RAN MAOXIU v. CHINA FUND SECURITIES LTD

HCA 2410 & 2411 & 2412 &
2413 & 2414/2019

[2020] HKCFI 2749

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2410 OF 2019

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HCA 2411/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2411 OF 2019

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HCA 2412/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2412 OF 2019

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HCA 2413/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2413 OF 2019

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HCA 2414/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2414 OF 2019

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(Heard together)

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D E C I S I O N

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1.  These are applications by summons by the Securities and Futures Commission (“Commission”) under section 385 of the Securities and Futures Ordinance (Cap 571) (“Ordinance”) for leave to intervene in five actions in the High Court, namely, HCA 2410, 2411, 2412, 2413 and 2414 of 2019 (“Actions”). Since the existing parties to the Actions have not opposed the applications, I shall be brief in stating my reasons.

2.  The plaintiffs in the Actions are five individuals respectively.  The defendant in all of the Actions is a company called China Fund Securities Ltd (“CFSL”),[1] which was at all material times a corporation licensed by the Commission to carry on business in dealing in securities and asset management in Hong Kong.  Each of the Actions consists of a claim on a dishonoured cheque drawn by CFSL in favour of the plaintiff dated 10 December 2019.

3.  The Commission has made its applications based on suspicions that the sums claimed in the Actions represent the proceeds of market misconduct committed by the plaintiffs in relation to the shares of Hon Corporation Ltd (“Hon Corp”), which the Commission is investigating.  The purpose of its intervention is to prevent the plaintiffs from obtaining and enforcing any judgment against CFSL.

4.  Hon Corp’s shares were listed on the Growth Enterprise Market of the Hong Kong Stock Exchange at the time.  There were 480 million issued shares.  The Commission suspects that the five plaintiffs herein together with one Mr Pan Ning (collectively, the “Traders”) orchestrated a “ramp‑and‑dump” scheme on the shares of Hon Corp.

5.  On 25 November 2019, Bizstar Global Ltd (“Bizstar”), Hon Corp’s controlling shareholder at the time, signed a placing agreement pursuant to which CFSL was to procure not fewer than 6 placees to subscribe for 216 million Hon Corp shares at $0.265 per share.  It appears that pursuant to this, the Traders signed a subscription agreement with CFSL on 27 November 2019.  On the same date,Bizstar deposited 216 million Hon Corp shares with CFSL.  On 28 November, CFSL on behalf of Bizstar sold those shares to the Traders, but the shares were only deposited into their account on 6 December 2019.

6.  Meanwhile, from the closing price of $0.49 on 19 November 2019, Hon Corp shares had a strong rally, closing at $0.92 on 5 December 2019.  The average trading volume in this period also increased to 9 times the daily average in the prior three months.

7.  In the early afternoon of 6 December 2019, through the activities of two individual traders (both of whom were suspected to be connected with some of the Traders), Hon Corp share price was pushed up to $1.02 within 32 minutes.  The Commission suspects that the trading by the two individuals was coordinated.  The Traders then successfully offloaded 148 million Hon Corp shares between 13:51 and 15:26 through CFSL at prices that mostly remained above $1 per share, accounting for 77% of the trading volume in the market.  From 15:26, the share price plummeted from $1.03 to $0.31 at 15:29.  The Traders continued to offload another 67 million shares at an average price of $0.236 per share.  The remaining 1 million shares of the Traders were sold on the next trading day, 9 December 2019, at an average price of $0.212 per share. 

8.  The average selling price per share for the 216 million shares by the Traders was $0.79, producing gross proceeds of approximately $170 million. The proceeds of sale were credited to the Traders’ respective accounts with CFSL on 10 and 11 December 2019.

9.  The Commission believes that the Traders might have acted in concert, possibly with others including CFSL, in orchestrating and perpetrating a scheme by engaging in manipulative trading designed to ramp up the share price of Hon Corp to an artificially high level to facilitate the Traders’ disposal of the shares they had acquired from Bizstar.  The Commission commenced an investigation on 9 December 2019 into whether during or around the period from 20 November to 6 December 2019 any persons dealing in the shares of Hon Corp may have engaged in or committed market misconduct.

10.  Based on notice from the Commission, on 10 December 2019 the Joint Financial Intelligence Unit of the Hong Kong Police Force issued a “Letter of No Consent” to CFSL, withholding consent for CFSL to deal with the sale proceeds.

11.  After the close of trading on 6 December 2019, CFSL issued cheques made in favour of each of the plaintiffs post‑dated 10 December 2019.  On 10 December 2019, the five cheques were presented for payment, but were dishonoured due to “stop payment” instructions given by CFSL to the bank on the same day.

12.  On 9 January 2020, the plaintiffs, acting by the same firm of solicitors, instituted the Actions against CFSL based on the dishonoured cheques.

13.  Having ascertained from CFSL that it had not yet filed any acknowledgment of service in relation to the Actions on 20 January 2020, on the next day the Commission served on CFSL a restriction notice under sections 204 and 205 of the Ordinance prohibiting CFSL from, inter alia, disposing of or dealing with any assets in the Traders’ accounts.  Apart from two of the Traders[2] who have written to the Commission enquiring as to the reasons for the restriction, the Commission has not received any application for a review or variation of the restriction notice.

14.  On 23 January 2020, the Commission wrote to the Registrar of the High Court informing the court of the Commission’s investigation, its concerns in relation to the Actions, and its intention to apply to intervene.

15.  On 9 March 2020, CFSL, acting by solicitors, filed an acknowledgment of service of the writ of summons in each of the Actions, indicating an intention to contest the proceedings.

16.  By summons taken out in each of the Actions dated 11 June 2020, the Commission applies for leave to intervene and be heard in the proceedings herein pursuant to section 385 of the Ordinance.  In the absence of any objection from the parties, the applications were directed to be disposed of on the papers.  The Commission has lodged written submissions by counsel in addition to an affirmation of a Senior Director in the Enforcement Division of the Commission filed in support of each summons.  Neither the plaintiff nor the defendant in any of the Actions has filed any evidence or submissions in opposition to the application.

17.  Section 385 of the Ordinance provides as follows:

“ 385. Power of Commission to intervene in proceedings

(1) Where—

(a) there are any judicial or other proceedings (other than criminal proceedings) which concern a matter provided for in any of the relevant provisions, or in which the Commission has an interest by virtue of its functions under any of the relevant provisions; and

(b) the Commission is satisfied that it is in the public interest for the Commission to intervene and be heard in the proceedings,

the Commission, after consultation with the Financial Secretary, may, by an application made in accordance with subsection (2) to the court hearing or otherwise having competent authority to hear the proceedings, apply to intervene and be heard in the proceedings.

…

(4) Subject to subsection (5), the court to which an application is made for the purposes of subsection (1) may by order—

(a) allow the application, subject to such terms as it considers just; or

(b) refuse the application.

…

(6) Where an application made for the purposes of subsection (1) is allowed under subsection (4)(a), the Commission, subject to the terms referred to in subsection (4)(a)—

(a) may intervene and be heard in the proceedings to which the application relates; and

(b) shall be regarded for all purposes as a party to the proceedings and shall have the rights, duties and liabilities of such a party.

…”

18.  Section 385 was a newly introduced provision in the Ordinance as enacted in 2003 which appears to be inspired by section 1330 of the Corporations Law of Australia.[3]

19.  I am satisfied that the jurisdiction to permit intervention by the Commission is engaged:

(1)  There are legal proceedings which concern a matter provided for in the “relevant provisions” as defined in Schedule 1 to the Ordinance.  It is true that the Actions do not at present raise the issue whether the alleged market misconduct was committed, but they are in substance claims for the sale proceeds of shares which, the Commission says, were the subject of market manipulation.  I agree with the Commission’s submission that the word “concern” (“涉及” in the Chinese version of the Ordinance) is of wide import, usually meaning “have relation or reference to” or “affect, have a bearing on, involve”, and I see no reason to read it in such a way as to require the proceedings to raise directly a claim or issue under the relevant provisions. 

(2)  It seems to me the second limb in section 385(1)(a), namely, that there are proceedings in which the Commission has an interest by virtue of its functions under any of the relevant provisions, is also satisfied.  The Commission clearly has an interest in ensuring that the funds possibly representing the proceeds of market misconduct are not dissipated pending its investigation, for they may be a source from which, for example, payments may be required to be made as a result of other proceedings subsequently brought by the Commission.

(3)  There is evidence that the Commission itself is satisfied that it is in the public interest for it to intervene in the Actions.

(4)  The Commission has consulted the Financial Secretary before making these applications, as required under section 385(1).

20.  The court to which an application is made under section 385 has a discretion whether to allow the application.  Having considered all the relevant materials, I consider it is an appropriate case in which to permit intervention by the Commission.

(1)  There are grounds to suspect that the plaintiffs have committed market misconduct or contravened the provisions of the Ordinance including section 278 (market manipulation), conduct which can be the subject of proceedings in the Market Misconduct Tribunal.  Pursuant to section 257, the Tribunal has power to require the disgorgement of profits by a person found to have engaged in market misconduct.  There could also be criminal and civil proceedings arising from the conduct, potentially resulting in orders against the plaintiffs for payment of money.  The Commission has a legitimate interest in seeking to ensure that there remain substantial funds in Hong Kong to meet such potential liabilities.

(2)  Given all the circumstances from the placement of shares to the response of CFSL to the Actions, and notwithstanding the notice of intention to defend given by CFSL on 9 March 2020, the Commission has reasonable grounds to fear that the Actions are collusive litigation or at least that the Actions would not be defended by CFSL with sufficient vigour or thoroughness.  CFSL has no incentive to prevent judgment being entered against itself since it makes no claim to the money in question.  Conversely, it may have an interest in avoiding an inquiry into the role, if any, it played in the suspected scheme carried out by the Traders such that, in particular, it is doubtful that CFSL would, of its own motion, raise any defence in the Actions based on the doctrines of ex turpi causa and illegality.

(3)  As such, the Commission has a legitimate interest, by intervention, to prevent the plaintiffs from obtaining and then enforcing any judgment in the Actions against CFSL.

21.  The Commission has asked for a general stay of further proceedings in the Actions pending the outcome of its investigation, with liberty for any party to apply to lift the stay on reasonable notice.  In the absence of any representations from the existing parties, this seems to me to be an appropriate direction to make. 

22.  For the above reasons, I shall make an order in each of the Actions in terms of the draft order submitted.