SECURITIES AND FUTURES COMMISSION v. LEE SING WAI

HCMA132/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

(Appellate Jurisdiction)

MAGISTRACY APPEAL NO. 132 OF 2006

(ON APPEAL FROM ESS 18613 OF 2005)

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J U D G M E N T

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1. This is an appeal against sentence only. 

2. The appellant was convicted on 10 January 2006 on his own plea of an offence of creating a false appearance of active trading in securities, contrary to sections 135(1)(a) and 139 of the now repealed Securities Ordinance, Cap. 333.  That offence took place between 14 February 2003 and 31 March 2003 when that Ordinance was still in effect.  He was sentenced to seven months’ imprisonment.

3. The facts of the case were that the appellant and two other individuals used nine accounts at five different brokerages to trade the shares of a listed company, Essex Bio-Technology Ltd (“Essex”), amongst themselves with a view to promoting the appearance of active trading in the shares of Essex and so enhance their market price.

4. The arrangement continued for some 32 trading days, though the appellant’s transactions took place on only four days over that period.  Nevertheless, the volume of the appellant’s transactions over those four days was high.  He sold 12.5 million shares in total and purchased 13.3 million shares.  His individual transactions on those four days ranged between 15%-52% of all daily purchases of the shares and between 18-50% of all daily sales.  The share price of Essex over the 32 day trading period ranged upwards from $0.10 per share to about $0.19 a share. 

5. The group’s transactions accounted for 75% of the turnover of Essex shares.  The total purchase and sales by the group represented 56% and 51% respectively of Essex’s entire share capital.

6. The purpose of all this was to artificially inflate the price of Essex shares, so that members of the group, including the appellant, could sell the shares held by them at a profit.

7. The appellant firstly complains that his sentence of seven months’ imprisonment is too severe.

8. I disagree.  Firstly, this was a sophisticated and relatively large scale operation.  It was also extremely cynical as all such operations are.  That is because, to make a profit, the members of the group had to sell their share holding in Essex at an artificially inflated price.  That meant the persons they sold those shares to would forseeably eventually lose a substantial portion of the moneys they paid for the shares when ordinary market forces returned the shares to their economic price.

9. Other innocent members of the investing public would be misled by the false price and turnover created in respect of the shares and purchase them without being aware that there was a premium attached to the price they paid attributable to the groups dishonesty.  This was, in other words, a selfish and blatant offence designed not only to bring profit to members of the group but to likely cause loss to members of the investing public.   In those circumstances, a sentence of immediate imprisonment was justified.  Offences such as the present are not merely regulatory or technical offences, they amount to frauds on the investing public. 

10. It was suggested by the appellant during the appeal that in virtually all previous such prosecutions sentences of suspended imprisonment were handed down.  I am surprised by that.  These offences are serious and cause real and substantial losses to investors and bring an important part of Hong Kong’s economy into disrepute.  Sentences of imprisonment, in my view, cannot be complained of even for first offenders. 

11. The level of sentence will obviously depend on the circumstances of the case of which the most important will usually be the scale of the operation underlying the offence.  In the present case, the magistrate said :

“17.   The facts in the present case clearly showed that Defendant collaborated with others to perform wash sales in the Unified Exchange, pushing up the volume of sales and the price of Essex shares by many times during a period of 32 trading days.  It was a scheme perpetrated out of greed over a period of time rather than a one-off act.  I did not agree with Counsel that the scheme was unsophisticated.  

18.   Tang was the mastermind.  Even so, Defendant still played an important role to assist him.  He was part of the group.

19.   Defendant might have lost money in the exercise but what his group did had created false or misleading appearance of the Essex shares in the market during the relevant period.  Whether Defendant or others gained or lost because of that was not important. The misdeed was it hampered the proper practice of shares trading in the Unified Exchange and this in turn hampered the reputation of Hong Kong as a significant stock market in the world.”

I agree with those comments.

12. By themselves the facts of this case warranted a sentence of immediate imprisonment for the reasons I have given, but there exists a second and separate reason why an immediate custodial sentence was appropriate in the present case.  The appellant has a poor history in regard to this sort of offence.  He was convicted on 21 June 2002, i.e. about a year before the offence in the present case, of the identical offence of creating a false or misleading appearance of active trading in the shares of another listed company.  In respect of that earlier offence, he was sentenced to nine months’ imprisonment, suspended for three years.

13. During the course of the investigation into the present offence, the appellant failed to attend before an SFC investigator as required.  That in itself was an offence and he was eventually prosecuted for it.  As that offence also fell within the term of the period of suspension imposed in respect of the earlier offence, that earlier sentence was activated to the extent of six months of its period of imprisonment.

14. Accordingly, when sentenced for the present offence, the appellant was already serving a sentence of six months’ imprisonment.  In that regard, the magistrate said this :

“21.   Defendant had committed an offence of the same kind before.  He was given a chance and got away with a suspended sentence in July 2002.  Yet, in less than a year, he did the same thing again to harm the share market.  The present offence was a serious one : Defendant partnered with others to conduct many wash sales on a scheme during the relevant period of about one and a half months.  It was an aggravating factor that he did so whilst he was still on that suspended sentence.”

15. Again, I agree with those comments.  The appellant took a calculated risk in breaching the terms of his suspended sentence and committed exactly the same offence again.  He can hardly complain of a sentence of seven months’ immediate imprisonment being imposed in respect of the present offence in those circumstances.

16. The appellant’s final complaint is that the magistrate should have ordered the sentence in respect of the present offence to be served at least partially concurrently to the sentence of six months’ imprisonment he was already serving.  He complains that the totality of thirteen months’ imprisonment is too severe.

17. Again, I disagree.  The appellant not once, but twice has embarked upon schemes to manipulate share prices to the potential loss of members of the public.  In the present case, he was a member of a group which in order to achieve its purposes conducted some $10 million or more in transactions so as to inflate the price of a listed company’s shares.  The scheme succeeded in nearly doubling the market price of Essex’s shares from $0.10 to $0.19. 

18. Although 75% of the turnover in Essex’s shares during the 32 trading day period was attributable to members of the group, that meant, on the face of it, that up to 25% of the shares turnover, still a significant percentage, was attributable to ordinary trading by members of the public.  Those individuals were at significant risk of loss.

19. In my judgment, the present offence, taken together with the appellant’s previous similar offence, shows a degree of culpability which more than justifies the totality of sentence the appellant will serve.

20. The appeal is dismissed.