HKSAR v. LI JIALIN

CACC 457/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 457 OF 2012

(ON APPEAL FROM DCCC NO. 1282 OF 2010)

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Hon Macrae JA (giving the judgment of the Court):

1. The applicant faced trial before HH Judge Yau in the District Court on 11 charges of price rigging, contrary to section 296(1)(a) and (4) of the Securities and Futures Ordinance, Cap 571 (SFO). He was convicted after trial on 10 charges and sentenced to 6 months’ imprisonment, concurrently on each charge. He appeals against conviction only. On 28 October 2013, we reserved judgment and said we would give our decision in due course. This we now do.

The factual background

2. The facts giving rise to the legal issues argued before us were not in dispute.  Consequently, they can be stated shortly.  The applicant, who was the chairman and controlling shareholder of a listed company, VST Holdings Limited (VST), bought and sold VST shares with his own funds using three trading accounts.  As a result, there was no change in the beneficial ownership of the shares.  At issue at trial (and in this appeal) was whether the prosecution had proved, in particulars expressed in identical terms in each charge, that the transactions entered into “had the effect of maintaining, increasing, stabilizing or causing fluctuations in the price of VST issued shares traded on the stock market operated by the Stock Exchange of Hong Kong Limited”.

3. The judge found that, by virtue of the applicant conducting share transactions in which the beneficial ownership did not change, the ‘nominal’ price of VST shares was increased.  He was not persuaded that what the applicant had done had had any of the other effects of maintaining, stabilizing or causing fluctuations in the nominal price of VST shares.

The issues on appeal

4. Accordingly, the issues can be refined for the purposes of this appeal into two questions:

(i) What constitutes the “price” for the purposes of an offence contrary to section 269(1)(a) of the SFO (the price issue); and

(ii) Did the applicant’s actions have the effect of increasing the price of VST shares (the effect issue)?

5. The evidence at trial had concentrated essentially upon these two questions (a separate factual issue no longer concerns us), on which expert evidence was called by both the prosecution and the defence: Ms Stella Fung Sau-hong (Ms Fung), a director of the Securities and Futures Commission and a chartered financial analyst, for the prosecution; Mr David John White (Mr White), a certified practising accountant and former Executive Director of the Securities and Futures Commission of Hong Kong, Dr Tom Vinaimont (Dr Vinaimont), an assistant professor of the Department of Economics and Finance at the City University of Hong Kong, and Mr Charles Li (Mr Li), a certified practising accountant and an independent financial adviser recognised by the Hong Kong Stock Exchange, for the defence.

The judge’s reasoning and findings

6. The differences between the expert witnesses for the respective parties were summarised by the judge before addressing the two questions identified above, as follows:

“43. The term “price” is not defined in the SFO, in order to decide on the effect of the transactions, the correct approach to price must first be established.

44. It is the prosecution's assertion that although price is not defined in the SFO, the Hong Kong Stock Exchange has in Rule 101 of the Rules of Stock Exchange defined how the “nominal price” of a share is calculated. Since this nominal price is the price that is quoted by the Hong Kong Stock Exchange to all users of its data, this is the correct price system to use when gauging the effect of the transactions.

45. It is Ms Fung's evidence that the nominal price is the price displayed on the website of the Hong Kong Stock Exchange which is accessible by the general public free of charge. Given that the nominal price will be the price that all consumers of securities information will be based on, Ms Fung considers that the proper way to decide on the effect a transaction had on the price is by way of taking the nominal price immediately before a transaction and then see what effect the transaction had on the nominal price.

46. The (applicant), through his three experts, argues that since price is not defined in the SFO, the court ought to look at other methods of ascertaining the price of the share before engaging in the exercise of looking at the effect of the transactions on the share price. Furthermore, the (applicant) argues that whatever methodology is used to gauge the effect of the share price must involve looking at the full range of prices before and after the transaction in question and not just the prices immediately before and after one particular transaction.”

7. The judge accepted the prosecution view that “price”, in the context of section 296 of the SFO, meant ‘nominal’ price on the basis that anybody trading in shares in Hong Kong, who wanted to find out the price of a particular stock at any given time, would have to look it up on the Hong Kong Stock Exchange.  The investing public would perceive the price of a share to be based on the price calculated, recorded and then released by the Hong Kong Stock Exchange.  He was of the view that any approach to ascertaining the price of a particular security should carry the features of uniformity and ease of calculation.  Likewise, whether there had been any effect on the price under the SFO should equally be judged according to the same price system.

8. Accordingly, he rejected the evidence of the three defence experts as to other methods of interpreting the word “price” in the section and their assessment of the effects, if any, on the ‘nominal’ price, where it was at variance with Ms Fung’s evidence.

The perfected grounds of appeal

9. The applicant essentially contends that the judge was wrong to find that the “price” for the purposes of section 296(1) of the SFO was the ‘nominal’ price as defined by the Hong Kong Stock Exchange (Grounds 1 and 4); that, by equating “price” with ‘nominal’ price, he failed to have regard to the last traded price (Ground 2); that he was wrong to judge the price of a share by reference to a “single price dot” in a series of transactions (Ground 3); that he erred in judging the “effect” on the price only by reference to the changes in price before and after the impugned transaction (Ground 5); that he should have adopted the meaning of “price” and “effect” most favourable to the defence (Ground 6); that he erred in fact in finding that the relevant trades had the effect of increasing the ‘nominal’ price (Ground 7) and accepting the prosecution’s shifting contention that some of the applicant’s buy orders had any effect on the nominal price (Ground 8).

10. It will be seen, therefore, that Ground 1, 2, 3 and 4 concern the price issue; Grounds 5, 7 and 8 concern the effect issue; and Ground 6 is concerned with both issues.  In reality, however, for reasons we shall explain, all of the Grounds of appeal, save Ground 6, 7 and 8 are essentially dependent on the true meaning of “price” in the section.  We shall therefore deal with the Grounds, as they were dealt with before us, by considering the price issue first, followed by the effect issue.

Consideration

(i) The price issue

11. Before considering this issue in the context of the competing arguments, it is instructive to take note of the provenance of section 296(1)(a) of the SFO.  Section 135(3) of the now repealed Securities Ordinance, Cap 333, which the present section 296(1) has replaced, stipulated as follows:

“(3) A person shall not with the intention of depressing, raising, or causing fluctuations in the market price of any securities effect any purchase or sale of any such securities which involves no change in the beneficial ownership of those securities.”

12. Mr Peter Duncan SC, on behalf of the applicant, has argued that nothing of significance should be read into the fact that the current section in the SFO only uses the term “price”, whilst its predecessor used the term “market price”.  He submits that the original wording of “market price” predated the adoption by the Hong Kong Stock Exchange of ‘nominal’ price as the meaning for “price” under the SFO.  Therefore, the subsequent adoption of a technical meaning for “price” under the non-statutory rules devised by the Hong Kong Stock Exchange cannot have the effect of changing (or enacting) the law so as to oust its original meaning of “market price”; a term that is well understood by the investing public to mean the last traded price.

13. Mr David Leung, for the respondent, accepts that the SFO does not anywhere define “price”.  However, he takes issue with the notion that section 296 of the SFO is a mere re-enactment of section 135 of the Securities Ordinance.  In particular, he points to section 296(6) of the SFO which, when read in conjunction with section 296(1), suggests that the legislature must, by the word “price”, have intended to mean something different from the term “market price” used in the previous legislation.  The relevant subsections of section 296 are as follows:

“(1) A person shall not, in Hong Kong or elsewhere –

(a) enter into or carry out, directly or indirectly, any transaction of sale or purchaseof securities that does not involve a change of the beneficial ownership of those securities, which has the effect of maintaining, increasing, reducing, stabilizing, or causing fluctuations in, the price of securities traded on a relevant recognised market or by means of authorised automated trading services;

…..

(6) In this section –

(a) a reference to atransaction of sale or purchase, in relation to securities, includes an offer to sell or purchase securities and an invitation (however expressed) that expressly or impliedly invites a person to offer to sell or purchase securities;

     …..”

14. Mr Leung submits that not only is there no equivalent of subsection (6) under the previous Securities Ordinance, but the inclusion of “an offer to sell or purchase securities” in the section would be otiose if “price” were to mean the “market price” based upon the last traded price or prices.  Therefore, the legislature must have intended the word “price” to mean something different from “market price”.

15. We would agree with Mr Leung to this extent.  When the legislature has obviously refrained from importing the same term from the old law (and other related legislation in kindred jurisdictions) into the new, one cannot assume that the new, refined or simplified term must bear the same meaning as its former incarnation.  There was no reason for the legislature not to have used the term “market price”, if that was the meaning it intended the word “price” to have in section 296 of the SFO.  Indeed, it seems clear from the inclusion of subsection (6) that the legislature must instead have intended to adopt a new approach to ascertaining the “price” of a share for the purpose of the section.  The question is whether ‘nominal’ price is that new approach.

16. ‘Nominal’ price is defined by the Hong Kong Stock Exchange as follows:

“Nominal Price refers to the following:

a. in respect of an issue of securities at any one time during or at the close of the Pre-opening Session means:

i. (when the IEP can be determined in accordance with Rule 501H) the IEP (Indicative Equilibrium Price); otherwise

ii. the previous closing price;

b. in respect of an issue of securities at any one time during or at the close of the Continuous Trading Session on a trading day means:

i. if the issue has been traded up to that time on the day:

A. (when the current bid price is greater than the last recorded price), the current bid price; otherwise

B. (when the current ask price is less than the last recorded price), the current ask price; otherwise

C. where both (b)(i)(A) and (b)(i)(B) above do not apply, then the last recorded price; or

ii. if the issue has not been traded up to that time on the day:

A. (when the current bid price is greater than the previous closing price), the current bid price; otherwise

B. (when the current ask price is less than the previous closing price), the current ask price; otherwise

C.  where both (b)(ii)(A) and (b)(ii)(B) above do not apply, then the previous closing price.”

17. Ms Fung explained in her evidence the meaning of ‘nominal’ price and how, apart from the last transaction (or recorded) price, it necessarily takes into account existing orders in the market, which are themselves driven by investor perception as to the stock concerned and reaction to news in the market generally, and to news about the company specifically, thereby better reflecting the most likely transaction price of the share at any given point of time during a trading day.  This, she said, was of more interest to investors during active trading than simply the last transaction price:

“In my opinion, the market price … of a stock at a particular point of time should reflect the most “possible” transaction price at that moment. It should take into account the last traded price of the stock, the current highest bid price and the current lowest ask price. In normal circumstances (particularly for actively traded stocks) the last traded price is a good indicator of the market price of the stock. However, if the current highest bid price is higher than the last traded price, it suggests that there is a buyer willing to buy the shares at a higher price. As a result, the most likely transaction price of the shares at that moment should be that bid price instead of the last traded price. On the contrary, if there is a seller willing to sell the shares at a price lower than the last traded price, the most likely transaction price of the shares at the moment will be that ask price, instead of the last traded price. My interpretation of the market price of the stock is consistent with the definition of “nominal price” as defined by the Stock Exchange of Hong Kong. During the trading hours, the nominal price of each stock is continuously displayed in all trading systems.”

18. It will be seen, therefore, that the notion of a ‘nominal’ price does not ignore or disregard the last transaction price: indeed, the last transaction (or recorded) price is an integral part of the Hong Kong Stock Exchange definition.  Moreover, where there has been no active trading in a particular stock, the price of the share would effectively be the last transaction price. Ms Fung acknowledged that investors would regard the last transaction price as “one of the most important references for their trading”.

19. Although Mr White, for the defence, was more concerned with the issue of the effect of the applicant’s transactions on the share price of VST, he described the notion of ‘nominal’ price as a “likely indicative price”, in other words a price which represented what might happen in the market place.  The last transaction price was what did happen and was therefore a more realistic assessment of the actual price of the share.  He distinguished between stocks which enjoyed a high volume of turnover, where effectively the ‘nominal’ price was likely to be the last transaction price (a statement with which Mr Li was also later to agree), and stocks which were thinly traded, where the link between the last transaction price and the ‘nominal’ price may be more attenuated; and where, therefore, the ‘nominal’ price might have more interest for traders.  However, investors would look at the totality of information available, and not just at the ‘nominal’ price.

20. Dr Vinaimont considered that the true price of a stock (which he described as the “benchmark” price) was best gauged by examining the average price of the five transactions immediately before and after each relevant trade.  However, he accepted that financial service information providers would not adopt his methodology in the information they published to the investing public about the price of a particular stock.  When it was put to him, in cross-examination, that his “concept or methodology of the benchmark price taking the five points average (was) even more difficult to be applied or understood by an average investor during the trading day”, he acknowledged that it was

“not supposed to be applied during the trading day, it's a matter of answering the question whether there was a price change or not. It's not a concept that should be interpreted by an investor.”

21. It became clear, therefore, that Dr Vinaimont’s “benchmark” price was somewhat academic and theoretical and more directed at identifying the effects (if any) of the applicant’s transactions on VST’s share price which, when adopting his methodology, were found not to be “meaningfully different from those of pure third party trades”.  For our part, we are not clear why he should have chosen for this exercise to examine five trades before and after the impugned trade, rather than three or ten or some other number.

22. The thrust of Mr Li’s evidence was that investors are more concerned with traded prices or an average price than with a ‘nominal’ price, which was a notional indicator rather than an actual price.  Whilst he accepted that he could readily work out the ‘nominal’ price by looking at the last transaction in conjunction with the best bid or best ask price, such a notional price was not particularly useful since there were a raft of other criteria one would want to consider.  An investor would look at a range of prices, not “just one dot” at a particular time in a line of transactions.  Mr Li was of the view that, in terms of effect, the orders placed by the applicant did not substantially affect the price and were within the range of orders placed by other third parties.

23. Whilst we are alive to the fact that the ‘nominal’ price of a stock is, as the word itself suggests, an indicative or notional price adopted by the Hong Kong Stock Exchange, we are nevertheless satisfied that it conforms best to the meaning of “price” in section 296(1) of the SFO.  It is precise, readily calculable (without resort to complex algorithms) and easily understood.  Moreover, it takes into account the last transaction price as well as the current orders in the market which depend, as Ms Fung succinctly put it, on “investors’ perception on the stock or any reaction to the news of the market or about the company specifically”.  Accordingly, the ‘nominal’ price takes into account actual transactions (ie the last traded price), as well as the most likely transaction price indicated by the highest bid and lowest ask queues, and it also reflects general or specific market sentiment which may govern those transactions.

24. Whilst it is of course true that one is looking at the price of a share at a particular point of time, one must remember that the mischief at which the section is targeted is the sale and purchase of shares, where there is no change in the beneficial ownership (a fact which would not, of course, be known to the investing public), having one of the five specified effects on the share price.  Such transactions will invariably be undertaken so as to achieve an immediate or short term effect.  It would rather defeat the purpose and effectiveness of the section if one were required to look (as Dr Vinaimont suggested) at the average of a series of subsequent transaction prices (whether it be three, five or ten) to see whether the effect of the transaction can ultimately be said to have been sustained.  The offence of price rigging is concerned with transactions which have one of five effects on the share price: not with whether the transactor can be said some time later to have succeeded ultimately in his purpose.

25. In our view, the ‘nominal’ price best informs the market of the effect of the transaction, while the immediacy of the methodology best contributes to the utility of the particular section in combating the mischief concerned.

26. On the price issue, therefore, we consider that the judge was right to accept that the ‘nominal’ price of a share is the appropriate measure of “price” for the purposes of section 296 of the SFO.

(ii) The effect issue

27. Having so found, we next consider whether the “price” of VST shares as defined was affected by the applicant’s trades; in other words, did the applicant’s transactions result in an increase in the ‘nominal’ price of the share?

28. Once one accepts that the correct method of defining the “price” for the purposes of section 296(1)(a) of the SFO is the ‘nominal’ price, the argument that the applicant’s trades did not have any of the effects on that price set out in the subsection rather falls away.  For the defence experts were concerned to show that what the applicant did had no real effect on VST’s share price, as they interpreted the term “price”; or that any effects they did have were insubstantial and no different from those expected or generated from genuine third party trades.  Mr Duncan submitted that if an equally (if not more) valid alternative analysis produced results which contradict the prosecution methodology, it would follow that the prosecution’s methodology must be questionable.

29. The problem with the argument is that we have found that the judge was right to accept the validity of the prosecution methodology which, when applied to the applicant’s transactions, showed that in each of the charges particularised in Charges 1 - 11 (save for Charge 2, on which he was acquitted), the transaction was found to have increased the ‘nominal’ price of VST shares.  Accordingly, the “price” (as we have accepted it should be interpreted) was increased by the transactions of the applicant which did not involve a change of beneficial ownership.  The argument that the effect might have been different if “price” is given another meaning is, therefore, somewhat redundant.

30. One obvious question which arises on the facts of this case is why the applicant should have gone to the time, trouble and expense of executing these transactions, effectively with himself, if not with the purpose of effecting one of the changes set out in section 296(1)(a).  We were informed during argument that since the applicant was both the buyer and seller of the shares in question, he would have been required to pay the transaction costs twice in respect of 128 trades valued at HK$15,977,120; which costs would have amounted to some HK$66,784.  The applicant did not give evidence, so we do not have the benefit of an answer from him to that intriguing question.  However, the absence of any explanation hardly assists him, if his trades have been shown to have had the effect of increasing the ‘nominal’ price of the share.

31. We see no reason to impugn the judge’s acceptance of Ms Fung’s evidence that the applicant’s transactions identified in the charges did have the effect of increasing the “price” of VST shares, as that term is properly to be construed.

Conclusion

32. Having accepted that the judge adopted the correct interpretation of the word “price” in section 296 of the SFO, we do not agree with the applicant’s complaint that the wrong methodology was used to determine the effect of his transactions on that price.  Accordingly, all of the applicant’s Grounds of appeal which derive from the contention that the judge adopted the wrong interpretation of the word “price”, namely Grounds 1, 2, 3, 4 and 5, must fail.

33. As for the general point of statutory interpretation that a meaning of “price” favourable to the defence ought to have been adopted where more than one possible interpretation was available (Ground 6), we do not accept for the reasons we have given that there was scope for a rival interpretation in the context of section 296(1) of the SFO. Indeed, the methodologies adopted by the three defence experts were not in themselves ad idem.  It would be extraordinary, and defeat the objects of the provision, if courts could not assess the effects of a transaction, in circumstances where the beneficial owner of the shares did not change, as long as there remained one possible way of looking at the definition of “price” which demonstrated no discernible effect on that price.  It is true that the judge accepted that “there can be multiple ways of defining price”.  Nevertheless, we consider that the meaning most appropriate to the mischief addressed by section 296, when viewed as a whole, is that the “price” is the ‘nominal’ price of the share.

34. In relation to the judge’s alleged factual errors, we do not accept that he made any error in attributing the effect on the ‘nominal’ price of the share to the applicant’s order instead of a matching third party order (Ground 7).  Ms Fung had in fact explained that where, for example, the applicant’s bid order matched several ask orders, one of which had been placed by the applicant, it was the applicant’s bid order which caused the change in the ‘nominal’ price.

35. As for the complaint that the prosecution had, on the last day of trial, shifted its position from impugning the applicant’s trades to his buy orders, as a result of which the judge was wrong to accept the altered contention that his buy orders (as distinct from his trades) had had the effect of increasing the ‘nominal’ price (Ground 8), we observe that this ground was not addressed in the applicant’s written argument prepared for the purpose of this appeal, nor was it argued before us.  We would remind legal practitioners that it is unacceptable for counsel not to deal with a particular ground of appeal in written or oral submission, if it is being pursued on appeal, and nonetheless expect the Court to deal with it by virtue of a throw-away line at the end of the written argument (as happened in this case) to the effect that “for the above reasons and those stated in relation to the other grounds of appeal (in) the Perfected Grounds of Appeal”, the application should be granted.  Either the ground is argued in some acceptable form or it is not pursued.

36. In any event, the argument, such as it is, is misconceived.  The prosecution case was at all times entirely clear to the defence and no complaint was made by the defence at the time when the alleged change in stance arose or at any time before the close of the evidence.  In our view, there is absolutely no merit in this point.

37. For the reasons we have given, there is nothing unsafe and unsatisfactory in any of the convictions.  The application for leave to appeal is refused.