ANDREW EDWARD LEFT v. SECURITIES AND FUTURES COMMISSION AND ANOTHER

CACV 228/2016

[2019] HKCA 224

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 228 OF 2016

(On appeal pursuant to s 266 of the Securities and Futures Ordinance,
Cap 571 from determinations of the Market Misconduct Tribunal)

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J U D G M E N T

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Hon Cheung JA, Kwan JA and Au JA:

I.   The appeal

1.  The Market Misconduct Tribunal (‘the Tribunal’) found the appellant, Mr Andrew Left (‘Mr Left’) culpable of market misconduct for having contravened section 277(1) of the Securities and Futures Ordinance (Cap. 571) (‘the Ordinance’) and imposed the following penalties on him, namely, a ‘cold shoulder’ order from any dealings in the Hong Kong financial market for five years; a ‘cease and desist’ order that he shall not again perpetrate any conduct which constitutes the form of misconduct identified in the proceedings under section 277(1); a disgorgement of profit in the sum of HK$1,596,240 with interest; and costs in favour of the Government and the Securities and Futures Commission (‘the SFC’).  Mr Left now appeals on a point of law against the decision.

II.   Facts

2.  The following is an extract of the facts found by the Tribunal.  Mr Left is the publisher of an internet website specialising on stock commentary called Citron Research.  According to this website :

‘ Citron Research represents the work of a team of investigators, led by Andrew Left. Mr. Left is a private investor with 17 years trading experience. Mr. Left has been quoted in every major US financial publication, including Forbes, Fortune, Wall Street Journal, Barron’s, CNBC, Investors’ Business Daily, and Business Week, as well as numerous Chinese media.’

3.  Evergrande Real Estate Group Limited (‘Evergrande’) is a major Mainland property development company listed in the Hong Kong Stock Exchange.

4.  On 21 June 2012, Mr Left who apparently resided in the United States published a report (‘the Citron Report’) on Evergrande in which it stated that Evergrande was essentially ‘an insolvent company’ that had consistently ‘presented fraudulent information to the investing public’.  In terms of the allegation of insolvency, the Citron Report stated that Evergrande had ‘generated cumulative operating cash flow before Capex of negative RMB 28 billion since 2006’.  In terms of presenting fraudulent information, the Citron Report stated that Evergrande, in reporting RMB 35 billion of equity as at 31 December 2011, was either overstating assets or understating liabilities and that, adjusting for these misstatements, Evergrande was ‘negative RMB 36 billion’.  The Citron Report alleged that Evergrande used ‘off balance sheet’ vehicles in order to underreport debt and it overstated the value of its property investment portfolio, creating ‘phantom’ profits and underreporting development costs.  The Citron Report stated :

‘ ...we believe that Evergrande has misled investors and represents the worst of Chinese neo‑capitalism, and therefore represents a good short opportunity in relation to other exposure in the Chinese capital markets.

Whether it be the capital markets, government enforcement, hard or soft landing, the endgame for Evergrande is a certainty; the only uncertainty is the timing.’

5.  It is the first time that Mr Left published a commentary on a company listed on the Hong Kong Stock Exchange.  According to the Tribunal, the uncontested evidence is that in or about March 2012, he received a package in the United States with no return address and no material evidencing the identity of the person who had sent it.  The package contained a lengthy analysis of Evergrande.  This analysis also made the same serious allegations of insolvency and various forms of accounting fraud.

6.  According to Mr Left, he did not accept the contents of the package at face value.  He went through a verification exercise, eliminating ‘all information that could not be verified’.  The material considered by him in that verification exercise was all public information from the internet and from Evergrande’s company filings.  He had not inquired with Evergrande about these allegations and there was no evidence that he had sought expert advice on appropriate regulatory restrictions, especially applicable accountancy standards, to which Evergrande would have been subject.

7.  The share price of Evergrande in the three months up to and including 20 June 2012, while subject to volatility, revealed no obvious upward or downward trend.  During this three‑month period, it traded in a range of $3.55 to $4.81.  Daily turnover ranged from between 26.7 million to 187.3 million in volume and $112.6 million to $784.9 million in value with the average being 82.2 million in shares and $351.8 million in value.  However, on 21 June 2012, Evergrande shares moved to a high of $4.52 in early trading but then declined sharply to a day low of $3.60.  This was down 19.6% from the previous day’s close.  The share price recovered somewhat after an announcement by Evergrande through the Stock Exchange and a tele‑conference with analysts but still closed the day at $3.97, down 11.4% on the previous day’s close.  As a reference, the Hang Seng Index declined just 1.3% that day.  Trading volume in the shares reached 940 million shares.  By contrast, the highest volume at any time earlier in the year had been 232 million shares, less than 25% of the volume reached on 21 June 2012.  Volatility also reached new levels for the year. Previously, the highest volatility level had been 12%; on 21 June it reached 22.7%.

8.  At about the time of publication of the Citron Report, Mr Left himself short‑sold Evergrande shares.

1)   On 11 April 2012, Mr Left opened a securities account to allow him to trade Hong Kong stocks.

2)   Mr Left started to short sell Evergrande shares on 6 June 2012, his short position reaching a peak of 4.1 million shares on 19 June 2012.  In respect of this trading, he had received net proceeds of $17,703,672 (after commission and tax but before share borrowing costs).

3)   Mr Left started to buy shares to cover his short position on 21 June 2012 ― the day the publication of his report became known in Hong Kong ― the 4.1 million shares purchased by him costing $15,993,116 (after commission and tax).

4)   With the cost of share borrowing being $114,316, this left him with a net profit of $1,596,240. 

9.  By a notice dated 15 December 2014 issued pursuant to section 252(2) and Schedule 9 of the Ordinance, the SFC directed the Tribunal to determine whether Mr Left had been guilty of market misconduct pursuant to the provisions of section 277(1) of the Ordinance by publishing false or misleading information likely to induce the sale of Evergrande shares, knowing the information to be false or misleading or being reckless or negligent as to whether it was so.

10.  Mr Left did not give oral testimony before the Tribunal nor submit a detailed written statement, but he entered into communications with a representative of the United States Securities and Exchange Commission, Mr Stephen Herm who was acting on behalf of the SFC.  The communications were considered by the Tribunal.

11.  After conducting an inquiry, the Tribunal found, amongst other things, that

1)   Mr Left published the Citron Report and thereby disseminated the information contained in it;

2)   certain of the information contained in it, namely, that Evergrande had been culpable of ‘fraudulent accounting’ and that in reality it was ‘insolvent’, was likely to impact on the Hong Kong market in one or more of the ways set out in section 277(1);

3)   such information was false and/or misleading as to material facts or through the omission of material facts;

4)   actual knowledge on the part of Mr Left that the information was false and misleading as to a material fact had not been established but he was reckless as to whether such information was false and/or misleading as to material facts or through the omission of material facts; and

5)   if not reckless, Mr Left was negligent as to whether such information was false and/or misleading as to material facts or through the omission of material facts.

III.   Statutory provisions

1)   Section 277(1)

12.  Section 277(1) contains the following four requisite elements ：

(1)   a person, whether in Hong Kong or elsewhere, must publish, that is, disseminate, information or be concerned in its dissemination;

(2)   the information must be likely to induce another person to buy or sell securities in Hong Kong or must be likely to maintain, increase, reduce or stabilize the price of securities in Hong Kong;

(3)   the information must be false or misleading as to a material fact, and

(4)   the person who has disseminated the information must know, or be reckless or negligent, as to whether the information is false or misleading as to a material fact.

2)   The Notice

13.  Section 13 of Schedule 9 to the Ordinance requires that a notice issued pursuant to section 252(2) shall specify 

‘ (a) .....

   (b) the identity of the person, and such brief particulars as are sufficient to disclose reasonable information concerning the nature and essential elements of the market misconduct.’

14.  The Notice issued by the SFC is in these terms :

‘ Whereas it appears to the Securities and Futures Commission that market misconduct within the meaning of section 277 of Part XIII of the Ordinance has or may have taken place in relation to the securities of Evergrande Real Group Limited (Stock Code: 3333) listed on the Stock Exchange of Hong Kong Limited, the Market Misconduct Tribunal is hereby required to conduct proceedings and determine:

(a)   whether any market misconduct has taken place;

(b)   the identity of any person who has engaged in the market misconduct; and

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

15.  The person specified in the Notice was Mr Left.  The Notice also gave the particulars of the market misconduct :

‘ ...

4.  The Citron Report pertained to Evergrande and was negative in the sense that it stated, inter alia, that the company was insolvent and had consistently presented fraudulent information to the investing public.

5.  The information in the Citron Report was false or misleading as to a material fact, or was false or misleading through the omission of a material fact: the company was not insolvent and nor had it consistently presented fraudulent information to the investing public.

6.  The Information was likely to:

(a) induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong; or

(b) induce the sale or purchase in Hong Kong of securities by another person; or

(c)   maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts, in Hong Kong.

7.  On 21^st June 2012, the turnover of Evergrande shares was exceptionally high and the share price fell significantly.’

8.  The Specified Person knew that, or was reckless or negligent as to whether, the Information was false or misleading as to a material fact, or was false or misleading through the omission of a material fact.

9.  By reason of the matters aforesaid, the Specified Person has or may have contravened section 277(1) of the Ordinance and therefore has or may have engaged in market misconduct.’

3)   The Synopsis  

16.  The SFC Notice was accompanied by a synopsis (‘the Synopsis’) setting out in greater detail the conduct of Mr Left and why it was asserted that such conduct had, or may have, constituted a contravention of section 277(1) of the Ordinance.

17.  Section 7 of the Synopsis specified why the information in the Citron Report was false and misleading :

‘ Neither the materials on which Mr Left relied (as referred to in the Citron Report) nor any other available information justified a conclusion that Evergrande was insolvent or had consistently presented fraudulent information to the investing public.’

IV.   Grounds of appeal

18.  Three grounds of appeal are raised :

(1)   The Tribunal exceeded its jurisdiction;

(2)   The Tribunal erred in failing to apply the correct test for recklessness; and

(3)   The Tribunal erred with the test of negligence.

1)   Jurisdiction

(1)   Mr Left’s argument

19.  Notwithstanding other matters contained in the Amended Notice of Appeal and skeleton arguments of Mr Left, his argument on jurisdiction as advanced by Mr McCoy SC and Mr Li is now confined to a narrow point as follows :

(i)   Section 252(2) requires the SFC to institute proceedings by giving the Tribunal a notice in writing containing a statement specifying the matters prescribed in Schedule 9.  Section 13 of Schedule 9 provides that the specified matters in the statement are, amongst other things,

‘ (a) the provision or provisions of Part XIII of this Ordinance by reference to which any person appears to have perpetrated any conduct which constitutes market misconduct; and

   (b)   the identity of the person, and such brief particulars as are sufficient to disclose reasonable information concerning the nature and essential elements of the market misconduct.’

(ii)   Section 15 of Schedule 9 further provides for the amendment of the statement :

‘ 15. At any time during the conduct of proceedings instituted under section 252 of this Ordinance, the Tribunal may order the Presenting Officer to amend the statement for the proceedings as described in section 13 in any manner the Tribunal considers appropriate, except that—’

(iii)   Section 16 of Schedule 9 deals with the issue of jurisdiction of the Tribunal after a statement has been amended :

‘ 16. To avoid doubt—

(a)   the Tribunal has jurisdiction exercisable by reference to a statement as amended under section 15 in the same manner as it has jurisdiction exercisable by reference to a statement described in section 13; and’

(iv)   In this case, the original statement in the Notice was simply on the basis that the Citron Report was false and misleading because in fact Evergrande had not engaged in fraud and was solvent.  The SFC then clarified its position when the appellant applied before the Tribunal for production of Evergrande’s records which were said to be relevant to the issue whether Evergrande was actually solvent and whether in fact it had been presenting true accounts.  The SFC stated it only relied on information in the public domain.  The Tribunal in its ruling of 27 October 2015 on Mr Left’s application identified the SFC clarification :

‘ 12. Properly understood, said Mr Duncan, the SFC case does not, therefore, depend on the production of the myriad documents that lie behind the published audited financial statements of Evergrande. The SFC case is limited to the assertion that Mr Left created false or misleading information out of what was publicly known about the corporation at the time. Any defence, he said, was to be similarly restrained.’ (emphasis added)

(v)   However, the statement was not amended and yet the Tribunal proceeded with the inquiry on the basis of the ‘clarified’ position of the SFC.  Accordingly the Tribunal did not have the jurisdiction to hear the case.

(2)   Our view

20.  We disagree with the submission.  Mr Left did not raise before the Tribunal the need for an amendment of the statement before the Tribunal could have jurisdiction to proceed with the inquiry.  In our view it is not proper for him to raise this point only on appeal.  If he was indeed concerned with the lack of jurisdiction of the Tribunal then he ought to have it raised below which would then enable the Tribunal to make appropriate orders requiring the SFC to amend the statement. This was not done.  Further, we do not read section 16 of Schedule 9 as restricting the jurisdiction of the Tribunal only to the matters contained in the statement before any amendment.  In our view this is an enabling provision to make plain the Tribunal’s jurisdiction after the amendment.  In any event, we are of the view that the point now relied upon by Mr Left is without merits.  The rationale of amending the statement is to ensure that he would know the case he is to meet.  In the present case, he clearly was aware of the case of the SFC.  The Synopsis which accompanied the Notice specifically stated in paragraph 7 that :

‘ 7. Neither the materials on which Mr Left relied (as referred to in the Citron Report) nor any other available information justified a conclusion that Evergrande was insolvent or had consistently presented fraudulent information to the investing public.’ (emphasis added)

21.  With the clarification that the SFC only relied on the information available in the public domain to establish his culpability, Mr Left could not have misunderstood in any way the case that was presented against him.  This first ground has no merits.

2)   Recklessness

(1)    The directions as to law and findings on the facts

22.  To prove market misconduct in section 277(1), it is a requisite element that the person who has disseminated the information must know, or be reckless, or negligent, as to whether the information is false or misleading as to a material fact.  The SFC’s case is that Mr Left was reckless or negligent as to whether the information in the Citron Report (that Evergrande was insolvent and had consistently presented fraudulent information to the investing public) was false or misleading as to a material fact, or was false or misleading through the omission of a material fact.  The Tribunal found on the evidence that both these culpable states of mind are established.

23.  The Tribunal referred[1] to the subjective interpretation of recklessness in criminal law as stated in Sin Kam Wah v HKSAR (2005) 8 HKCFAR 192 at §44:

‘ … it has to be shown that the defendant’s state of mind was culpable in that he acted recklessly in respect of a circumstance if he was aware of a risk which did or would exist, or in respect of a result if he was aware of a risk that it would occur, and it was, in the circumstances known to him, unreasonable to take the risk. Conversely, a defendant could not be regarded as culpable so as to be convicted of the offence if, due to his age or personal characteristics, he genuinely did not appreciate or foresee the risks involved in his actions.’

24.  To reflect the above subjective test, The Tribunal formulated these three questions and said if the answer to each is ‘yes’, Mr Left would be found reckless:

‘ (a) When Mr Left came to publish the Citron Report, was he aware of the risk that the information in it which is the subject of these proceedings was false and/or misleading?

(b)   Was Mr Left further aware that in the circumstances the risk was of such substance that it was unreasonable to ignore it?

(c)   Did he nevertheless, although aware of (a) and (b) above, go ahead and publish the Citron Report?’[2]

25.  In respect of each question, the Tribunal found that a compelling inference can be drawn of the facts that each question falls to be answered in the affirmative[3].

(2)   The main grounds of appeal

26.  These are the main contentions raised on behalf of Mr Left regarding recklessness[4]:

   (i)   The Tribunal erred in law in failing to apply the correct test for recklessness.  The correct test is not the test in criminal law as stated in Sin Kam Wah. The correct test is the test for fraudulent misrepresentation in civil cases, namely, that a person is reckless in making a statement ‘if and only if he does not care whether the statement is true, i.e. that he is indifferent to the truth’ (‘the indifference test’).

   (ii)   It is not clear what test the Tribunal had applied in formulating the three‑question test, whether it was the Sin Kam Wah test or the indifference test or a hybrid test (which is said to be unknown to the law), as the Tribunal had stated as follows:

‘ The Tribunal is satisfied, however, that the formulation of the three questions set out in paragraph 92 above is not only a reflection of the definition of the Court of Final Appeal but is also in the present case a workable formulation, one that incorporates the common law concept of indifference to the truth.’[5]

   (iii)   If the Tribunal meant its three-question test to include a requirement that the person is not only aware of the risk, but also of the unreasonableness of taking the risk, it erred in law in not actually applying this test to the facts. It did not find Mr Left was aware of any unreasonableness of taking the risk and only found it was unreasonable for him to have taken the risk.  If the Tribunal had applied this test, it would have found that Mr Left was not aware of any unreasonableness in taking the risk[6].

   (iv)   If the Tribunal meant to find Mr Left was aware of any unreasonableness of taking the risk, it erred in law in so finding as there was no evidential basis for this.

   (v)   The Tribunal erred in law in regarding the risk Mr Left took to be unreasonable without considering what the standard of reasonableness should be and in failing to apply the correct standard.  So long as a person makes clear his comments are derived from public information and sets out the public information from which he derives his comments, it would be reasonable for him to take the risk that his analysis and logic might be flawed.

   (vi)   The Tribunal erred in failing to give due regard for the constitutionally protected freedom of expression when considering the test to apply for recklessness.  It should have strived to limit the intrusion into speech and required justification of the regulation of public commentary and the extent of such regulation.

(3)    The test of recklessness

27.  Before the Tribunal, it was contended by Mr Li on behalf of Mr Left that the correct test of recklessness in this context is the indifference test employed in cases of fraudulent misrepresentation at common law.  This submission is repeated on appeal by Mr McCoy.  The main arguments advanced in support of this contention may be summarised as follows:

   (i)   The Sin Kam Wah test in criminal law is concerned with recklessness in doing an act.  The market misconduct in section 277(1) is not a criminal offence. Further, section 277(1)(ii) speaks of recklessness as to whether a piece of information is false or misleading, i.e. recklessness as to the quality of the information.  The parallel between the dissemination of information and the making of representation is obvious.  It is therefore apt to apply the indifference test used in reckless misrepresentation in civil cases.

   (ii)   The Sin Kam Wah test is unsuitable for judging recklessness in the making of market commentary, as there is always an inherent risk that a commentary may turn out to be wrong.

   (iii)   In applying the Sin Kam Wah test to the situation of making market commentary, the test would boil down to whether it is reasonable to make the commentary.  This would elide the test of recklessness with the test of negligence.

   (iv)   Insofar as the Tribunal purported to have adapted the Sin Kam Wah test to include an element of indifference to the truth, it appeared to have modified the element of awareness of circumstances which would render it objectively unreasonable to take risk, into an element of awareness of unreasonableness to take risk, and this modification has no precedent in law.

28.  The pertinent question is whether the test of recklessness in criminal law should be applied in the context of market misconduct under section 277(1).  It is important to be clear as to what this test in criminal law entails.

29.  In Sin Kam Wah, the Court of Final Appeal followed the House of Lords decision of R v G & Anr [2004] 1 AC 1034, which departed from R v Caldwell [1982] AC 341 on the meaning of ‘reckless’ in a case of arson under section 1 of the Criminal Damage Act 1971.  Hitherto, the Hong Kong courts had followed Caldwell and R v Lawrence [1982] AC 510, which applied a purely objective test for recklessness as summarised in Archbold: Criminal Pleading, Evidence and Practice (41^st ed, 1982) §17-25:

‘  Recklessness on the part of the doer of an act presupposes that there is something in the circumstances that would have drawn the attention of an ordinary prudent individual to the possibility that his act was capable of causing the kind of serious harmful consequences that the section that created the offence was intended to prevent and that the risk of those harmful consequences occurring was not so slight that an ordinary prudent individual would feel justified in treating them as negligible. It is only when this is so that the doer of the act is acting ‘recklessly’ if, before doing the act, he either fails to give any thought to the possibility of there being such risk or, having recognized that there was such a risk, he nevertheless goes on to do it.’ (Emphasis supplied)

30.  The certified question before the House of Lords in R v G at §1 was as follows:

‘ Can a defendant properly be convicted under section 1 of the Criminal Damage Act 1971 on the basis that he was reckless as to whether property was destroyed or damaged when he gave no thought to the risk but, by reason of his age and/or personal characteristics the risk would not have been obvious to him, even if he had thought about it?’

31.  Lord Bingham, with whom the other Law Lords agreed, answered the certified question ‘obliquely’ in this manner in §41:

‘ A person acts recklessly within the meaning of section 1 of the Criminal Damage Act 1971 with respect to – (i) a circumstance when he is aware of a risk that it exists or will exist; (ii) a result when he is aware of a risk that it will occur; and it is, in the circumstances known to him, unreasonable to take the risk.’

32.  In overruling Caldwell and focusing on the defendant’s state of mind where recklessness is an element in the offence instead of the perception of an ordinary prudent individual, there was understandable concern whether the subjective interpretation of recklessness might allow wrongdoers who ought to be convicted to escape conviction (Lord Steyn, at §58).  It is the ‘knowing disregard of an appreciated and unacceptable risk of causing an injurious result’ or ‘a deliberate closing of the mind to such risk’ (Lord Bingham, at §32) that would be regarded as criminally culpable, not so where the defendant genuinely did not appreciate or foresee the risks involved in his actions, due to his age and/or personal characteristics (Sin Kam Wah, at §44).  If the defendant genuinely does not perceive the risk, ‘such a person may fairly be accused of stupidity or lack of imagination, but neither of those failings should expose him to conviction of serious crime or the risk of punishment.’ (Lord Bingham, at §32)

33.  The way the certified question was answered was designed to assist the inquiry if the defendant did or did not genuinely appreciate or foresee the risks involved in his actions.  The use of the word ‘unreasonable’ in the second part of the test (‘and it is, in the circumstances known to him, unreasonable to take the risk’) is not to allow an element of objectivity to creep back into the test of recklessness.  We firmly reject any suggestion that this would elide the test of recklessness with the test of negligence.

34.  Mr McCoy declined to be drawn as to whether the indifference test he advocated is of a higher or lower standard compared to the Sin Kam Wah test.  He merely said the two tests are different.  In our view, if a person makes a statement not caring whether it is true and shows an indifference to the truth, he is simply closing his mind to the risk whether the information conveyed is false or misleading.

35.  Lord Edmund-Davies said this in his dissenting judgment in Caldwell at 358D:

‘ But a defendant’s admission that he ‘closed his mind’ to a particular risk could prove fatal, for, ‘A person cannot, in any intelligible meaning of the words, close his mind to a risk unless he first realises that there is a risk, that is the end of the matter’: see Glanville Williams, Textbook of Criminal Law (1978), p. 79.’

36.  And Lord Steyn had this to say in R v G at §58:

‘ That brings me to the question whether the subjective interpretation of recklessness might allow wrongdoers who ought to be convicted of serious crime to escape conviction. Experience before R v Caldwell did not warrant such a conclusion. In any event, as Lord Edmund-Davies explained, if a defendant closes his mind to a risk, he must realise that there is a risk and, on the evidence, that will usually be decisive: p 358D. …’

37.  To similar effect is the statement of the Court of Appeal in HKSAR v Li Kim Ching, CACC 208/2006, 12 July 2007 (a case of rape and buggery), at §58:

‘  In the present case, the judge used the expression ‘couldn’t care less’ … In our view, it cannot be said of a person that he could not have cared less about consent unless he had at first realised that there was a risk of no consent.’

38.  The Tribunal is correct in stating that the three‑question test it formulated (which reflects the concept of recklessness as defined in Sin Kam Wah) ‘incorporates’ the common law concept of indifference to the truth.  The SFC filed a respondent’s notice to contend that the determination of the Tribunal should be affirmed on the alternative ground that had it applied the ‘2‑stage test of recklessness’ in Sin Kam Wah, it would have come to the same conclusion that Mr Left was reckless.  We do not regard the Tribunal to have deviated from the test in Sin Kam Wah in formulating the three‑question test or in having the common law concept of indifference to the truth ‘incorporated’ in its test (when properly understood as explained above).  The respondent’s notice is unnecessary.

39.  We do not think the distinction Mr McCoy sought to draw between acts and words with a different test of recklessness for each is sound.  Nor do we think an inherent risk that a representation or statement may turn out to be wrong would be proper justification for applying a different test in deciding whether the maker of the representation or statement is reckless. Counsel’s contention that the test formulated by the Tribunal had ‘modified the element of awareness of circumstances which would render it objectively unreasonable to take risk’ into ‘an element of awareness of unreasonableness to take risk’ is not borne out by a proper reading of the relevant paragraphs of the MMT Report[7].

40.  The Sin Kam Wah test of recklessness was devised in respect of a culpable state of mind in criminal law.  We acknowledge of course that market misconduct in section 277(1) in Part XIII of the Securities and Futures Ordinance is not a criminal offence.  But as pointed out by Mr Duncan SC[8] for the SFC, the equivalent market misconduct offences in Part XIV relating to criminal offences, namely, sections 295 (false trading), 296 (price rigging) and 298 (disclosure of false or misleading inducing transactions) also provide for recklessness as a culpable state of mind.  In view of the potential sanctions which may flow from a finding of market misconduct as provided in section 257, we think it is entirely appropriate that the same test should apply for recklessness in respect of the same prohibited act, whether this be a market misconduct in section 277(1) or a criminal offence in section 298(1).

41.  We note also that the Sin Kam Wah test was adopted by another Market Misconduct Tribunal (chaired by Lunn J, as he then was) in the report on Sunny Global Holdings Ltd dated 21 July 2008 (at §10), in respect of market misconduct under section 277(1).

42.  For all the above reasons, we reject the submissions made on behalf of Mr Left that the test of recklessness formulated by the Tribunal was wrong in law.

(4)    Application of the test of recklessness

43.  The contentions that the Tribunal had failed to apply the right test correctly to the facts may be dealt with shortly.

44.  We reject the contention that the Tribunal did not find Mr Left was aware of any unreasonableness of taking the risk and only found it was unreasonable for him to have taken the risk.  As we have said, that is not a proper reading of the relevant parts of the MMT Report.

45.  As for the other contentions that there was no evidential basis for certain findings and that the Tribunal should have made other findings, these would appear to be challenges on findings of fact.  In HCMP 3195/2016, the Court of Appeal (Kwan and Poon JJA) gave judgment on 13 January 2017 refusing to give leave to Mr Left to appeal on questions of fact in respect of the grounds of appeal in §§6(3), 6(4) and 10.  These grounds were described in the judgment as follows:

‘ 17. The grounds in §§6(3) and (4) must be read with §6(2). In §6(2), it was contended that there was no evidential basis to find that Mr Left was aware of any unreasonableness of taking the risk that the information in the Citron Report was false or misleading as to material facts. The two paragraphs that followed set out the findings of fact that the MMT should have made. §6(3) contended that the undisputed evidence (the Citron Report itself, the fact that Mr Left did not consult an accounting expert, and that he short sold Evergrande shares) showed and the clear inference should be that he believed he had a sufficient working knowledge of accounting for him to conduct his commentary. §6(4) contended that the undisputed evidence showed and the clear inference should be that Mr Left believed his commentary to be materially correct.’

‘ 22. The claim here was that the MMT erred in finding that Mr Left must have been aware that his analysis and logic (which he adopted from an anonymous author) required expertise in accountancy regulation and standards of some complexity and in important respects particular to Hong Kong, and that it was unreasonable for Mr Left not to seek accounting advice or approach Evergrande for clarification on accounting issues. §10(1) repeated the contention that it is not unreasonable for an investor like Mr Left to rely on his working knowledge of accounting. §10(2) repeated the contention that it is not unreasonable for an investor like Mr Left to miss the complexities and technicalities in the accounting issues such that he would be unaware of any special need for expert advice or further clarification.’

46.  For the reasons given in that judgment, the Court of Appeal rejected the contention there was no evidential basis to find that Mr Left was aware of the risk that the allegations in the Citron Report were false or misleading as to material facts and that the risk was of such substance it was unreasonable to ignore it. The court took the view that the inferences drawn on the proved facts are sufficiently compelling and there is no valid basis to interfere with the findings of fact of the Tribunal[9].

47.  What Mr Left has sought to do in this appeal is to delete the words ‘and fact’ in the opening sentence in §6 and §10 of the grounds of appeal and to argue that the findings were in error ‘in law’.  We do not accept this is a permissible course.  Even if it were, we do not think the reasoning of the Tribunal in reaching the findings can be faulted for the reasons given in the earlier judgment.

(5)    Freedom of expression

48.  The contention is that the right of freedom of expression, though not an absolute right, is constitutionally protected and this requires the court to construe narrowly any interference with this right in setting the ambit of the test for recklessness in section 277(1).  Mr McCoy stressed the importance of free flow of information in the financial market and reiterated that the market would have the ability to sift through information and contrarian views.  He referred this court to the relevant parts of the closing submission made to the Tribunal by Mr Li[10]. However, the submission of Mr Li in this respect was made with regard to the construction of the word ‘negligent’ in section 277(1) and the Tribunal therefore dealt with his submission accordingly[11].  It does not appear from the written closing submission it was argued before the Tribunal that in setting the ambit as to the test for recklessness, due regard should be given to the constitutional protection of the freedom of expression.

49.  In view of how the arguments were presented to the Tribunal, that counsel for Mr Left had confined his arguments on the freedom of expression to the construction of ‘negligence’ in section 277(1), and made no submission in respect of ‘recklessness’ in that regard, we must reject Mr McCoy’s contention that the Tribunal had failed to give due consideration to this matter.

50.  In any event, even if it is appropriate in the circumstances to consider these arguments premised on constitutional protection for the first time on appeal, we do not think they would have made much mileage for reasons similar to those given by the Tribunal in considering the construction of ‘negligence’, and to be dealt with in the latter part of our judgment in relation to the issues on negligence.

3)   Negligence

51.  As mentioned above, the Tribunal found on an alternative basis that, even if it was wrong on its conclusion on recklessness, Mr Left was still in breach of section 277(1) as he was ‘negligent’ in compiling and publishing the Citron Report in the way as he did^[12].

52.  The Tribunal came to this conclusion on negligence by applying this standard of care: whether Mr Left exercised the level of care to avoid the inclusion of false or misleading information as to material facts that ‘is realistically required of a reasonably prudent person carrying out the function of a market commentator and/or analyst’ (emphasis added)^[13].

53.  Under this ground of appeal, Mr McCoy contends that the Tribunal erred in law by applying the above standard of care.  Hence, its conclusion on finding Mr Left guilty of negligence under section 277(1) is also wrong in law.

54.  However, as acknowledged by Mr McCoy at the hearing, the Tribunal’s conclusion on negligence is only an alternative one.  If this court rejects Mr Left’s ground of appeal in relation to recklessness, his appeal will be unsuccessful in any event, and it is academic for him to challenge the Tribunal’s negligence conclusion.  Mr McCoy is therefore content to rely only on the written submissions set out in the skeleton in support of this ground of appeal.

55.  In the premises, and given we have in the above rejected Mr Left’s ground of appeal concerning recklessness, we would deal with the negligence ground of appeal shortly as follows.

56.  In essence, Mr McCoy submits that the Tribunal erred in law in equating the standard of care of an unlicensed individual making a commentary to that of a market commentator or analyst.  He summarizes the submissions in his skeleton as follows (which encapsulate in substance Mr Li’s extensive submissions made before the Tribunal).

57.  First and foremost, Mr McCoy says to impose liability for negligent misstatements is a serious interference with the freedom of speech.  The interference must therefore be construed as narrowly as possible.

58.  Second, it is trite that the standard of reasonableness depends on the type of activity, not the actor (unless the activity itself requires the actor to have some professional qualification)^[14]. The Citron Report was a piece of commentary by an unlicensed individual.  It was an activity which any member of the public can engage in^[15].

59.  Third, particular care must apply when setting a standard for speaking.  Words are by nature more far-reaching than acts^[16]. This is all the more so in modern financial markets, whose very function is to absorb a mass of information and make connections between different matters (eg, rumours about change in personnel in the White House, implications on trade negotiations, and effect on the stock prices of PRC companies).

60.  Fourth, there is no policy imperative to set an onerous standard for protection of the investing public.  Commentaries based on public facts are fully subject to the scrutiny of the market.  It is difficult for the courts to measure the quality of a commentary.  On the other hand, errors in analysis are well countered by a vast repository of other commentaries.

61.  Fifth, the primary purpose of section 277 was to regulate information disseminated by listed companies and insiders.^[17] Outsiders stand in a different position.  Their comments are based on and can be verified by others against publicly known facts.  It cannot be considered ‘negligent as to whether the information is false or misleading’ when an outsider shares (and makes clear he is sharing) his understanding of the known facts.

62.  Sixth, a statement encouraging readers to do further research and form their own conclusions is a salutary reminder that analysis can be wrong.  In tort, it would vitiate liability^[18]. In this case, the reminder Mr Left made to his readers underscored the special nature of analysis (as opposed to statements of fact) and was also an aspect of the care he took when sharing his analysis.

63.  Taking into account the above, in particular the need to zealously protect the freedom of speech, Mr McCoy says the correct test of negligence should be that as long as a commentator makes clear his commentary is based on public information and cites those sources (both of which Mr Left did), he has exercised reasonable care and his contributing his commentary to the marketplace is a net positive.

64.  As we understand it, the lynchpin of Mr McCoy’s submissions (and Mr Li’s contentions before the Tribunal) for a lower standard of care is the respect for and protection of the fundamental right of freedom of speech of an unlicensed market commentator.  Given this, an unlicensed commentator in exercising such a fundamental right must not be subject to a higher standard of care referable to a market commentator or analyst.

65.  The Tribunal had indeed carefully and fully considered these contentions before coming to the view that the standard of care should be one that was comparable to a market commentator or analyst^[19].

66.  In our view, the Tribunal is correct.  We will explain why.

67.  The scope and extent of a duty of care is contextually based.  Further, as stated by the Tribunal, the right to freedom of expression is not absolute and can be subject to proportionate restriction.  This was rightly and fairly accepted by Mr Li and not challenged (and not challengeable) in this appeal.

68.  Moreover, as concluded by the Tribunal, having taken into account the right to freedom of expression and on a purposive construction of section 277(1):

(1)   The statute creates a duty of care on any and all persons (not only people who have assumed special responsibility to the market) who choose to disseminate information that is likely to impact on the market to ensure that such information is not materially false or misleading^[20].

(2)   The duty of care is owed to the market^[21].

(3)   The legitimate aim of such a provision in limiting the freedom of expression is to protect the public at large from potentially very damaging effect of false or misleading information.  It is a legitimate aim which serves to protect economic order, ‘a subset of the broader principle of ordre public’^[22].

69.  This construction cannot be faulted under the well-established principles of purposive construction^[23]. As explained and considered by the Tribunal (which we agree), this objective construction is consistent with:

(1)   The plain and ordinary meaning of the express and material words adopted in the provision, particularly the words ‘a person’, read as a whole and in context^[24]. Mr McCoy’s submission set out at paragraph 61 above has been dealt with and rightly rejected by the Tribunal on the basis that, on the plain meaning of the words ‘a person’ used in the provision, the legislature does not intend to draw any distinction between ‘insiders’ and ‘outsiders’ in imposing a duty on that person not to disseminate fraudulent or misleading information whether knowingly, recklessly or negligently^[25]. None of the submissions advanced by Mr McCoy can demonstrate the Tribunal’s reasons to be wrong.

(2)   The legislative material presented to the LegCo when moving for the passage of the Bill^[26], which relevantly states as follows:

‘… false or misleading information has a very serious effect on the price of securities or futures contracts which may cause immediate harm to a large number of investors and disruption in the market. The provisions are intended to protect the interests of investors and to maintain an orderly market. The Administration is of the view that it is reasonable to impose on those involved in disclosing information that might have an effect on investment decisions a duty to take reasonable steps to ensure that such information is true and not misleading.’ (emphasis added)

(3)   The obvious objective aim and context of the legislation which is to ‘maintain the integrity of the markets and to protect the public at large from very damaging effects of false or misleading information’.

(4)   The proportionate restrictive context that a person would only be held liable in negligence when the information he or she disseminates is proved to be false or misleading as to a material fact of significance, but not merely an expression of opinion, and the information must also be shown to be influential and likely to induce others to deal in the Hong Kong market^[27].

70.  Given this purposive construction, the Tribunal’s conclusion on the standard of care of this statutory duty is clearly correct when measured against the following context:

(1)   The legislative intention of section 277(1), which is to protect the public and the integrity of the market itself against, among others, any ‘negligent’ dissemination of false or misleading market sensitive information relating to material facts by anyone.

(2)   Further, as pointed out by the Tribunal, in light of the speed and fluidity of financial markets, there must always be a danger that false or misleading information, especially those relating to complex issues, may have a materially detrimental impact on the market before its true nature is understood and becomes known^[28]. 

(3)   In the premises, for an effective duty of care to operate in such context, it is pertinent to require the person disseminating the information to carry out reasonable steps to ensure that those information is true and not misleading before the publication of such information.

(4)   If the standard of care was the one as proposed by Mr McCoy, an unlicensed commentator can draw any market sensitive conclusions however negligently even though they are false or misleading, by merely declaring that they are based solely on information in the public domain and setting out that information.  That will fundamentally defeat or undermine the protective purpose of section 277(1) in the context of the speed and fluidity of financial market.  This cannot be right.

(5)   Finally, as submitted by Mr McCoy, the standard of care is an objective one, and must be judged by looking to the ‘activity’ but ‘not to the individual characteristics’ of the person carrying out the activity^[29]. In this respect, whether it is carried out by a market commentator, analyst or an unlicensed person, the nature of the ‘activity’ of compiling and publishing report to disseminate information relating to material facts which is market influential is the same.  There is therefore nothing wrong in principle to apply the same standard of care to any person who seeks to carry out this same nature of activity.

71.  This ground of appeal therefore also has no merits and should be dismissed.

V.   Conclusion

72.  Accordingly the appeal is dismissed.

VI.   Costs

73.  SFC is to have the costs of the appeal with certificate for two counsel.