TAI FOOK SECURITIES CO LTD v. SINCERE'S KNITTING MILLS LTD AND ANOTHER

HCA 3394/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3394 OF 2002

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AND

HCA 3393/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3393 OF 2002

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BETWEEN

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J U D G M E N T

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Introduction

1.  These are consolidated claims for a total of $13,948,005.53, by the Plaintiff a brokerage and securities house, against the two Defendants, being the amount allegedly owed on their Margin Accounts held by them with the Plaintiff for the purpose of trading in shares and securities.  There are in fact two actions, now consolidated by an order dated 29 July 2003.  In HCA 3394/2002, the claim is based on the 1^st Defendant’s margin account, it being a textile company in which the 2^nd Defendant, Mr Cheung Po Tung, is the principal shareholder and the person who operates it.  In this action, he is sued in his capacity as the guarantor of the 1^st Defendant’s (“Sincere”) margin account.  In HCA 3393/2002, Mr Cheung is the only defendant, sued in his personal capacity on his margin account.  As will presently become apparent, the issues in both actions are identical, hence their consolidation.

2.  The substance of these two actions relates to the purchase of 12,000,000 placement shares, purchased by Sincere and by Mr Cheung, in a company known as Asia Orient Holdings Limited [stock number 214] (“Asia Orient”) through the Plaintiff that had been appointed to act as one of two placing agents for the issue, together with BNP Peregrine, and also to act as joint underwriter for the placement.  The detail concerning the placement and of the Defendants’ purchase into it will become clear when I relate the relevant evidence.  The price of each placement share was $1.13.  The placement took place on the afternoon of 24 September 1999, which was a Friday.  Through Mr Cheung, Sincere applied for 8 million shares and he applied for 4 million for himself.  As is usual with placements trading in Asia Orient was suspended for the purpose of the placement, following a prior announcement by the company.  It was expected that trading would resume on the following Monday, 27 September.  In the event, the placement received only a lukewarm response.  Not all the shares that the Plaintiff had been allocated for placing were taken up by investors with the result that as an underwriter the Plaintiff was required to purchase the remaining 11.5 million shares that had not been subscribed to.

3.  On 27 September, contrary to expectation, trading in Asia Orient remained suspended at the request of the company.  It opened on Tuesday morning, 28 September, and as the trading records demonstrate, after a modestly profitable early showing the price steadily depreciated throughout the day and on the following day to well below the placing price of $1.13.  The Plaintiff was only able to dispose of 1 million of the Defendants’ holding at $1.14.  The balance remained unsold at a very considerably reduced price.  Mr Cheung had hoped that the Plaintiff, through their Account Executive, Mr Andy Cheung (“AC”) who was dealing with this matter on Mr Cheung’s behalf, would have been able to dispose of all of these shares at some profit during the course of the first day’s trading after the placement.  The difficulty for the Defendants was that they were expected to pay for the shares and also face a margin call on their accounts to bring the accounts up to the limit of their margin.  Neither Mr Cheung nor Sincere had the readily available resources to pay their Margin calls.

4.  Although much was to happen following this default at the end of September and early October 1999, it is sufficient at this stage for me to observe that the Plaintiff’s claim against both Defendants is the result of their unsuccessful venture into this placement.  For their part, both Defendants have counterclaimed for damages for, amongst other causes of action, misrepresentation on the part of the Plaintiff by virtue of AC having misrepresented to Mr Cheung the likely demand for the placed shares which resulted in him subscribing for far more shares than he would otherwise have done, and also for loss of profit in not having complied with his instructions to sell all the holdings at the opening bell when it is said that had he done so, he could have realised a profit for both Defendants.

5.  This, in essence, is what these actions are concerned with.  I am now required to colour in, by means of the evidence, the substance of the dispute which has been hard fought over 15 days of evidence and two days of final speeches.

The witnesses

6.  This case must turn almost entirely on the credibility of the three witnesses of fact that have given evidence.  I have also heard from two highly experienced and knowledgeable experts in the field of securities trading but, in the event, their evidence and the assistance which they have sought to provide me with will not materially affect the outcome.

7.  The Plaintiff’s witnesses are AC, whose evidence is paramount to its case, because it is he who had direct dealings with Mr Cheung in effecting the subscription for the shares and with receiving his instructions for their sale on the first day of trading and Mr William Lee, a senior executive of the Plaintiff, who had overall charge of the placement and who was involved during its progress from mid-afternoon until it closed at either 5:30 pm or 6:00 pm.  The Defendants’ only witness of fact is Mr Cheung himself.  Fortunately, I have also the very considerable advantage of having transcripts of telephone conversations between Mr Cheung and AC, leading up to the subscription for shares and, thereafter, when trading in the shares resumed and he wished to dispose of them in the very difficult circumstances created by the very heavy selling pressure on the share and its consequential declining price.  The advantage of the transcripts is that I have heard from witnesses who have had to speak to matters that occurred more than 6 years ago, exacerbated by the fact that they were not aware that these matters were to become the subject of litigation until 3 years after the event when the Plaintiff issued its writ.

8.  AC and Mr Cheung have known each other since the early 1980s when AC was working as an Estate Agent, and Mr Cheung used his services in the purchase of a property.  They were to become very friendly with each other.  It is a friendship which is said by Mr Alfred Chan, who appears for the Plaintiff, to have a very real bearing on how I should resolve the many factual disputes which must, ultimately, be decisive of the case as a whole.  AC is a salesman through and through.  I do not mean this in any pejorative sense.  He started by selling property in the 1980s and moved to shares and other securities in about 1989.  He was educated only to secondary school level going to a school which concentrated on commercial and vocational rather than academic subjects.  In 1989, he began working for a brokerage company called Man Lung and invited Mr Cheung to open an account there.  In 1991, he joined the Plaintiff, which is a substantial securities house, and took Mr Cheung with him in the sense that he has had an account with it since then.  He is licensed by the Securities and Futures Commission (“SFC”) to deal in securities and in futures contracts.  This is not to say that he is a financial adviser although, as he frankly admitted in the course of his 5-day cross-examination, he will frequently be asked to express his opinion about shares by his clients.  That is not surprising having regard to the fact that he buys and sells on behalf of clients on a daily basis and is therefore well able to discern market trends and sentiment and even, more importantly, I would have thought he is in the front line for latching onto market rumour which will so often dictate buying and selling decisions by investors both big and small.

9.  His terms of employment are that he is paid only on a commission basis, on the number of shares and other securities that he sells to his clients.  There is therefore every incentive for him to persuade his clients to buy as many shares as possible and thereby maximise his income.  The more they buy, the more he earns. This feature of his employment and remuneration is very much a matter that Mr Paul Leung, who appears for the Defendants, has drawn attention to and relies on having regard to the substantial quantity of placement shares which Mr Cheung and, through him, Sincere purchased, a very substantial issue being whether AC had misrepresented the likely demand for the share.  The greater the demand, the less likely that the applicant for the shares would get the whole of the allotment that he applied for.  Mr Cheung’s evidence is that he had been misled into believing that he was likely to only receive as little as 5% of what he had put in for and that it was for this reason, and none other, that he had applied for 12 million shares worth over $13.5 million, which was far in excess of anything that he had previously done in his ‘career’ in buying and selling shares and securities.

10.  Apart from his terms of remuneration, which are designed to encourage sales, it is right to say that I formed the impression having seen him in the witness box over many days that AC is a savvy individual, by which I mean shrewd, experienced, knowledgeable and a highly-motivated operator in his field.  This view comes not only from seeing him give his evidence, in terms of what he said and how he said it but also, by having the advantage of reading his ‘real-time’ performance in the telephone transcripts, some of which were replayed before me – not that I could understand them because they were, of course, in Cantonese – nevertheless, they still conveyed for me the atmosphere of the exchanges between the two men.  If Mr Chan has sought to convey the impression that AC is an unsophisticated and therefore perhaps simple individual, the lack of sophistication and simplicity only goes to the social and cultural aspects of his personality because, in terms of acumen, he lacks for nothing.  In saying these things about him, I do not wish to imply any pre-disposition towards dishonesty or sharpness, but rather to emphasise that when it comes to his job, I am completely satisfied that AC has and had all his wits about him and knows precisely what he is doing.

11.  The Plaintiff’s other factual witness is Mr William Lee who had overall charge of the placement.  He has since been promoted to a very senior position within the Plaintiff’s organisation.  Like AC, his evidence has come under very severe challenge and like AC, it is submitted by Mr Leung that he has made a number of untruthful statements in the course of his evidence, which I will need to consider when I come to decide the facts.  Suffice it to say at this stage that Mr Lee is highly experienced in this field and obviously well regarded by his superiors in the Plaintiff’s organisation.

12.  Mr Cheung Po Tung, along with AC, is the most important witness in the trial. He has rightly been described as yet another Hong Kong success story.  He came, with very little education, from the Mainland and started a modest garment business, basically operating from one room.  By 1972, he had acquired a 10,000 square foot factory exporting garments to the USA, as well as to other parts of the world.  By 1999, when these matters occurred, he had moved his operations to a large factory in Chiu Chow province.  He also had 3,000 square foot office premises in Tsim Sha Tsui East which was owned by one of his companies.  He also operated a yarn-trading business called Remytex and engaged in trading textile quotas.  He also owned, with his wife and son, substantial premises in Kowloon which were let to Dairy Farm, from where it operated a branch of its Wellcome Supermarkets.  He owned a flat in Shenzhen as well as commercial properties there and in Cambodia and Thailand.  He has branched into a restaurant as well as a sauna business in Hong Kong.  By 1999, it is very plain that by virtue of hard work and good business sense, he had become a wealthy man.  He has made light of a lack of education opportunities when he was a young man.  He does not understand much English and reads very little.  Where he cannot read a document he will get his staff to explain it to him.  He is well aware of the importance of business and contractual documents which he has to get through and deal with on a daily basis.  Of relevance in this case is the Margin Trading Agreement that he entered into with the Plaintiff, both on his own account and on behalf of Sincere, to which I will need to make specific reference presently.

13.  The next matter which I need to refer to concerning Mr Cheung is his experience of and appetite for buying and selling shares.  Both sides, for their own different reasons, have referred to and relied on this.  There is no doubt that by 1989, he was well into this activity when AC was working at Man Lung and then he moved with him to the Plaintiff in 1991.  It is also clear that he started by investing in “blue chip” shares such as the Bank, Swire and other well established companies on the Hang Seng Index as well as larger, and therefore seen to be safer, mainland corporations.  I accept that much of these purchases were made for long term investment intended to be held.  Thereafter, he became more interested in active share trading involving short-term buying and selling.  Quick profit was what he was looking for.  Once his appetite grew he was persuaded to open a Margin Trading Account, the terms of which I will refer to shortly.  The effect of this was that he could, in effect invest on credit provided that the account had in it sufficient value in terms of shares held, or indeed cash, to enable him to purchase shares without the need to pay for them at the time.  His interest in stocks and shares became such that AC was able to persuade him to purchase and install a stock monitor in his office, so that he could see in “real-time” the progress of the stock market and the shares being traded on it.  I am told that initially the quality of his monitor was superior to that being used by AC in the Plaintiff’s offices.  By September 1999, he accepts that he was a significant player in the stock market.  This is what he did everyday, or very nearly everyday.  Presumably, if he did not trade on any given day he still kept a very close eye on the performance of the stock market.  He would risk, and I use the word advisedly, hundreds of thousands of dollars on his trading in shares.  This activity was therefore a very significant part of his life.  He also kept up by reading the financial press on trends and predictions. He also spoke to AC on a daily basis getting his opinion and exchanging views.  I have absolutely no doubt that when these events took place Mr Cheung was a very experienced and knowledgeable buyer and seller of shares and one who well appreciated the risks involved.

14.  I now propose to say something about Mr Cheung’s and AC’s relationship.  I get this not only from what they have both said about it in the witness box but also from having seen it “in action” through the transcript of their conversations during the placement and, after it as Mr Cheung sought to unravel his position.  So far as AC was concerned Mr Cheung was a very valued client – one of about 9 regular clients of his.  A big player who would thereby produce good and steady remuneration for him through the commissions that he would be paid by the Plaintiff’s on Mr Cheung’s transactions.  I am certain that AC looked upon Mr Cheung as an excellent long term prospect for future earnings for him.  It needs to be understood, and this is how I propose to approach this, that so far as AC was concerned this placement was just another transaction that he was executing on behalf of Mr Cheung with many more to come in future.  I say this recognizing, as one must, that in terms of value this was by far and away the biggest that he had transacted for him.  Additionally, both men had developed a certain fondness and respect for each other.  They met socially, although their socializing was entirely due to their business relationship.  Their use of strong language, as the transcript makes clear, serves to underline their friendly relationship.  Only friends would talk to each other like that.

15.  So far as Mr Cheung was concerned, I am also satisfied that he looked upon AC as a valued and respected connection for his share trading.  Here was an “insider” in the trade who was willing to share opinions with him and given him tips which he realised must have come from the, relatively speaking, inner circle of people like AC who were dealing with shares professionally, in the sense of executing trades and constantly talking to fellow professionals.  Just the sort of person a heavy trader like Mr Cheung would find valuable to know.  I am also satisfied that he liked him.

16.  It is therefore against the background of this relationship that one must try to understand and approach the evidence as to how the placement was subscribed for, and how Mr Cheung then sought to extricate himself from the thoroughly bad position that he found himself in after the share resumed trading on 28 September.  The other matter that also needs to be emphasized is that Mr Cheung, who was no innocent abroad when it came to share trading, was very conscious of the risks involved.  He knew this was serious gambling and that the risks had to be managed and, hopefully, minimised as best he could arrange by informing himself about the particular transaction that he was proposing to enter into whilst ultimately realising that in share trading there are hardly any sure fire successes.  Knowledge and experience are essential, but in this field of activity, there were and are no guarantees.  Fortunes are won and lost in this particular game.  Mr Cheung realized all of this.

The Margin Trading Accounts

17.  It seems to me that the starting point for a consideration of the issues between the parties must be the Margin Trading Accounts which form the basis of the contractual arrangements between the Plaintiff and Defendants.  This is entitled Client Agreement and is at Bundle C3-859.  Clause 2.1 sets out the basis of the relationship:

“The Client hereby instructs and authorises Tai Fook Securities to open and maintain in its book one or more Margin Accounts in the name of the Client for the purpose of purchasing, investing in, selling …. and generally dealing in and with all kinds of Securities in accordance with the terms of this agreement …. unless otherwise indicated by Tai Fook Securities … Tai Fook … shall act as agent for the client in effecting transactions pursuant to this agreement.”

Clause 6.1 relates to trading recommendations which is said by the Plaintiff to be of importance.  It is in these terms:

“The Client acknowledges and agrees that the Client retains full responsibility for all trading decisions in the Margin Account(s) that Tai Fook Securities is responsible only for the execution, clearing, and carrying of transactions in the Margin Account(s); that Tai Fook Securities has no responsibilities or obligations regarding any conduct, action, representation or statement of any introducing firm investment advisor or other third party in connection with the Margin Account(s) or any transaction therein; and that any advice of information by Tai Fook Securities, its employees or agents, whether or not solicited, shall be constitute an offer to enter into transaction and Tai Fook Securities shall be under no liability whatsoever in respect of such advice or information.”

It is of course an exemption clause and to be interpreted and given effect to as the law provides, which I will come to presently, but as Mr  Chan submits, it also serves to inform the client that he alone must be responsible for any trading decision despite any advice or information that he may have been provided by the Plaintiff.  This is to be read alongside Clause 16.1 that places the risk of trading on the client.

“The Client acknowledges that the price of Securities can and does fluctuate, and that any individual securities may experience upwards or downwards movements, and may under some circumstances even become valueless.  The Client appreciates therefore that there is an inherent risk that losses may be incurred rather than profit made, as a result of buying and selling Securities.  This is a risk that the Client is prepared to accept.”

Clause 16.1 states the obvious, based on bitter experience for so many buyers and sellers of shares.  I have absolutely no doubt that Mr Cheung well appreciated the statement in this Clause.

18.  The eventual outcome of this case must turn on the evidence, but there can be no doubt, having regard to the terms of these Agreements that the ultimate decision on whether to buy a share or not will lie with the investor [the Defendants].  In response to this, Mr Paul Leung for the Defendants, submits that the effectiveness of these terms is completely over-borne by a series of misrepresentations, some of them allegedly made by AC, quite apart from questions of reasonableness in the light of the Control of Exemption Clauses Ordinance (Cap 71) and investor protection legislation.

The factual Issues

19.  It is helpful to recite these now in order to more easily follow the evidence that is said to bear on them.  The Defendants accept that Mr Cheung placed the order for the purchase of 8 million shares for Sincere and 4 million for himself and that on paper there are the outstanding balances against their respective accounts which are now sued on by the Plaintiff.

20.  Essentially the position is this; that a variety of misrepresentations were made by the Plaintiff, significantly by AC – but by others as well – at various stages to persuade the Defendants [and here I mean Mr Cheung] to do the following:

(i) on 24 September 1999, to purchase a total of 12 million shares in Asia Orient and,

(ii) On 28 and 29 September 1999 and subsequently, at a lunch meeting on 15 October 1999, to withhold selling those shares,

(iii) On the morning of 28 September 1999 the Plaintiff, through AC, failed to carry out Mr Cheung’s instructions to sell the placement shares.

21.  Once one understands these essentials it becomes relatively straightforward to follow the evidence which, given the great detail in which the matter has been investigated particularly by Mr Leung who cross-examined AC for 5 days, is substantial.

22.  Both counsel have addressed me with the assistance of extremely detailed and comprehensive written submissions which have covered all the ground necessary for me to resolve this dispute.  I am extremely grateful to both of them.  Mr Chan has sought to express the issues at page 2 of his material in a way that the best captures what it is that I have to decide.  This is taken from the way the Plaintiff has addressed the matter.

(i) Firstly, what representations, if any, were made by AC to Mr Cheung on Friday, 24 September 1999.

(ii) Secondly, what was the nature of these representations and what were the legal consequences flowing from such representations.

(iii) Thirdly, what were the nature of the instructions given by Mr Cheung to AC on 28 September 1999, the first day when trading resumed in Asia Orient shares.

(iv) Fourthly, what representations, were made by AC to Mr Cheung on 28 and also on 29 September and what were the legal consequences flowing from such representations.

(v) Lastly, during the lunch meeting of 15 October 1999, attended by AC, Mr William Lee and another Tai Fook executive as well as Mr Cheung, what representations, if any, were made by Mr William Lee about the wisdom of holding onto the placement shares and what, if any, legal consequences flow from those representatives.

The Defendant’s pleadings

23.  The Defendants had got off to a bad start by pleading their case on a mistaken factual premise which made the case against the Plaintiff appear far worse than it can properly be put.  Their case, as originally pleaded, described a cynically fraudulent enterprise based on an incorrect date which was not conceded to be incorrect until the start of the trial.

24.  I have ready indicated that the placement shares were subscribed to and the results of the subscription became known on 24 September.  The original defence which was dated 11 November 2002 alleged, wholly erroneously, that AC had a telephone conversation with Mr Cheung on 27 September 1999 and introduced to him the placement in Asia Orient which he said was a company with very good future prospects, and that, as a result, the placing shares were in substantial demand.  [Defence para 15(2) A/32].  In view of what was said, Mr Cheung said he was interested in buying 1 million but, on being told that he would only get 5% to 10% of what he applied for having regard to the overwhelming demand, AC advised that 10 to 20 million should be applied for [para 15(4) A/33].  Relying on what AC told him and during the course of the same telephone conversation, he agreed to apply for 8 million and 4 million shares for Sincere and himself respectively [para 15 A/33].  The following day, the 28^th, AC told Mr Cheung that he had in fact been allocated 100% and during this conversation he instructed AC to sell all of the allocation at market price [para 17/40].

25.  AC failed to deal with this instruction promptly and only managed to sell 1 million shares.  During a subsequent telephone conversation on the 28^th, AC told Mr Cheung that the price of the share would go up and advised him to hold onto the balance of his allocation [para 19 A/42].  As a result he held onto them.

26.  During a telephone conversation in mid-October 1999, Mr Cheung told AC that he wished to dispose of his holding due to the fall in the price.  AC organised a lunch meeting with Mr William Lee and the others that I have already mentioned, during which William Lee expressly told Mr Cheung that the price was going up and that he should hold onto his shares.  Relying on this he did.

The Amended Defence

27.  Substantial amendments were made on 5 February 2005, following a change of counsel, when Mr Leung came into the case.  It is instructive to set out the basis of this amended plea in some detail.  It was alleged that the Plaintiff [through AC] was the Defendants’ “financial advisor”.  The 27 and 28 September’s allegations need to be considered separately.

28.  On 27 September it was said that the conversation relating to the placement occurred after 4 pm.  In the amended pleading [para 15(3)  A/32) the nature of the representation in this telephone conversation were expanded on and Mr Cheung said that he would buy between 1 and 1.5 million .  He was eventually persuaded to purchase 8 and 4 million having been told that he should consider a purchase of 10 to 20 million due to the great demand.  On the 27^th, he was told that he had in fact been given a 100% allocation.

29.  Given the nature of these representations, after 4 pm on the 27^th, it was said that they had been made “fraudulently, recklessly or negligently” [para 16C A/34-36].  The case was further “cranked up” by the allegation that the Plaintiff as the underwriter of the placement and as such liable to purchase the unsubscribed for shares, deliberately presented a misleading picture of the demand for the share knowing that the take-up was poor.  This it did “fraudulently” when there was a conflict of interest between itself and a potential purchaser such as the Defendants [para 16C(c)(iii)-(v) and para 16D A/36].  In order to underline the point, it was said that had the Defendants subscribed to the full suggested allocation of 20 million the Plaintiff would not have had to take up any shares [para 16E(3)A/37].

30.  The amendments then deal with the 28^th September.  At 9.45 am, Mr Cheung instructed AC to sell all the shares at market price.  At 10 am Mr Cheung made a further call to AC when he was told that the share was then trading at $1.17 and $1.18 [at a 5 cent profit] and Mr Cheung repeated his instruction to sell it all at market price.  At 10.10 am AC said that he could not sell any shares because the price had been fluctuating Mr Cheung repeated that his instruction to sell everything even at $1.14 [para 17C A/41].  Sometime after 11 am AC told him that he had only succeeded in selling 1 million shares at $1.14 having put up 5 million for sale.

31.  From this factual basis it was alleged that the Plaintiff was in breach of duty by failing to carry out Mr Cheung’s instructions in that AC only put up 5 million shares for Sincere and none for himself [para 18 A/41-42].

32.  During further conversations that day, AC advised Mr Cheung to hold onto the shares because the price had dropped a lot.  That he should not panic and that it would go up.  Then came the further allegation that had the instruction to sell been complied with all 12 million shares could have been disposed of had they gone at market price and that this might even have realized a profit.

33.  As I have already indicated the plea that the approach by the Plaintiff to Mr Cheung to subscribe for the placement on 27 September could only have meant that, knowing of the poor showing of the placement, they still wished him and his company Sincere to acquire a substantial tranche of shares in order to reduce their own exposure as underwriters.

34.  What then happened, and this has in my judgment transformed the course of the trial, was that the Plaintiff’s staff were able to retrieve the telephone recordings of most of the telephone conversations that Mr Cheung had with AC.  This discovery came in March 2005.  These tapes showed, beyond any doubt whatsoever, that the placement had taken place on the 24th and that the relevant conversations had also taken place on that date.  This of course had the effect of removing the real sting from the case, picked up by the Defendants’ expert and commented on in his report, that notwithstanding having had prior knowledge of a very moderate take-up of the shares, AC still persisted in trying to persuade Mr Cheung to purchase a very large quantity.  Curiously enough, the fact that the placement had not taken place on the 27th but on the 24th was not formally conceded until the first day of the trial in October 2005, so that Mr Chan has had to prepare his case on the basis of an obviously mistaken allegation.  Notwithstanding this concession, a case has still been advanced, now more difficult but not impossible to make, that in the course of the placement in the afternoon of the 24th the Plaintiff’s staff and therefore AC knew that the placement was not going well, but nevertheless persuaded Mr Cheung to buy this substantial quantity of 12 million shares.

The Evidence

35.  Whilst no single aspect of the evidence will, by itself, be determinative of the action it is the transcripts of the telephone conversations which must carry the greatest weight.  I must make clear that they do not comprise all of the conversations because AC, who had four telephone on his desk, only had two fitted with voice recorders.  It is common ground that he also had private telephones which he had provided for himself with the Plaintiff’s permission.  The number of one of them had been given to Mr Cheung, as one of his very best clients, to get through to him quickly, particularly if his company line was engaged.  It is also common ground that some of the telephone conversations between the two men on the crucial dates were conducted on this telephone with the result that there is no record, save for the recollection of the witnesses now some 6 years old.

36.  Fortunately, it is perfectly possible to come to a reliable conclusion as to the nature and general content of these unrecorded conversations by having a sight of the transcripts where these transcribed conversations are said to have preceded or, on occasions, followed transcribed ones.  The evidence about the unrecorded conversations, most of it from Mr Cheung, can be evaluated and tested from the surrounding recorded conversations where their content and context point to whether I am able to accept the evidence concerning the unrecorded conversations. As well, of course, from the general background and the nature of the relationship of these two witnesses and also from Mr Cheung’s undoubted expertise in the trading of shares and of the stock market in general.

37.  I do not propose to set out here in any extensive way the content of individual transcribed conversations, save where this is absolutely essential.  To do so would make this judgment unnecessarily and unhelpfully lengthy.  What I will do is to refer to the conversations by bundle and page number and summarize what I consider to be the effect of the particular conversation with, on occasions, citation of the relevant parts of the transcript.

38.  What is significant is to see from Mr Cheung’s witness statements, before the discovery of the telephone conversations, what it was that he was prepared to suggest that AC had told him and then to compare this with the transcripts of the conversations.

39.  The allegations as pleaded are that in the course of a long conversation after 4 pm AC had told Mr Cheung that Asia Orient was a company with good prospects and good growth potential, that demand for the placement shares was great and that any application for the shares would not be fully allotted, but only 5% or 10% would be issued and so he should apply for 10 to 20 million shares.

40.  The real situation is that there were in fact a series of short conversations over a period of time and so Mr Cheung’s recollection must have been defective when he gave his earlier witness statements.  Mr Chan has made the comment that perhaps one might have expected a better showing from Mr Cheung in terms of recollection if he was someone who had been so badly misled or, even worse, duped into applying for so many shares in a placement that was known to be performing badly.  On the other hand, in excusing any shortcomings in recollection by his own witnesses, Mr Chan has observed that the Plaintiff first learnt of the very serious allegations only after the defence had been filed over three years after the event.  His witnesses had no prior indication that one day they would have to meet allegations of this seriousness, nothing of this sort having been indicated by or on behalf of Mr Cheung prior to the filing of the defence.

41.  The transcribed telephone calls start at Bundle C2/541.  They are all calls made by AC to Mr Cheung, together with a call to a lady called Mica who was co-ordinating the placement under the supervision of Mr William Lee.  One can only get a proper sense of what was going on by reading all of the transcripts in their chronological order.  The call at 11.08 am has no reference to this placement share but really comprises of a general chat about the state of the market, and the immediate impression that one gets is that AC in talking to Mr Cheung is speaking to somebody who is entirely comfortable with and knowledgeable of the stock market.

42.  The next recording is at 12.09 pm [C2/551].  There is reference to the state of the Hang-Seng Index which had dropped 240 points (a substantial amount) and of another share held by Mr Cheung.  The first reference to Asia Orient (214) is at 555 lines 57-62:

“Mr Cheung    :      Hey what about … What is the price of 214 now?

Stockbroker    :      143 and 144.  It dropped a little bit.  The high was 157.

Mr Cheung      :      Yesterday it closed at 13 something.

Stockbroker    :      131.

Mr Cheung      :      131, it is now 144, representing at 10% increase already.

Stockbroker    :      Ah ha.”

What I get from this is that there must already have been previous talk about 214 between the two men and that Mr Cheung was aware of its pre-placement announcement performance.

43.  The next reference comes at 3.55 pm.  The conversation begins about another stock.  Then at p.567 line 24 the talk turns to 214.

“Stockbroker  :      And you … you … want to apply [for it] in a moment, so you can get it to your account?  Rather take that 214 and bet on it, may be you buy it back on Monday.”

They then revert to talk of another share and return to 214 at line 70 page 570:

“Stockbroker  :      And this 214, you …

Mr Cheung      :      214, so Sincere applies … I also apply for some, lets see when the times comes.

Stockbroker    :      So, Sincere applies for …

Mr Cheung      :      5 (million)

Stockbroker    :      5 (million), and 2 (million) on your side

Mr Cheung      :      2 (million), yes, yes.”

The call is then interrupted when AC talks to Mica on an unrelated matter.  They continue from line 80/571:

“Mr Cheung    :      Yes … (inaudible)

Stockbroker    :      Huh … so … I will ask her [“her” refers to Mica] what it will be, and check the multiple.  If necessary see if you want to make it bigger.

Mr Cheung      :      You ask … you just ask her.

Stockbroker    :      OK, I will call you back in just a moment.”

AC then rings another client of his to see if he is interested in 214 but this individual says that he is not interested.

44.  The next call is of importance and so I will set it out in full.  AC calls Mica to find out the progress of the placement:

“Female 2        :      Yes.

Stockbroker    :      Mica.

Female 2         :      Yes.

Stockbroker    :      Huh … Just want to ask you, what’s the cut-off time for 214?

Female 2         :      The cut-off time is not known yet, there’s no mention of it, but you have to act as soon as possible because they can say the cut-off time is now at any time.

Stockbroker    :      Hello.

Female 2         :      Because the response to it has been so good, right.

Stockbroker    :      One more thing, for 1186 … Is it true that the forms for Monday can … can …

Female 2         :      It’s OK to give me before 12 o’ clock.

Stockbroker    :      Be withdrawn?

Female 2         :      Yes, withdrawal is acceptable.  It’s also OK to do it all over again from the beginning.  Yes, that’s right.

Stockbroker    :      It’s OK to do it all over again from the beginning … but still there isn’t enough time for that.

Female 2         :      Yes, that’s right.

Stockbroker    :      There isn’t enough time for that.

Female 2         :      Correct, yes, … Okay?

Stockbroker    :      Also, also, for 214, how many times it has been over-subscribed which you just mentioned?

Female 2         :      I don’t know.  I don’t know. I didn’t say it …

Ha… I have never said how many times it’s been over-subscribed.  Fine, okay, fine, thank you.”

45.  Almost immediately after that at 4.10 pm he telephoned Mr Cheung again.  Given its importance I will also set out this conversation in full:

“Man 1            :      Lai Fong

Stockbroker    :      Mr. Cheung, please.

Man 1             :      (inaudible) Mr. Cheung.

Stockbroker    :      …. Er, is it Humphrey?

Man 1             :      Speaking.

Stockbroker    :      Huh …

Man 1             :      Hello (inaudible).

Stockbroker    :      Yes ….

Man 1             :      (inaudible) please wait for a moment.

(music during call waiting)

Mr. Cheung     :      Hello.

Stockbroker    :      Mr. Cheung

Mr. Cheung     :      Yes.

Stockbroker    :      He …… I called her just now to ask …. she said ….. the situation seemed to be the response is very enthusiastic, but [she] did not dare to say how many times it was.  And she said, you know, these were just …… too much …. if that’s the case, perhaps I will help you make an application: one for 8 million, and one for 4 million, and when it comes back it should not .…. surely it will not be granted in full.

Mr. Cheung     :      Yes.

Stockbroker    :      At most half will be granted.  Just sell it on Monday.

Mr. Cheung     :      Good.

Stockbroker    :      Right?

Mr. Cheung     :      400(0000) and 800(0000).

Stockbroker    :      Fine.

Mr. Cheung     :      Mm …

Stockbroker    :      Fine.

Mr. Cheung     :      Thank you.”

46.  And so after this brief exchange between the two of them Mr Cheung agreed to buy the 8 and 4 million shares.  This was the last of the recorded calls on the 24th.

47.  An important part of Mr Cheung’s case was that there had been a representation made to him by AC that rather like a very recent PCCW placement that he had participated in which was heavily oversubscribed and he only received 5% of what he had applied for, this share was going to go the same way.  It was this he says that persuaded him to apply for a total of 12 million which, on an assumption of 5% or 10% allotment, he was prepared to take on.  He had said these representations had been made to him in telephone calls that he had made to AC on his private line.  This is denied by AC.  Fortunately, one is able gauge the matter by reference to the calls that have been transcribed.

48.  Before I turn to an analysis of the situation in terms of their pre-application conversations I should refer to another issue that forms part of Mr Cheung’s attack on the integrity of AC and also of William Lee.  Part of the factual basis for this is that the representation made as to the prospects of this share were made at a time when AC and Mr Lee knew that the placement was not going well.  It was very much in the interest of AC and of the Plaintiff company as a whole to keep close tabs on its progress because they, as underwriters, had a potential liability to purchase unwanted shares.  AC says that he would not really know about the progress of the placement and all he could get was what Mica had told him on the recorded telephone conversation.  In any event the outcome would only be reliably known, at best, just before closing time as the tally would come in from the branch offices.  The point made on behalf of the Defendants by Mr Leung is that it is inconceivable that the Plaintiff would not have a “real-time” tally of the orders being placed.  He adds to that by pointing to Mr Lee’s evidence that he in fact, notwithstanding his seniority, had got onto the telephone and drummed up orders from his own clients.  He would not have done so unless he knew it was not going well and needed to off-load shares in order to, at least, reduce the Plaintiffs’ exposure to the shares when the placement closed.

49.  Related to this issue is the fact that AC has said that he did not put in Mr Cheung’s tickets until just before the close when he would have been well aware that the placement had not gone well and that Mr Cheung was therefore liable to have his whole or, very nearly his whole, application for shares allocated to him.  Notwithstanding all of this and despite the fact that he could have told Mr Cheung the truth and given him the option to withdraw his application, which was permissible, he went on and put in the tickets.

50.  I have also heard evidence about a conversation between Mr William Lee and AC late in the afternoon when AC says he asked him about the share’s prospects.  This has been minutely analysed by Mr Leung with a view to show that both witnesses have lied about this, in order to demonstrate that they both knew that the day had gone badly and yet, quite cynically and deliberately, Mr Cheung’s application went in to serve AC’s interests because he would get a commission on the sale and in the Plaintiff’s interest who would therefore have to buy less unsubscribed for shares.

51.  This is of course a very grave allegation which I will need to test by, amongst other things, seeing how Mr Cheung reacted once he realised that he had been saddled with his entire application and after he saw the value of his holding collapse on the 28^th and the 29^th and when, as he says, contrary to his instructions AC had only managed to dispose of 1 million of these shares.

52.  This evidence brings to a close the first part of what is a case of two distinct parts.  The first, relating to the events leading up to the making of the application for the shares; the second relating to what followed after the resumption of trading in the shares when it is said that had AC followed Mr Cheung’s instructions he could have disposed of the entire holding and even made a small profit.

53.  Because the outcome of the action must turn on the credibility of the witnesses it will be helpful if I were to go through the evidence concerning the aftermath of the allocation and what happened thereafter because it is only following an appraisal of all of the evidence that I can make reliable judgments on whose evidence is to be believed, from which I can then apply my findings to the various legal submissions as may be necessary.

54.  Mr Cheung was informed that he had received his entire application for shares at about 8 pm on the 24^th.  I have no doubt that this came as a surprise and as a cause for apprehension because that would have indicated to him that the placement had not been a popular one.  Certainly nothing like the PCCW replacement, where he had been allocated a small proportion of what he had applied for.  To make him even more apprehensive, came the news that on Monday the 27^th the company had asked for the share to remain suspended.  Then on the 28^th the share resumed trading.  Here again I am assisted by transcribed telephone calls which show how AC and Mr Cheung sought to manage the situation.  There is also a table which shows the trading pattern of the share from the opening bell.  After a brief upward movement, sentiment turned against it and the price depreciated.  The record is there and speaks for itself.  It is common ground that the trading volume was sufficient for the whole of the 12 million shares to have been absolved at prices which may, perhaps, have yielded a small profit.  This being so it becomes fundamentally important to follow precisely what instructions were given by Mr Cheung to AC to manage the disposal of the portfolio.  With this in mind I again turn to the transcripts.

55.  There are a number of telephone calls on the 27^th when Mr Cheung was informed that the share would remain suspended.  At 9.56 am [C2/587] before he learnt of the suspension, AC having called him, he wanted to know the opening price.  AC told him that it had not opened.  He says:

“It’s not opened yet.  I just call you first.  Now [you] have to think about how it should be handled because the quantity is large.”

He then says;

“… if as soon as it opened you …. if its good …. at least you will sell …”

Mr Cheung responds;

“sell half of it first.”

AC agreeing says;

“Yes, otherwise it’s too heavy for you.  If it’s good, of course it’s good, so be it.  If it is not good, you, that is, will be afraid of it.  It’s fortunate that today’s market has gone up.”

They then speak of other shares.  The next call from AC is just after 10 am following the opening of the market.  He tells Mr Cheung that the market has opened lower.  There are then a series of further telephone calls from AC where the discussion is a general one about a number of matters with, perfectly understandably, a prevailing mood of apprehension.  At 4.16 pm on the 27^th they revert to share 214 [C2/642-644] as follows:

“Mr. Cheung   :      So, when will that 214 be listed?

Stockbroker    :      214?  I don’t know.

Mr. Cheung     :      You didn’t ask?

Stockbroker    :      You and the …. orr … I don’t know if it could be opened tomorrow, you need to wait until tomorrow.  You will know when it is shown on the machine tomorrow morning.  It has not been announced whether it will be opened tomorrow …

Mr. Cheung     :      Mm …

Stockbroker    :      Of course I will come back early in the morning to watch it closely.  If it is opened, I will do it immediately.  But if it’s not opened, then nothing can be done about it.

Mr. Cheung     :      OK …

Stockbroker    :      So, even if it is not opened tomorrow, it won’t hurt, that’s because the market now is not good, right.  It’s even better if the market does not resume ….

Mr. Cheung     :      The market is so fucking poor, fuck, once it’s listed, it may go banging like this ….

Stockbroker    :      Yes.

Mr. Cheung     :      So, I will watch it closely tomorrow.

Stockbroker    :      Good, OK, bye bye.”

What is not there is any sense of resentment from Mr Cheung that AC has completely misled him as to the demand on the placement – 5% to 10% when, in fact, he was given 100%.  The matter is being dealt with professionally about how to deal with the situation as it is.  The conversation is conducted as the previous ones had been on the 24^th.  Some strong language is used that only people on friendly terms might resort to with each other in conversation.  This lack of complaint is a matter that I will return to presently.

56.  The crucial day on this part of the case is the 28^th.  There is no substitute to reading the transcripts of the calls as a whole.  They start at C2/648 to 743.  The distinct message that one gets from such a reading is of AC trying to manage a very difficult position on behalf of Mr Cheung.  The price was moving steadily down and the selling pressure far outweighing buying.  The original allegation by Mr Cheung was that the whole allocation should be sold at market price.  This is simply not borne out by the transcripts, even making every allowance for other telephone calls between the two men which were on another line and therefore not recorded.  Prices were being suggested which due to selling pressure were being missed.  It is also significant that at no time did Mr Cheung accuse AC of not doing what he had told him to do.  In the event only 1 million shares were sold at $1.14.  There is a complaint on Mr Cheung’s behalf by Mr Leung that more shares could have been disposed of had AC not delayed by a few minutes in placing his order and this, I will need to address in a moment.  Nevertheless, it is perfectly plain from this transcript that Mr Cheung, realising that he was in a very bad position indeed, was doing his best to monitor the market through AC and try as best he could to catch a price.  I am absolutely certain that AC had followed the instructions that he was receiving most attentively and that the suggestion that he had not, is simply not borne out by the evidence.

57.  The sad tale continued on the 29^th.  The share continued to fall with a suggestion that Mr Lau (one of the Lau brothers) who had a very significant involvement in Asia Orient would support the share through his own buying of it.  The situation has been very graphically captured in the transcript of the conversation at 11.44 am [C2/775 et seq.];

“Mr. Cheung   :      Ai, fuck you, it was “pushed” down even at 02.

It’s only at 01, isn’t it? (Stockbroker: Yes.)

Fuck, it’s fucking so bad, how should it be handled?

Fuck your mother (inaudible) This morning it was 07 …

Stockbroker    :      Ai … fuck you …. really miserable.

Mr. Cheung     :      Really, fuck you, so wow, fuck you.  There’s no other way, just watch and see what happens.

Stockbroker    :      OK, OK.”

The final conversation on the 29^th was at 3.58 pm.  When the decision was made to hang on and decide what to do the following day.

58.  It is said that Mr Cheung had been misled into believing that the share would recover and thereby persuaded not to sell in the course of the 29 September.  I will analyse the evidence about this presently to determine whether that sort of charge can properly be levelled at AC.

59.  As with all failed investments the time came for Mr Cheung and Sincere to have to settle up on their margin accounts.  This led to AC being asked by Mr Cheung to arrange a lunch with Mr William Lee to discuss how best to proceed.  The Plaintiff was by then pressing for payment and there must have been a real concern in Mr Cheung’s mind that the Plaintiff, in order to reduce the Defendants’ level of indebtedness, would liquidate their positions on Asia Orient, producing a very substantial loss on the transaction.

60.  Mr Cheung was anxious to gauge, from Mr Lee, what the future prospects for the share were.  The impression that I get is that both sides dealt with the other in a rather civilised manner in the course of the lunch, anxious not to cause upset.  The Plaintiff wished to be repaid and the Defendants wanted to see if they could get through with the least possible pain.  Nevertheless, what is clear when one looks at the Defendant’s case that they had been duped into buying a very large position, in what was apparently known by the Plaintiff to be a modestly received placement, is that there was not one word of complaint about their treatment from Mr Cheung.  In fact he subsequently purchased more 214 shares at a lower price to “average down” the cost of his original purchase.

61.  The remaining history of the matter can be stated briefly.  Everything that was done in the months that followed this misfortune gave every appearance, on the part of Mr Cheung, of his accepting liability without any complaint about the way that he had been treated in purchasing the share and the subsequent attempts to dispose of it at some profit or, at least, at no great loss.  To show good faith he prepared a list of his real estate assets and post-dated cheques were produced to pay off the debt which were subsequently renewed.  Thereafter he signed an instalment agreement upon which these actions are based to pay off the total indebtedness.  This being done on the 1 August 2000 very nearly a year after these events.  All of this had been done without complaint.  It was only after the issue of the writ, following default on the instalments and when the defence appeared, that these very grievous criticisms have been levelled at the Plaintiff and its staff.

Conclusion

62.  Mr Leung who has fought this matter with great determination on behalf of the Defendants and who, it seems to me, has taken every possible point that can be raised has had to argue the matter from an extremely difficult position.  He has been driven to rely on, amongst other matters, the failure by the Plaintiff to call Mica who advised AC as to the state of play on the placement when he telephoned her as a witness and for not calling Mr Hamon Cheung, one of the person’s present at the lunch who seems to have played a very passive role on that occasion.  He has invited me to draw adverse inferences from that failure and to hold that both of these potential witnesses have not been called because they could have said things adverse to the Plaintiff.  I am not prepare to come to such a conclusion.

63.  The fact is that when one looks at this evidence as a whole, Mr Cheung went into this venture with his eyes wide open.  I do not wish to appear unkind to Mr Cheung but he is like the punter who wishes to blame his bookmaker when his horse has come in second and he had bet on it coming first.  This is a case about a highly experienced and knowledgeable stock market player who has entered into an inadvisedly large investment in a high-tech stock at a time when such stocks were in fashion and has come most unhappily, unstuck.  I have re-read the evidence several times in order to discern anything underhand from AC or from Mr Lee and there is no such evidence.  I reject out of hand any suggestion that AC had made any sort of misrepresentation to Mr Cheung in order to induce him to purchase a share that was known at the time to be unenthusiastically received, by the market, on its placement.  At the end of the day this was a matter for Mr Cheung to decide on.  He considered that it would be worth purchasing in this quantity.  There was never any representation that he would receive only 5% to 10% and the suggestion by AC that he would get a half at most was no more than an honest expression of opinion in an activity that is full of risks, which Mr Cheung was fully aware of.  This being my view, the first part of the defence case against the Plaintiff must fail.

64.  The next element concerns the question of whether there has been a failure on the part of AC to carry out Mr Cheung’s instructions on 28 and 29 September.  In this regard, I am satisfied that there was no instruction, as alleged by Mr Cheung, that AC was to sell all at market price.  The matter was much more subtle than that and this is abundantly clear on a true reading of the transcripts.  The fact of the matter is that AC was faced with an extremely difficult state of affairs.  This was a rapidly falling market and nobody in their right mind would have dumped 12 million shares in one go.  In any event, that was not his instruction.  He had been given specific instructions to sell quantities at specific prices.  This is very clear from the transcripts and it was a sensible instruction for Mr Cheung to have given, although his suggested prices had perhaps been a little too ambitious because by the time that his offers came up on the stock exchange queuing system the price had dropped to below what he was offering the share at.  Frankly, it is not surprising when one looks at what happened on the 28^th that only 1 million shares were sold given the constraints of Mr Cheung’s instructions to AC.  In difficult circumstances, I am satisfied that AC did all that he could reasonably have done given what was being asked of him by Mr Cheung.

65.  On 29 September, the decision was made to hang on and see what happened in the future having regard to the interest of Mr Lau in Asia Orient and again this would appear to have been a perfectly sensible thing to do.  Equally, at the lunch in October, I cannot find anything said or inferred by Mr William Lee as to the prospects of the share that might be seen to be improper or capable of being construed as a misrepresentation of any kind for which the Plaintiff can now be brought to account.

66.  History shows that the prediction of the fortunes of any company, let alone a third line stock like Asia Orient, is very difficult.  I am certain that Mr Cheung realised this and that is why he made no complaint about the way that he had been treated by AC and the Plaintiff.  He realised that this was an investment that had gone bad and which he would in due course have to pay for.  Perfectly sensibly, he then sought to negotiate a delay in making payment, firstly by presenting post-dated cheques and thereafter by entering into the instalment agreement.  In the event, he did not have the resources to meet those obligations and when he was sued for recovery of these substantial debts, for reasons best known to himself, he has decided to make these very serious allegations which I have found have absolutely no substance.  For what it is worth, I am certain that had he been treated in the way that he now says that he was he would have taken these points at the time and this would have been reflected in the transcribed telephoned conversations.

67.  The debt, in principle, being admitted there must be judgment to the Plaintiff for the amount claimed together with interest as pleaded in the statement of claim and there being no substance in any of the allegations raised in the defence and the counterclaim these must also stand dismissed.  Inevitably, the Plaintiff must have its costs of the action, to be taxed on a party and party basis.  The order for costs will be an order nisi in the usual way.