HKSAR v. LI JIALIN

Reasons for Verdict

1. The defendant faces a total of 27 charges.

2. Charges 1 through to 11 are for price rigging of share transactions under s.296(1)(a)[1] and (4) of the Securities and Futures Ordinance, Cap.571 (“SFO”). The defendant pleaded not guilty to these 11 charges.

3. Charges 12 to 27 are for the defendant’s failure to perform a duty of disclosure within a specified period under ss.341(1)(a), 347, 348(1)(a) and 351(a) of the same ordinance. The defendant pleaded guilty to these 16 charges and was convicted upon his admission to the summary of facts prepared specifically for the purpose of his pleading guilty.

Background

4. The defendant was at all material times the controlling shareholder and chairman of VST Holdings Limited (“VST”), a company listed on the Stock Exchange of Hong Kong (“SEHK”). Over 40% of the total shareholdings in VST was vested in the defendant.

5. There are 3 securities trading accounts involved in this case. One was held in the defendant’s own name (“the defendant’s sole account”), one was held jointly by the defendant and his wife (“the defendant’s joint account”) and one was held in the name of a Li Baolin (“the LI BAOLIN account”).

6. It is the prosecution’s case that the defendant held the beneficial interest in the shares bought, sold and held by each of the 3 trading accounts.

7. It is the prosecution’s case that the defendant initiated and completed transactions between the 3 trading accounts of VST shares, resulting in no change of their beneficial ownership.

8. It is the prosecution’s case as particularized that these transactions by the defendant of VST shares between the 3 accounts “had the effect of maintaining, increasing, stabilizing or causing fluctuations in the price of VST issued shares traded on the stock exchange operated by the Stock Exchange of Hong Kong Limited.”

Issues

9. The first issue is whether the prosecution can prove that the transactions identified by the prosecution in SF-22 resulted in no change in beneficial ownership of those shares.

10. The next issue is what the price of the VST shares were at any given moment. The prosecution says it is the “nominal price” system used by the SEHK, calculated and recorded automatically by the SEHK computer system and as listed out in the MSS Stock Activities report exhibited in SF-21. The defendant disagrees.

11. Once the issue of price is settled, the question then is whether the prosecution can prove beyond reasonable doubt that the transactions had any of the effect particularized in the charges.

12. Although it would appear that the defendant did not challenge the allegation that the transactions particularized in the 11 charges did not involve a change in the beneficial ownership of the relevant VST shares, it is still for the prosecution to prove beyond reasonable doubt that such was the case.

General Evidence

13. The court heard from a total of 4 expert witnesses. Their expertise was not challenged and I found that each of them could give opinion evidence in accordance and within the realm of their expertise. The defendant did not give evidence.

14. Both the prosecution and the defence are well aware of the pronouncement of the Court of Final Appeal in the case of Fu Kor Kuen Patrick and Another v HKSAR, FACC4/2011 and the expert reports had either been edited accordingly, or this court had been told which paragraphs to ignore when being led through the expert statements.

15. Ms. Stella Fung is the only expert witness for the prosecution. She is a Director of the Securities and Futures Commission and a Chartered Financial Analyst charter holder. She prepared 3 reports. The first is a substantive report on the case, the second amending slightly the first and the 3^rd is in reply to the 3 reports prepared by the defence expert witnesses.

16. Ms. Fung used the raw data obtained from the historical daily “MSS Stock Activities” documents of VST shares (exhibit SF-21) for the 11 days (1 day per charge) to compile a spreadsheet for ease of reference in exhibit SF-22 (p1758-9 of box 6). The SF-22 spreadsheet lists out the trade date, time, parties, price and quantity of the transactions, as well as what effect, if any, Ms. Fung found each individual transaction to have had on the VST share price. SF-22 was later revised slightly and incorporated in the prosecution’s closing submission bundle.

17. The methodology engaged by Ms. Fung as to effect on price is simple and direct. She would take the nominal price immediately before a relevant trade to see if there was an increase in the nominal price as a result of the transaction, or a reduction in the nominal price or no change in the nominal price. The range of change identified by Ms. Fung is an increase in price of between 1 to 8 spreads (each $0.01 change in price is regarded as 1 spread).

18. All raw data are exhibited by Ms. Stella Fung in her expert reports, admitted into evidence by way of admitted facts pursuant to s.65C of the Criminal Procedure Ordinance, Cap. 221. Subject to minor amendments and 2 exceptions, the buying and selling of VST shares in the 3 accounts as stipulated in SF-17 (later SF-22) are not disputed. The 2 exceptions which are not admitted are the 2 columns headed “Effect on share price” and “Buyer initiated transaction?”.

Findings

Beneficial ownership

19. In order to decide whether the transactions in question involved a change of beneficial ownership in the shares, one has to look at where the beneficial interest in the shares bought and sold in the 3 accounts lies. It is the prosecution’s case that they all lie in the defendant and since the transactions in question were all between the 3 accounts, the transactions did not involve a change of beneficial ownership.

20. Section 296 is incorporated under Part XIV of the SFO. Section 290 of the SFO applies to offences under this Part.

21. Section 290(1) stipulates when in law a person shall be regarded as having an interest in securities. The section casts a wide net. If a person has authority, whether formal or informal, expressed or implied, to dispose of or to exercise control over the disposal of the securities, that person shall be regarded as having an interest in the securities.

22. Section 290(2)(b) stipulates that it is immaterial that the authority mentioned above is exercisable jointly with another person. This is relevant when considering whether the defendant has an interest in the shares dealt with by the joint account with his wife.

23. Section 290(7) is also applicable and relevant when considering the joint account. This section stipulates when a sale or purchase of securities does not involve a change in their beneficial ownership. It is specifically stated that even if an associate of a person who had an interest before the sale or purchase has an interest after the sale or purchase, it would still be regarded as having no change in beneficial ownership.

24. “Associate” is defined in section 285 which is headed “Interpretation of Part XIV”. Section 285(1)(a) defines an associate as including the person’s spouse.

25. It is interesting to note that the definition in s.285 also include the person’s brother. In the prosecution’s Opening Submission, at paragraph 3(c), it is alleged that the joint account was “in the name of the defendant’s brother, Li Baolin”. There is however no admissible evidence available to the court to make this factual finding of their relationship.

The defendant’s sole account

26. It is admitted fact that the defendant on 1^st November 2001 opened one of the securities account in question with Guotai Junan (account number 007705, exhibit P-1). There is no evidence to suggest that the defendant did not have the authority to dispose of or to exercise control over the disposal of the securities in this account, and it must be an irresistible inference that the defendant did have such authority given that he was the person who opened the account and it is specifically stated in the account opening form that the defendant was the ultimate beneficiary owner of the account and that he was the only person responsible for giving instructions for the account. The contents of this account opening form was not disputed by the defendant. I find therefore that the defendant did have an interest in the securities in this account.

The defendant’s joint account with his wife

27. It is admitted fact that at all material times, the defendant and his wife jointly held a securities trading account with HSBC with account number 172-538191-380. This is one of the 3 accounts being used in some of the transactions.

28. I find that it can be inferred, as a joint account holder, that the defendant had the authority to dispose of or exercise control over the disposal of the securities dealt with through this account. The defendant therefore has an interest in those securities.

The Li Baolin account

29. It is admitted fact that the Li Baolin account was opened by one Li Baolin on 7^th September 2005 with Guotai Junan, the same securities company for the defendant’s sole named account above, with account number 019375.

30. The account opening documents are found in exhibit P-2. It is stated in the account opening application form by the purported Li Baolin that he was the ultimate beneficiary owner of the securities account and that he only was responsible for giving instructions for the account. The prosecution obviously is not relying on this information and says this is not the case.

31. The prosecution points first of all to 3 sums of money being credited into the Li Baolin account between 22^nd August and 14^th September 2007. It is admitted facts that a total of $16,618,170.45 were transferred from the VST Computers Hong Kong Limited (a wholly owned subsidiary of VST) company account with HSBC (178-6-036457) and the joint account of the defendant and his wife with HSBC (account number 172-538191-888) into the Li Baolin account between that period on 3 different occasions.

32. According to prosecution witness Mr. Lung, the now retired former company secretary and Financial Controller of VST, the first of the transfers on 22^nd August 2007 of $3.6 odd million was 70% of a $5 million settlement sum for a court case between 2 parties in mainland China. The $5 million was arranged to be received by VST Computers Hong Kong Limited (the wholly owned subsidiary of VST Holdings). Somehow, $3.6 million of that $5 million was deposited into the Li Baolin Guotai Junan securities account. Mr. Lung said he had no idea who instructed the deposit to be made, despite having made enquiries after the matter was raised by the Securities and Futures Commission in around February or March 2008. Although Mr. Lung said he did talk with the defendant about this matter, the defendant did not give him any information or instructions about the matter.

33. It is obvious that Mr. Lung is very protective of the defendant. I find it incredible that a company secretary when being asked by the SFC to explain about a fund transfer of $3.6 million from the VST Computers company account into Li Baolin’s account would fail to ask the defendant, the more active of the 2 directors of that company, who instructed the transfer and for what purpose. Either Mr. Lung is lying about whether he did ask or he chose deliberately not to ask the defendant in order to protect him.

34. According to Mr. Lung, he had seen Li Baolin on a few occasions including at company parties and in VST’s office. It is his evidence that sometimes the defendant was present when Mr. Lung saw Li Baolin, sometimes he was not. On the occasions that the defendant was present, the defendant never told Mr. Lung what the defendant’s relationship with Li Baolin was. I find it very strange that the defendant would not have introduced Li Baolin, whoever he may be, to Mr. Lung, given that Mr. Lung is a very senior member of the company and that he had been working there “for quite some time”.

35. Nevertheless, there remains no direct evidence to prove that Li Baolin is the brother of the defendant, and section 285(1)(a) would not be applicable in that regard and therefore the interest that Li Baolin might have had in the securities in this account cannot be accorded to the defendant through this channel.

36. The prosecution next seeks to prove that the transactions in VST shares between the 3 accounts could not have been conducted by Li Baolin and that it must have been the defendant who initiated the transactions.

37. It is admitted fact that at all material times, the 128 transactions between the 3 accounts were all conducted via the internet and initiated from the IP address 202.66.166.206. This IP address was at the material times a unique address for the computer network system of the VST group of companies. Based on the statement of Mr. Richard Ng of Diyixian.com Limited, what this means is that although the transactions were all conducted online, the operator of the computer that handled those transactions must have been physically present at the VST premises in order for the said IP address to have been recorded from the online transactions.

38. The movement records of Li Baolin, which is admitted into evidence, show that Li Baolin was never physically present in Hong Kong on any one of the 11 charge dates when the 128 transactions were conducted. In fact, between 1^st August 2007 and 30^th April 2008, Li Baolin had only come to Hong Kong 5 times and on each occasion he left on the same day as he had arrived.

39. The prosecution therefore says that it was not Li Baolin who initiated or carried out the transactions.

40. I find that based on the circumstantial evidence referred to above, the fact that VST Computer is a wholly owned subsidiary company of VST with the defendant as the active director and major shareholder, the fact that somehow $3.6 million was deposited by VST Computers’ company account into Li Baolin’s securities account for no apparent reason, the fact that it was done just 2 weeks before the day of the 1^st charge in 2007; the fact that just a few weeks later another $13 million were transferred from the joint name bank account of the defendant and his wife into Li Baolin’s account again for no immediately apparent reason; the fact that Li Baolin himself could not have executed the subsequent transactions conducted through the Li Baolin securities account, there can be no other inference but that the money deposited into the Li Baolin account must have been used in the trading of the VST shares going through the account, and that the defendant had an interest in the money deposited into the Li Baolin account and therefore it follows that the defendant must have had an interest in the securities that was bought and sold through the Li Baolin account.

41. Based on my finding that the defendant had an interest in the securities in each of the 3 accounts, I find that when the securities were bought and sold between these 3 accounts there was no change in beneficial ownership of the securities. I find this element of the offence proved beyond reasonable doubt.

Entered into or carried out, directly or indirectly

42. I find that based on the same circumstantial evidence referred to above, it must be an irresistible inference that the defendant had through his control over his sole account, the joint account and the Li Baolin account entered into or carried out directly or indirectly the transactions performed through the 3 trading accounts.

Had the effect of increasing, stabilizing, maintaining or causing fluctuations in VST share price

43. The term “price” is not defined in the SFO, in order to decide on the effect of the transactions, the correct approach to price must first be established.

44. It is the prosecution’s assertion that although price is not defined in the SFO, the Hong Kong Stock Exchange has in Rule 101 of the Rules of Stock Exchange defined how the “nominal price” of a share is calculated. Since this nominal price is the price that is quoted by the Hong Kong Stock Exchange to all user of its data, this is the correct price system to use when gauging the effect of the transactions.

45. It is Ms. Fung’s evidence that the nominal price is the price displayed on the website of the Hong Kong Stock Exchange which is accessible by the general public free of charge. Given that the nominal price will be the price that all consumers of securities information will be based on, Ms. Fung considers that the proper way to decide on the effect a transaction had on the price is by way of taking the nominal price immediately before a transaction and then see what effect the transaction had on the nominal price.

46. The defendant, through his 3 experts, argues that since price is not defined in the SFO, the court ought to look at other methods of ascertaining the price of the share before engaging in the exercise of looking at the effect of the transactions on the share price. Furthermore, the defendant argues that whatever methodology is used, to gauge the effect of the share price must involve looking at the full range of prices before and after the transaction in question and not just the prices immediately before and after one particular transaction.

47. While the 3 expert reports of Mr. White, Dr. Vinaimont and Mr. Li all make for very enlightening reading, my finding is that the proper system of price to apply under s.296 is the system as adopted by the SEHK.

48. There can be no doubt that, as shown by the defence witnesses and in particular Dr. Vinaimont, there can be multiple ways of defining price. It is clear that in the eyes of the academic there are serious flaws in the SEHK adoption and usage of the nominal price system and there might exist more accurate and perfect systems of pricing that could be and should be implemented instead.

49. Yet, I find that regardless of the strengths and weaknesses of the nominal price system, it is the system used by the Hong Kong stock exchange, a market that is operated by a company that is legally entitled (Section 23 of the SFO) to make up rules for the smooth running and operation of the Exchange.

50. However a consumer may dislike, disagree with or disapprove of the system used by the Hong Kong stock exchange, the most he or she can do about it is to choose not to trade there. If they choose to so trade, they would have no choice but to accept those rules.

51. Any reasonable person who wishes to trade in shares in the Hong Kong stock exchange and would want to find out what the price of a particular share at any given time will have to look it up with the Hong Kong stock exchange.

52. The Hong Kong stock exchange would also be the ultimate source of data for any third party data providers who may each have their own way of presenting and interpreting the data so obtained. At the end of the day, there is only one set of rules that applies so that the stock market can function properly.

53. The public perception of the price of a share is based on the price that was calculated, recorded and then released by SEHK. This is the price that will eventually be considered by the investing public, leading to whatever resultant decision that the investing public might make. Their decisions will ultimately govern the share prices. The SEHK price system is therefore the proper and correct system to use to begin gauging the effect of a transaction has on price.

54. Mr. White, expert for the defence, agreed that nominal price is ‘a methodology that is used by the exchange to express a likely indicative price, a price that represents what might happen in the market place’, and that ‘last traded price and nominal price are used for different reasons and would be addressed by different investor, persons who invest in the market for different reasons.’

55. According to Dr. Vinaimont, ‘nominal price’ is ‘an invention by Hong Kong Exchanges’, it is not a universally accepted measure for taking the price. Dr. Vinaimont was very helpful when he further explained that nominal price ‘is an algorithm that ensures that, at each point of time, Hong Kong Exchanges has, if you ask them what is the price, they have a number that they can give.’

56. To me, this is the most important reason why nominal price should be the price that is adopted when looking at whether there would be an effect on the price. There are hundreds of thousands of buyers and sellers of shares, each of them may have a different approach to what the price of a share is and should be. The SEHK system may not be perfect, but it is a system used by the stock exchange. The imperfections, the shortcomings would apply to everyone using the same system and therein lies uniformity and a degree of certainty governing their dealings.

57. I find that if the nominal price system adopted by the Hong Kong Stock Exchange Limited is the only price system used by them in the Hong Kong stock exchange, then whether a transaction has any effect on the share price should also be judged based on that same price system.

58. I find that Ms. Fung’s methodology of looking at the nominal price immediately before a transaction and then see what effect the transaction had on the nominal price is the correct approach.

59. I find that two important factors to take into consideration when deciding on what approach to take are uniformity and ease of calculation. Furthermore, the wording of s.296(1)(a) is very specific in that the transaction must have an effect on price. It does not say “likely to have” an effect, it does not say “would have had” an effect.

60. Such specific language must be treated with equal specificity when considering the elements of the offence. Ms. Fung’s methodology achieves that specificity as well as the added advantage of ease of calculation.

61. As much as this court appreciates the education provided by the defence experts, I find that both the price system in place and used by the Hong Kong stock exchange and Ms. Fung’s methodology of calculating the effect of a transaction on the share price the proper and correct approach to use in the present case.

Price effect: in context?

62. In arguing about how to approach the effect on price question, the defence referred to 3 cases in support of their proposition that a court must look at the overall context of all the transactions before coming to a decision as to the effect a transaction has on the share price.

63. The first is the Australian case of R v Lloyd (1996) 19 ACSR 528 in which the Crown appealed against the sentence imposed on the respondent upon conviction for 2 counts of creating a misleading appearance with respect to the price of shares by way of transactions and 1 count of creating a misleading appearance with respect of the price of shares by way of approving a facility commitment of $5m to a company.

64. The Supreme Court, on their way to consider the appeal against sentence, confirmed that the trial judge had correctly identified the gravamen of counts 1 and 2:

“The misleading appearance which is the gravamen of the charge in counts 1 and 2 is the appearance that the price on the market of the Stock Exchange of Paragon Resources NL shares was that paid by genuine and willing buyers the implication being that those buyers were involved in the acquisition and sale of shares in the company for purposes of investment or trade not at predetermined artificial price levels for collateral purposes but for which the purchases and sales would not be effected.”

65. Therein lies the crucial difference to our present case. The gravamen of an offence under s.296(1)(a) is that the transaction did not involve a change of beneficial ownership and that the transaction had any one of the 5 effects on the price stated in the section. We are not concerned with the appearance of the transactions as it looked to the objective eyes of the investing public. If the transaction had an effect on price and did not involve a change of beneficial ownership, then the offence has been committed. The trial judge would therefore be looking at a case from a completely different perspective if the charges are brought under s.295(1)(a) instead.

66. In the Australian civil case of North & Ors v Marra Developments Ltd, the High Court was again concerned with the offence of doing something which was calculated to create a false or misleading appearance with respect to the price of any securities. The appellants stockbrokers were engaged by the respondent company to advise in a takeover operation. When the appellants subsequently sued for remuneration for their services, the respondent raised the defence that their agreement to “establish the market” in the shares at a much higher price was illegal and unenforceable because it contravened ss.70 and 71 of the Securities Industry Act 1970 (NSW) and the common law. Section 70 is the section that prohibits the doing of anything which was calculated to create a false or misleading appearance with respect to the price of any securities.

67. It must first of all be noted that much of the evidence in that case was by way of the appellants’ answer to interrogatories. In those interrogatories, the appellants admitted that one of the appellants was aware that directors of the respondent company had formed an association to raise and maintain the price of the shares and the appellants admitted that it was the intention of one of the appellants in effecting or participating in transactions involving the purchase of shares in the respondent company to directly or indirectly raise the current price on the Stock Exchange or to maintain such price at or about a particular level.

68. The relevant part of Mason J’s judgment relied on by the defendant is at p.394 of the judgment. When commenting on the primary judge’s finding that he was “not reasonably satisfied that the plaintiff’s activities had the effect of raising the price of the shares above their market value”, for the reason that the prices paid over the relevant period reflected prices which one would have expected the market to pay, Mason J stated that the primary judge had failed to give weight to the importance which the appellants attached to their action in ‘establishing’ a market, to the marked preponderance of their activity in the market for shares of the respondent company and to the dramatic fall in the price of the share prices once the appellants’ support and that of the respondent company’s directors was withdrawn. Mason J then proceeded to look at transactions in the shares for the next 5 months.

69. I think it is Mason J’s view that the more significant shortcoming of the primary judge’s finding of having no effect on the share price is the failure to give sufficient weight to the intention of the appellants to establish a market. I find that the proper approach in each case in deciding on the effect on share price must depend on the alleged wrongdoing in each case and the section of law that the wrongdoing is being judged against. I find that the case of North v Marra is distinguishable from our present case for the simple fact that the court there was concerned with the creation of a false or misleading appearance, and not directly on whether a transaction has an effect on price.

70. In the Hong Kong case of Re Sino Katalytics Investment Corp, Report of the MMT, 9 July 2012, the Market Misconduct Tribunal had to decide whether trading of Sino Katalytics shares between 2 person (the company chairman/executive director/single largest shareholder and another executive director/substantial shareholder of Sino Katalytics) which took place shortly before the placement of shares of the company had the effect of creating a false or misleading appearance with respect to the price. If so, did they trade with the intention or being reckless as to whether their trading would have or likely to have that effect.

71. The relevant part of the report that the defendant relies on is at paragraph 91.

72. There it was not disputed that trading between the 2 persons within 20 minutes on a single trading day resulted in a sharp rise in the share price to 5.5 cents per share. In considering the sharpness of the rising, the Tribunal remarked that there were only 2 previous transactions that day at 4.2 and 4.4 cents per share. They then referred to the closing price of 4.2 cents the previous 2 trading days and then went further back to 4 days ago when the closing price was 4.1 cents. The Tribunal also noted that 4.2 cents was the ‘High’ in trading on the 4 previous trading days.

73. The defendant wishes to illustrate the point that in order to look at the effect of any transactions on the price of a share, the Tribunal went backward in time to put the share price into context.

74. But just as in the cases of R v Lloyd and North & Ors v Marra, the Tribunal was concerned with whether a false or misleading appearance with respect to price had been created. In order to do so, the court or tribunal would have to look at the overall picture to judge how the trades had made the appearance of the price to become. This is significantly different to the act of considering whether a transaction ‘has the effect’ of, say, increasing the price.

75. One other point to note is this, although the full historical data are not available in the Tribunal’s report, as deduced from paragraph 91, it would appear that the nominal price of the share would also have gone up as a result of the trading in question. In that case, both persons were found culpable of price rigging under the equivalence of a s.296(1)(b) SFO offence.

76. I find that Ms. Fung’s approach in taking the nominal price immediately before to see if a transaction had any and what effect in the share price is the proper approach when dealing with charges under s.296(1)(a).

What is “nominal price”

77. The relevant parts of Rule 101 is excerpted by Ms. Fung in SF-31 exhibited with her 3^rd expert report (P-10) as follows:

“ “nominal price”

(a) in respect of an issue of securities at any one time during or at the close of the Pre-opening Session means:-

(when the IEP can be determined in accordance with Rule 501H) the IEP; otherwise

(b) (ii) the previous closing price;

(c) in respect of an issue of securities at any one time during or at the close of the Continuous Trading Session on a trading day means:-

if the issue has been traded up to that time on the day:

(when the current bid price is greater than the last recorded price), the current bid price; otherwise

(when the current ask price is less than the last recorded price), the current ask price; otherwise

where both (b)(i)(A) and (b)(i)(B) above do not apply, then the last recorded price; or

(d) (ii) if the issue has not been traded up to that time on the day:-

(A) (when the current bid price is greater than the previous closing price), the current bid price; otherwise

(B) (when the current ask price is less than the previous closing price), the current ask price; otherwise

(C) where both (b)(ii)(A) and (b)(ii)(B) above do not apply, then the previous closing price; ”

78. It is based upon Rule 101 that the computer system of the SEHK would calculate, record and display the nominal price of a share over time. The nominal price at all material times can be found in the MSS Stock Activities report exhibited by Ms. Fung in SF-21, set out under the column entitled “Nom Price”.

The various particularized effects

Effect of Increasing

79. I turn now to the transactions identified in each of the 11 charge to see if they had the requisite effect of increasing the price of VST shares. Each charge relate to one particular trading day. Each day may have a little as 2 (charge 5) or as many as 33 (charge 3) relevant transactions.

80. A preliminary point to note is that under s.296(6) of the SFO, a reference to a transaction of sale or purchase in relation to securities includes an offer to sell or purchase and an invitation (however expressed) that expressly or impliedly invites a person to offer to sell or purchase securities and a reference to entering into or carrying out a transaction of sale or purchase shall in the case of an offer or an invitation referred to above be construed as a reference to making the offer or the invitation (as the case may be).

81. The effect of s.296(6) is that in situations when we see the nominal price rising as a result of say, a bid order placed, but the sale had not yet been completed, by definition, the placing of the bid order itself would still be regarded as a transaction entered into.

Charge 1

82. There were 7 transactions on 4^th September 2007 between the defendant’s joint securities account with his wife and the Li Baolin securities account. Of the 7 transactions, according to Ms. Fung in SF-22, 3 of them had caused the price of VST share to increase by respectively 8 spreads, 1 spread and 1 spread.

83. Ms. Fung, in her 3^rd expert report which was prepared in response to the defendant’s expert reports explained in detail how she had concluded that there was a price effect of up 8 spread in transaction item 1.

84. In this transaction, an ask order was placed via the Li Baolin account at 10:05:07 at $3.08 for 200,000 shares (see entry at p.1484 of Box 6, being page 2 of 18 of the MSS Stock Activities Report). The nominal price, as defined under Rule 101 at that time was $3.0.

85. About 3 minutes later, a bid order was placed by the defendant’s joint account at $3.08 for 200,000 shares. This bid order was immediately matched by the automated computer system of the Stock Exchange with 4 ask orders. Three of those were from third parties unrelated to the defendant but the other one was the said ask order for 200,000 shares.

86. By way of the operation of the automated matching system and according to the matching priority of the system, the said 200,000 shares ask order was matched by 2 earlier orders from 2 third parties first which took up 10,000 shares, and then the remainder 190,000 shares was taken up by the said bid order from the defendant’s joint account. The 3 transactions were in reality executed at the same time and the resultant change in the nominal price of VST shares was up 8 spreads, from $3.0 to $3.08.

87. It is Ms. Fung’s analysis that if the 200,000 shares bid order had not been placed by the defendant’s joint securities account, the Li Baolin account ask order would not have been matched and no trade would have been concluded and the nominal price would have stayed at $3.0. Therefore, this transaction had the effect of increasing nominal price of VST shares from $3.0 to $3.08.

88. I find that the transactions in items 1, 4 and 6 did have the effect of increasing the share price of VST by the margin as stated by Ms. Fung in SF-22.

Charge 2

89. There were 4 transactions on 13^th September 2007 between the Li Baolin account and either the defendant’s sole account or his joint account. Of the 4 transactions, one had the effect of increasing the VST share price by 5 spreads. This transaction was however later confirmed to have been a Direct Trade, meaning both the seller and buyer were represented by the same securities firm and as such would not have had altered the nominal price and therefore would not have had any effect on the share price under Ms. Fung’s methodology.

Charge 3

90. There were 33 transactions on 4^th October 2007 between the 3 accounts variously. 7 of those is found by Ms. Fung to have had the effect of increasing the VST share price by up to 4 spreads.

91. Take transaction item 15 as an example. The Li Baolin account placed an ask order at 10:19:39 at $3.20 for 50,000 shares. This ask order was subsequently matched with 5 bid orders, which included 3 from third parties and 2 from the defendant’s joint account.

92. According to Ms. Fung’s calculation, although part of the Li Baolin ask order (4,000 shares) had been executed before transaction item 15, the nominal price had dropped to $3.16 before the execution of item 15. The execution of transaction 15 then had the effect of raising the nominal price of the shares by 4 spreads from $3.16 back to $3.20. If there was no transaction item 15, the nominal price would have remained at $3.16.

93. In transaction item 44 (MSS stock activities entries are at page 1557 of box 6), an ask order for 100,000 shares was placed via the defendant’s joint account at 15:28:02 at $3.21. The stated nominal price on the MSS stock activities record is at $3.21, which is as a result of the said ask order.

94. Immediately after this ask order, the Li Baolin account placed a bid order for 120,000 shares at $3.22. The stated nominal price as recorded in the MSS stock activities record at this point in time was then increased by 1 spread to $3.22.

95. I find that trade items 34, 35, 40, 41, 42 and 44 each had the effect of raising the VST share price by 1 spread as stated by Ms. Fung in SF-22.

Charge 4

96. There were 17 transactions on the following day 5^th October 2007. Two of those had the effect of raising the VST share price by 1 and 2 spreads respectively.

97. Take transaction item 47 as an example. An ask order at $3.22 for 100,000 shares was placed by the defendant’s joint account at 15:20:02 and was later matched with 3 bid orders. All 3 orders were from the defendant’s sole securities account.

98. Although in item 46, the share price had already reached $3.22, the share price had dropped by one spread to $3.21 at 15:21:23 when an ask order at that price was placed by a third party via Barclays Capital (p.1567, Box 6 for Stock Activities report). The execution of item 47 later had the effect of raising the share price by 1 spread back to $3.22.

99. I find that items 47 and 57 did have the effect of raising the share price by respectively 1 and 2 spreads as stated by Ms. Fung in SF-22.

Charge 5

100. There were 2 transactions (item 62 and 63) on 8^th October 2007, both of which had the effect of raising the price of VST shares by 1 spread. Both trades were between the defendant’s joint account and his sole name account.

101. Take item 62 as an example. An ask order was placed via the defendant’s sole account for 200,000 shares at $3.29 at 10:20:35. This was matched by a bid order placed via the defendant’s joint account with his wife for 230,000 shares at $3.29 at 10:23:23. Given that the nominal price was at $3.28 before item 62, this transaction had the effect of raising the price by 1 spread.

102. I find that item 63 also had the same effect of raising the VST share price by 1 spread as stated by Ms. Fung in SF-22.

Charge 6

103. There were 6 transactions identified by Ms. Fung on 21^st November 2007 as being matched trades between the 3 accounts. One of those had the effect of increasing the price of VST shares by 1 spread.

104. Item 69 is the only transaction that had the effect of increasing the price of VST shares in this charge.

105. An ask order for 50,000 shares was placed via the defendant’s joint account with his wife at $2.41 at 11:06:09. This was matched by a bid order placed via the defendant’s sole account for 80,000 shares at $2.41 at 11:06:48. Given that the previous nominal price according to the MSS Stock Activities data was $2.40 and then it rose to $2.41 as a result of the said bid order as well as the matching of the 50,000 shares ask order with the said bid order, the transaction did have the effect of raising the price of VST shares by 1 spread.

Charge 7

106. There were 14 transactions identified on 31^st December 2007. 6 of those had the price effect of raising the share price of VST by between 1 to 3 spreads. Transactions number 74 and 78 in the revised SF-22 is ignored on the basis that there is a possibility of double counting of the price effect. The benefit of the doubt is given to the defendant.

107. Taking trade item 72 (MSS stock activities at pages 1619-1620, box 6) as an example. An ask order was placed via the defendant’s sole name account for 200,000 shares at the ask price of $2.24 at 10:17:41. This ask order did not affect the nominal price at that point in time and it remained at $2.21 as before.

108. This ask order was matched by a bid order placed via the defendant’s joint account at 10:19:34 for 20,000 shares at the bid price of $2.24. As a result of this bid order, the nominal price was recorded as having risen from $2.22 to $2.24 in the MSS stock activities report. The transaction was completed at the same time at the share price of $2.24 and the nominal price remained at $2.24, the sale price.

109. As pointed out above, under s.296(6), a reference to a transaction of sale or purchase in relation to securities includes an offer to sell or purchase and an invitation (however expressed) that expressly or impliedly invites a person to offer to sell or purchase securities and a reference to entering into or carrying out a transaction of sale or purchase shall in the case of an offer or an invitation referred to above be construed as a reference to making the offer or the invitation (as the case may be).

110. In other words, the placing of the bid order which caused the nominal price of the share to be raised by 1 spread can be and should be construed as the defendant having entered into a transaction which caused that effect.

111. For the same reasons, I find that items 73, 75, 77, 81 and 82 each had the effect of raising the price of VST shares by 2, 3, 1, 1, and 2 spreads respectively as stated by Ms. Fung in SF-22.

Charge 8

112. There were 32 transactions identified by Ms. Fung on 2^nd January 2008. 13 of those had the effect of raising the share price of VST by 1 to 2 spreads. Items 90 and 95 are ignored. Item 90 is a Direct Trade and as such would not have affected the nominal price of the share. In relation to item 95, there is a possibility of double counting of the price effect and it is ignored for the benefit of the defendant.

113. Taking item 84 (page 1640 of the MSS stock activities report) as an example. An ask order was placed via the defendant’s sole securities account at 10:08:06 for 100,000 shares at an ask price of $2.29. This did not have any effect on the nominal price according to the report.

114. This ask order was matched by a bid order placed via the defendant’s joint account with his wife. The bid order was for 150,000 shares at the bid price of $2.29 which had the immediate effect of raising the nominal price by 1 spread to $2.29 according to the figure recorded in the MSS stock activities report.

115. Although there were at the same time 2 sales completed with third parties at the sale price of $2.90, it does not detract from the fact that the bid order did have an effect of raising the nominal price by one spread.

116. In relation to item 115, an ask order was placed via the defendant’s sole securities account for 120,000 shares at an ask price of $2.35 at 14:56:02. This ask order did not have any effect on the nominal price which remained at $2.35.

117. This ask order was later matched by a bid order placed via the defendant’s joint account with his wife. The bid order was for 100,000 shares at a bid price of $2.35 placed at 14:57:35. Although this bid price is the same as that of the above ask price, according to the MSS stock activities record, the nominal price of VST share had actually lowered to $2.33 at 14:56:45 as a result of a sale at $2.33 between two third parties.

118. The effect of the bid order at $2.35 was therefore to bring the price back to $2.35, which was an increase of 2 spreads.

119. Based on similar calculation and reasoning, I find that the transactions as set out in items 84, 92, 93, 99, 100, 109-113, 115 and 116 did have the effect of raising the price of VST shares by the margin as set out by Ms. Fung in her SF-22.

Charge 9

120. There were 3 transactions on 3^rd January 2008 identified. They each had a price effect on VST shares by raising it by 4, 3 and 1 spreads respectively.

121. Taking item number 119 (page 1675 of Box 6) as an example.

122. An ask order for 120,000 shares at an ask price of $2.34 per share was placed via the defendant’s sole securities account at 10:16:14. This ask order itself did not have any effect on the nominal price of the share according to the MSS stock activities report and it remained at $2.33.

123. A bid order for 200,000 shares was placed via the defendant’s joint securities account with his wife at a bid price of $2.34 at 10:16:43. This bid order had the immediate effect of raising the nominal price of the share from $2.33 to that of $2.34 as recorded by the Stock Exchange computer system and indicated in the MSS stock activities report.

124. The ask order was taken up by 2 third parties with the majority going to match the ask order referred to above. Those sales were all concluded at the sale price of $2.34. According to the opinion of Ms. Fung, the effect on the price was first of all caused by the placing of the bid order via the defendant’s joint account. That order alone would have had the effect of raising the price by 1 spread. Furthermore, without the bid order of the defendant, the sale of the 200,000 shares would not have been completed. But then even if that was the case, the nominal price would still have been raised as a result of the bid order.

125. I find that the transactions in items 117-119 did have the effect of raising the share price of VST by the amount as set out by Ms. Fung in SF-22.

Charge 10

126. There were 7 transactions on 4^th January 2008 identified by Ms. Fung. 4 of those transactions had the effect of raising the VST share price by between 1 to 5 spreads. Item number 122 is ignored on the basis that there is a possibility of double counting of its price effect and the benefit of the doubt is granted to the defendant.

127. Taking item 120 (page 1700 of box 6 for MSS stock activities report) as an example.

128. An ask order was placed via the defendant’s sole securities account for 100,000 shares at an ask price of $2.38 at 10:04:49. This ask order did not have any immediate effect on the nominal price which remained at $2.32.

129. A bid order was placed via the defendant’s joint securities account with his wife for 100,000 shares at a bid price of $2.38 per share. This bid order had the immediate effect of raising the previous nominal price of $2.33 to that of $2.38, as recorded in the MSS stock activities report.

130. As a result of the defendant’s bid order, the whole of the ask order of 100,000 shares was able to be taken up, with 16,000 shares going to 2 third parties and 84,000 shares taken up by the defendant’s joint account.

131. Again, without the defendant’s bid order for 100,000 shares the sale would not have been completed. But in any event, as a result of the placing of the bid order via the defendant’s joint account, the nominal price had been raised by 5 spreads.

132. Taking item 123 (page 1703, box 6 for MSS stock activities report) as another example.

133. An ask order for 100,000 shares was placed via the defendant’s sole securities account at an ask price of $2.37 at 10:21:01. This ask order did not have any immediate effect on the nominal price of VST shares.

134. A bid order for 150,000 shares was placed via the defendant’s joint securities account with his wife at a bid price of $2.37 at 10:21:47. This bid order had the immediate effect of raising the nominal price from $2.35 to $2.37, as recorded by the Stock Exchange computer system.

135. 4 sales were completed at the same time this bid order was placed. Without the bid order the sales could not have been completed. In any event, the nominal price would already have been affected by the placing of the bid order.

136. I find that the transactions in items, 120, 121, 123 and 126 each had the effect of raising the share price of VST by the margins as set out by Ms. Fung in SF-22.

Charge 11

137. There were 2 transactions on 17^th January 2008 identified. Each had the effect of raising the VST share price by 3 and 2 spreads respectively.

138. The MSS stock activities report for item 127 is at page 1743 of box 6.

139. An ask order for 100,000 shares at an ask price of $1.65 was placed via the defendant’s joint securities account with his wife at 15:12:50. This ask order did not have any immediate effect on the nominal price of VST shares.

140. Immediately after the said ask order was placed, a bid order for 110,000 shares was placed via the defendant’s sole securities account at a bid price of $1.65 at 15:13:13. This bid order had the immediate effect of raising the nominal price of the share from $1.62 to $1.65.

141. 100,000 shares of the said ask order was taken up by the said bid order at the sale price of $1.65.

142. In item 128, an ask order for 100,000 shares at an ask price of $1.65 was placed via the defendant’s joint account at 15:14:34. This ask order did not have an immediate effect on the nominal price, which remained at $1.63.

143. A bid order for 120,000 shares was placed via the defendant’s sole securities account at a bid price of $1.65 at 15:14:57. The immediate effect of this bid order was to raise the nominal price from $1.63 to $1.65.

144. 100,000 shares of this bid order was used to take up the 100,000 shares ask order above, at the sale price of $1.65 per share. 10,000 shares were taken up by a third party. Without the bid order placed via the defendant’s sole account, the sale would not have been matched. In any event, according to the methodology implemented by the Stock Exchange, the nominal price would have remained raised at $1.65 as a result of the said bid order at 15:14:57.

145. I find therefore that the transactions in item 127 and 128 did have the effect of raising the price of VST shares by the margin as set out by Ms. Fung in SF-22.

Effect of Stabilizing and Maintaining

146. It is the prosecution’s case that for the transactions that is listed as having no effect on share price in the revised SF-22, by virtue of the quantity of the orders, they had the effect of maintaining and stabilizing VST share price.

147. I find that I cannot agree with this proposition.

148. The wording of the section and the particulars are that the transactions “had the effect”, not “would have” or “likely to have”. I am not satisfied that the prosecution has prove beyond reasonable doubt that those transactions had the effect of maintaining or stabilizing VST share prices.

149. In Ms. Fung’s 1^st report, after listing in a table at paragraph 31 the total shares that the defendant had dealt with, said this:

“32. As a result, the wash sales, the same-price trading and "buy high, sell low" trading activities conducted by LI had boosted market turnover of VST shares significantly. These transactions would have given investors an impression of an active trading in VST shares.”

150. This may very well be true but did the transactions then had the effect of maintaining or stabilizing VST share prices? That is the pertinent question.

151. In addressing what a market manipulator may want to achieve through Matched Order sales and purchase of shares[2], Ms. Fung said this,

“38. The term "matched orders" refers to pre-arranged trades by a person who enters a purchase or sale order knowing that his/her associate has entered a corresponding order, for substantially the same quantity of securities at substantially the same price. The aim of this is to convey an appearance of active trading in the securities to induce others to buy the shares. The intention is that new investors are attracted by the apparent increase in trading activity in the shares so that the share price rises. The manipulator is then able to sell the shares and make a financial gain, to benefit from the higher valuation of their holding of shares (such as enjoying a higher margin loan amount), or to facilitate the listed company to place new shares onto the market at favorable price. The investing public will be misled by these matched orders as to the turnover and price of the securities as they are given a false and misleading impression that the transactions are resulted from the genuine bidding and asking from independent investors. They [the investing public]_may be induced to buy the shares at the execution price of the matched orders, and provide an opportunity for the manipulator or listed company to sell shares at around that price”

152. It would appear that Ms. Fung went into the intention of the person conducting the matched order sales, which is not an element of the offence under section 296(1)(a). Furthermore, in Ms. Fung’s own words, the investing public “may be” induced to buy the shares at the execution price of the matched orders. In other words, it can be said that the transactions might not have had the effect of inducing the public to buy or sell at the price and so the transactions might also not have had the effect of maintaining or stabilizing VST share prices.

153. At paragraph 40(c), Ms. Fung said this:

“The transactions between the 3 accounts constituted more than 10% of daily market turnover on 7 out of the total 11 trading days. As a result, their transactions boosted the market turnover of VST shares significantly on those 7 trading days. This is consistent with the intention of manipulators of creating an impression of active trading in the shares through matched orders to induce others to trade the shares.”

154. At paragraphs 45 and 46, Ms. Fung looked specifically at 4^th and 5^th October 2007 (charge 3 and 4) and said this:

“45. During 4 to 5 October 2007 the transactions between the 3 accounts conducted by LI accounted for 34.7% of the total market turnover. Without these transactions the daily market turnover of VST shares during these 2 trading days would be significantly reduced by 34.7% from 2,097,000 shares to 1,369,000 shares. As a result, these transactions had boosted the market turnover of VST shares and would have given investors an impression that the VST shares were actively traded.

46. …Therefore, it appears to me that the matched trades, which had boosted market turnover as well as the share price, had positive effect in encouraging investors to subscribe for the placing shares.”

155. In both paragraphs 40(c), 45 and 46 it may be true that such impression would have been given, but again, the pertinent question to ask is whether the transactions had the effect of maintaining or stabilizing VST share prices.

156. At paragraphs 48 and 49, Ms. Fung introduced the word “supported” to describe the effect that the wash sales had on VST share price.

“48. … Given the dominance of wash sales in market turnover of the shares and their effect on the share price, it appears to me that the wash sales had boosted market turnover of the shares and supported the share price.

49. … Therefore, the wash sales conducted by LI had boosted market turnover and supported the share price.”

157. I am not sure whether “supported” has the same meaning in the legal context as “maintained”. The prosecution did not elaborate on this. Although defence expert Dr. Vinaimont did refer to the 2 paragraphs, he was merely dealing with whether the share price increase was as a result of the wash sales or not. In any event, the logic behind Ms. Fung’s assertion of supporting the share price would be the same as she had explained in the previous paragraphs, that is to say, the higher price may induce the investing public to take up the shares at that price, with the keyword being “may”.

158. At the conclusion of her 1^st report, Ms. Fung said this:

“51. The transactions between the 3 accounts conducted by LI had the effect of boosting the market turnover of VST shares significantly during these 2 trading days, which might have positive effect in encouraging invest[tors] to subscribe for the placing shares since the daily turnover of the shares is one of the major considerations for investors in making decision to take up the placing shares.

52. … Nevertheless, wash sales had the effect of creating a false and misleading appearance of active trading in the shares. In particular, wash sales conducted by LI accounted for 20.7% and 41.6% of the market turnover of VST shares on 31 December 2007 and 2 January 2008 respectively, which might have given investors a false and misleading appearance of an active trading in VST shares on the last trading day of the year 2007 and the first trading day of the year 2008.”

159. Again, even in Ms. Fung’s words, there is only a possibility that a positive effect of the market turnover of VST shares would encourage investors to subscribe for the VST shares or give a false appearance of active trading. It is not necessarily a foregone conclusion that such effect, such encouragement or false appearance had led to the price of VST shares to be maintained or stabilized.

160. It may very well be the case that based on the evidence of Ms. Fung the defendant could have been guilty of an offence of false trading under s.295(1)(a) of the SFO where a person must not do anything with the intention or being reckless as to whether it has, or is likely to have the effect of creating a false or misleading appearance of active trading in securities, but the defendant is not facing that charge.

161. Both the wording of s.296(1)(a) and the particulars set out for the charges are very specific. The prosecution must prove beyond reasonable doubt that each transaction had either one of the 2 effects of maintaining or stabilizing VST share prices. I find that the prosecution has failed to prove beyond reasonable doubt in any of the 11 charges that the relevant transactions on the day had the effect of maintaining or stabilizing the price of VST shares.

162. Furthermore, I find that even if the investing public had in fact been encouraged or induced to deal in VST shares as a result of the individual transaction, in order for something to be stabilized, it must have been either in a trend of falling or rising so that it can be stabilized. I find the prosecution has not made out the scenario of the VST shares being in a downward, or upward, trend which had been stabilized by the transactions.

163. For similar reason, I am not satisfied beyond reasonable doubt that those transactions that Ms. Fung stated as having no effect on the share price had the effect of maintaining the VST share price. The prosecution simply has not made out with sufficient specificity as to how each of those transactions had the effect of maintaining the share price. Even if the price of VST shares was the same both before and after a relevant transaction, it does not necessarily mean that the only inference to be drawn is that the transaction had caused the share price to be maintained. There can be other external factors such as the state of the overall market affecting the share price.

Effect of Fluctuations in VST share price

164. The last particularized effect in the 11 charges is causing of fluctuations in VST share prices.

165. Fluctuation is defined in the Shorter Oxford Dictionary as “the action or condition of passing irregularly between one state and another; repeated variation; an alternate rise and fall in amount or degree.”

166. In relation to the transactions that Ms. Fung has identified as having no effect on the share price in SF-22, I find that the prosecution has failed to prove beyond reasonable doubt that they had the effect of causing a fluctuation in the share prices of VST.

167. As for the transactions identified and found earlier as having an increasing effect on the price, I find that the prosecution has failed to prove beyond reasonable doubt that each had caused fluctuations in the share prices.

168. Ms. Fung in her 3 statements did not once explain specifically how each of the transactions had resulted in fluctuations of VST share prices. Perhaps this court can go through each of the transactions, look at the prices before and after the transactions, compare them and then come to a decision, but it is not for the court make out the case for the prosecution as it would not be fair to the defendant.

169. I find therefore that the prosecution has failed to prove that the transactions had caused fluctuations in the VST share prices on the relevant dates in each of the 11 charges.

Verdict

170. Having found that in each of the 10 charges there were transactions that caused the effect of increasing the price of VST shares, and having found that the transactions were conducted between the 3 securities accounts which the defendant had control over as well as an interest in the shares dealt with via the accounts, and having found that the transactions did not involve a change of beneficial ownership in the shares traded between the accounts in those transactions, I find that the prosecution has proved beyond reasonable doubt that the defendant had committed the offence of price rigging under s.296(1)(a) in relation to charges 1, 3 to 11, and I convict the defendant of those 10 charges accordingly.

[1] 296(1) A person shall not, in Hong Kong or elsewhere-

(a) enter into or carry out, directly or indirectly, any transaction of sale or purchase of securities that does not involve a change in the beneficial ownership of those securities, which has the effect of maintaining, increasing, reducing, stabilizing, or causing fluctuations in, the price of securities traded on a relevant recognized market or by means of authorized automated trading services;

[2] The heading “The Modus Operandi of Matched Orders by Market Manipulators” was deleted from Ms. Fung’s report at the request of the prosecution.