whether a corporation specified in subsection (2C)-

(a) constitutes a risk to, or may affect, the financial stability of the jurisdiction of the authority or regulatory organization; or

(b) is complying or has complied with, or is likely to be able to comply with, legal or regulatory requirements that-

(i) are administered by the authority or regulatory organization; and

(ii) relate to transactions or activities regarding any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, collective investment scheme, or other similar transactions or activities, that are regulated by the authority or regulatory organization.

(2C) The corporation specified for the purposes of subsection (2B) is one that-

(a) is regulated by the authority or regulatory organization; and

(b) is a licensed corporation or a related corporation of a licensed corporation.

(2D) The written statement referred to in subsection (2A)(b) must be to the effect of confirming that the authority or regulatory organization has not been and will not be able to-

(a) obtain the information referred to in section 180(4A)(a) or (b) by any other reasonable means; and

(b) fully ascertain the matters described in subsection (2B) without the information.

(2E) The written undertaking referred to in subsection (2A)(b) must be to the effect that the authority or regulatory organization-

(a) will use the information obtained from the Commission because of the request for assistance solely for ascertaining the matters described in subsection (2B);

(b) will not use any of the information in any proceedings, in the jurisdiction of the authority or regulatory organization or elsewhere, unless-

(i) the authority or regulatory organization has made a separate request under subsection (1) (investigation request), and the Commission has decided to provide assistance under that subsection; and

(ii) the authority or regulatory organization has obtained the same information from the Commission because of the investigation request;

(c) will treat the information as confidential and will not disclose it to any other person, in the jurisdiction of the authority or regulatory organization or elsewhere, for any purpose without the consent of the Commission;

(d) will, on receiving a demand legally enforceable under the laws of the jurisdiction of the authority or regulatory organization, for the disclosure of any of the information-

(i) inform the Commission as soon as reasonably practicable; and

(ii) assist in preserving the confidentiality of the information by taking all appropriate measures as may be available (including but not limited to asserting legal exemptions or privileges under the laws of the jurisdiction of the authority or regulatory organization); and

(e) will cooperate with the Commission in any action or proceedings, in the jurisdiction of the authority or regulatory organization or elsewhere, that seek to safeguard the confidentiality of any of the information.

(3) The condition referred to in subsections (1), (2) or (2A)(a)(ii) is that-

(a) it is desirable or expedient that the assistance requested under subsection (1), (2) or (2A) (as the case may be) should be provided in the interest of the investing public or in the public interest; or

(b) the assistance will enable or assist the recipient of the assistance to perform its or his functions and it is not contrary to the interest of the investing public or to the public interest that the assistance should be provided.

(4) In deciding whether the condition specified in subsection (3) is satisfied in a particular case, the Commission shall take into account-

(a) where the recipient of the assistance is an authority or regulatory organization referred to in subsection (1) or (2A), whether the authority or regulatory organization will-

(i) pay to the Commission any of the costs and expenses incurred in providing the assistance; and

(ii) be able and willing to provide reciprocal assistance within its jurisdiction in response to a comparable request for assistance from Hong Kong; or

(b) where the recipient of the assistance is a companies inspector referred to in subsection (2), whether-

(i) the companies inspector will pay to the Commission any of the costs and expenses incurred in providing the assistance; and

(ii) under the laws of the country or territory in which the companies inspector is appointed, reciprocal assistance will be provided in response to a comparable request for assistance from Hong Kong.

(5) Where the Commission is satisfied, for the purposes of subsection (1), (2) or (2A)(a)(i), that an authority, regulatory organization or companies inspector outside Hong Kong-

(a) performs any function similar to a function of the Commission or the Registrar of Companies, or regulates, supervises or investigates banking, insurance or other financial services or the affairs of corporations; and

(b) is subject to adequate secrecy provisions,

the Commission shall as soon as reasonably practicable thereafter cause the name of the authority, regulatory organization or companies inspector (as the case may be) to be published in the Gazette.

(6) If a person is required-

(a) to provide or make an explanation or statement as required by an authorized person within the meaning of section 179 exercising pursuant to subsection (1) or (2) a power under section 179; or

(b) to give an explanation or further particulars as required by, or to give an answer to any question as raised by, an investigator exercising pursuant to subsection (1) or (2) a power under section 183,

and the explanation or statement, the explanation or further particulars, or the answer (as the case may be) might tend to incriminate him and he so claims before providing or making the explanation or statement, giving the explanation or further particulars, or giving the answer (as the case may be), then, without limiting the provisions of section 187, the authorized person or investigator (as the case may be) shall not provide evidence of the requirement and the explanation or statement, the explanation or further particulars, or the question and answer (as the case may be) to an authority, regulatory organization or companies inspector outside Hong Kong for use in criminal proceedings against him in the jurisdiction of the authority, regulatory organization or companies inspector (as the case may be).

(7) Where the Commission receives from an authority, regulatory organization or companies inspector outside Hong Kong an amount paid in respect of any of the costs and expenses incurred in providing assistance under this section, and all or any of the costs and expenses have been paid out of moneys provided by the Legislative Council, the Commission shall pay to the Financial Secretary the amount received to the extent that it has already been paid out of moneys provided by the Legislative Council.

(8) Any matter published under subsection (5) is not subsidiary legislation.

(9) In this section, companies inspector (公司審查員), in relation to a place outside Hong Kong, means a person whose functions under the laws of that place include the investigation of the affairs of a corporation carrying on business in that place.” (Underlining added)

116.  It should be noted that section 180(4A) which is mentioned in section 186 concerns the SFC providing assistance to an overseas regulator in relation to intermediaries and their associated entities.

117.  So far as material, section 179 provides:

“(1) Where, in relation to a corporation which is or was listed-

(a) it appears to the Commission that there are circumstances suggesting that at any relevant time the business of the corporation has been conducted-

(i) with intent to defraud its creditors, or the creditors of any other person;

(ii) for any fraudulent or unlawful purpose; or

(iii) in a manner oppressive to its members or any part of its members;

(b) it appears to the Commission that there are circumstances suggesting that the corporation was formed for any fraudulent or unlawful purpose;

(c) it appears to the Commission that there are circumstances suggesting that persons concerned in the process by which the corporation became listed (including that for making the securities of the corporation available to the public in the course of such process) have engaged, in relation to such process, in defalcation, fraud, misfeasance or other misconduct;

(d) it appears to the Commission that there are circumstances suggesting that at any relevant time persons involved in the management of the affairs of the corporation have engaged, in relation to such management, in defalcation, fraud, misfeasance or other misconduct towards it or its members or any part of its members;

(e) it appears to the Commission that there are circumstances suggesting that at any relevant time members of the corporation or any part of its members have not been given all the information with respect to its affairs that they might reasonably expect; or

(f) a matter in respect of the investigation of which the Commission decides to provide assistance under section 186(1) or (2) relates to the corporation and is, in the opinion of the Commission, of a nature similar to the matter described in paragraph (a), (b), (c), (d) or (e) as being suggested by the circumstances referred to in such paragraph,

an authorized person may, subject to subsections (5) to (10), give a direction to-

(i) the corporation;

(ii) a corporation that is, or was at the material time, a related corporation of the corporation;

(iii) an authorized financial institution, other than the corporation or a corporation described in paragraph (ii);

(iv) an auditor, other than the corporation or a corporation described in paragraph (ii);

(v) any other person,

requiring the production, within the time and at the place specified in the direction, of any record and document specified in the direction.

(2) A power under this section to require the production of any record or document by any person includes the power-

(a) if the record or document is produced-

(i) to make copies or otherwise record details of the record or document; and

(ii) to require-

(A) the person;

(B) in the case of a corporation, any person who is a present or past officer of the corporation, or is or was at any time employed by the corporation,

to provide or make any explanation or statement in respect of the record or document (including, in so far as applicable, a description of the circumstances under which it was prepared or created, details of all instructions given or received in connection with it, and an explanation of the reasons for the making of entries contained in it or the omission of entries from it); or

(b) if the record or document is not produced, to require-

(i) the person;

(ii) in the case of a corporation, any person who is a present or past officer of the corporation, or is or was at any time employed by the corporation,

to state where it is.

(3) An authorized person may in writing require the person providing or making an explanation or statement under this section to verify within a reasonable period specified in the requirement the explanation or statement by statutory declaration, which may be taken by the authorized person.

(4) If a person does not provide or make an explanation or statement in accordance with a requirement under this section for the reason that the explanation or statement was not within his knowledge or in his possession, an authorized person may in writing require the person to verify within a reasonable period specified in the requirement by statutory declaration, which may be taken by the authorized person, that he was unable to comply or fully comply (as the case may be) with the requirement for that reason.

(5) An authorized person shall not give any direction under subsection (1)(i) or (ii) to require the production of any record or document unless the authorized person has reasonable cause to believe that the record or document relates to the affairs of the corporation to which the direction is to be given or a corporation of which such corporation is, or was at the material time, a related corporation.

(6) An authorized person shall not give any direction to an authorized financial institution under subsection (1)(iii) to require the production of any record or document unless the authorized person has reasonable cause to believe, and the Commission certifies in writing that the authorized person has reasonable cause to believe, that-

(a) the authorized financial institution is in possession of any record or document relating to the affairs of a corporation to which any direction has been or may be given under subsection (1)(i) or (ii); and

(b) the record or document required to be produced under the direction-

(i) relates to the affairs of such corporation or to a transaction with such corporation; and

(ii) is relevant to the consideration of whether there has been the occurrence of-

(A) where subsection (1)(a), (b), (c), (d) or (e) applies, the matter described in such subsection as being suggested by the circumstances referred to in such subsection; or

(B) where subsection (1)(f) applies, the matter in respect of the investigation of which the Commission decides to provide assistance under section 186(1) or (2).

(7) An authorized person shall not give any direction to an auditor under subsection (1)(iv) to require the production of any record or document unless the authorized person has reasonable cause to believe, and the Commission certifies in writing that the authorized person has reasonable cause to believe, that-

(a) the auditor is in possession of any record or document, which is in the nature of audit working papers, relating to the affairs of a corporation to which any direction has been or may be given under subsection (1)(i) or (ii); and

(b) the record or document required to be produced under the direction-

(i) relates to the affairs of such corporation; and

(ii) is relevant to the consideration of whether there has been the occurrence of-

(A) where subsection (1)(a), (b), (c), (d) or (e) applies, the matter described in such subsection as being suggested by the circumstances referred to in such subsection; or

(B) where subsection (1)(f) applies, the matter in respect of the investigation of which the Commission decides to provide assistance under section 186(1) or (2).

(8) An authorized person shall not give any direction to a person under subsection (1)(v) to require the production of any record or document unless the authorized person has reasonable cause to believe, and the Commission certifies in writing that the authorized person has reasonable cause to believe, that-

(a) the person has dealt or has had dealings, directly or indirectly, with, or is otherwise in possession of any record or document relating to the affairs of, a corporation to which any direction has been or may be given under subsection (1)(i) or (ii); and

(b) the record or document required to be produced under the direction-

(i) relates to the affairs of such corporation or to a transaction with such corporation;

(ii) is relevant to the consideration of whether there has been the occurrence of-

(A) where subsection (1)(a), (b), (c), (d) or (e) applies, the matter described in such subsection as being suggested by the circumstances referred to in such subsection; or

(B) where subsection (1)(f) applies, the matter in respect of the investigation of which the Commission decides to provide assistance under section 186(1) or (2); and

(iii) cannot be obtained by giving a direction to any other person under subsection (1)(i), (ii), (iii) or (iv).

(9) The power of an authorized person to give any direction under subsection (1) (other than subsection (1)(iii)) to any corporation which is an authorized financial institution may be exercised only in respect of-

(a) subsection (1)(e); or

(b) subsection (1)(f), if, and only if, the matter in respect of the investigation of which the Commission decides to provide assistance under section 186(1) or (2) is, in the opinion of the Commission, of a nature similar to the matter described in subsection (1)(e) as being suggested by the circumstances referred to in that subsection (1)(e).

(10) Before an authorized person gives any direction under subsection (1) (other than subsection (1)(iii)) to any corporation-

(a) where the corporation is an authorized financial institution or a corporation which, to the knowledge of the authorized person, is a controller of an authorized financial institution, or has as its controller an authorized financial institution, or has a controller that is also a controller of an authorized financial institution, the authorized person shall consult the Monetary Authority; or

(b) where the corporation is an insurer authorized under the Insurance Companies Ordinance (Cap 41), the authorized person shall consult the Insurance Authority.

(11) The Commission may authorize in writing any person as an authorized person for the purposes of this section.

(12) The Commission shall furnish an authorized person with a copy of his authorization, and the authorized person, before exercising any power under this section, shall produce a copy of the authorization to the person in respect of whom the power is exercised for inspection.

(13) A person who, without reasonable excuse, fails to comply with a requirement imposed on him by an authorized person under this section commits an offence and is liable-

(a) on conviction on indictment to a fine of $200000 and to imprisonment for 1 year; or

(b) on summary conviction to a fine at level 5 and to imprisonment for 6 months.

(14) A person who-

(a) in purported compliance with a requirement imposed on him by an authorized person under this section, produces any record or document or provides or makes an explanation or statement which is false or misleading in a material particular; and

(b) knows that, or is reckless as to whether, the record or document or the explanation or statement is false or misleading in a material particular,

commits an offence and is liable-

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

(ii) on summary conviction to a fine at level 6 and to imprisonment for 6 months.

(15) A person who-

(a) with intent to defraud-

(i) fails to comply with a requirement imposed on him by an authorized person under this section; or

(ii) in purported compliance with a requirement imposed on him by an authorized person under this section, produces any record or document or provides or makes an explanation or statement which is false or misleading in a material particular; or

(b) being an officer or employee of a corporation, with intent to defraud causes or allows the corporation to-

(i) fail to comply with a requirement imposed on it by an authorized person under this section; or

(ii) in purported compliance with a requirement imposed on it by an authorized person under this section, produce any record or document or provide or make an explanation or statement which is false or misleading in a material particular,

commits an offence and is liable-

(i) on conviction on indictment to a fine of $1000000 and to imprisonment for 7 years; or

(ii) on summary conviction to a fine at level 6 and to imprisonment for 6 months.

(16) A person is not excused from complying with a requirement imposed on the person by an authorized person under this section only on the ground that to do so might tend to incriminate the person.

(17)   …”

118.  So far as material, section 181 provides:

“(1) An authorized person may, for the purpose of enabling or assisting the Commission to perform a function under any of the relevant provisions, require-

(a) a person registered as the holder of securities in a register of members kept under the Companies Ordinance (Cap 622);

(b) a person whom the authorized person has reasonable cause to believe holds any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or an interest in any securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme;

(c) a person whom the authorized person has reasonable cause to believe has acquired or disposed of any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or an interest in any securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme, whether directly or through a nominee, trustee or agent, and whether as beneficial owner, nominee, trustee, agent or otherwise;

(d) a licensed person or registered institution through whom or which the authorized person has reasonable cause to believe any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or an interest in any securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme has been acquired, disposed of, dealt with, traded or arranged,

to furnish to him any of the information specified in subsection (2) within the time and in the form specified by him.

(2) The information specified for the purposes of subsection (1) is-

(a) the particulars (including, in so far as applicable, the name and aliases, address, telephone and facsimile numbers, electronic mail address, occupation and particulars of any document of identity (including, if not an individual, any document evidencing incorporation or registration)) that are reasonably capable of establishing the identity of the person on whose behalf, or by, from, to or through whom, the securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or the interest in securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme in question is held, or has been acquired, disposed of, dealt with, traded or arranged (as the case may be);

(b) the particulars (including the quantity) of and, in the case of acquisition or disposal, the consideration (if any) for the securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or the interest in securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme; and

(c) the instructions (if any) given to or by the person referred to in paragraph (a), or any officer, employee or agent of such person, in relation to the holding, acquisition, disposal, dealing, trading, arrangement of or in respect of the securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or the interest in securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme.

(3) An authorized person may in writing require the person furnishing any information under this section to verify within a reasonable period specified in the requirement the information by statutory declaration, which may be taken by the authorized person.

(4) If a person does not furnish any information in accordance with a requirement under this section for the reason that the information was not within his knowledge or in his possession, an authorized person may in writing require the person to verify within a reasonable period specified in the requirement by statutory declaration, which may be taken by the authorized person, that he was unable to comply or fully comply (as the case may be) with the requirement for that reason.

(5) The Commission may authorize in writing any person as an authorized person for the purposes of this section.

(6) The Commission shall furnish an authorized person with a copy of his authorization, and the authorized person, when exercising any power under this section, shall upon request by the person in respect of whom the power is exercised produce a copy of the authorization for inspection.

(7) A person who, without reasonable excuse, fails to comply with a requirement imposed on him by an authorized person under this section commits an offence and is liable-

(a) on conviction on indictment to a fine of $200000 and to imprisonment for 1 year; or

(b) on summary conviction to a fine at level 5 and to imprisonment for 6 months.

(8) A person who-

(a) in purported compliance with a requirement imposed on him by an authorized person under this section, furnishes to the authorized person information which is false or misleading in a material particular; and

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

commits an offence and is liable-

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

(ii) on summary conviction to a fine at level 6 and to imprisonment for 6 months.

(9) A person who-

(a) with intent to defraud-

(i) fails to comply with a requirement imposed on him by an authorized person under this section; or

(ii) in purported compliance with a requirement imposed on him by an authorized person under this section, furnishes to the authorized person information which is false or misleading in a material particular; or

(b) being an officer or employee of a corporation, with intent to defraud causes or allows the corporation to-

(i) fail to comply with a requirement imposed on it by an authorized person under this section; or

(ii) in purported compliance with a requirement imposed on it by an authorized person under this section, furnish to the authorized person information which is false or misleading in a material particular,

commits an offence and is liable-

(i) on conviction on indictment to a fine of $1000000 and to imprisonment for 7 years; or

(ii) on summary conviction to a fine at level 6 and to imprisonment for 6 months.

(10)   …”

119.  Section 182 reads:

“(1) Where-

(a) the Commission has reasonable cause to believe that an offence under any of the relevant provisions may have been committed;

(b) the Commission has reasonable cause to believe that a person may have engaged in defalcation, fraud, misfeasance or other misconduct in connection with-

(i) dealing in any securities or futures contract or trading in any leveraged foreign exchange contract;

(ii) the management of investment in any securities, futures contract or leveraged foreign exchange contract;

(iii) offering or making any structured product, leveraged foreign exchange contract or collective investment scheme;

(iv) giving advice in relation to the allotment of securities, or the acquisition or disposal of, or investment in, any securities, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, futures contract, leveraged foreign exchange contract or collective investment scheme; or

(v) any transaction involving securities margin financing;

(c) the Commission has reasonable cause to believe that market misconduct may have taken place;

(ca) the Commission has reasonable cause to believe that a breach of a disclosure requirement may have taken place under Part XIVA;

(d) the Commission has reasonable cause to believe that the manner in which a person has engaged or is engaging in any of the activities referred to in paragraph (b)(i) to (v) is not in the interest of the investing public or in the public interest;

**(da) the Commission has reasonable cause to believe that a prescribed person other than an authorized financial institution or an approved money broker may have contravened the reporting obligation, clearing obligation, trading obligation or record keeping obligation;

+(db) the Commission has reasonable cause to believe that a registered SIP may have failed to comply with a requirement made under section 101X;

(e) the Commission-

(i) for the purpose of considering whether to exercise any power under section 194 or 196, has reason to inquire whether any person is or was at any time guilty of misconduct, or is not a fit and proper person, as described in section 194(1) or (2) or 196(1) or (2); or

(ii) for the purpose of assisting the Monetary Authority to consider whether to exercise any power under section 58A or 71C of the Banking Ordinance (Cap 155), has reason to inquire whether any person-

(A) is or was at any time guilty of misconduct, or is not or has ceased to be a fit and proper person, as described in section 58A(1) of that Ordinance; or

(B) is or was at any time guilty of misconduct, or should cease to be regarded as a fit and proper person, as described in section 71C(4) of that Ordinance;

(f) the Commission has reason to inquire whether any of the conditions imposed in respect of an authorization under section 104, 104A or 105 are being complied with; or

#(g) a matter in respect of the investigation of which the Commission decides to provide assistance under section 186(1) or (2) is, in the opinion of the Commission, of a nature similar to the matter described in paragraph (a), (b), (c), (d), (da), (db), (e) or (f) as that which the Commission has reasonable cause to believe or has reason to inquire (as the case may be),

the Commission may in writing direct one or more of its employees or, with the consent of the Financial Secretary, appoint one or more other persons, to investigate any of the matters referred to in paragraphs (a) to (g).

(2) The costs and expenses incurred by an investigator, other than an employee of the Commission, are to be paid out of moneys provided by the Legislative Council.

(3) The Commission shall furnish an investigator with a copy of his direction or appointment (as the case may be), and the investigator, before first imposing any requirement on a person under section 183(1), (2) or (3), shall produce a copy of the direction or appointment (as the case may be) to that person for inspection.

(4) Before the Commission directs any of its employees, or appoints any person-

(a) to investigate any matter under subsection (1)(e)(i), to the extent that the investigation is for the purpose of considering whether to exercise any power under section 196; or

(b) to investigate any matter under subsection (1)(e)(ii),

the Commission shall consult the Monetary Authority.”

120.  Section 183 reads:

“(1) The person under investigation or a person whom the investigator has reasonable cause to believe has in his possession any record or document which contains, or which is likely to contain, information relevant to an investigation under section 182, or whom the investigator has reasonable cause to believe otherwise has such information in his possession, shall-

(a) produce to the investigator, within the time and at the place the investigator reasonably requires in writing, any record or document specified by the investigator which is, or may be, relevant to the investigation and which is in his possession;

(b) if required by the investigator, give the investigator an explanation or further particulars in respect of any record or document produced under paragraph (a);

(c) attend before the investigator at the time and place the investigator reasonably requires in writing, and answer any question relating to the matters under investigation that the investigator may raise with him; and

(d) give the investigator all assistance in connection with the investigation which he is reasonably able to give, including responding to any written question raised by the investigator.

(2) An investigator may in writing require the person giving or making an explanation, particulars, answer or statement under this section to verify within a reasonable period specified in the requirement the explanation, particulars, answer or statement by statutory declaration, which may be taken by the investigator.

(3) If a person does not give or make an explanation, particulars, answer or statement in accordance with a requirement under this section for the reason that the explanation, particulars, answer or statement was not within his knowledge or in his possession, an investigator may in writing require the person to verify within a reasonable period specified in the requirement by statutory declaration, which may be taken by the investigator, that he was unable to comply or fully comply (as the case may be) with the requirement for that reason.

(4) Neither section 182 nor this section shall be construed as requiring an authorized financial institution to disclose any information or produce any record or document relating to the affairs of a customer to the investigator unless-

(a) the customer is a person whom the investigator has reasonable cause to believe may be able to give information relevant to the investigation; and

(b) the Commission is satisfied, and certifies in writing that it is satisfied, that the disclosure or production is necessary for the purposes of the investigation.

(5) The investigator may, and if so directed by the Commission shall, make interim reports on his investigation to the Commission, and on the conclusion of his investigation shall make a final report on his investigation to the Commission.

(6)   The Commission may, with the consent of the Secretary for Justice, cause a report under this section to be published.”

121.  Section 184 sets out offences in relation to investigations.  By section 184(1), (2) and (3), a person who fails to comply with a requirement under section 183(1), (a), (b), (c) and (d), and (2) and (3), without reasonable excuse, or with intent to defraud, commits an offence and may be liable to a fine and to a term of imprisonment depending on whether the case was dealt with summarily or on indictment.  It is provided by section 184(4) that a person is not excused from complying with a requirement imposed under section 183 only on the ground that to do so might tend to incriminate the person.

122.  Section 187 deals with the admissibility in evidence of an explanation or statement provided under sections 179 or 183.  Section 187 reads:

“(1) Where—

(a)an authorized person within the meaning of section 179 requires a person to provide or make an explanation or statement under that section;

(b)an investigator requires a person to give an explanation or further particulars or to give an answer to any question under section 183; or

(c)an MA investigator requires a person to give an explanation or further particulars or give an answer to a question under section 184B,

the authorized person or the investigator (as the case may be) shall ensure that the person has first been informed or reminded (as the case may be) of the limitations imposed by subsection (2) on the admissibility in evidence of the requirement and of the explanation or statement, the explanation or further particulars, or the question and answer (as the case may be).

(2) Notwithstanding any other provisions of this Ordinance, where—

(a)an authorized person within the meaning of section 179 requires a person to provide or make an explanation or statement under that section;

(b)an investigator requires a person to give an explanation or further particulars or to give an answer to any question under section 183; or

(c)an MA investigator requires a person to give an explanation or further particulars or give an answer to a question under section 184B,

and the explanation or statement, the explanation or further particulars, or the answer (as the case may be) might tend to incriminate the person and the person so claims before providing or making the explanation or statement, giving the explanation or further particulars, or giving the answer (as the case may be), then the requirement as well as the explanation or statement, the explanation or further particulars, or the question and answer (as the case may be) shall not be admissible in evidence against the person in criminal proceedings in a court of law other than those in which the person is charged with an offence under section 179(13), (14) or (15), 184 or 184D, or under section 219(2)(a), 253(2)(a) or 254(6)(a) or (b), or under Part V of the Crimes Ordinance (Cap. 200), or for perjury, in respect of the explanation or statement, the explanation or further particulars, or the answer (as the case may be).”

The secrecy provisions

123.  Another aspect of the Applicants’ challenge is the secrecy obligations under the SFO.  An investigation by the SFC is subject to the secrecy provisions set out in section 378.  The section defines the scope of the secrecy obligations, the exceptions and the consequences for breaching any of the obligations.  So far as material, section 378 provides:

“(1) Subject to subsection (13A), except in the performance of a function under, or for the purpose of carrying into effect or doing anything required or authorized under, any of the relevant provisions, a specified person—

(a) shall preserve and aid in preserving secrecy with regard to any matter coming to his knowledge by virtue of his appointment under any of the relevant provisions, or in the performance of any function under or in carrying into effect any of the relevant provisions, or in the course of assisting any other person in the performance of any function under or in carrying into effect any of the relevant provisions;

(b) shall not communicate any such matter to any other person; and

(c) shall not suffer or permit any other person to have access to any record or document which is in his possession by virtue of the appointment, or the performance of any such function under or the carrying into effect of any such provisions, or the assistance to the other person in the performance of any such function under or in carrying into effect any such provisions.

(2) Nothing in subsection (1) applies to—

(a) the disclosure of information which has already been made available to the public;

(b) the disclosure of information with a view to the institution of, or otherwise for the purposes of, any criminal proceedings, or any investigation carried out under the relevant provisions or otherwise, in Hong Kong;

(c) the disclosure of information for the purpose of seeking advice from, or giving advice by, counsel or a solicitor or other professional adviser acting or proposing to act in a professional capacity in connection with any matter arising under any of the relevant provisions;

(d) the disclosure of information by a person in connection with any judicial or other proceedings to which the person is a party;

(e) the disclosure of information in accordance with an order of a court, or in accordance with a law or a requirement made under a law;

(ea) the disclosure of information to the Hong Kong Deposit Protection Board established by section 3 of the Deposit Protection Scheme Ordinance (Cap. 581) for the purpose of enabling or assisting the Board to perform its functions under section 5(a), (d) and (e) of that Ordinance;

(f) the communication of any information or opinion to which section 381(1) applies (whether with or without reference to section 381(2))—

(i) to the Commission in the manner described in section 381(1);

(ii) where section 381(4) applies, to the Insurance Authority or the Monetary Authority (as the case may be) in the manner described in section 381(4).

(3) Notwithstanding subsection (1), the Commission may disclose information—

(a) in the form of a summary compiled from any information in the possession of the Commission, including information provided by persons under any of the relevant provisions, if the summary is so compiled as to prevent particulars relating to the business or identity, or the trading particulars, of any person from being ascertained from it;

(b) to a person who is a liquidator appointed under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32);

(c) to the Market Misconduct Tribunal;

(d) to the Securities and Futures Appeals Tribunal;

(ea) to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Review Tribunal established under section 55 of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615);

(e) to the Monetary Authority, if—

(i) the information relates to—

(A) any business of a registered institution which constitutes a regulated activity for which the registered institution is registered; or

(B) any business of an associated entity that is an authorized financial institution, which is that of receiving or holding client assets of the intermediary of which the associated entity is an associated entity; or

(ii) in the opinion of the Commission the condition specified in subsection (5) is satisfied;

(f) if in the opinion of the Commission the condition specified in subsection (5) is satisfied, to—

(i) the Chief Executive;

(ii) the Financial Secretary;

(iii) the Secretary for Justice;

(iv) (Repealed);

(v) the Insurance Authority;

(vi) the Registrar of Companies;

(vii) the Official Receiver;

(viii) the Mandatory Provident Fund Schemes Authority;

(ix) the Privacy Commissioner for Personal Data;

(x) the Ombudsman;

(xi) a public officer authorized by the Financial Secretary under subsection (12);

(xia) the Financial Reporting Council established by section 6(1) of the Financial Reporting Council Ordinance (Cap. 588);

(xii) an inspector appointed by the Financial Secretary to investigate the affairs of a corporation;

(xiii) a recognized exchange company;

(xiv) a recognized clearing house;

(xv) a recognized exchange controller;

(xvi) a recognized investor compensation company;

(xvii) a person authorized to provide authorized automated trading services under section 95(2);

(g) if in the opinion of the Commission the condition specified in subsection (5) is satisfied—

(i) to an authority or regulatory organization outside Hong Kong which, or to a companies inspector outside Hong Kong who, in the opinion of the Commission satisfies the requirements referred to in subsection (6)(a) and (b);

(ii) to—

(A) the Hong Kong Institute of Certified Public Accountants;

(B) any other body prescribed by rules made under section 397 for the purposes of this subparagraph, with a view to its taking of, or otherwise for the purposes of, any disciplinary action against any of its members;

(h) to a person who is or was an auditor appointed under any provision of this Ordinance, for the purpose of enabling or assisting the Commission to perform its functions under any of the relevant provisions;

(i) where the information is obtained by an investigator under section 183, to—

(i) the Financial Secretary;

(ii) the Secretary for Justice;

(iii) the Commissioner of Police;

(iv) the Commissioner of the Independent Commission Against Corruption;

(v) the Market Misconduct Tribunal;

(vi) the Securities and Futures Appeals Tribunal;

(j) for the purpose of, or otherwise in connection with, an audit required by section 16;

(k) with the consent of the person from whom the information was obtained or received and, if the information relates to a different person, also with the consent of the person to whom the information relates.

(4) Notwithstanding subsection (1), a person who is or was an auditor appointed in relation to a licensed corporation or an associated entity of a licensed corporation under section 159 or 160, and a person who is or was an employee or agent of such auditor, may disclose information obtained or received by him in the course of performing his duties as such auditor or as an employee or agent of such auditor (as the case may be)—

(a) for the purposes of any judicial or other proceedings arising out of the performance of his duties as such auditor or as an employee or agent of such auditor (as the case may be);

(b) in the case of a person who is or was an employee or agent of an auditor, to the auditor.

(5) The condition referred to in subsection (3)(e), (f) and (g) is that—

(a) it is desirable or expedient that the information should be disclosed pursuant to subsection (3)(e), (f) or (g) (as the case may be) in the interest of the investing public or in the public interest; or

(b) the disclosure will enable or assist the recipient of the information to perform its or his functions and it is not contrary to the interest of the investing public or to the public interest that the information should be so disclosed.

(6) Where the Commission is satisfied, for the purposes of subsection (3)(g)(i), that an authority, regulatory organization or companies inspector outside Hong Kong-

(a) performs any function similar to a function of the Commission or the Registrar of Companies, or regulates, supervises or investigates banking, insurance or other financial services or the affairs of corporations; and

(b) is subject to adequate secrecy provisions,

the Commission shall as soon as reasonably practicable thereafter cause the name of the authority, regulatory organization or companies inspector (as the case may be) to be published in the Gazette.

(7) Where information is disclosed pursuant to subsection (1), or any of the circumstances described in subsection (2), (3) or (4) (other than subsections (2)(a), (3)(a), (g)(i) and (k) and (4)(b))-

(a) the person to whom that information is so disclosed; or

(b) any other person obtaining or receiving the information, whether directly or indirectly, from the person referred to in paragraph (a),

shall not disclose the information, or any part thereof, to any other person, unless-

(i) the Commission consents to the disclosure;

(ii) the information or the part thereof (as the case may be) has already been made available to the public;

(iii) the disclosure is for the purpose of seeking advice from, or giving advice by, counsel or a solicitor or other professional advisor acting or proposing to act in a professional capacity in connection with any matter arising under any of the relevant provisions;

(iv) the disclosure is in connection with any judicial or other proceedings to which the person or the other person referred to in paragraph (a) or (b) (as the case may be) is a party; or

(v) the disclosure is in accordance with an order of a court, or in accordance with a law or a requirement made under a law.

(8) …

(9) The Commission, in disclosing any information in any of the circumstances described in subsection (3) or in granting any consent pursuant to subsection (7)(i) or (ia) or (8)(ii), may impose such conditions as it considers appropriate.

…”   

The grounds for judicial review

124.  The Applicants advance three grounds for judicial review which can be broadly stated as follows. The first is that the SFC acted unlawfully by transmitting to the Japanese regulators materials derived through compulsion for use in criminal proceedings in Japan (“Ground 1”). The second is that the SFC acted unlawfully by transmitting information and materials to the Japanese regulators without ensuring adequate secrecy as required under the SFO (“Ground 2”).  The third is that section 181 of the SFO contravenes BOR 10 and is unconstitutional.  Accordingly, the materials obtained from the Applicants under that power were obtained unlawfully, and should not have been transmitted to the Japanese regulators (“Ground 3”).

The framework for international cooperation

125.  Before I address the grounds for judicial review, it is appropriate to give a brief overview of the legal and administrative framework by which the SFC assists and cooperates with an overseas regulator in the context of this case.

126.  As one would expect, there is a firm commitment for international cooperation and mutual assistance between market regulators throughout the world.  The SFC has entered into a number of collaborative arrangements with other regulators or relevant bodies. The Applicants refer to the IOSCO MMoU and to its provisions concerning the exchange of information and materials, in particular from third parties, and the stipulated permissible uses of information exchanged among regulators and the obligations of confidentiality. 

127.  Section 186 of the SFO provides a legislative framework for the SFC to cooperate with overseas regulators. Under subsections (1) and (2), the SFC may accede to requests for investigatory assistance from authorities, regulatory agencies or companies inspectors from outside Hong Kong, regarding a person who has contravened or is contravening legal or regulatory requirements that the outside body or person administers or enforces.  The investigation must relate to transactions involving the financial products that the SFC regulates or similar transactions that the outside body or person regulates. 

128.  The SFC may, amongst other things, investigate the matter by exercising its routine surveillance power under section 181 and its relevant investigatory powers under sections 182 and 183, for instance by obtaining information and documents requested by the overseas regulator, provided that certain conditions set out in sections 186(3), 186(5)(a) and 186(5)(b) are met.  They can be conveniently summarised as follows:

(a)   the SFC is of the opinion that the following is satisfied: (i) it is desirable or expedient that the assistance should be provided in the interest of the investing public or in the public interest; or (ii) the assistance will enable or assist the overseas regulator to perform its functions and it is not contrary to the interest of the investing public or to the public interest; and

(b)   the SFC is satisfied that the overseas regulator performs a similar function and is subject to adequate secrecy provisions.

129.  In deciding whether the condition in subsection (3) is satisfied, by virtue of subsection (4), the SFC must consider whether the outside body or person will meet the costs and expenses of giving the assistance and whether reciprocal assistance will be provided in that other jurisdiction to a similar request from Hong Kong.

130.  There are additional safeguards in section 186(6) in relation to statements made by persons where they have claimed the privilege against self-incrimination which prevents use of such statements by an overseas regulator in criminal proceedings. 

131.  Separately, section 378 governs the preservation of secrecy of non-public information, including information obtained under sections 181, 182 and 183, but at the same time provides the SFC, in certain circumstances, the means to disclose information to prescribed persons.  Section 378(3)(g)(i) gives the SFC the means to disclose information to overseas regulators provided that certain conditions set out in sections 378(5), 378(6)(a) and 378(6)(b) are met, which are essentially the same two conditions as specified under section 186.

132.  Under sections 186(5) and 378(6), where the SFC is satisfied that an overseas regulator performs a similar function and is subject to adequate secrecy provisions, the SFC must as soon as reasonably practicable thereafter cause the name of the overseas regulator to be published in the Gazette.

133.  Importantly, the cooperation and assistance that the SFC renders to an outside body or person must be done “in the interest of the investing public or in the public interest.”

134.  The Applicants submit that section 186 must be considered together with the provisions of section 378 which govern the disclosure of information to an outside body or person.  They place particular emphasis on section 378(6), where the SFC may assist an authority, regulatory agency or company inspector from outside Hong Kong if the body or person performs a function similar to a function of the SFC or any corporate or financial regulatory body and is subject to adequate secrecy arrangements. 

135.  The Applicants further submit that the SFC is required to comply with the relevant statutory obligations and requirements when rendering investigative assistance or providing information gathered under its legislative powers to an outside body or person.  The Applicants emphasise the condition under section 186 and to the requirement that the matter in relation to which the outside body or person seeks investigatory assistance must, in the SFC’s opinion, be a matter that is similar to one of the matters that the SFC may investigate under sections 179 or 182.

136.  Mr Chan Kwok Ho Jimmy, the Director of the Enforcement Division of the SFC at the relevant time, was responsible for international enforcement cooperation with overseas regulators.  In his affirmation, he comprehensively sets out the SFC’s legal requirements and obligations under the SFO in relation to its dealings with overseas regulators, particularly in the context of this case.  He explains that due to the international nature of the Hong Kong financial markets, he deals with investigatory requests that are sent to or received from overseas securities regulators for the collection of evidence for investigation or proceedings. He sets out in considerable detail the SFC’s dealings with the Applicants and the Japanese regulators in relation to this case.

137.  Mr Chan points out that the FSA was published in the Gazette on 27 January 2006 for the purposes of sections 186(5) and 378(6).  It is stated in the Gazette that the SFC “is satisfied that the FSA meets the conditions specified in section 186(5) and section 378(6) of the SFO.  It is also stated that the SFC may disclose non-public information obtained in the performance of its functions under the SFO to this authority and provide investigatory assistance to this authority provided that other applicable statutory requirements are satisfied.”[45] 

138.  In coming to the decision that the SFC would provide assistance to the Japanese regulators, Mr Chan relied on the fact that the FSA is a signatory to the IOSCO MMoU and it is stated in the Note Verbale and the Undertaking that the information received by the Japanese regulators from the SFC would not be used in criminal proceedings in Japan.  He also relied on the repeated assurances given by the Japanese regulators on each occasion that they would not use the information provided in criminal proceedings in Japan before transmitting the materials to them.  He notes that in the Letter of Request and the letter dated 18 December 2014, it was stated that the information provided by the SFC would be used by the FSA and SESC for administrative or regulatory purposes only, and not be used for a criminal investigation or criminal proceedings.

139.  An issue arose during the proceedings as to the applicable version of the offence provision under which the Japanese regulators took action against the Applicants, namely Article 174-2 of the Financial Instruments and Exchange Act (“the FEIA” or “the Act”).  It appears that the original version had been superseded.  On this issue, Mr Chan explains that:

“… it is not the practice of the Commission to review the text of the domestic law of the requesting jurisdiction before deciding to comply with a request, and in the present case, I did not review the text of Article 174-2 of the FIEA or its previous version. I now have the opportunity to consider both versions, ie the version before and the version after amendment. Having compared and considered the two versions, I consider that Article 174-2 of the FIEA still appears to be civil/regulatory in character which is not dissimilar to the market misconduct provisions under Part XIII of the SFO in the Hong Kong regime. I can confirm that the differences between the two versions and the opportunity to consider the text of Article 174-2 would not have altered my decision to transmit information to the Japanese regulators. The differences between the two versions does not alter the matters which the Commission is required to consider under section 186 of the SFO.”[46]

140.  Mr Chan explains that there are currently 112 signatories to the IOSCO MMoU and the SFC receives about 100 requests for assistance from the overseas regulators.  He states that it would not be practical for the SFC to review the domestic law of each requesting jurisdiction before the SFC can give the assistance sought.

141.  The position taken by the SFC is completely understandable.  They carried out an extensive review of the text of the relevant domestic law, amongst other things, before satisfying themselves that the relevant regulatory authorities comply with the requirements and standards to be accepted and gazetted as a counterpart body under the SFO.  It would neither be reasonable, nor practical, for the SFC to monitor and check every change in the law of another jurisdiction, unless it involves a material change of circumstances.  I am satisfied that the changes in the provisions of Article 174-2 were not of material significance so as to affect the legal requirements and obligations on the SFC in its dealings with the Japanese regulators.  They did not change the essential character of Article 174-2.

As to Ground 1: Whether the compelled materials were used in criminal proceedings

142.  The complaint under this ground is that the disclosure of compelled materials to the Japanese regulators took place in circumstances that allowed their use in proceedings, which the Applicants submit were “criminal” within the meaning of BOR 10 and 11(2)(g) and section 186(6) of the SFO, and therefore these provisions had been breached.  The Applicants seek declaratory relief that a breach to that effect has been committed by the SFC.

143.  There is no dispute that the SFC provided compelled materials to the Japanese regulators which they could use in taking certain action under Japanese law in relation to this case. The SFC’s evidence discloses that they were satisfied that the Japanese regulators understood the limitations on the use of the materials that they transmitted to them and that the proceedings contemplated by the Japanese regulators under Article 174-2 were administrative or regulatory.

144.  The Applicants contend that the Japanese proceedings are criminal in the sense contemplated by section 186(6) of the SFO and BOR 10 and 11(2)(g), and are therefore engaged in respect of proceedings which involve the “determination of a criminal charge”.

145.  The issue in this ground for review turns on the proper legal categorisation of the Japanese proceedings.  So far as material, the English translation of Article 174-2 reads:

“(1) If a person effects a series of purchases and sales of securities, etc., in violation of the provisions of Item (i), Paragraph (2), Article 159 (meaning purchases and sales of securities, etc., as prescribed in the same paragraph), offers to effect such a series of purchases and sales, or entrusts, etc., a person with effecting such a series of purchases and sales (hereinafter referred to in this Article as a “Violation”, with such a person hereinafter referred to in this Article as a “Violator”), in accordance with the procedures prescribed in the following section, the Prime Minister shall order the Violator to pay an administrative monetary penalty to the National Treasury that is equivalent to the total of the amounts set forth in each of the following items (referred to in Paragraphs (10) and (11) as the “Total Amount”):

(i)   the amount obtained by deducting the amount set forth in (b) below from the amount set forth in (a) below:

(a)  the price of sales, etc., of securities on the Violator’s own account (limited to those connected with the volume of such purchases or sales involved in the said Violation);

(b)the price of purchases, etc., of securities on the Violator’s own account (limited to those connected with the volume of such purchases or sales involved in the said Violation);

(ii)   the amount specified in (a) to (d) below according to the category for each of the cases mentioned therein (when the Violation falls under two or more of the categories set forth in (a) to (d) below, the total of the amounts specified in those two or more categories):

(a)  when the volume of sales, etc., of securities on the Violator’s own account that are involved in the said Violation exceeds the volume of purchases, etc., of securities on the Violator’s own account that are involved in the said Violation: the amount obtained by deducting the amount specified in 2. below from the amount specified in 1. below (if the resulting amount is less than zero, the amount shall be deemed to be zero):

1.   the price of sales, etc., of securities for the volume that is in excess;

2.   the amount obtained when the lowest price for the purchase, etc., of securities pertaining to the securities, etc., involved in the said Violation from among the lowest prices as prescribed in Article 67-19 or Article 130 on each day during the period from the end of the said Violation until one month has elapsed since its end (in cases where there is no such price, the price determined by the Cabinet Office Ordinance as being equivalent to such price, and the price on the day on which the Violation ends shall be the amount determined by the Cabinet Office Ordinance) is multiplied by the volume that is in excess.

(b)When the volume of purchases, etc., of securities on the Violator’s own account that is involved in the said Violation exceeds the volume of sales, etc., of securities on the Violator’s own account that are involved in the said Violation: the amount obtained by deducting the amount specified in 2. below from the amount specified in 1. below (if the resulting amount is less than zero, the amount shall be deemed to be zero):

1.   the amount obtained when the highest price for the sale, etc., of securities pertaining to the securities, etc., involved in the said Violation from among the highest prices as prescribed in Article 67-19 or Article 130 on each day during the period from the end of the said Violation until one month has elapsed since its end (in cases where there is no such price, the price determined by the Cabinet Office Ordinance as being equivalent to such price, and the price on the day on which the Violation ends shall be the amount determined by the Cabinet Office Ordinance) is multiplied by the volume that is in excess;

2.   the price of purchases, etc., of securities for the volume that is in excess.

(c)   when, during the period from the start of the Violation until one month has elapsed since the end of the said Violation, the Violator causes the securities involved in the Violation, which the Violator or a person set forth in the items of Paragraph (6) issues, to be acquired through a solicitation, or has issued such securities through a reorganization: the amount obtained by deducting the amount specified in 2. below from the amount specified in 1. below (if the resulting amount is less than zero, the amount is deemed to be zero):

1.   the amount obtained when the highest price for the purchase, etc., of securities that the Violator causes to be acquired through such solicitation, or has issued through reorganization, from among the highest prices as prescribed in Article 67-19 or Article 130 on each day during the period from the end of the said Violation until one month has elapsed since its end (in cases where there is no such price, the price determined by the Cabinet Office Ordinance as being equivalent to such price, and the price on the day on which the Violation ends shall be the amount determined by the Cabinet Office Ordinance) is multiplied by the volume of securities that the Violator causes to be acquired through such solicitation, or has issued through reorganization;

2.   the amount obtained when the price at the start of the Violation involving the securities that the Violator causes to be acquired through such solicitation, or has issued through reorganization, is multiplied by the volume of securities that the Violator causes to be acquired through such solicitation, or has issued through reorganization.

(d)   when, during the period from the start of the Violation until one month has elapsed since the end of the said Violation, the Violator has, on the account of someone other than themselves, committed a Violation, effected the sale, etc., of securities, or has effected the purchase, etc., of securities; the amount determined by the Cabinet Office Ordinance as the amount of fees, remuneration, or other types of consideration connected with the said Violation, the sale, etc., of securities, or the purchase, etc., of securities.

…”[47]

146.  Article 159 concerns the prohibition of market manipulation which sets out various acts that are prohibited.  Amongst the prohibitive acts is Article 159(2)(i) which provides that no person is “to conduct a series of sales and purchases of securities … that would mislead other persons into believing the sales and purchases of the securities are thriving or would cause fluctuations in prices of listed financial instruments.”  I should point out that the Article 159 does not set out any penalty provisions.  It would appear that Article 174-2 can only be invoked in relation to the prohibitive act as set out under Article 159(2)(i) and that Article 174-2 is a standalone provision dealing with the disgorgement of any profits arising from such prohibitive act.

147.  A useful benchmark to determine whether or not the proceedings concern a criminal charge or offence is the three criteria laid out in in Engel v The Netherlands (No 1) (1979-80) 1 EHRR 647, which was adopted in Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170. 

148.  In Koon Wing Yee, Sir Anthony Mason NPJ in his judgment, with whom the other judges agreed, held that in determining whether proceedings were criminal in nature for the purposes of BOR 10 and 11, the following three criteria applied:

149.  Sir Anthony Mason noted that “if the proceedings are classified as civil in domestic law, that, though important, is by no means conclusive because the second and third criteria are more significant”.[49] He first explained that “proceedings which may result in the imposition of a penalty for wrongful conduct will involve the determination of a criminal charge unless they have a character which is neither criminal nor penal”.  He next distinguished proceedings involving a criminal charge from disciplinary proceedings “which do not concern the public at large, usually have such a non-criminal, non-penal character.  Proceedings under regulatory legislation whose purpose is essentially protective rather than punitive and deterrent may also have such a character, … So also with proceedings that have a preventative rather than a punitive or deterrent purpose.  Likewise, proceedings for a penalty which is compensatory in nature have a non-criminal and non-penal character.”[50]

150.  Sir Anthony Mason added that a fine which is punitive and deterrent, rather than compensatory, may suggest that the matter is criminal in nature if the penalty is sufficiently substantial.  He noted that in Napp Pharmaceutical Holdings Ltd v Director General of Fair Trading,[51] it was accepted that proceedings were properly classified as criminal for the purpose of the equivalent article to BOR 10 where the penalties were intended to be severe and to have a deterrent effect.  He said that it followed that in general terms, proceedings which are not expressed to be criminal proceedings will not be classified as criminal for the purposes of the BOR unless the penalty for wrongful conduct, which may be imposed, is substantial.

151.  The first criterion is the classification of the charge in domestic law.  If the proceedings are categorised as criminal in domestic law, this will usually be decisive, although the converse may not be the case.  In any event, it would appear from the authorities that this criterion is usually a starting point in determining whether or not the proceedings involve a criminal charge or offence.  The second criterion is the nature of the charge and its purpose.  This concerns the nature of the conduct addressed by the charge as well as analysis of whether the purpose of the charge is regulatory, or whether it is in fact punitive and deterrent in nature.  If the latter, then it is more likely to be a criminal charge.  The third criterion is the severity of the potential sanction, that is the maximum penalty, provided upon conviction of the charge or offence. 

152.  The Applicants acknowledge that under the first criterion, the Japanese proceedings are classified as administrative under Japanese domestic law.  However, they advance their challenge on the basis that the Japanese proceedings involve the determination of a criminal charge by reference to either the second or the third criterion.

153.  As to the second criterion, the Applicants contend that the charge against the 1^st Applicant in Japan concerns market manipulation, which is prohibitive conduct, that is criminal in nature.

154.  The Applicants’ stress that the SESC Announcement was a recommendation to the Prime Minister of Japan and the Commissioner of the FSA to issue an administrative monetary penalty based on findings of the 1^st Applicant’s “market manipulation” concerning its trades of Nitto Denko shares on 25 September 2013.  It was stated in the announcement that the trades constituted “a series of sale and purchase of securities and entrustments that would mislead others into believing that sale and purchase of the shares were thriving and would cause fluctuations in prices of the shares.”[52]

155.  The Applicants place considerable emphasis on the reference to “market manipulation” and the description of the 1^st Applicant’s share trades in the notice, without any relevant analysis of Article 174-2.  They submit that the allegations are serious and implicate the 1^st Applicant “in dishonest and fraudulent conduct.”  They emphasise that under this provision the perpetrators are referred to as “offenders” and that the purpose of the scheme is said to be “deterrence”.  But Article 174-2 is the imposition of a monetary penalty based on the profits arising from prohibited share trading activity that would mislead investors about the pricing of the stock.

156.  The SFC submit that disciplinary proceedings, which do not concern the public at large, are usually non-criminal and non-penal.  They also submit that this may also be the case with proceedings under regulatory legislation, whose purpose is essentially protective rather than punitive and deterrent.  They contend that whilst market misconduct and manipulation are serious matters it does not necessarily follow that the proceedings in Japan are criminal proceedings because market misconduct proceedings can be civil in nature provided that no punitive penalty is imposed.  See Koon Wing Yee v Securities and Futures Commission [2009] 3 HKC 164, at paragraphs 7 to 9.  They are undoubtedly correct as illustrated by the fact that there are market misconduct offences under the civil jurisdiction as well as the criminal jurisdiction in the SFO.

157.  As to the third criterion, the Applicants argue that the penalty under Article 174 was intended to be severe and have a deterrent effect.  They submit that the quantum of the penalty or fine sought by the FSA reflects a penal sanction.[53]  The Applicants are simply focusing on the quantum of the penalty and do not analyse the method and basis of the calculation of it.

158.  The SFC submit that the present case is analogous to Koon Wing Yee v SFC because the administrative monetary penalty under Article 174-2 is primarily to disgorge the 1^st Applicant of its profits.  In the SESC Announcement the proposed administrative monetary penalty comprised of two elements.  First, the difference between the highest value (within the one month period after 25 September 2015) of all the shares purchased and in the 1^st Applicant’s possession attributable to the Fund as of 25 September 2013, and the actual value of all the shares purchased and in the 1^st Applicant’s possession attributable to the fund as of 25 September 2013.  As pointed out by the SFC, this seeks to disgorge the 1^st Applicant of all of its benefits derived from the enhanced share price in the month following the impugned transactions as a result of its purported market manipulation.  Secondly, the total fees, remuneration or any other type of consideration in respect of the impugned transactions paid or payable to the 1^st Applicant.

159.  A statement has been provided by Mr Kaoru Saito, the Head of the Financial Markets Division of the FSA, in which he explains that the Administrative Monetary Penalty (“AMP”) system aims at disgorgement of the notional profit of the violator.  He states:

“As one of the purposes of the AMP system is to deter misconduct, while fundamentally the level of the AMP is to be decided in relation to the effect of deterrence, not necessarily equivalent to economic gains of violators, the current system keeps the level of the AMP as minimally required for such deterrence and a specific calculation method is prescribed under the FIEA for each type of conduct, based on an amount equivalent to illegal profits obtained by a violator through misconduct. It should be noted that the calculation method is prescribed, based on an amount equivalent to illegal profits that are generally or abstractly expected that each type of misconduct. The amount of an AMP to be imposed on given misconduct, therefore, will be calculated by the applicable calculation method for the misconduct, regardless of the actual amount of illegal profits made through the misconduct. This is because, amongst others, the calculation method of AMPs should be clear as the AMP system is an administrative measure; and to ensure effectiveness of the deterrence by active and effective utilisation of the system, the amount of AMPs should be easy to calculate and it would not be appropriate to calculate the amount of illegal profits on a case by case basis.”[54] (Emphasis added)

160.  As pointed out by the SFC, it would appear from the transaction records that the 1^st Applicant earned a profit far greater than the sum of the administrative monetary penalty imposed.  In the SESC investigator’s report dated 24 September 2014, the approximate profit of the 1^st Applicant was JPY10,678,730,000.  It had previously been suggested that the approximate profit was at least JPY 6,312,000,000.[55]

161.  Mr Saito further explains the difference in nature between an administrative monetary penalty and criminal penalties which may be imposed for the same act of market misconduct.  He states:

“All of the misconduct described above is also subject to criminal penalties; the AMP system, however, is a measure to deter misconduct and ensure the effectiveness of regulations, and has different purposes from those of criminal penalties, which focus on anti-sociality and immorality of misconduct and are based on punishment of responsible persons. An order to pay an AMP, therefore, will be issued if facts to satisfy elements required to impose the AMP established at an administrative procedure (described below), regardless of whether criminal penalties are imposed or not.

In addition, it is obvious that imposition of a criminal penalty and an AMP will not give rise to double jeopardy issues because the purposes of the AMPs and criminal penalties are different.

Please note, however, that under the FEIA, when imposing a criminal penalty in market misconduct, the property obtained through criminal misconduct must be confiscated, or if confiscated is impossible, the equivalent value must be collected. As a policy consideration that the full amount of AMPs, which is considered to be equivalent to illegal profits, should not be imposed when confiscation or collection is made under the above provisions to disgorge illegal profits through misconduct, there is a provision that requires adjustment amount of AMPs by deducting the amount equivalent to the value of confiscation or collection.”[56]

162.  In any judgment, the proceedings under Article 174-2 are not criminal proceedings under the Engel criteria.  They are civil in nature and primarily seek to disgorge illicit profits.  As properly understood, an administrative monetary penalty is not a penal penalty or criminal sanction.   

The administrative penalty ordered on 11 June 2018

163.  On 11 June 2018, the FSA made an administrative monetary penalty order in the sum of JPY 684,240,000 (approximately HK$48.5 million) against the 1^st Applicant, to be paid by 13 August 2018.

164.  The monetary penalty was imposed on a finding that the trading of shares in Nitto Denko on 25 September 2013 by the 1^st Applicant was an act of market manipulation and violated Article 159(2) in relation to its trading of shares.

165.  This latest development prompted further submissions from the Applicants and the SFC on the question as to whether the penalty imposed by the FSA should be regarded in substance as a criminal or administrative sanction.

166.  The Applicants complained that the monetary penalty established that the proceedings in Japan were criminal in nature and that the materials the SFC obtained from the Applicants under compulsion, which it provided to the Japanese regulators, were unlawfully relied upon to reach a conviction against the 1^st Applicant.

167.  The Applicants point out that the sum of the monetary penalty is more than 55% greater than the original proposed penalty, which was JPY430,740,000, although that penalty had been later increased to JPY684,240,000 before it was formally imposed. 

168.  The Applicants contend that Exhibits No. 8 and No. 10 to the FSA decision confirmed the direct use of the compelled materials in reaching its decision.  They also contend that there was “a further danger arising out of the fact that the decision-maker had access to the interview transcripts of the 2^nd Applicant.”

169.  Exhibit No. 10 set out the 1^st Applicant’s daily position of Nitto Denko shares during the period from 2 September to 31 October 2013.  The Applicants submit that this information was provided to the SFC on 27 August 2014 in response to the section 183 Notice issued by the SFC dated 8 August 2014.

170.  Exhibit No. 8 set out the identities of unitholders and officers of the Fund, amount of assets managed, and the contribution ratio.  The Applicants submit that this information was provided to the SFC on 8 October 2014 in response to the second section 183 Notice issued by the SFC dated 26 September 2014.

171.  The SFC note that apart from these two exhibits to the FSA decision, the Applicants do not contend that the FSA decision displayed any other materials that were provided by the Applicants to the SFC.

172.  Of the matter that the Japanese regulators may have had access to the interview records of the 2^nd Applicant, the SFC argue there is no substance to this complaint as no allegation had been made by the Applicants in the Amended Form 86 that the interview records had been relied upon by the FSA in its proceedings or in coming to its decision.

173.  Of the reliance of Exhibits No. 8 and No. 10 by the FSA, the SFC argue that the Applicants made no claim for privilege against self-incrimination when submitting the relevant materials to the SFC.  They point out that no such privilege could be attached to the materials because they were in the nature of pre-existing records.  Accordingly, there was nothing objectionable for the Japanese regulators to have relied on such materials in making its decision.  I agree with this submission and it is clear from the conduct of the Applicants that they willingly volunteered information, in addition to providing records that they were obliged to provide the SFC. Furthermore, the applicants were legally represented in their dealings with the SFC, and at no time did they make a claim of the privilege against self-incrimination, except when the 2^nd Applicant was interviewed. 

174.  The Applicants contend that the FSA decision reinforces the conclusion that the Japanese proceedings are criminal under the Engel test in relation to the second and third criterion.

175.  Of the second criterion, the Applicants contend that the charges by their nature and purpose, are criminal because they are designed as deterrent and punitive measures.

176.  The Applicants submit that the market manipulation offence under the Act is not regulatory in character because “it proscribes misleading conduct whereby the respondent deliberately entices investors into trading at artificially inflated prices in order to gain from it.”

177.  The Applicants extracted from the FSA decision, passages that they submit reveal that the offence is not regulatory but criminal for “at the heart of which lies the element of an intention deliberately to mislead other investors in order to gain profit or avoid loss.” In their written submission, they seek to show that the physical act of the offence is accompanied by a mental element that is criminal in nature by reference to the following passages:

“15. The mens rea of the offence of market manipulation under the Act is stated at p.18 of the FSA Decision, as follows:

“The phase ‘for the purpose of inducing sales and purchase of securities’ referred to in the introductory portion of that paragraph means the intention to entice investors to engage in purchases and sales of securities by misleading them into believing that the prices of securities would be based on the natural supply and demand balance, despite the fact that the prices are being artificially manipulated to fluctuate.” (Emphasis added)

16. The FSA found (at p.21) as follows in relation to the pattern of trading:

“Such manner of conducting the Transactions strongly implies that the Respondent, in the course of conducting the Transactions, had the intention to mislead other investors into believing that the trading in the Shares was thriving due to the growing demand and entice them to trade the Shares.” (Emphasis added)

17. Further at pp.24-25 the FSA held that:

“As mentioned in IV. 2. above, it is found that the Respondent conducted the Transactions with the intention to cause price fluctuations while being aware that these transactions are likely to give a false impression to investors and have them participate in trading based on that impression, and hence, the Respondent had the intention to entice investors to engage in purchases and sales of securities by misleading them into believing that the prices of securities would be based on the natural supply and demand relations, despite that fact that the prices are being artificially manipulated to fluctuate.” (Emphasis added)

18. As the Court of Final Appeal said in Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170 at §60:

“60. To describe SIDO as ‘regulatory’ is an imprecise use of that expression. SIDO is not regulatory in the sense that a licensing scheme or a comprehensive road traffic statue (containing detailed licensing and registration provisions) is regulatory. To say that SIDO regulates insider dealing is to misdescribe it and to disguise or colour its true nature and purpose which is, in substance, to stamp out insider dealing by punishing those who engage in it. Insider dealing is certainly not a regulatory offence.”(Emphasis added)

178.  The SFC submit that the quoted passages should be read in the context of the findings of the FSA in the section headed “Evaluation” of the FSA Decision.  It was noted that the impugned conduct was the placing of large market orders or purchase orders at prices higher that the ones at which orders had been executed previously and were placed in a row within an extremely short period of time.  The FSA found that such a series of purchases would mislead others into believing that the trading was thriving objectively and could cause fluctuations in the market prices.  It was stated in the FSA Decision that the 1^st Applicant’s share trading activity should “be regarded as a series of transactions that were highly effective in creating the situation in which there were a large number of purchase orders for the Shares due to the placement of large market orders or limit orders at prices significantly higher than the last traded price, thereby driving the share price up higher, and in this respect, they are found to be a series of purchases and sales that would mislead others into believing that the trading was thriving objectively and could cause fluctuations in the market prices.”[57]

179.  The SFC reiterate that whilst the conduct was held to be market manipulation, it was not criminal because the statutory sanctions were civil in nature.  See Chau Chin Hung v Market Misconduct Tribunal, HCAL 123 and 124/2007 and 22/2008, 22 September 2008, unreported.

180.  I agree with the SFC’s submissions.  The FSA in its lengthy and comprehensive written decision sets out in great detail the background of the case, the relevant provisions, the submissions from the 1^st Applicant and its reasoning for and calculation of the monetary penalty in the amount specified.  It is clear that the administrative monetary penalty payment order is made under Article 174-2 to disgorge the profits made by the 1^st Applicant from its sales and purchases of securities that caused a fluctuation in the market price.

181.  Of the third criterion, the Applicants contend that the scale and nature of the penalty as reflected by the FSA decision confirms it is general and deterrent in nature.  It is further contended that the penalty is calculated in order to exceed any mere disgorgement of profits and is therefore a criminal penalty.

182.  As pointed out by the SFC, the change in the amount of the penalty from the amount previously proposed in the SESC Announcement of JPY430,740,000 to the present figure came about because a higher share price of JPY7,546 (from JPY7,300) was adopted as the “higher price” under Article 174-2, based on the average price fetched in basket trading on the Tokyo Stock Exchange Trading Network.  Significantly, there was no change as to the basis and formula for calculating the monetary penalty.

183.  I agree with the SFC that the increased magnitude in the monetary penalty in itself is not of significance on this issue.

184.  The SFC also submit that the amount of the monetary penalty should be gauged against the amount of capital gains by the 1^st Applicant which the FSA found to have been made, which exceeded JPY10 billion in total.  As rightly pointed out by the SFC, it is not so much the amount that matters but rather the formula in determining the penalty, which was, in my view, a disgorgement of profits.

185.  I am satisfied that the proceedings instituted by the FSA against the 1^st Applicant under Article 174 were non-criminal and non-penal in character and properly categorised as administrative or regulatory proceedings.  The purpose of the proceedings is to disgorge the profits derived from conduct that breached regulations or rules in relation to share trading activities in the marketplace.  The purpose of the proceedings is not punitive and deterrent in nature and that is evident by the calculation of the monetary penalty.

Method of calculation of the Administrative Monetary Penalty

186.  For the sake of completeness, I will set out the method of calculation of the administrative monetary penalty that was ordered by the FSA as explained in its decision:

“ (1) With regard to the volume of the matching sales and purchases of the securities involved in the Violation, it is the amount calculated by deducting the value of the purchases of said securities, etc. on the violator’s own account from the value of sales, etc. of said securities on the violator’s own account;

(2) in the case where the volume of the purchases, etc. of the securities involved in the Violation on the violator’s own account exceeds the volume of the sales, etc. of the securities involved in the Violation on the violator’s own account: it is the amount calculated by multiplying the highest price among the highest prices prescribed in Article 67-19 or Article 130 of the same Act prior to said amendment with regard to the sales etc. of the securities involved in the Violation as of each day during the period of one month after the end of the Violation, by the volume of that excess, and then deducting therefrom the value of such volume of excess of the purchases, etc. of the securities; and

(3) in the case where, during the period from the onset of the Violation until one month has elapsed since the Violation ended, the violator commits another violation or conduct sales, etc. or purchases, etc. of securities: it is the amount of fees, remuneration or any other type of consideration involved in such violation, etc.

2. The total sum of administrative monetary penalty to be imposed in this case becomes 684,240,000 yen, as calculated by adding the amounts as calculated in (1) to (3) below, after rounding down from 684,248,610 yen the amount of less than 10,000 yen as pursuant to the provisions in Article 176, paragraph (2) of the Act.

(1) The volume of the matching sales and purchases of the securities involved in the Violation is 0 shares because: (i) the volume of the sales, etc. of the securities on the violator’s own account is 0 shares; and (ii) the volume of the purchases, etc. of the securities on the violator’s own account is 1,030,522.25 shares (the sum of (1) 571,800.25 shares, calculated by multiplying the volume of the actual purchases, etc. (7,886,900 shares) by the ratio of contribution of the violator’s officers, etc. to Hareion Fund (7.25%), and (2) 458,722 shares, calculated by multiplying the volume of the securities involved in the Violation that the violator held at the time of the onset of the Violation, for which the violator is deemed to have conducted purchases, etc. of said securities on its own account at the price as of the time of the onset of the Violation (6,690 yen), pursuant to the provisions of Article 174-2, paragraph (8) of the same Act prior to said amendment and Article 33-13, item (i) of the Order for Enforcement of the Financial Instruments and Exchange Act (6,327,200 shares), by said ratio of contribution (7.25%)). Accordingly, the amount regarding the volume of the matching sales and purchases is 0 yen.

(2) In the case where the volume of the purchases, etc. of the securities involved in the Violation on the violator’s own account exceeds the volume of the sales, etc. of the securities involved in the Violation on the violator’s own account, the amount regarding the volume of that excess is calculated by multiplying the highest price prescribed in Article 130 of the same Act prior to said amendment with regard to the sales, etc. of the securities involved in the Violation as of each day during the period of one month after the end of the Violation, by the volume of that excess, and then deducting therefrom the value of such volume of excess of purchases, etc. of the securities. Accordingly, the amount regarding the volume of excess in such case is 675,191,021 yen, which is calculated as follows: (7,546 yen x 1,030,522.25 shares)

- {the value of the purchases, etc. of securities during the period of the Violation which is prorated according to the ratio of contribution of the violator’s officers, etc. to the fund (55,617,651,000 yen [the details of the value of the purchases, etc. of securities are as described in Appendix 1] x 7.25%) + the value of the securities involved in the Violation that the violator held at the same of the onset of the Violation, for which the violator is deemed to have conducted purchases, etc. of said securities on its own account at the price as of the time of the onset of the Violation (6,690 yen x 6,327,200 shares x 7.25%)}

(3) In the case where, during the period from the onset of the Violation until one month has elapsed since the Violation ended, the violator commits another violation or conducts sales, etc. or purchases, etc. of securities, the amount of fees, remuneration or any other type of consideration involved in such violation, etc. is 9,057,589 yen, which is calculated as follows, pursuant to the provisions of Article 174-2, paragraph (1) of the same Act prior to said amendment and Article 1-16 of the Cabinet Office Order on Administrative Monetary Penalty under the Provisions of Chapter VI-2 of the Financial Instruments and Exchange Act prior to its amendment by Cabinet Office Order No. 7 of 2014, if the violator commits another violation or conducts purchases, etc. of securities, as referred to in Article 174-2, paragraph (1), items (ii), (d) of the Financial Instruments and Exchange Act prior to the amendment by Act No. 45 of 2013, in the course of investment of the property subject to investment: [a] the total value of investment fees paid to the violator as consideration for the investment of said property subject to investment in the months when the transactions subject to calculation were conducted, is multiplied by [b] the highest value among the total values of securities in the transactions subject to calculation, which constitute said property subject to investment, during the period from the onset of the Violation until one month has elapsed since the Violation ended, then divided by [c] the total value of said property subject to investment as of the latest day of the last days of the months when the transactions subject to calculation were conducted, and then prorated according to [d] the ratio of contributions of contributors other than the violator’s officers, etc. to the fund. Specifically, [a]13,927,406 yen x [b](7,540 yen x 14,214,100 shares)/ [c]152,832,389,165 yen x [d]92.7%

   …”[58]

187.  Submerged in this ground for judicial review are complaints by the Applicants of the provision by the SFC of the compelled materials to an overseas regulator for use in criminal proceedings in breach of section 186(6) and the privilege against self-incrimination.  There is no substance to these complaints because they are primarily based on the proceedings under Article 174-2 being categorised as criminal proceedings, which I have concluded they are not.

188.  This ground for judicial review therefore fails.    

As to Ground 2: Whether the secrecy provisions were breached in relation to the compelled materials

189.  The complaint under this ground is that the secrecy requirements covering compelled materials have been breached.  The Applicants contend that the SFC failed to ensure secrecy of confidential information on the part of the Japanese regulators, resulting in the leaking of information about the allegations of the case, as evidenced by media inquiries and the public announcement on 5 December 2014.  They claim that, as a result of the breach of the confidentiality, they have suffered damage. 

190.  They point out that the SFC had the statutory obligation of ensuring secrecy of their investigations by virtue of section 378(1).  They refer to the fact that disclosure to an overseas regulator should also be subject to adequate secrecy provisions (section 378(6)(b)), and that the SFC is entitled to impose conditions on its foreign counterparts (section 378(9)).

191.  They contend that the SFC had not fully discharged its obligations, pointing out that the FSA and SESC confirmed in writing that they would not disclose information; and both the SOI and the IOSCO MMoU required prior consent from the SFC before the FSA and SESC disclosed any testimony or documents transmitted to them.  To this end, they argue that the SFC failed to take reasonable steps to ensure that the SESC complied with the requirement to seek prior consent before any dissemination of confidential information.

192.  It was disclosed by the SFC that the FSA and SESC in fact contacted them by way of telephone, on the day before the SESC Announcement, informing them that it would be made.  The Applicants complain that “the SESC merely informed the Commission that they would issue an announcement”, but neither the FSA, nor the SESC, consulted the SFC.

193.  In light of the foregoing, the Applicants submit that the SFC did not intervene in the potential publication of confidential information timeously, and therefore did not discharge its statutory obligation under section 378 to preserve the secrecy of confidential information.

194.  The issue under this ground turns on whether the SFC had reasonable expectation that the FSA and SESC would comply with its obligations and commitments of confidentiality and took all reasonable steps to ensure they would do so.

195.  In my view, there is no substance to this ground for three reasons.  First, the nature of the inquiries did not necessarily constitute a breach of the secrecy provisions. Nor was the source or sources of any alleged leaks to the media identified.  The nature of the proceedings in Japan were administrative or regulatory and the secrecy provisions were not breached by making a public announcement about the monetary penalty.  Secondly, the Applicants have sought alternative remedy in relation to this issue by instituting civil litigation against the Government of Japan. Although this ground is framed as a public law issue, it seems to be more about the concerns of the Applicants in relation to the leaking of information of the case.  Thirdly, the issue of secrecy of investigations under the SFO, as far as I can ascertain from the information and materials before me, is a matter that is taken very seriously by the SFC as evidenced by the procedures and arrangements that they have put in place.  In the present case, the evidence points to constant reminders to and assurances from the Japanese regulators of the requirements and obligations in relation to confidentiality of the information and materials provided to them by the SFC.

196.  As pointed out by the SFC, on each occasion when they disclosed information and documents relating to the suspected market manipulation of Nitto Denko shares by the 1^st Applicant to the FSA and SESC, they informed the FSA and SESC that the information and documents were confidential and were passed to them under section 378(9) of the SFO.  They informed the FSA and SESC not to onward disclose the information and documents to any third party, other than in accordance with the IOSCO MMoU, without their prior written consent.  Furthermore, the FSA and SESC had on various occasions confirmed in writing to the SFC that they would not disclose information and documents received from the SFC in relation to the alleged market manipulation of Nitto Denko shares to any party without the SFC’s prior consent except where that is permitted by the IOSCO MMoU. 

197.  As stated by Mr Chan, there was and is no reason for the SFC to doubt that the FSA and SESC would not take adequate steps to ensure confidentiality of the information and documents provided to them.  He further states that the SFC had taken all reasonable steps to ensure confidentiality and it followed standard practice adopted internationally for such co-operation as reflected in the relevant provisions of the SFO and the IOSCO MMoU, representing the highest standard of international securities law enforcement cooperation practice, which were fully observed.  I am satisfied on the information and materials before me that that was indeed the case. 

198.  Mr Chan explains that the SFC do not know how Japanese media obtained information about the purportedly confidential home address and email account of the responsible officer of the 1^st Applicant, and how they came to know about the SESC’s investigation into suspected manipulation of Nitto Denko by the 1^st Applicant.  The FSA and the SESC informed the SFC that all their staff who were involved in this matter were subject to a secrecy obligation under Japanese law.  The FSA and the SESC had told the SFC that they were not aware that information provided by the SFC to them had been leaked to the Japanese media until the SFC informed them of the allegations made by the Applicants in the present proceedings.

199.  The SFC submit that it had “satisfied” itself that the FSA and SESC had adequate secrecy.  They point out that it is sufficient for the SFC to be “satisfied” that the Japanese regulators are subject to adequate secrecy provisions as required by section 186(5)(b). They submit they were so satisfied and the FSA was accordingly gazetted as a suitable overseas regulator in accordance with this and other provisions.

200.  The SFC explain that they were satisfied that secrecy would be appropriately addressed by the Japanese regulators by the relevant list of provisions and undertakings, including: (i) the Japanese National Public Service Act; (ii) Article 11 of the IOSCO MMoU; (iii) the ability to comply with the secrecy requirement as confirmed by the IOSCO MMoU Screening Group Verification Team; (iv) the SOI between the SFC and the FSA; (v) the Note Verbale; and (vi) the undertaking by the FSA and SESC.

201.  The SFC argue that they properly formed the opinion that the conditions were satisfied, and they submit that there is nothing in the Applicants’ case supporting the claim that they had breached their secrecy obligation.  They point out that there is no evidence showing that the leak of information was attributable to the FSA or the SESC or the SFC.

202.  The SFC deny that information and materials in relation to the suspected market manipulation of Nitto Denko shares by the 1^st Applicant were disclosed to the FSA and SESC without any, or any adequate protection to preserve confidentiality and prevent their use in any intended criminal proceedings. 

203.  Mr Chan explains that the various requirements that need to be satisfied for the protection and preservation of confidentiality of information and materials when dealing with overseas regulators were extensively addressed when nominating the FSA as an overseas regulator under the SFO.  I will deal with each of the requirements in turn.

204.  It is required under sections 186(5)(a) and 378(6)(a) that the FSA and SESC perform a similar function to that of the SFC.  It is readily apparent that the functions performed by the FSA and SESC are similar to the statutory functions of the SFC as set out in section 5 of the SFO. 

205.  It is required by sections 186(5)(b) and 378(6)(b) that the FSA and SESC are subject to adequate secrecy provisions.  Prior to the execution of the SOI, on 28 April 2005, the Consulate-General of Japan sent a diplomatic instrument, known as a Note Verbale, to the Financial Services and the Treasury Bureau of the HKSAR, concerning the regulatory co-operation between the SFC and the FSA.  The Note Verbale stated, among other things, in paragraph 1.5 that information provided by the FSA and SESC to the SFC and vice versa would remain confidential unless the former government consents to the disclosure of such information.  Clause 8 of the SOI also provides that the Japanese regulators and SFC respectively, would keep confidential any information furnished, requests made, and discussions and consultations held under the SOI. 

206.  Mr Chan explains that the FSA submitted its application to become a signatory to the IOSCO MMoU in May 2006 and was required to provide information about the secrecy provisions under Japanese law.  The FSA’s application was forwarded to an IOSCO MMoU and underwent an extensive screening process.  The screening group were satisfied that there were adequate provisions under Japanese law to ensure confidentiality of documents and information received from foreign authorities as required by paragraph 11(b) of the IOSCO MMoU.  In particular, all public employees, including FSA staff members, are required by the National Public Service Law to keep confidential any non-public information they have obtained.  The FSA became a signatory of the IOSCO MMoU in 2008.  As a signatory of the IOSCO MMoU, the FSA and SESC (which the FSA oversees) are bound by paragraph 11(b) of the IOSCO MMoU which provides that:

“11. Confidentiality

…

(b) The Requesting Authority will not disclose non-public documents and information received under this Memorandum of Understanding, except as contemplated by paragraph 10(a) or in response to a legally enforceable demand. In the event of a legally enforceable demand, the Requesting Authority will notify the Requested Authority prior to complying with the demand, and will assert such appropriate legal exemptions or privileges with respect to such information as may be available. The Requesting Authority will use its best efforts to protect the confidentiality of non-public documents and information received under this Memorandum of Understanding.”[59]

207.  Paragraph 10(a) of the IOSCO MMoU provides that:

“10. Permissible Uses of Information

(a) The Requesting Authority may use non-public information and non-public documents furnished in response to a request for assistance under this Memorandum of Understanding solely for:

(i) the purposes set forth in the request for assistance, including ensuring compliance with the Laws and Regulations related to the request; and

(ii) a purpose within the general framework of the use stated in the request for assistance, including conducting a civil or administrative enforcement proceeding, assisting in a self-regulatory organization’s surveillance or enforcement activities (insofar as it is involved in the supervision of trading or conduct that is the subject of the request), assisting in a criminal prosecution, or conducting any investigation for any general charge applicable to the provision specified in the request where such general charge pertains to a violation of the Laws and Regulations administered by the Requesting Authority. This use may include enforcement proceedings which are public.”[60]

208.  Mr Chan states that the FSA and SESC had given an undertaking to the SFC that privileged information will not be used by the  FSA and the SESC in any criminal proceedings against the interviewee and had repeatedly confirmed in writing that it would not disclose information and documents received from the SFC in relation to the suspected market manipulation of Nitto Denko shares by the 1^st Applicant to any party, except in compliance with the IOSCO MMoU, without the SFC’s prior consent;

(a)   By an email dated 26 June 2014, the FSA and SESC agreed not to disclose the information received from the SFC to anyone outside the FSA and SESC without the SFC’s prior consent.

(b)   It is stated in the Letter of Request that the FSA and SESC would maintain confidentiality of the information received from the SFC in accordance with the terms of the SOI and IOSCO MMoU. 

(c)   It is stated in the Undertaking that any testimony or statements of an interviewee disclosed by the SFC to the FSA and SESC under section 186(6) and 378(g)(i) of the SFO would be subject to the requirement that the FSA and SESC shall not disclose the testimony or statements of the interviewee, or any part thereof, to any other person unless the SFC consents to the disclosure.

(d)   It is stated in the letter dated 18 December 2014 that the SESC would use the record of the Interview provided by the SFC and would maintain confidentiality of the information in accordance with the terms of the SOI and the IOSCO MMoU. 

209.  It is required under sections 186(3) and 378(5) that the disclosure in the present case would assist the FSA and SESC to perform their functions and in doing so it was not contrary to the interest of the investing public or public interest.  The SFC point out that the disclosure of information and documents in relation to the alleged market manipulation of Nitto Denko shares by the 1^st Applicant would obviously assist the FSA and SESC in performing their functions.

210.  Similarly, disclosure of such information and documents to the FSA and SESC is not contrary to the interest of the investing public or public interest when one of the statutory functions of the SFC as stated in section 5 of the SFO is to co-operate with and provide assistance to regulatory authorities or organizations, whether formed or established in Hong Kong or elsewhere.  Further the alleged manipulation by the Applicants is on its face a serious one.  The SFC argue that it is not in the public interest that Hong Kong be used as a haven for suspected manipulation of foreign securities markets as it brings Hong Kong into disrepute as a legitimate and well-regulated financial market and cannot be contrary to the public interest or the interest of the investing public to share information that would help an overseas regulator investigate such suspected manipulation and, if needed, take enforcement action.  This statement is undoubtedly very true and clearly in recognition of the language and spirit of the relevant provisions of the SFO and the international nature and responsibility of securities markets.

211.  It is required under section 186(6), that statements made where a claim for privilege against self-incrimination had been made cannot be used in criminal proceedings.  The Note Verbale provides in paragraph 1.3 that information received by the FSA and SESC from the SFC and vice versa would not be used in criminal proceedings carried out by a court or a judge.  In paragraph 1.4, any proposed use of evidence in criminal proceedings must go through the official channel between the Government of Japan and the Government of the HKSAR. 

212.  The FSA and the SESC in their Undertaking to the SFC undertook that, if any testimony or statements of an interviewee disclosed by the SFC to them under sections 186(6) and 378(3)(g)(i) of the SFO contains statements over which a claim for privilege against self-incrimination had been made, the FSA and SESC would not use such privileged information in any criminal proceedings against that interviewee; and they shall not disclose such testimony or statements of the interview, or any part thereof, to any other person unless the SFC consents to the disclosure.

213.  On 18 December 2014, when the FSA and SESC requested the SFC to provide them with a copy of the record of the Interview and all the documents submitted by the Applicants to the SFC after the Interview, the FSA and SESC again confirmed in writing that the information provided by the SFC would be used by the FSA and SESC for administrative or regulatory purposes only and would not be used for criminal investigation or criminal proceedings.

214.  The Applicants complain that “secrecy has been flouted in this case.  It is claimed that the responsible officer began to receive press inquiries from Japanese media outlets about the allegations against the 1^st Applicant from 2 December 2014.  It is further claimed that communication came on the responsible officer’s private mobile telephone and an email address that she set up for the purpose of communicating with the SFC.

215.  They claim that the adverse publicity about this case had damaged the business of the 1^st Applicant and destroyed the Fund.  I note that the Applicants have taken civil action in Japan in relation to this matter.  This is a broad general complaint that does not fall under any of the heads of judicial review.  In any event, judicial review is a remedy of last resort and where attentive redress has been sought, it is not appropriate to utilize this jurisdiction.

216.  In an effort to give this complaint relevancy in these proceedings, the Applicants focus on the secrecy provisions in section 378 and allege that the SFC did not put in place adequate measures to maintain its secrecy obligations with an overseas regulator.  There is no substance to this complaint.  In fact, the converse is true.  The SFC fulfilled its obligations in this regard in an exemplary manner.

217.  The Applicants also make an issue about the lack of consultation by the FSA and SESC prior to the SESC Announcement on 5 December 2014 and seek to classify this as a breach of the secrecy provisions.  There was constant communication between the regulators, and by the time the announcement was made it was understood that the compelled materials could be used in relation to administrative or regulatory proceedings.  This was a permissible use of the compelled materials.

218.  In my view, the SFC took all reasonable steps and implemented all reasonable measures necessary to ensure that the secrecy provisions under the SFO were adhered to by their Japanese counterparts.  

219.  I find there is no substance in this ground for judicial review. 

As to Ground 3: Whether section 181 contravenes BOR 10

220.  By this ground, the Applicants challenge the constitutionality of section 181 of the SFO on the basis that it is incompatible with BOR 10 and 11(2)(g).

221.  As already mentioned, following a report of suspected market manipulation by the 1^st Applicant, the SFC issued a notice under section 181 which was served on the responsible officer of the 1^st Applicant on 5 May 2014.  The notice demanded certain information about the trading activities of the shares in Japan by the 1^st Applicant.  At the conclusion of the notice it stated:

“You must answer this demand for information

If you do not comply with this demand for information, or you give false or misleading information, you may commit an offence under section 181(7), (8) or (9) of the Ordinance.”

222.  The Applicants complain that the section 181 notice compelled the production of potentially self-incriminatory materials without supplying any concomitant protection against the use of such materials in criminal proceedings.  Nor did the notice caution the recipient of the privilege against self-incrimination.

223.  In support of this challenge, the Applicants have invoked BOR 10 (equality before the courts and the right to a fair and public hearing) and 11(2)(g) (rights of persons charged with or convicted of criminal offence).  These rights have been given constitutional protection by BL 39, although, the privilege against self-incrimination is also found under the common law.[61]

224.  The issues raised in the present application is whether BOR 10 and 11(2)(g) are engaged and whether there are inroads on these rights which are disproportionate and unconstitutional.  It is on this basis that the Applicants seek to challenge the constitutional validity of section 181.

225.  It is well recognised that in litigation involving a constitutional challenge against a statutory provision, the approach to be employed by the court in deciding the matter is to first address whether the right allegedly violated is engaged, that is, whether the measure in issue purports to restrict or limit the right.  If it does, the court goes on to address whether the restriction or limitation is justified, in that it satisfies the requirement of proportionality as laid down in Hysan Development Co Ltd v Town Planning Board (2016) 19 HKCFAR 372.

BOR 10

226.  The basis of this challenge is in relation to BOR 10 which has broader application, while BOR 11(2)(g) is of narrow scope.  This was relevantly addressed in Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170 by Sir Anthony Mason NPJ as follows:

“80. More to the point is the judgment of Ribeiro PJ in HKSAR v Lee Ming Tee & Another, with which other members of the Court agreed. His Lordship said that the protection given by art. 11(2)(g) of the BOR:

… is only a testimonial immunity, namely, the right “not to be compelled to testify against himself or to confess guilt”. It is therefore of a much narrower scope than the common law privilege against self-incrimination and had no application at the time of the company inspection since neither respondent had been charged at that time.

81. Ribeiro PJ went on to say that Strasbourg Court has deduced from the right to a fair trial in criminal proceedings in accordance with art.6 (art.10 of the BOR), the existence of the privilege against self-incrimination as an integral part of the right to a fair trial which is closely linked to the presumption of innocence.  This privilege (the art.10 privilege) extends to answers to questions compulsorily obtained before the commencement of criminal proceedings.  The judgment of Ribeiro PJ in Lee Ming Tee supports this view because, in accordance with Saunders v United Kingdom, it bases the art.10 protection on respecting the will of an accused person to remain silent.  Thus the protection does not extend to evidence compulsorily obtained which exists independently of the will of the accused.  But it does cover compulsorily obtained answers, if objected to, because the answers are obtained against the will of the accused.”

227.  As noted, even though BOR 11(2)(g) relates to a testimonial privilege, a broader privilege against self-incrimination may be deduced in the criminal context as an integral part of the right to a fair trial protected by BOR 10.  This broader privilege extends to answers compulsorily obtained before the start of criminal proceedings.  See Koon Wing Yee v Securities and Futures Commission [2009] 3 HKC 164, at paragraph 5.

228.  As I understand the Applicants’ argument under this ground, it is that BOR 10 is engaged in this case because the person served with a section 181 notice is required to provide the information demanded, on pain of criminal penalty, and that such information would expose the person to self-incrimination in criminal proceedings.

Section 181

229.  Pursuant to section 181(1), a person authorised by the SFC is entitled to demand production of certain information from a person mentioned in that subsection, namely:

“(a) a person registered as the holder of securities in a register of members kept under the Companies Ordinance (Cap 622);

(b) a person whom the authorized person has reasonable cause to believe holds any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or an interest in any securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme;

(c) a person whom the authorized person has reasonable cause to believe has acquired or disposed of any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or an interest in any securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme, whether directly or through a nominee, trustee or agent, and whether as beneficial owner, nominee, trustee, agent or otherwise;

(d) a licensed person or registered institution through whom or which the authorized person has reasonable cause to believe any securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or an interest in any securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme has been acquired, disposed of, dealt with, traded or arranged”

230.  The information that may be demanded is stipulated in section 181(2) which provides:

“(a) the particulars (including, in so far as applicable, the name and aliases, address, telephone and facsimile numbers, electronic mail address, occupation and particulars of any document of identity (including, if not an individual, any document evidencing incorporation or registration)) that are reasonably capable of establishing the identity of the person on whose behalf, or by, from, to or through whom, the securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or the interest in securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme in question is held, or has been acquired, disposed of, dealt with, traded or arranged (as the case may be);

(b) the particulars (including the quantity) of and, in the case of acquisition or disposal, the consideration (if any) for the securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or the interest in securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme; and

(c) the instructions (if any) given to or by the person referred to in paragraph (a), or any officer, employee or agent of such person, in relation to the holding, acquisition, disposal, dealing, trading, arrangement of or in respect of the securities, futures contract, leveraged foreign exchange contract, OTC derivative product, or the interest in securities, futures contract, leveraged foreign exchange contract, OTC derivative product or collective investment scheme.”

231.  Section 181(3) empowers the SFC to demand that the person supplying the information to give a statutory declaration to verify such information.

232.  It is a criminal offence to fail or refuse to comply with the demand for information “without reasonable excuse”.  This is provided for under section 181(7) which specifies that the maximum penalty for non-compliance (1) on indictment is a fine of $200,000 and imprisonment for 1 year; or (2) on summary conviction is a fine at level 5 and imprisonment for 6 months.

233.  There are further offences of furnishing false or misleading information under section 181(8), and of failing to comply or furnishing false or misleading information with intent to defraud under section 181(9).

234.  It is important to note that section 181 is directed to a particular class of persons who are required to furnish information about the particulars and the instructions of transactions in respect of securities and related financial products for the purpose to enable or assist the SFC to perform its functions under the SFO. 

235.  Mr Chan explains that section 181 empowers the SFC, in the exercise of its functions under the SFO, to require information about a client, details of a transaction (e.g. the quantity of the financial product involved and the consideration paid) and instructions relating to the transaction from a licensed person or registered institution through whom a financial product the SFC regulates was traded, or a person who holds an interest in such a financial product, or a person who has traded in such a financial product.  The SFC may seek information in relation to securities, futures contracts or leverage foreign exchange contracts, or in relation to any interest in any of these products or any interest in a collective investment scheme.[62]

236.  There is no doubting the importance and effectiveness of the section 181 power.  This was poignantly conveyed by Mr Chan in his following comments:

“51. One of the statutory functions of the Commission is to supervise, monitor and regulate the activities of the securities and futures markets (section 5 of the SFO). It is essential for the performance of the functions of the Commission that, if any unusual or suspicious trading activity occurs, which may indicate suspected insider dealing, market manipulation or other trading crimes or misconduct, which is discovered either during the Commission’s routine surveillance or if it is drawn to the attention of the Commission, the Commission is equipped with the power to require information about the transactions concerned. In many cases, the Commission must exercise this power before it can form a view on whether there is reasonable cause to believe that any offence or misconduct has taken place. Once the Commission has reasonable cause to believe that an offence under any of the relevant provisions may have been committed or has reasonable cause to believe breaches or misconduct set out in section 182 of the SFO may have occurred, the Commission can then commence an investigation. Section 181 is therefore an essential tool for the Commission to gather enough information about trading to evaluate whether sufficient grounds exist to start an investigation. Without the section 181 power, the Commission may not have the information it needs to form that view. In the Commission’s past experience, the issue of section 181 notices also can and has resulted in a cessation of suspicious trading in the shares of listed companies, thereby contributing to the orderliness of the market, which is one of the regulatory objectives of the Commission. This power is well known among market practitioners, an important tool for the Commission to decide whether to investigate and its existence is an important deterrence against misconduct which the SFO is aimed to prevent. The Commission’s power under section 181 of the SFO is therefore of immense importance and value to the Commission’s carrying out of its statutory functions and duties.” (Footnote: Hearing Bundle A/9/157.)

The section 181 notice

237.  The notice under section 181 essentially requested the 1^st Applicant to provide information about its client’s (i.e. the Fund) holding of and trading in Nitto Denko shares between August and September 2013.  It was expressed in the following terms:

“1. Particulars of the Client(s) such as fund manager(s) and authorised person(s) to trade;

2. Month-end holding summary of all Nitto Denko Corporation shares or warrants held by the Client(s) and any other funds managed by you for each month from August 2013 to September 2013;

3.   Particulars (including the share price, quantity, and execution brokers) of ALL trades in Nitto Denko Corporation shares or warrants executed by you or by other dealers on your behalf for the Client(s) and any other funds managed by you during the period from 2 September 2013 to 30 September 2013;”

The Applicants’ submission

238.  The Applicants argue that BOR 10 is engaged as section 181 compels the production of potentially self-incriminatory materials, without protection against their use in criminal proceedings.  However, they acknowledge that the privilege against self-incrimination is not absolute and therefore can be restricted by statute. Relying on the judgment of Ribeiro PJ in A v The Commissioner of the Independent Commission Against Corruption (2002) 15 HKCFAR 362,[63] the Applicants refer to the principle of legality which requires that any abrogation of a fundamental right has to be effective expressly or by necessary implication. 

239.  The Applicants submit that section 181 has to be read in context.  It is part of a suite of powers set out in Part VIII of the SFO, which concern investigations.  Sections 179, 183 and 184B also contain powers to compel production of materials and information related to transactions in securities and related financial products for investigative purposes.  It is only section 179 that contains express words abrogating the privilege against self-incrimination. See section 179(16).  The Applicants argue that the remaining three provisions, sections 181, 183 and 184B, do so by necessary implication.  They make the point that if the privilege was truly available as submitted by the SFC, then it would be incumbent on the SFC to put a recipient on notice of the privilege against self-incrimination. 

240.  The Applicants contend that section 181 is intended to abrogate the privilege against self-incrimination by necessary implication, as read in context with sections 179, 183 and 184B.

241.  The Applicants do not dispute that the measure set out in section 181 is prescribed by law and rationally connected to a legitimate societal aim.  As is evident from the SFO as a whole, the aim is to aid in the proper regulation of the securities and futures markets both here and abroad.  It has been emphasised that this is a very important public function which is vital to public confidence in the markets and therefore necessarily requires special measures in view of the complexity and scale of modern markets.  However, the question remains whether the measure would satisfy all the matters relevant to the proportionality analysis.

242.  The Applicants refer to the proportionality analysis in Secretary for Justice v Lakter [2009] 2 HKC 100.  In that case, the respondent was the registered owner of a motor vehicle that was captured by a red light camera.  Pursuant to section 63(1) of the Road Traffic Ordinance, Cap 374 (“the RTO”), the respondent was served with a notice requiring him to identify the driver.  He refused to do so, and as a consequence he was prosecuted under section 63(6)(1) of the RTO.  At trial, he challenged the constitutionality of the legislative scheme on the basis that it disproportionately restricted his right not to self-incriminate himself under BOR 10 and 11.  Having found that the RTO scheme did place a restriction on the right not to self-incriminate, the Court of Appeal then went on to consider whether such restriction was proportionate.[64]  The Court ultimately held that the interference was justified because the extent of the questioning was limited only to a single piece of information, namely the identity of the driver.  The issue of proportionality was evaluated by reference to four matters which was explained by Ma CJHC (as the Chief Justice then was) in the leading judgment of the Court:

“36. Given that the right to silence is not absolute and therefore capable of qualification, what are the relevant matters to be considered by the courts? In Koon Wing Yee, Sir Anthony Mason said this at 400-1 (para 83):

‘83. The protection given by art 10 of the BOR to the privilege against self-incrimination is not absolute. A derogation from it can be justified, in accordance with the principles enunciated by this Court in cases culminating in Lam Yuk Fai v HKSAR. In Lee Ming Tee, Ribeiro PJ pointed out that the direct use of compulsory obtained self-incriminating materials could be justified if it was not a disproportionate response to a serious social problem and did not undermine the accused’s right to a fair trial viewed in the round’.

37. Essentially, the critical question confronting the court when determining whether or not the right to silence can be derogated from or qualified is this: what is the fair balance to be struck between, on the one hand, the demands and interests of the general community and, on the other, the fundamental rights of the individual? This bring sharply into focus those aspects which the judgment of Sir Anthony Mason in Koon Wing Yee (see para 36 above) has emphasised when considering provisions such as s. 63: (a) does the provision provide a disproportionate response to that problem when seen against an individual’s right to a fair trial (in the words of Ribeiro PJ) ‘in the round’?

 

38. In the consideration of these two aspects, the following matters become relevant for a court to identify:

(1) The social objectives of the legislation in question. In other words, the identification of the public interest at stake.
(2) The extent of the interference with fundamental rights.
(3) The safeguards in place for the protection of the individual.
(4) The penalties involved in non-compliance.”[65]

243.  The Applicants also refer to the additional comments of Sir Anthony Mason NPJ in Koon Wing Yee in the paragraph that follows the one that was quoted by Ma CJHC:

“84. Although the appellant contends that s.33(6) is a proportionate response, in accordance with the principles referred to in the preceding paragraph, because insider dealing is an insidious mischief which is difficult to prove and in other respects a defendant has protections afforded by a fair trial, the submission cannot be accepted. Section 33 authorizes the obtaining of compulsory answers to questions which go to the very core of a case of insider dealing. In this respect, it constitutes, as the Court of Appeal said [52],

‘… the complete abrogation of the right of silence’.

How can such a complete abrogation of the right be justified as proportionate or striking a fair balance between the rights of the accused and the public interest in combating insider dealing? One only has to contrast s.33(4) and (6) with (a) Brown v. Stott and O’Halloran where the courts held that compelling the answer to a single, simple question in the context of a regulatory statute was a proportionate response; (b) Lee Ming-tee where there was a direct use prohibition on the answers obtained; and (c) Saunders where statutory abrogation of the common law privilege coupled with statutory permission to use the questions and answers against the accused at his trial was held to result in a violation of art.6(1). In the present case, the direct use prohibition was limited to criminal proceedings but with permission expressly given by the statute for the questions and answers to be used directly for all the purposes of the Ordinance, including use in proceedings before the Tribunal. There was nothing to show that a direct use prohibition which excluded use in the Tribunal as well would not have been enough to achieve the legislature’s rational and legitimate aim to eliminate insider dealing. Such a prohibition may well have achieved a balance between the public interest and the private rights of the individual.” 

244.  It is on the basis of the four matters laid out in Lakter that the Applicants submit section 181 is a disproportionate interference with the privilege.  As noted, the first matter is not an issue.

245.  As to the second matter, the Applicants argue that the scope of the intrusion by section 181 on the privilege against self-incrimination is wide by reference to the “array of information” that can be demanded under section 181(2).  They claim that it would cover the identity of a party to a transaction in securities etc., the particulars of the transaction, and the instructions given to or by the party to the transaction.  They submit this is the type of information that would be needed to establish an offence contrary to the SFO, such as market misconduct. See Part XIV of the SFO which addresses Offences Relating to Dealings in Securities and Futures Contracts, etc.  They submit that the power can be used against a member of the public who comes under section 181(1)(c), namely a person who has acquired or disposed of any securities etc.

246.  As to the third matter, the Applicants argue that the penalties for non-compliance of the provision are grave.  They point to the maximum penalties for non-compliance under sections 181(7) and 181(9).  They also point to the alternative redress under section 185(1) of treating the failure to comply with the notice under section 181 as a contempt of court.

247.  As to the fourth matter, the Applicants argue that unlike sections 179, 183 and 184B under Part VIII, section 181 does not enjoy direct use immunity precluding use of the answers given by the person in criminal proceedings.  Moreover, information or materials obtained under sections 179, 183 and 184B may not, where the privilege has been claimed, be provided to overseas regulators for use in criminal proceedings (see section 186(6) and section 186A(10) and (11)), while no such protection is provided under section 181.

The SFC’s submission

248.  The SFC submit that section 181 did not abrogate the privilege against self-incrimination, given that the exercise of the privilege constitutes a “reasonable excuse”.  Other provisions in the SFO, such as section 179(16) and section 184(4), explicitly provide that the privilege against self-incrimination is not an excuse for non-compliance.  However, there is no such provision in section 181.  They argue that section 181 did not intend to override the privilege against self-incrimination. 

249.  The SFC point out that the power under section 181 is different from that under section 179 or section 183.  They submit that section 181 enables the SFC to call for information relating to transactions of securities and related financial products as part of its general regulatory responsibility as compared to the other more intrusive powers that may seek to investigate criminal misconduct.

Whether section 181 concerned with pre-existing materials

250.  The SFC also contend that the privilege against self-incrimination does not apply to materials derived from section 181 because they fall within the class of “pre-existing materials” that have an existence independent of the will of the recipient of the notice in the sense contemplated in Saunders v United Kingdom (1996) 23 EHRR 313 which has been followed in HKSAR v Lee Ming Tee (2001) 4 HKCFAR 133 and Koon Wing Yee. 

251.  The SFC, however, draws the distinction between “pre-existing materials” and “materials created in response to the investigation which come into existence by an exercise of will pursuant to a testimonial obligation imposed upon the party”.  They argue that the privilege against self-incrimination attaches to the latter but not to the former.  They seek to justify this proposition by reference to the comments of Ribeiro PJ in Lee Ming Tee where he stated:

“In evaluating this balance, it is important to bear in mind that the purpose of the privilege is to respect the will of the accused to remain silent, thereby ensuring that the accused is not compelled to provide proof of his or her guilt. The privilege has no application to evidence which exists independently of the will of the accused. This proposition was expressly recognised in Saunders v United Kingdom (1996) 23 EHRR 313 at para 69. Indeed, in my judgment, there is much to be said for the general proposition that there is no inherent unfairness in establishing a person’s guilt by the use of reliable objective evidence obtained from an independent source, even if the acquisition of that evidence was facilitated by clues contained in the excluded admissions.”[66] (Emphasis added)

252.  The reference to Saunders in the extract of the judgment of Ribeiro PJ is where the European Court of Human Rights held that a defendant cannot claim privilege in respect of materials which have an existence independent of the will of the suspect.[67]

253.  The SFC also rely on the comments of Lam VP in Pacific Harbor Advisors Pte Ltd v Winson Federal Ltd, CACV 115/2016, 22 June 2016, unreported, which they submit supports their contention that the privilege does not extend to pre-existing evidence. Lam VP stated:

“Fifth, PSI does not protect a person from being required to produce documents which have existence independent of the person claiming the privilege, see HKSAR v Lee Ming Tee, supra p.177; Saunders v United Kingdom (1996) 23 EHRR 313. Thus, an examinee under Order 48 can be required to produce documents shedding light on his assets and financial situation even if he claims PSI.”[68] (Emphasis added)

254.  The SFC point out that the information that the Applicants were required to provide, consisted of the 1^st Applicant’s daily position of shares in Nitto Denko and the identities of the unitholders of the Fund, including those who were employees of the 1^st Applicant.  They argue that such documents were clearly in the nature of “pre-existing” records, to which the privilege against self-incrimination did not attach.

255.  The Applicants argue that this is incorrect as a matter of law.  They refer to Lee Ming Tee where Ribeiro PJ expressly stated that the privilege against self-incrimination at common law does extend to compelled production of documents.[69]  They also argue that section 181 is not exclusively directed at “pre-existing materials”.  What may be demanded is provided for in section 181(2).  The introductory remarks to that subsection refer to the provision of information, not documents (whether pre-existing or otherwise).  Subsections 181(2)(a), (b) and (c) then state that what the SJ may demand are particulars of transactions.  This they submit includes, amongst other things, the identities of the parties to the transaction and their details (under subsection (a)), particulars of the securities etc. dealt with, and the consideration (subsection (b)), and any instructions given in relation to the carrying out of the transaction(s) in question (subsection (c)).

256.  Accordingly, the Applicants submit that section 181 is concerned with demands for information, not for materials that already exist.  They also point out that section 181(3) empowers the SFC to require the provider of information to test as to the truth of the information given by way of statutory declaration.  The Applicants argue that section 181 is a testimonial provision concerned with the provision of information and is not confined with the provision of pre-existing materials.

257.  Like the SFC, the SJ highlights the purpose and function of section 181.  It is submitted that the scope of section 181 is narrow.  The SFC may only request information from persons engaged in the dealing of securities and not just from any member of the public.  The SFC may only require production of information specified in section 181(2), that is, as to a client, details of a transaction and instruction relating to the transaction.  The application of section 181 is limited in that it provided under subsection (1) that a request for information can only be made to the extent that it enables or assists the SFC to perform a function under any of the relevant provisions of the SFO.  The defining ambit of section 181 therefore limits its application to enable or assist the SFC to perform a function under any of the relevant provisions of the SFO; the category of persons as listed under subsection (1) and the nature and scope of the information requested as provided in subsection (2).

258.  It is also submitted by the SJ that persons who are required to provide information under section 181 are those who have voluntarily engaged in a regulated commercial activity, and it is reasonable to expect them to abide by the requirements of the regulatory scheme.  As a general proposition, this is undoubtedly correct. 

259.  A publicly listed company and its statutorily appointed or registered officers are not in the same position as the ordinary citizen.  They have agreed to abide by a body of laws and regulations governing a public corporation, subject to the power of investigation and compliance set out and structured under an extensive statutory regime.  They are committed to a range of obligations, duties and responsibilities for the privileged position they hold.  This includes making and maintaining certain records to which the SFC has a right of access and the keeper of the records has a duty of disclosure.

260.  Overall, I agree with the submissions of the SFC and the SJ.  However, notwithstanding section 181 is quite specific and limited in relation to the class of persons to whom it applies and the type of information to be furnished, it cannot be excluded that the information may be other than pre-existing materials.  Although, in my view, it would be rare indeed that such information would not be an existing or public record.

261.  In my assessment of the information that was furnished by the 1^st Applicant pursuant to the section 181 notice, it related to information concerning the Fund and the share transactions in Nitto Denko that would be normally recorded and available, if not publicly.  It would also be considered to be information which exists independently of the will of the provider of the information.

262.  In addition, it must be shown that the information provided would expose the recipient to self-incrimination in criminal proceedings.  The notice was served on the 1^st Applicant, a corporation licensed by the SFC to carry on a regulated activity under the SFO and subject to the relevant statutory provisions and regulatory codes in force.  No objection was raised in furnishing the information, nor was any objection taken subsequently when the SFC directed a formal investigation into the matter.  In fact, the Applicants volunteered information beyond what had been requested by the SFC.  In the circumstances, it would seem that the right was not engaged.

263.  The SFC also contend that the 1^st Applicant (or its responsible officer) did not claim the privilege against self-incrimination when answering the first notice and therefore there has been a waiver of privilege.  This is a factual matter, I do not have the necessary information and materials to decide the matter, if it is one properly within this Court’s jurisdiction.

The SJ’s submission

264.  There are four principal grounds advanced by the SJ against the constitutional challenge.  The first ground is that on a proper interpretation of section 181, it does not engage and infringe the privilege against self-incrimination under BOR 10.  The rationale in support of this contention is that section 181(7) only imposes liability for failure to provide requested information “without reasonable excuse” and possible self-incrimination would constitute a reasonable excuse.  Therefore, the privilege is neither overridden, nor abrogated under section 181. 

265.  The second ground is that BOR 10 is not engaged in the exercise of inspection powers for administrative or regulatory purposes.  Since the information seeking power under section 181 is part of the SFC’s routine supervisory powers, BOR 10 is therefore not engaged. 

266.  The third ground is based on the premise that a statutory provision will not be invalidated on constitutional grounds unless shown to be inherently or systematically incompatible with a constitutional provision.  The SJ argues that this is not the case with section 181 and BOR 10.  It is submitted that as much as section 181 materially encroaches BOR 10, the measure cannot be deemed disproportionate having regard to the vital public interest objectives that it serves and the regulatory context in which it operates. 

267.  The fourth ground seeks to rely on constitutional remedies that may be employed if the Court finds that section 181 constitutes an unlawful infringement of BOR 10.  In such a case, the SJ urges the Court to apply remedial interpretation to render the operation of section 181 constitutionally compliant.  As I will explain later, I do not see any need to employ any constitutional remedies.

Whether BOR 10 is engaged

268.  The starting point to this challenge is whether section 181 engages and interferes with the privilege against self-incrimination under BOR 10.  The SJ argues that this is primarily a matter of statutory interpretation and if the Applicants fail on this threshold issue, the constitutional challenge inevitably fails.[70] 

269.  The SJ relies on a number of well-established principles of interpretation which I will set out for the purpose of this discussion.  These principles are:

(1)   The statutory context and purpose are paramount in determining the meaning of the words used: Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351, at paragraph 15 (Ma CJ).

(2)   The statutory context should be taken in its widest sense and includes the other provisions of the statute: HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568, at paragraph 13 (Li CJ).

(3)   All provisions within a statutory setting must be read together as a “purposive unity in its appropriate legal and social setting”: Medical Council of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144, at paragraph 29 (Bokhary PJ).

(4)   In the absence of express language or necessary implication to the contrary, the Court must presume that statutory words do not intend to curtail basic individual rights: R v Secretary of State for the Home Department, Ex p Simms [2000] 2 AC 115, 131F (Lord Hoffmann); A v Commissioner of Independent Commission Against Corruption (2012) 15 HKCFAR 362, at paragraphs 70-71 (Ribeiro PJ). Even in the absence of ambiguity, where some fundamental or basic right is at stake, legislative provisions must be read with a presumption of legality, which includes a presumption that in enacting a provision the legislature did not intend to interfere with fundamental or basic rights: Ex p Simms 130D-G (Lord Steyn). See also HKSAR v Lam Kwong Wai (2006) 9 HKCFAR 574, at paragraph 64, Sir AnthonyMason NPJ referring to the “very strong common presumption or rule of construction in favour of constitutional validity”.

270.  It has been held that the courts should give a generous and purposive interpretation to the rights expressed in the BOR, in order to give Hong Kong residents the full measure of the fundamental rights and freedom that are guaranteed.[71] 

271.  The parties take diametrically opposed positions in relation to the interpretation of section 181.  Rather unusually, the Applicants argue that section 181 abrogates the privilege against self-incrimination, whereas the SFC and the SJ argue that it does not and the privilege is available to be exercised where the circumstances permit.

272.  In advancing this argument, the SJ places reliance on the fact that the offence creating provision under section 181(7) allows for non-compliance with a section 181 demand where there is “reasonable excuse”.  It is contended that on a fair and proper reading of section 181(7) where compliance with a section 181 demand would be self-incriminating, this plainly constitutes a “reasonable excuse for non-compliance”.  On this point, it is submitted that a court would refuse to read a statutory provision as abrogating the privilege against self-incrimination unless that provision does so “unmistakeably, expressly or by necessary implication”: A v Commissioner of Independent Commission Against Corruption (2012) 15 HKCFAR 362, at paragraph 71.  In that case, the notice under challenge was one under section 14 of the Prevention of Bribery Ordinance, Cap 201, which empowered the Independent Commission Against Corruption to require information from a person in connection with an ongoing investigation.  Under section 14(4), it imposed an obligation on the person to “comply with the terms of that notice”, making it a criminal offence to fail or neglect to do so without reasonable excuse.  However, critical to its analysis, the Court noted that the obligation to provide such information was imposed, “notwithstanding the provisions of other Ordinance or rule of law to the contrary save only the provisions of section 4 of the Inland Revenue Ordinance (Cap 112)”.  In this context, the Court concluded that a rule of law “to the contrary” could only mean a rule of law which would otherwise contradict or relieve the person of the obligation imposed by section 14(4) to comply with the terms of the notice.  The Court noted that the common law privilege against self-incrimination was obviously such a rule of law, and it therefore followed that in compelling compliance with a section 14 notice, notwithstanding other Ordinances or rules of law to the contrary, section 14(4) necessarily removed the immunity from answering questions which the privilege against self-incrimination would otherwise provide. 

273.  The SJ argues that there is nothing in section 181 which expressly excludes the assertion of any privilege against self-incrimination from the scope of the wording of the proviso under section 181(7).  It is further submitted that by the nature and content of the provision it cannot be said that by necessary implication it abrogates the privilege against self-incrimination.

274.  In response to the Applicants’ argument that a recipient of a section 181 notice would simply be able to defeat the notice by invoking the privilege, the SJ points out that the notion of “reasonable excuse” self-evidently does not encompass a privilege that is unavailable on the facts.  The SJ therefore rejects the suggestion by the Applicants that the absence of abrogation of the privilege would make section 181 unworkable or fail in its essential purpose. 

275.  As is commonly accepted, a reasonable excuse includes any excuse which would be accepted by a reasonable person to justify the non-compliance of a legal obligation.  It will depend on the particular facts and circumstances of the case and the purpose of the provision to which the defence of “reasonable excuse” is an exception. 

276.  In SFC v Ernest & Young [2015] HKLRD 293,[72] Ng J in distilling the principles stated in Bank of the Valletta PLC v National Crime Authority (1999) 164 ALR 45 held that a reasonable excuse includes any excuse which would be accepted by a reasonable person to justify the non-compliance with a notice lawfully issued; in other words, the test is objective rather than subjective; each case is highly sensitive to its own facts.  It was further held that physical or practical difficulties in producing the documents are illustrative of matters constituting reasonable excuse.  So are cases where the non-compliance is based on some right, privilege or immunity recognised by law.  However, reasonable excuse is not confined to such cases. 

277.  It is argued by the SJ that a review of other relevant provisions in the SFO reinforces its submission that section 181 does not abrogate the privilege against self-incrimination. The SJ refers in particular to sections 179, 184 and 184D.  The SJ notes that unlike section 181, these provisions contain sub-provisions directed at ensuring compliance by imposing criminal liability for failure “without reasonable excuse” and additional sub-provisions that expressly remove possible self-incrimination from the scope of the “reasonable excuse” defence.  For example, section 179(16) expressly states that a person is “not excused from complying… on the ground that to do so might tend to incriminate the person”. Like provisions are found in sections 184(4) and 184D(7).  The point made by the SJ is that this illustrates that the legislature intended to exclude or abrogate the privilege against self-incrimination in the context of the SFO and did so expressly and unmistakeably in line with the law as elucidated in A v Commissioner of Independent Commission Against Corruption.[73]

278.  It is further argued that the absence of any words excluding the privilege against self-incrimination from section 181(7) must be taken to be deliberate and reflecting a clear legislative intention against any interference with the privilege for the purposes of section 181.  Furthermore, section 187 provides “direct use immunity” in respect of materials provided under sections 179, 183 and 184B but not in relation to section 181.  It is submitted therefore that the exclusion of section 181 in section 187 clearly indicates that the legislature never intended the production of potentially self-incriminating materials under section 181.  The reasoning is that by section 181(7), the SFC would not receive such materials, and therefore the direct use restriction is unnecessary in respect of the operation of section 181.  The main point of the SJ is that whether there is an intention to abrogate the privilege under the SFO, the legislative approach has been to do so in express and clear terms, as evidenced by sections 179(16), 184(4) and 184D(7). 

279.  In response, the Applicants argue that if the privilege against self-incrimination is not abrogated in section 181, then it was incumbent upon the SFC to caution a recipient of a section 181 notice of the right not to provide the information in the exercisable privilege against self-incrimination.  However, a failure to administer a caution would not render the provision unconstitutional as a result. 

280.  I agree with the submissions of the SFC and SJ that the privilege against self-incrimination has neither been overridden, nor abrogated by section 181.  However, the Applicants make a valid point that if the privilege against self-incrimination is available to a person who is the subject of a section 181 demand, the SFC should accordingly warn and caution such person of the privilege.  This is something that in the future the SFC will need to address.

281.  In considering section 181 in context of the SFO and with other provisions, it is clear in my view that the legislature did not intend to abrogate the privilege.  If that was the intention of the legislature it would have done so expressly and unmistakably in the similar way as it did in other provisions.  This is evident by the fact that the offence creating provision under section 181 contains a proviso which allows for non-compliance where there is “reasonable excuse”.  The privilege against self-incrimination would constitute a reasonable excuse for non-compliance.

Whether section 181 satisfies the proportionality analysis

282.  As explained by Ribeiro PJ in Hysan Development,[74] the law recognises that certain constitutional guaranteed rights are absolute and that in such cases, there is no room for any proportionality analysis.  However, where the guaranteed right is not absolute, the law may validly create restrictions limiting such rights.  In such circumstances, it is for the court to determine the permissible extent of those restrictions and it does so by a process referred to as a proportionality analysis.

283.  The lawful limitations of guaranteed rights may validly be created as acknowledged by BL 39(2) which provides that the rights and freedoms enjoyed by Hong Kong residents shall not be restricted unless as “prescribed by law”, satisfying the requirement of legal certainty, and must be consistent with the provisions of the relevant international instruments as implemented through the laws of the HKSAR. 

284.  Ribeiro PJ reviewed the relevant authority on the proportionality analysis where he adopted the four-step approach delineated in Bank Mellat v Her Majesty’s Treasury (No 2) [2014] AC 700.

285.  The four-step approach to be applied by Hong Kong courts when conducting a proportionality analysis is as follows:

(1)   The restriction or limitation must pursue a legitimate aim.

(2)   The restriction or limitation must also be rationally connected to the legitimate aim.

(3)   The restriction or limitation must also be no more than was necessary to accomplish that legitimate aim.  The standard of “no more than necessary” is a test of reasonable necessity, so if the court is satisfied that a significantly less intrusive and equally effective measure is available, the impugned measure may be disallowed.  The alternative standard of “manifestly without reasonable foundation” recognises that the originator of the impugned measure is better placed to assess the appropriate means to advance the legitimate aim.  The standard of reasonableness depends on many factors relating principally to the significance and degree of interference with the right; the identity of the decision maker; and the nature and features of the encroaching measure relevant to setting the margin of discretion.

(4)   Whether a reasonable balance has been struck between the societal benefits of the encroachment and the inroads made into the constitutionally protected rights of the individual, asking in particular whether pursuit of the societal interest results in an unacceptably harsh burden on the individual.

286.  The Applicants submit that section 181 constitutes a disproportionate interference to BOR 10 and the measures go beyond what is necessary in achieving its legitimate aim.

287.  They argue that section 181 effects a complete abrogation of the right against self-incrimination and as noted in Koon Wing Yee, a significant factor in relation to the issue of proportionality is the fact that questions and answers under compulsion constitute a substantial intrusion into the privilege against self-incrimination.

288.  They submit that the measure is disproportionate taking into account the following considerations.  The scope of inquiry possible under section 181 is not as extensive as those in Koon Wing Yee, but the section permits disclosure of the particulars of any trading activity.  They submit that section goes beyond the “single, simple question” held to be permissible in road traffic case of Lakter.  They further submit that the type of information provided under the section would tend to establish the elements of relevant offences.  They contend that the prosecution ought to prove its case, but such information alleviates it of that responsibility.  They add that the information compelled under the section could be used in evidence for the prosecution of serious criminaloffences.

289.  The SJ argues that in interpreting section 181, it is important to bear in mind its context and purpose, particularly given that the regulations of the securities and futures market in Hong Kong are of “immense” public interest.   It is submitted that there is no proper basis for the Court to find that section 181 is a disproportionate interference to BOR 10.

290.  The SJ submits that whether an incursion into a protected right is justified depends on the importance of the objectives.  It also depends on the particular extent of section 181’s interference with the right, with regard to the particular facts of the case.  It is contended that the Court should not find that section 181 involves a disproportionate incursion into the BOR-protected realm generally as the extent of interference is case-sensitive.  A uniform determination that section 181 is disproportionate, or otherwise, is inappropriate.

291.  Nonetheless, the SJ submits that the incursion is proportionate.  It is submitted that the scope of section 181 is narrow, in that the SFC may only request information related to the transaction from persons engaged in securities dealing.  It can only do so to the extent that it enables or assists the SFC to perform a function under any of the relevant provisions. 

292.  It is submitted that the inspection power of the SFC is routinely exercised with a view to ascertaining whether there are any defects in regulatory compliance.  Any interference is minimal, in that self-incriminating evidence is only used for regulatory or disciplinary purposes.  It is also submitted that section 181 strikes a fair, reasonable and proportionate balance between the need to ensure that the SFC has sufficient powers to exercise effective oversight of the securities industry, and the right to privilege against self-incrimination. 

293.  The SJ further argues that even if section 181 limits the ability of a person to avoid self-incrimination, it still does not involve an engagement of BOR 10.  This the SJ argues is because the privilege protected by BOR 10 does not extend to the exercise of inspection powers or administrative or regulatory purposes as opposed to the admission of evidence in criminal proceedings. 

294.  There is a long line of authority to this effect in respect of Article 6 of the European Convention on Human Rights (the equivalent to Article 10).  See for example Fayed v UK, at paragraphs 61 and 62;[75] Saunders v UK, at paragraph 67;[76] Abas v Netherlands;[77] R v Hertfordshire County Council, ex p Green Environmental Industries Ltd;[78] IJL, GMR and AKP v UK, at paragraph100;[79] R v Kearns,at paragraphs 31, 32, and 52;[80] Allen v UK;[81] Shannon v UK, at paragraph38;[82] Eklund v Finland, at paragraph 51.[83]  It is submitted that the focus of BOR 10 is upon exposure to “prosecution in a criminal case” rather than broader regulatory purposes, as noted in Saunders,at paragraph 65.

295.  The same distinction is recognised by the courts in Hong Kong.  Thus in SJ v Latker [2009] 2 HKC 100, in analysing whether BOR 10 was engaged in the first place, a distinction was drawn between, on the one hand inquiries for an administrative or extra-judicial purposes, including those primarily for regulatory purposes, and, on the other hand, those “made in the course of an investigation into the commission of a criminal offence and the purpose of seeking the information was, undoubtedly, to obtain evidence which would enable a charge to be laid”.[84]

296.  The SJ argues that in relation to a BOR based challenge, the court will only impugn a statutory provision as unconstitutional if it is clearly, inherently incompatible with a BOR guarantee.  It is therefore necessary to succeed in impugning section 181 that it is shown that the provision is of itself “systematically incompatible” with BOR 10.  See Lam Siu Po v Commissioner for Police (2009) 12 HKCFAR 237, at paragraph 142 (Ribeiro PJ). 

297.  The SJ argues that section 181 does not involve a blanket systematic restriction precluding the exercise of the privilege against self- incrimination.  Nor does it involve a statutory prohibition effectively preventing the court from remedying any restriction affecting an individual case by way of judicial review. 

298.  The SJ rightly contends that the relevant context is that of effective regulation of the securities and futures market in Hong Kong.  This is a matter of immense public interest in terms of Hong Kong’s general and economic reputation and standing.  It is argued that the SFO generally, and section 181 specifically, reflect and implement policy judgments as to what is effective and beneficial for the SFC’s vital role as a regulator and ultimately the general public good.  It is stressed that these involve matters of policy as to which there is no single right answer or point of balance.  This was echoed by Lam and Hartmann JJ (as they then were) in Chau Chin Hung v Market Misconduct Tribunal, HCAL 123/2007, 22 September 2008, where they said:

“The financial services industry in Hong Kong is of very considerable importance to the community. Accordingly, there is a directly proportionate interest in the community to ensure that the market in securities is not only well regulated but also that the public at large are protected from the misconduct of those that seek to obtain impermissible personal advantage to the disadvantage of the market generally. The widespread recognition in other jurisdictions, as well as the Hong Kong, of the difficulty of achieving this objective, given the complexity of the operations of the market, is a factor to be borne in mind in weighing the proportionality of the measures adopted in Hong Kong.”[85] (Emphasis added)

299.  There is no doubt that section 181 serves a legitimate aim and as emphasised by Le Pichon JA in SFC v C [2009] 4 HKLRD 312 at paragraph 34, the SFO seeks to “facilitate the attainment of the SFC’s regulatory objectives and render more effective the discharge of its statutory functions”.  Clearly the aim of the effective regulation of the financial services industry is an extremely important one.

300.  As submitted by the SJ, whether section 181 involves a disproportionate response falls to be assessed in this light, and not merely from the perspective of the impact of the measure on individuals such as the Applicants or those in comparable positions.  The issue as to whether an incursion into a protected right is justified depends on the importance of the objectives served by that incursion.[86]

301.  The SJ emphasises that an important aspect of the balancing analysis is the nature of the right affected and the extent of interference with that right.  It is pointed out that the extent of interference is necessarily case and fact sensitive rather than a uniform position and therefore it cannot be said that an intrusion into the privilege under section 181 would be disproportionate in all circumstances. It is submitted that under section 181, an array of information may be demanded which can vary in its nature and extent.  On this basis, it is argued, the Court cannot generally find that section 181 involves a disproportionate incursion into the protected right. 

302.  The SJ submits that a holistic approach should be taken in assessing whether a procedure offends BOR 10.  In this regard, the availability of judicial review to remedy an unwarranted or disproportionate information request in a given case is plainly a critical systemic safeguard that militates against any conclusion that section 181 is in its right disproportionate and unconstitutional.

303.  I agree with the submissions of the SJ.  As I have already stated, I am of the view that the privilege against self-incrimination has not been abrogated by section 181.  It is available to be invoked by a recipient of a section 181 notice if the circumstances warrant it.  In any event, I am satisfied that the proportionality analysis has been fulfilled by section 181 if there is any intrusion on the privilege against self-incrimination.  In my view, the section is rationally connected with accomplishing the legitimate aim of ensuring that the financial markets of Hong Kong operate fairly and honestly and the nature and limitation of the section provides a measure that is no more than reasonably necessary for accomplishing this purpose.  Furthermore, a reasonable balance has been struck between the societal benefits of the section and any inroads that there may be into the privilege against self-incrimination.

304.  This ground of judicial review therefore fails.

The issue of delay

305.  This application for leave to apply for judicial review was filed on 12 February 2016 in relation to the decision of the SFC to transmit compelled information and materials from the Applicants to the Japanese regulators.  It would appear that the decision was made some time after the 1^st Applicant had been interviewed on 27 and 28 November 2014 and before the SESC Announcement on 5 December 2014.  The application therefore falls outside the three-month time limit set down in Order 53, rule 4(1) of the Rules of the High Court, Cap 4A. 

306.  The Applicants claim that they did not know exactly when the transmission of the compelled materials took place, although they say from available information it may have been on one or more occasions between 22 October and 2 December 2014.

307.  The Applicants submit that it was not until the transmission of the materials was expressly confirmed by the SFC in its letter dated 17 November 2015, that the Applicants came to know for certain that this had occurred.  It is argued on this basis that the present application was brought within three months of the Applicants learning that the transmission of the materials had taken place, even though it occurred earlier. 

308.  The Applicants also submit that, when considering the issue of delay, this application for judicial review raises important questions of law in relation to the constitutionality of section 181 of the SFO and the circumstances in which the SFC may properly share privileged and/or confidential material with an overseas regulator.

309.  It is necessary to briefly look at what transpired between the Applicants and the SFC at the relevant times in order to address this issue.  The former solicitors of the 1^st Applicant on 7 January 2015 made representations to the SFC complaining about the SESC Announcement.  Implicit in their representations was the provision by the SFC of information that it had gathered to the Japanese regulators and breach of secrecy of the matters disclosed and under investigation.  It was not until 13 October 2015 that the current solicitors wrote to the SFC complaining about the assistance the Applicants suspected or believed the SFC had provided to the Japanese regulators, including the provision of privileged materials. 

310.  In response by letter dated 17 November 2015, the SFC, after setting out the legal requirements that had to be met, stated: 

“In the circumstances, the SFC decided that assisting would enable or assist JFSA and SESC to perform their functions and that it was not contrary to the interest of the investing public or to the public interest to do so. We made a similar decision about disclosing the information we gathered as a result to the JFSA and SESC under ss 378(3)(g)(i) and (5) of the SFO. In our view, both decisions are uncontroversial.”

311.  The SFC went on to address the action taken by the SESC as contained in the SESC Announcement which it noted was “an administrative monetary penalty”, stating that:

“The SFC was not involved in that recommendation nor will it be involved in making a final decision as this is entirely a matter for the Japanese authorities under Japanese law. In any event, no criminal proceedings have been commenced in Japan so the issue of the protection of the privilege against self-incrimination does not arise.”

312.  The Applicants contend that they did not know for certain that any materials had been transmitted to the Japanese regulators until it was expressly confirmed by the SFC in its letter dated 17 November 2015.  They further contend that prior to that date, they harboured suspicions that such a transmission may have taken place, as set out in the letter of 13 October 2015.  It is on this basis that they say that the present application has been brought within three months of them learning of the challenged decision and follow up action had taken place.  It is submitted that the Applicants were entirely justified in waiting to confirm, following correspondence with the SFC, that the challenged decision and follow up action had in fact occurred.  It is further submitted that the Applicants have acted entirely reasonably and that there are good reasons to extend time to bring the present challenge.  This is all well and good, but there is an unexplained period of delay from 5 December 2014 to 13 October 2015, during which time it is said the Applicants harboured suspicions that a transmission of information by the SFC to the Japanese regulators may have taken place. 

313.  The 2^nd Applicant in his first affirmation stated that neither the 1^st Applicant nor he “had been separately contacted by the SESC before the SESC Announcement. Therefore, I believe that the SESC Announcement was not based on an independent investigation by the SESC.  Indeed, in the SESC Announcement, the SESC stated that it appreciated the ‘assistance of the Securities and Futures Commission of Hong Kong in this matter’.”[87]

314.  From this passage, it would appear that the 2^nd Applicant, as submitted on his behalf, was of the belief when the SESC Announcement was made that the SFC had rendered assistance to the Japanese regulators.  As previously noted, the former solicitors on 7 January 2015 made representations to the SFC complaining about the SESC Announcement. 

315.  It is evident that there is a significant period of inactivity leading up to 13 October 2015. 

316.  The SFC on this issue submits that at the latest, by 5 December 2014, when the SESC Announcement was published, the Applicants must have known as a fact that the SFC had shared information it had gathered with the Japanese regulators.  They contend that such an understanding was clearly manifested in the letter dated 13 October 2015.  They also point to the fact that no reason has been given by the Applicants to explain the long period of inactivity since 5 December 2014.  They argue that the judicial review is without merit and when this factor is looked at together with the magnitude of the delay and the absence of any adequate explanation from the Applicants, it is proper for the Court to refuse to extend time.  See Pagtama & Ors v Director of Immigration, HCAL 13, 45 & 56/2014, 12 January 2016, paragraph 238, per Au J; BI v Director of Immigration [2016] 2 HKLRD 520, paragraphs 131-139.

317.  I do not accept that the Applicants were not aware of the assistance rendered by the SFC to the Japanese regulators until it was confirmed by the SFC in its letter of 7 November 2015.  I agree with the SFC’s submission. 

318.  I am also concerned about the disruption and delay these proceedings may have had on the SFC investigation, and for that reason in cases of this type, it is highly desirable that a court should address at the outset the statutory requirements that have to be satisfied before granting leave.  I note that the Applicants have initiated proceedings in Japan in relation to what has taken place there and that is a matter of some significance in relation to certain grievances that the Applicants have raised in the present proceedings.  However, the provision of compelled materials by the SFC to overseas regulators, as governed by the legal and administrative framework, has been called into question and this had to a large extent led to the present proceedings that are out of time. 

319.  The SFC performs an extremely important role in the regulation and enforcement of the financial markets, and to this end, it should not be inappropriately frustrated or distracted by collateral litigation.  With any law enforcement function, it is imperative that the relevant law enforcement authority be allowed to properly carry out its investigative powers in relation to an alleged breach of the law without any undue interruption or prejudice.  This is an important public interest consideration in determining whether to grant an extension to bring judicial review proceedings that are out of time.  It follows from the reasons I have given that I found the evidence of the SFC comprehensive and compelling in addressing the complaints of the Applicants.

320.  In light of the foregoing, I refuse to grant an extension of time.

Conclusion

321.  This application for judicial review fails for two reasons.  First, it is made out of time and no satisfactory or sufficient explanation has been provided for the delay to justify this Court granting the Applicants an extension of time.  Secondly, the grounds for judicial review are not sustainable in light of the evidence and submissions of the SFC and the SJ.

322.  The application for judicial review and the reliefs sought are therefore refused.  I see no reason why costs should not follow the event, and accordingly I make an order nisi that the Applicants pay the costs of the SFC and the SJ, with a certificate for two counsel, to be taxed if not agreed.