NG CHIU MUI AND ANOTHER v. SECURITIES AND FUTURES COMMISSION

CACV 141/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 141 OF 2009

(ON APPEAL FROM THE SECURITIES AND FUTURES
APPEALS TRIBUNAL APPLICATION NOS. 7 AND 8 OF 2007)

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REASONS FOR JUDGMENT

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Hon Ma CJHC:

1. I agree with the reasons set out in Le Pichon JA’s judgment for dismissing the present appeals. I also agree with the order nisi as to costs.

Hon Le Pichon JA:

2. These were appeals by two of three applicants who had unsuccessfully applied to the Securities and Futures Appeals Tribunal for a review of the final decision made by the Securities and Futures Commission (“the SFC”) against each of them.  At the conclusion of the hearing, the appeals were dismissed with written reasons to be handed down which we now do.

Introduction

3. Ng Chiu Mui, the first appellant, and Law Kai Yee, the second appellant, (collectively “the appellants”) were responsible officers of a company known as Hantec International Ltd (“HIL”).  HIL was licensed to carry out Type 3 (leveraged foreign-exchange trading) regulated activity.  HIL is part of the Hantec group.  Its holding company, Hantec Holdings Ltd, is listed on the main board of the Stock Exchange of Hong Kong.

4. HIL is a wholly owned subsidiary of Hantec Holdings Ltd which, through another wholly-owned subsidiary, Hantec Bullion Investments Ltd, holds a 30% interest in Cosmos Hantec International (“CHI”), a New Zealand company which carries on the business of offshore leveraged foreign-exchange trading.  CHI was and is not registered with the SFC.

5. Until May 2005, CHI maintained a ‘liaison office’ at Room 4408A, Cosco Tower, 183 Queen’s Road Central.  HIL’s offices were located on the 43^rdand 45^th floors of Cosco Tower and when CHI vacated its office, that space was taken over by HIL.

6. The first appellant was a director of CHI until 2005.  At all material times, she was a director of Hantec Holdings which, through its Overseas Investment Management Department (“OIM”), had provided ‘back-office’ services to CHI in Hong Kong.  The second appellant has been a director of CHI since 2006.

Background facts

7. Following the receipt of complaints against a number of licensed representatives of HIL who allegedly had induced individuals to open accounts with CHI in order to trade leveraged foreign-exchange contracts, the SFC conducted an investigation under 182 of the Securities and Futures Ordinance Cap. 571.

8. The SFC conducted a raid on CHI’s premises on 2 March 2005 and seized a number of documents, including copies of CHI’s account opening documents relating to Hong Kong clients which showed licensed representatives accredited to HIL as their responsible account executives, internal documents of CHI showing Hong Kong as one of its target markets, and correspondence and other documents purporting to show the involvement of Hantec group’s OIM in the affairs of CHI.

9. Subsequent to the raid and seizure of documents, the SFC conducted interviews of material witnesses.  It then formed the view that CHI in fact had been carrying on the business of leveraged foreign-exchange trading within Hong Kong although it was not licensed to do.  It further formed the opinion that each of the appellants was guilty of misconduct and was not fit and proper to be licensed.

10. The SFC sent each of the appellants a Notice of Proposed Disciplinary Action (“NPDA”) dated 5 July 2007.  In the case of the first appellant, the NPDA stated that the Commission was of the opinion that the first appellant had aided and abetted the unlicensed activities of CHI in breach of General Principle 7 and § 12.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.  The notice then proceeded to set out the Commission’s case in detail.

11. In outline, it set out ‘Grounds for Concern’ stemming from complaints received against HIL’s licensed representatives.  The names of the Hong Kong clients together with a table of their trading losses and the names of account executives as provided by CHI were attached to the letter which also recorded that CHI had admitted that it had paid commissions to 4 HIL executives in respect of trades conducted by their clients.  It outlined evidence to the effect that the first appellant who was in charge of OIM had instructed its employees to assist CHI in its unlicensed activities, including receiving completed account opening documentation and other correspondence in Hong Kong, forwarding the same to New Zealand, keeping bank account opening documents and introductory brochures in Hong Kong for collection by customers and further outlined the first appellant’s involvement in approving and checking fund transfers, including the payment of commissions on behalf of CHI to account executives on a daily basis.

12. The NPDA recorded allegations that, inter alia, the first appellant had told staff of HIL on various occasions, and more specifically, at a meeting held in May 2005 immediately after a cocktail party in Macau to celebrate the opening of CHI’s Macau office, that CHI was set up as an additional line of business for HIL’s account executives in that they could introduce business to CHI which is an overseas company not regulated by the Commission, highlighting the fact that CHI’s minimum margin requirement would be lower than that of HIL and that commissions to account executives would be higher.  The first appellant and other senior officials of HIL including the second appellant took turns to elaborate on that message and said that, given the licensing status of HIL account executives, it might not be desirable for HIL’s employees to refer clients to CHI and suggested that HIL’s employees should find persons to act as nominees (“人頭”) to receive commissions from CHI on their behalf.

13. The Commission was of the view that the first appellant’s acts amounted to aiding and abetting unlicensed activities.  It set out the proposed disciplinary action and the reasons therefor.  The Commission then invited the first appellant to make written submissions, stating that the decision to take disciplinary action was not a final decision.

14. The second appellant’s NPDAoutlined his involvement which was limited to attending the meeting in CHI’s Macau office after the cocktail party and elaborating on the first appellant’s message that HIL’s licensed representatives could solicit business for CHI from Hong Kong clients and explaining how that could be done despite their licensing status by using a nominee to receive commissions on their behalf.

15. The Commission took the view that by encouraging licensed representatives of HIL to participate in the unlicensed activities of CHI, the second appellant was guilty of misconduct and was not fit and proper to be licensed.  The Commission set out the proposed disciplinary action and the reasons therefor and invited the second appellant to submit written submissions if he objected to the proposed action.

16. Despite invitations to both appellants to make submissions to answer the Commission’s case against them, neither did.  This was notwithstanding requests made (and granted) for extensions of time to enable them to do so.  Accordingly, by letters dated 7 September 2007, the appellants were each given a Notice of Final Decision, in which the Commission reached the same conclusions as in the NPDAs.  The Notices also contained the decision on the disciplinary action against both appellants:-

“1^st Appellant

I enclose our Notice of Final Decision, and the reasons for it, to revoke your licence and the approval of your status of a responsible officer, and prohibit you for life from:

(a) applying to be licensed or registered;

(b) applying to be approved as a responsible officer of a licensed corporation;

(c) applying to be given consent to act or continue to act as an executive officer of a registered institution under section 71C of the Banking Ordinance; and

(d) seeking through a registered institution to have your name entered in the register maintained by the Monetary Authority under section 20 of the Banking Ordinance as that of a person engaged by the registered institution in respect of a regulated activity.”

“2^nd Appellant

I enclose our Notice of Final Decision, and the reasons for it, to suspend your licence for three [3] years.”

17. The Notices reminded the appellants of their right to a review by the Tribunal under s.217 of the SFO.  Both appellants sought reviews, as did another applicant (who had, like the appellants, also received a NPDA followed by a Notice of Final Decision).

18. The Tribunal (which, by consent, had been presided over by the Chairman Mr Justice Stonesitting alone) remarked that the review of the Final Decision was ‘notable’ in that none of the applicants for review (including the appellants) made any representations to the SFC upon receiving the NPDA; and, further, that none of the applicants (including the appellants) gave evidence to the Tribunal in support of the review application, “thereby declining to expose themselves to cross-examination”. Accordingly, in a Determination dated 15 May 2009, the Tribunal dismissed the applications for review.  As stated earlier, the appellants appealed to this court.

These appeals

19. The appeals were of limited scope.  They raise two points of law.

Statutory construction

20. The first point relates to the proper meaning of the term ‘actively markets’ in section 115 (1) of the Ordinance.  That is relevant to establishing the primary liability of CHI, absent which the appellants cannot be liable for aiding and abetting or encouraging unlicensed activities.

21. Section 115 (1) reads:

“(1) If-

(a) a person actively markets, whether by himself or another person on his behalf and whether in Hong Kong or from a place outside Hong Kong, to the public any services that he provides; and

(b) such services, if provided in Hong Kong, would constitute a regulated activity,

then-

(i) the provision of such services so marketed shall be regarded for the purposes of section 114(a) as carrying on a business in that regulated activity;

(ii) the person’s marketing of such services as referred to in paragraph (a) shall be regarded for the purposes of section 114(b) as holding himself out as carrying on a business in that regulated activity;…”

22. To put section 115 in its context, it is necessary to have regard to section 114 which, in essence, prohibits a person from carrying on business or holding himself out as carrying on business in a regulated activity andprohibits a person from performing or holding himself out as performing any regulated function in relation to a regulated activity carried on as a business.  The term ‘regulated function’ is itself defined in section 113. In relation to a regulated activity carried on as a business by any person, it covers any function performed for that person relating to the regulated activity, except work ordinarily performed by an accountant, clerk or cashier.

23. Mr Grossman SC who appeared for the appellants submitted that the Tribunal had misapplied the term ‘actively markets’ by taking too narrow a view of its meaning and, irrespective of the facts of the case, had the effect of rendering the whole procedure flawed.

24. Mr Grossman accepted that “marketing” means no more than making a product available to the public and while “active” is the opposite of “passive”, Mr Grossman submitted that it was an important adverbial modifier and suggested that there had to be something more proactive/aggressive than mere marketing.

25. Mr Grossman referred the court to § 25 of the Determination which recorded that counsel then appearing for the appellants had argued strongly before the Tribunal that the term ‘actively markets’ within section 115, when taken in conjunction with the SFC explanatory material, must be taken to mean no more than marketing in the primary sense of pro-actively advertising the service to the Hong Kong public and did not encompass instances of the actual sale of products to individual customers.

26. The SFC explanatory material can be found on its website posted on 17 March 2003.  It stated, inter alia, that

“…In determining whether or not a person “actively market” its services to the public, the SFC will consider the nature of the business activities as a whole and have regard to a number of factors, including (without limitation) the following:

•      whether there is a detailed marketing plan to promote the services;

•      whether the services are extensively advertised…

•      whether the related marketing is conducted in a concerted manner and executed in accordance with a plan or schedule which indicates a continuing service rather than a one-off exercise;

•      whether the services are packaged to target the people of Hong Kong;

•      whether the services are sought out by the customers on their own initiative”

It was submitted that the SFC’s interpretation was the correct one and the Tribunal was wrong to have dismissed that interpretation as well as the footnoted commentary in the consultation paper presented to the Bills Committee as “straws in the interpretative wind”.

27. But the SFC’s view can be of no relevance as a matter of law unless it is a tool of statutory interpretation.  Since Mr Grossman accepts that it is not such a tool, the Tribunal’s approach plainly was correct.

28. Mr Grossman also criticized § 28 of the Determination which read:

“For my own part, I fail to see why the term “actively markets” should not, on its face, also be taken to include the actual sale of a particular product to a member of the Hong Kong public, although clearly much will depend upon the evidence surrounding the circumstances of any such sale.  However, it seems tolerably clear that an actual sale consequent upon the advertising of the service to the Hong Kong public must be regarded as falling within this rubric.”

Mr Grossman’s submission was that, prima facie, the first sentence of that paragraph seemed to be saying that “actively markets”could encompass only the mere sale of a product.

29. I do not consider that to be a correct reading of the first sentence as a whole.  The sentence has two limbs to it: Mr Grossman’s approach effectively ignores the second limb.  The Tribunal was not saying that an actual sale is sufficient the purposes of “actively marketing”. Rather, it is clear from the second limb that much would depend upon the evidence surrounding the circumstances of such sale.

30. In conclusion, it is clear that the criticisms directed at the Tribunal’s interpretation of “actively markets” are misconceived and wholly devoid of merit.  I would only add as well that on the facts of the present case, it was clear that CHI was actively marketing financial services in Hong Kong.

The procedural point

31. The second point of law raised by Mr Grossman relates to the basis upon which the Tribunal decided to conduct the proceedings.  As a preliminary matter, the court was reminded that the procedure, albeit based on the Ordinance, is highly unusual in that the SFC is acting as investigator, judge, jury and punisher.  Pausing here, it is to be noted that Mr Grossman accepts the constitutionality of the procedure.

32. Be that as it may, as I understand it, the complaint was that the Tribunal’s approach to the review exercise was fundamentally flawed in that the quasi-judicial approach taken by the SFC was not ‘overseen’ by the Tribunal.  By way of example, Mr Grossman drew attention to § 20 of the NPDA sent to the second appellant where the Commission stated that it preferred the evidence of certain witnesses it had interviewed to that of the second appellant.  That, it was said, was a quasi-judicial decision.  Mr Grossman then referred the court to §§ 84 and 117 of the Determination:

“84. It seems to me that in this situation, unless it can be shown … that the regulator is plainly wrong in coming to its conclusions in the light of the available materials, bearing in mind that such conclusions are untrammelled by any positive contrary testimony on behalf of the applicant, or that the material which has been evaluated cannot reasonably support the inference/conclusion as drawn, then in my view there is and can be no proper basis for review intervention by this Tribunal; to the contrary, for what it be worth, the clear probability is that the SFC, qua reasonable regulator acting in good faith, in fact drew wholly appropriate conclusions/inferences from the data available to it, including the various records of interviews.

…

117. It seems to me, with respect, that the content of the Amended Grounds as filed to underpin Mr Law’s application for review may have contained possibilities for further inquiry, and possibly even potential for success given the nature of the evidence adduced against him, but in the absence of any response whatever from Mr Law, whether sworn or unsworn, at any time subsequent to the NPDA, I fail to see how the Tribunal now can act on these grounds without, in effect, second guessing the SFC, which over the past years is a course this Tribunal consistently has declined to adopt – save, of course, in instances in which it can be shown, and shown clearly, that the regulator is in error or is plainly wrong, which in my judgment is not the case in this instance; in fact, looking at this matter largely and liberally I should have been surprised if the SFC had not pursued this case after assembling the evidence that it did in the course of its inquiries into the activities of CHI.”

33. The thrust of Mr Grossman’s submission was that since the Ordinance gave a very wide discretion to the Tribunal in the conduct of the review, on the basis of the very powerful tool given the SFC by dint of its myriad roles, it was incumbent on the Tribunal to do more than not to second-guess the SFC, and merely accept, without independent evaluation, its findings.

34. The appellants’ criticism of the Tribunal’s approach appears to have been predicated on the Tribunal proceeding on the assumption, without actually having examined the material underlying that assumption, that everything the SFC had done must be right and that the burden was on the appellants to show that the SFC was wrong.  In support, Mr Grossman made reference to a passage in the transcript where the Tribunal stated that there had to be “some very clear error” for the Tribunal to interfere with the regulator as indicative of its general approach.

35. I do not agree that that was the approach of the Tribunal.  Take § 84 of the Determination on which much reliance was placed. While Mr Grossman focused on the words “unless it can be shown …that the regulator is plainly wrong…”, properly read, it is clear that the Tribunal was not merely accepting the SFC’s conclusions without more.

36. First, those conclusions were considered “in light of the available materials”. Next, the Tribunal took into account the fact that those conclusions were “untrammelled by any positive testimony”. It is also clear that a relevant consideration was whether the material that had been evaluated “could not reasonably support the inference/conclusion as drawn”.  In other words, contrary to what has been submitted, the Tribunal did not proceed as Mr Grossman suggested, that the SFC’s findings/conclusions were necessarily correct, without any regard to the underlying materials.

37. For my part, while the appellants sought to present the issue as one that involved reversing the burden of proof, I do not consider that any such issue arises.  In my view, the Tribunal’s conduct of the review was perfectly proper and entirely beyond reproach.

Penalty

38. In its review, in the case of the first appellant, the Tribunal substituted prohibition for a period of 10 years in lieu of the prohibition for life that had been imposed by the SFC.  In the case of the second appellant, the Tribunal reduced the period of licence suspension by 25%, namely, from the 3 years to 2 years and 3 months.

39. While the penalty imposed on each of the appellants formed a ground of appeal, it was not a point that was pursued with any great enthusiasm. Mr Grossman submitted that the cases before this court were far from being the worst kind of cases that could exist.  In his written submissions, he stated that the appellants were only involved in a limited manner in “actively marketing” CHI’s products.  It was said that the penalty imposed, in particular the 10-year prohibition on the first appellant, was manifestly excessive and shocking.

40. On any view, the misconduct involved was serious and detrimental to the integrity of the market: it included blatant attempts to conceal the unlawful activities which the appellants condoned, the effect of which was to deprive the appellants’ clients of their statutory protection under Hong Kong law and to expose them to unnecessary risks.  In the case of each of the appellants, the Tribunal did consider whether the penalty was excessive and disproportionate to the facts of the case and, as a result,actually reduced the penalty imposed.  The only criticism that was advanced against the substituted penalties was nothing more than surmise on the part of Mr Grossman that they were coloured by the Tribunal’s displeasure that the appellants had not given evidence.

41. That the Tribunal might have felt a sense of frustration of the appellants’ forensic ‘strategy’ is readily understandable: not only did the appellants not make representations to the SFC upon receiving the NPDAs, they also declined to give evidence when, at the directions hearing, the Tribunal was led to believe that representations would be forthcoming.  But I can find nothing to suggest that the sense of frustration (if it be that) caused the Tribunal to impose a ‘heavier’ sentence.  To the contrary, notwithstanding the fact that it was not a point taken by those representing the appellants, of its own accord, in the case of the first appellant, the Tribunal made the point that few cases of misconduct could be said to justify ‘life’ in the true sense and, in the case of the second appellant, that there was arguably a lack of internal consistency in the penalties meted out and varied ‘downwards’ the sentence meted out in each case.  The appellants should consider themselves fortunate.  In the circumstances, gratitude rather than criticism would appear to be the more fitting response.

Costs

42. I would propose that there be an order nisi of costs in favour of the SFC.

Hon Kwan JA:

43. I agree with the Reasons for Judgment of Le Pichon JA and the costs order nisi.