A v. SECURITIES AND FUTURES COMMISSION

HCAL 64/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 64 OF 2010

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BETWEEN

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D E C I S I O N

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1.  Leave to apply for judicial review is refused.

2.  A was a licensed person under the Securities and Futures Ordinance (Cap. 571) (SFO).  He seeks judicial review in relation to certain disciplinary proceedings being taken against him by the Securities and Futures Commission (SFC).

3.  In October 2008 the SFC interviewed A in connection with an investigation into “false trading and/or price rigging and/or stock market manipulation”.

4.  In August 2009 the SFC informed A by letter that, in the SFC’s view, A had breached General Principle 1 of the relevant Code of Conduct by manipulating certain securities contracts on 2 days.  The SFC proposed to suspend A’s licence and fine him $134,580 (the SFC’s estimate of A’s profit).  The SFC’s letter to A was accompanied by a statement from the SFC’s in-house expert explaining how A may have manipulated the market in the relevant securities contract.  The SFC invited A to make any representations which A wished to put forward in response.

5.  A engaged his own expert to rebut the SFC in-house expert’s statement.  A sent his expert’s opposing view along with counsel’s submissions in response to the SFC’s allegations in October 2009.  A argued that General Principle 1 did not apply.  He also suggested that the SFC’s expert was not only biased (being in-house) but also wrong.

6.  In May 2010 the SFC wrote back to A.  The SFC stated that under SFO s. 129 it was entitled to take into account a range of factors in considering whether someone was a fit and proper person to be licensed.  Accordingly, the SFC reasoned that even if General Principle 1 was inapplicable, disciplinary action could still be taken on account of concerns over A’s “fitness and properness” as a licensed person.  The SFC therefore stood by its views.

7.  A’s licence having since been revoked as a result of A’s not having applied to transfer his licence to a new employer after leaving his previous employment, the SFC now proposed by its May 2010 letter to prohibit A from re-entering the industry for 18 months.  The level of proposed fine remained as stated before.

8.  The SFC sent a further statement by its in-house expert as well as a report by an independent expert in support of its reply to A’s representations.  The SFC requested that A submit any additional submissions in response by early June 2010.  The SFC has granted extensions of the time to respond until late June 2010.

9.  A says that the procedure which the SFC followed was in breach of natural justice.  A argues that this was because, between its August 2009 and May 2010 letters to A, the SFC has substituted the “charges” being made against A.  A also criticises the SFC for relying on new expert evidence.  According to A, this is akin to substituting “charges” and adducing further evidence after the defence has closed its case in criminal proceedings.  A consequently seeks judicial review of the SFC’s May 2010 letter and the SFC’s refusal to withdraw the same.

10.  On 23 July 2010 A made further submissions to the SFC’s letter of May 2010 without prejudice to A’s judicial review application

11.  In my view, there is no substance to the procedural objections taken by A.  Under the SFO, it is for the SFC to police conduct among licensed persons and to take disciplinary action where it believes there has been misconduct.  It is true that the SFC’s role bears some similarities to that which a prosecutor undertakes in criminal proceedings. But that does not mean that what the SFC does is fully analogous to that of a prosecutor in the conduct of criminal proceedings.

12.  One has to ask one’s self at all times whether the procedure taken by the SFC in deciding upon disciplinary action is fair in light of all relevant circumstances.  In so evaluating the SFC’s conduct, one has to be reasonable and practical.  The SFC is not a formal Court or tribunal and in policing the activities of licensed persons cannot realistically be expected to follow the full rigours of court criminal procedure.

13.  On the contrary, the SFC has to act promptly and efficiently in order to protect the investing public from the harmful effects of unethical conduct by suspected licensed persons.  The SFC needs to supervise and investigate the activities of numerous licensed persons on a day-to-day basis.  To expect the SFC to adhere to the full technicalities of Court criminal procedure would unduly hamper the SFC from carrying out its role effectively.

14.  Here the SFC proposed to discipline A pursuant to SFO s. 194(1) and (2).  Under SFO s. 198 the SFC may not exercise its powers under those provisions “without first giving the person in respect of whom the power [to discipline] is to be exercised a reasonable opportunity of being heard”.  That then must be the touchstone, imposed by statute, against which the propriety of the SFC’s procedures has to be assessed.  Has the SFC acted reasonably in giving an affected person an opportunity to be heard?

15.  Assume (without accepting) that, having considered A’s response to its October 2009 letter, the SFC wished to change the basis of its proposed disciplinary action against A from a breach of General Principle 1 to a consideration of SFO s. 129.  Why (one asks rhetorically) should the SFC not be able to do so, provided (as the SFC has done here with A) a reasonable opportunity to be heard on the new basis has been given?

16.  The analogy with what a prosecution does in a full-fledged trial which A prays in aid of his intended judicial review is inapposite.  If, having carefully considered the evidence, the SFC takes the view pursuant to s. 129 that someone is not fit and proper to be a licensed person, why should such person be allowed to deal with the investing public? In such case, the SFC would be under a duty as watchdog to revoke the person’s license, regardless of whether the SFC first formed an initial view (rightly or wrongly) that the relevant person had also breached some other provision.

17.  Consider the SFC’s reliance on an in-house expert in support of its view.  The SFC cannot be expected, each time that it wishes to investigate a licensed person with a view towards disciplinary action, to engage an outside expert.  There is no good reason for such a requirement.  It would be costly and delay the SFC in its routine investigation of financial matters.  It is wrong (as A attempts to do) to press the analogy of the SFC as Court prosecutor bringing some case in Court in order somehow to suggest that the expert needs to be some independent consultant.

18.  In any event, for the purposes of its May 2010 letter, the SFC engaged an outside expert.  I see no substance at all in A’s complaint that this was procedurally unfair because this was a second expert and this other expert specifically addressed himself to A’s criticisms of the in-house expert’s original statement.  In answering A’s criticisms, the SFC was merely doing what it is supposed to do.

19.  We are not in the situation of a formal criminal trial with the opening and closing of a case and the examination and cross-examination of experts.  All the SFC is doing is carrying out an investigation and deciding whether a licensed person should be disciplined in some way.  In carrying out such investigation, the SFC should be entitled to consult internal or outside experts as it deems appropriate.  Provided the SFC acts reasonably in giving an affected person an opportunity to be heard on the substance of an expert opinion, I see no unfairness or ground of complaint.  In the present case, the May 2010 letter invited A to make further submissions and gave nearly a month in which such could be made.  That time has been extended. That seems to me to have been impeccably fair.

20.  I see no reasonably arguable case that there has been a breach of the principles of natural justice.  A’s arguments stem from the overly rigid application of a false analogy with what happens in criminal trials.  There is no basis for such a strict analogy.

21.  There is, moreover, a more fundamental reason why leave for judicial review cannot be granted to A.  That simple reason is that A has not exhausted all available remedies.  A’s application is premature.

22.  Any decision by the SFC to discipline A under SFO s. 194(1) and (2) is subject to appeal to the Securities and Future Appeals Tribunal (SFAT) under SFO Part XI.  From the SFAT there is a further level of appeal (also under SFO Part XI) to the Court of Appeal.

23.  Here the SFC has not even finally decided to discipline A.  By its May 2010 letter the SFC invited further submissions.  A put in further submissions on 23 July 2010.  As a result possibly of this judicial review, the SFC does not yet appear to have come to any final decision whether to discipline A.  The SFC may be persuaded by A’s submissions and ultimately decide not to discipline A.  But, even if the SFC comes to (or has already arrived at) an adverse decision, there remains recourse to the SFAT and the Court of Appeal.  For the Court to intervene now would amount to an unwarranted interference in the administrative procedures established by the legislature.  I see no justification for judicial review at this early stage.

24.  Mr Sean Fang (appearing for A) suggests that, unless leave to apply for judicial review is granted, A’s reputation will be irreparably damaged.  I do not accept that submission.

25.  If A’s conduct is innocent, then presumably A can exonerate himself in further submissions before the SFC or in his defence before the SFAT or the Court of Appeal.  If A is concerned about possible adverse publicity while he conducts his defence, proceedings before the SFC are confidential and there is provision for A to apply to the SFAT to conduct review proceedings in camera.  A may also apply to the SFAT to stay the execution of disciplinary action determined by the SFC.

26.  Mr Fang argues that A will have no recourse, if leave for judicial review is refused, but to spend “huge amounts of costs” to file further expert evidence to rebut the material relied on by the SFC in its May 2010 letter.  No particulars are given of this alleged “huge amount of costs” anywhere in A’s Notice of Application for Judicial Review or in his affidavit in support.  Indeed, no mention at all is made in A’s Notice of Application for Judicial Review as to why leave to apply for judicial review should be granted when A has not exhausted all available administrative remedies.  Some vague unparticularised “huge amount of costs” cannot by itself, without more, be a basis for ignoring the principle of exhaustion of remedies.

27.  Nor does the Court engage in an elaborate cost benefit analysis when deciding to grant leave for judicial review despite the non-exhaustion of remedies.  The reality is that judicial review proceedings themselves cost money.  Where the legislature has provided for a relatively speedy and inexpensive administrative review or appeal process for the determination of a disciplinary case, the Court should be wary of granting judicial review before that administrative review or appeal process has been concluded.  A premature intervention by the Court will only have the counter-productive effect in most cases of inflating costs and delaying a prompt determination of a disciplinary matter.

28.  Mr Fang says that the SFC may bring further charges or adduce further evidence.  But again that can be said of many types of proceedings.  I am unable to see why that constitutes special reason for ignoring the well-established principle that administrative remedies should first be exhausted.  It can only be in exceptional cases where the Court will ignore the wisdom of judicial restraint when administrative remedies have not been exhausted.  This is not such a case.

29.  There is no reasonable prospect of success for this proposed judicial review.