CHAU CHIN HUNG, EDMOND AND OTHERS v. MARKET MISCONDUCT TRIBUNAL AND OTHERS

CACV 62/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 62 OF 2009

(ON APPEAL PURSUANT TO SECTION266 OF THE
SECURITIES AND FUTURES ORDINANCE, CAP. 571
FROM DETERMINATIONS OF THE MARKET MISCONDUCT TRIBUNAL
IN RELATION TO DEALINGS IN THE SHARES OF
QPL INTERNATIONAL HOLDINGS LIMITED)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  These were appeals by Chau Chin Hung (“the first applicant”), Sun Hung Kai Investment Services Ltd (“Investment Services”) and Sun Hung Kai Strategic Capital Ltd (“Strategic”) (collectively “the applicants”) from an order made by the Market Misconduct Tribunal (“the Tribunal”) on 25 February 2009. At the conclusion of the hearing the appeals were dismissed with written reasons to be handed down, which we now do.

Background

3.  By a notice dated 6 June 2007 issued pursuant to section 252(2) and Schedule 9 of the Securities and Futures Ordinance, Cap. 571 (“the Ordinance”), the Financial Secretary directed the Tribunal to conduct proceedings and determine

(a)  whether any market misconduct had taken place in relation to the securities of QPL International Holdings Ltd (“QPL”);

(b)  the identity of every person who had engaged in market misconduct; and

(c)  the amount of any profit gained or loss avoided, if any, as a result of the market misconduct.

4.  The notice specified three forms of market misconduct, namely, false trading, price rigging and stock market manipulation, the applicants as well as Connie Cheung Sau Lin (“Ms Cheung”) being the persons specified in the notice as suspected of having perpetrated market misconduct. At the time of the notice, Strategic was known under its former name of Cheeroll Ltd.

5.  After conducting the proceedings as directed by the notice, the Tribunal prepared a written report. It determined, inter alia, that the applicants were culpable of market misconduct and false trading and price rigging.

6.  The Tribunal ordered, inter alia, as follows:

“(2)  Under section 257(1)(c) of the Ordinance,

(a)  Edmund Chau Chin Hung shall not again perpetrate any conduct which constitutes market misconduct;

…

(c)  Cheeroll Limited (now known as Sun Hung Kai Strategic Capital Limited) shall not again perpetrate any conduct which constitutes market misconduct; and

(d)  Sun Hung Kai Investment Services Limited shall not again perpetrate any conduct which constitutes market misconduct.”

7.  The applicants challenge only those orders and not orders made under other subsections of section 257 of the Ordinance. Ms Cheung is not party to any of the appeals.

The statutory provisions

8.  The relevant provisions read:

“  PART XIII
MARKET MISCONDUCT TRIBUNAL
Division 1 – Interpretation

245.  Interpretation of Part XIII

(1)  In this Part, unless the context otherwise requires-

…

“market misconduct" (市場失當行為) means-

(a)  insider dealing;

(b)  false trading within the meaning of section 274;

(c)  price rigging within the meaning of section 275;

(d)  disclosure of information about prohibited transactions within the meaning of section 276;

(e)  disclosure of false or misleading information inducing transactions within the meaning of section 277; or

(f)  stock market manipulation within the meaning of section 278, and includes attempting to engage in, or assisting, counselling or procuring another person to engage in, any of the conduct referred to in paragraphs (a) to (f);

…”

“257.  Orders, etc. of Tribunal

(1)  … the Tribunal may at the conclusion of any proceedings instituted under section 252 make one or more of the following orders in respect of a person identified as having engaged in market misconduct pursuant to section 252(3)(b)-

(a)  …

(c)  an order that the person shall not again perpetrate any conduct which constitutes such market misconduct as is specified in the order (whether the same as the market misconduct in question or not);

…

(5)  The Tribunal may, in relation to any person, specify any market misconduct in an order under subsection (1)(c), whether or not there is, at the time when the order is made, likelihood that the person would perpetrate any conduct which constitutes the market misconduct.

…

(10)  A person commits an offence if he fails to comply with an order made under subsection (1)(a), (b) or (c) and is liable-

(a)  on conviction on indictment to a fine of $1,000,000 and to imprisonment for 2 years; or

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

These appeals

9.  Two issues arise on these appeals. The first relates to the scope of the power conferred on the Tribunal by section 257(1)(c). The second relates to the tribunal’s finding of price rigging.

The scope of section 257(1)(c)

10.  Mr Brewer, who appeared for the applicants, submitted that the orders made under that provision exceeded what the statutory provision authorises. In other words, those orders are ultra vires the Tribunal. His principal contention was that the use of the phrase “market conduct in question” necessarily restricted the prohibition to market misconduct within the notice, although he eventually conceded that because of the words “or not” it could extend to misconduct revealed in evidence or found by the Tribunal notwithstanding that it was not specified in the notice. It was said that the use of the word “again” in that provision requires a finding that the specified person had already engaged in market misconduct of that nature.

11.  The gravamen of the applicants’ complaint was that as the statutory definition of “market misconduct” extends to 6 different types of misconduct but only 3 types were raised in the notice or otherwise revealed in evidence or found to have occurred by the Tribunal, any order made under section 257(1)(c) had to be confined to the 3 types of misconduct. In the present case, he said, the evidence did not reveal that additional types of misconduct had occurred. It was submitted that by prohibiting the specified persons from perpetrating “market misconduct” when only 3 of the 6 types of misconduct were ever in play, the Tribunal had exceeded its powers.

12.  It is to be noted that the orders sought to be impugned actually replicate the language of subsection (c). In my view, the reading Mr Brewer sought to give to subsection (c) is wrong and impermissible.

13.  For subsection (c) to apply, the person against whom an order under section 257 is made must be one who has been identified as having engaged in “market misconduct”. The applicants are such persons. Subsection (c) then authorises the Tribunal to specify conduct that constitutes “market misconduct” in the order. The Tribunal was doing precisely that by making a “cease and desist order” in respect of all market misconduct. In my view, the use of the word “again” merely reflects the fact that the person against whom a subsection (c) order is made has in the past been found to have perpetrated market misconduct, and nothing more. Further, on any fair reading, the words appearing within parenthesis in subsection (c) - whether the same as the market misconduct in question or not - far from imposing any restriction of the type of market misconduct that may be specified in the order make it plain that it matters not if the misconduct specified in the order was not raised in the notice or was not the subject of a finding by the Tribunal.

14.  For these reasons, I reject the reading put forward by the applicants. In my view, it is devoid of merit.

15.  Mr Brewer then submitted that even if he were to fail on the ultra vires point, the Tribunal’s exercise of its powers was disproportionate to the circumstances of the case. A number of objections were advanced.

16.  ‘Cease and desist orders’ are said to originate from the US where prevailing practice requires that there be some likelihood of future violations. It was said that in the present case there was nothing to suggest the likelihood of future violations. But the answer to Mr Brewer’s objection lies in subsection (5) which expressly authorises the Tribunal to specify “any market misconduct” in a section (c) order

“whether or not there is, at the time when the order is made, likelihood that the person would perpetrate any conduct which constitutes the market misconduct.”

Mr Brewer acknowledged that the wording of subsection (5) posed a significant difficulty in the way of his argument.  In my view, that difficulty is insurmountable.

17.  The next objection was that as subsection (c) orders are intended to be preventative in nature, it was inappropriate, in principle, to make orders of unlimited duration. It was submitted that that was particularly the case with the corporate applicants, namely, Investment Services and Strategic. They face the prospect of criminal sanction under subsection (10) in the event of future breach. It was also said that Investment Services employs over 500 SFC-licensed representatives whose conduct could be attributed to it and that to impose an order of unlimited duration when there was no evidence of any systemic institutional failure was wrong in principle.

18.  I do not agree. The legislation plainly contemplates and permits the making of ‘cease and desist orders’ in perpetuity and does not differentiate between corporations and natural persons who are found to have been guilty of market misconduct. The Tribunal in making the order was exercising its discretion and unless it can be shown that the Tribunal was plainly wrong, there would be no basis for this court to interfere with its decision. There is nothing in the legislation to suggest that anything short of systemic institutional failure would not justify a ‘cease and desist order’ and it is not the function of this court (nor is it within its powers) to rewrite the legislation. This ground of challenge is hopeless and must be rejected.

The finding of price rigging

19.  This was very much a subsidiary point and was not advanced with any great enthusiasm or conviction.

20.  By way of background, it needs to be said that it was found that the first applicant had placed substantial orders, not intending to purchase such shares but to create a false impression of strong market demand in order to facilitate disposals of QPL shares by clients of the corporate applicants.

21.  The question thus posed was whether the first applicant accepted that by creating an impression of greater market interest the price of the shares “could” move, to which the answer was in the affirmative. Mr Brewer submitted that the first applicant’s conduct could not be regarded as reckless when the first applicant did not say that the price “would” move. That was the scope of the challenge to the Tribunal’s finding of price rigging.

22.  I find no merit whatever in the submission. In the light of the evidence before it, it was plainly open to the Tribunal to make a finding of recklessness. The use of the word “could” did not preclude the Tribunal from making such a finding.

Hon Stone J:

23.  I agree with the reasons for judgment of Le Pichon JA.