THE SECURITIES AND FUTURES COMMISSION v. CHOY WAI ZAK AND ANOTHER

HCMA 264/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO. 264 OF 2002

(ON APPEAL FROM WSS 14068-14070/2001)

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J U D G M E N T

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1. The 1st appellant, Choy Wai-zak, faced two charges of intentionally creating, or causing to be created, a false or misleading appearance of active trading in Hong Kong Parkview Group Limited shares on the Stock Exchange of Hong Kong, contrary to sections 135(1)(a) and 139 of the Securities Ordinance, Cap. 333. The 2nd appellant, Cyril Yuen Sze-ning, faced one such charge jointly with the 1st appellant.

2. The offences involved an intentional deception of the investing public, leading the public to believe that the shares were being more actively traded than they really were. The maximum sentence provided for this offence in the Securities Ordinance is 2 years' imprisonment.

3. Each defendant pleaded not guilty to the charge he faced, and each was convicted, after trial, by Mr Peter White, Permanent Magistrate, at Eastern Magistrates Court, on 18 March 2002. The bulk of the prosecution facts were agreed and the issue at the trial was one of the defendants' intention.

4. After conviction and on the same day, the 1st appellant was sentenced to two consecutive terms of 4 months' imprisonment and the 2nd appellant was sentenced to 4 months' imprisonment. The 1st appellant was ordered to pay prosecution costs of $26,000 and the 2nd appellant was ordered to pay prosecution costs of $13,000. Both now appeal against their prison sentences. I am told that they are not appealing against the cost orders.

5. Briefly, the facts are these. The 1st appellant was the vice-president of a company called Emperor International Exchange Limited, the 2nd appellant was his subordinate. The 1st appellant purchased over half a million shares in the Hong Kong Parkview Group in May 1999 through his account with Emperor Securities. He opened a second account with a firm called Dash-in Securities also in May 1999. By the beginning of June 1999, the 1st appellant had sold all but 100,000 of his shares. He then continued to sell and purchase further Hong Kong Parkview Group Limited shares, so that by close of business on 15 November 1999 he held 350,000 Parkview shares.

6. In relation to the summons No. 14070, (the first offence), in separate transactions, commencing on 15 November 1999, the 1st appellant sold 60,000 shares to himself: the Emperor account in effect selling to the Dash-in account. There was thus no change in the beneficial ownership. The shares were sold in tranches in which each trade was at a higher price than the previous ones, giving the impression of a rising price. By doing this, the 1st appellant gave the investing public the impression of an arm's length transaction when such was not the case.

7. In relation to the other two offences, those in summonses 14068 and 14069, both appellants bought and sold Hong Kong Parkview Group shares to each other on 19, 22 and 23 November 1999. The manner of their trading was such as to create a new benchmark price for those shares of $4.40 per share. The 1st and 2nd appellants contracted a substantial percentage of all trading in that stock over that trading period.

8. The magistrate was satisfied that the trades led the stock price to increase considerably; that they were carried out with a view to maximising both appellants' returns; that the schemes were carried out to the detriment of the investing public - the market; and that the appellants were guilty of "the most serious fraudulent conduct."

9. Both defendants had mitigation. Each had a clear record. I pause here to comment that it is well-known in the majority of fraud cases, such as this is, that the offenders often are of previous good character. Finance houses are unlikely to employ people with criminal records, particularly criminal records for dishonesty. The case was not an example of sophisticated market manipulation; though, again, I comment that obviously it required knowledge of how the market works and a knowledge of how the market reacts to demands for securities. Both appellants saved court time by admitting a number of facts, and both, to an extent, assisted the Securities and Futures Commission in the Commission's investigation of the case.

10. The magistrate took all these matters of mitigation into account. He was addressed extensively by counsel in relation to the lack of sophistication. Despite the fact that both appellants had pleaded not guilty, the magistrate gave full weight to what mitigating factors there were, including their previous good character, and gave each of them of a one-third discount in sentence. This resulted in them receiving sentences of imprisonment for each offence that were one-sixth of the maximum sentence provided for in the ordinance.

11. At the request of the defence made for the purpose of this appeal, the Securities and Futures Commission obtained case reports of all 14 previous prosecutions for offences under section 135 of the Securities Ordinance, where convictions were obtained. All were heard between September 1993 and July 2002. Of these, eight resulted in fines; one resulted in a community service order; one resulted in a community service order for one defendant and a suspended sentence of 9 months' imprisonment for the other; three resulted in suspended sentences; only one, this one, resulted in an immediate sentence. Of the 14 cases, only one other proceeded on a not guilty plea and that case resulted in a suspended sentence. In all the other cases the sentences followed guilty pleas.

12. The grounds of appeal, essentially, are that the sentences were too high; that the magistrate should have considered the possibility of either suspending sentences of imprisonment, or of imposing community service orders. It is also said that, as no immediate sentence of imprisonment has been imposed for this offence in the past, the magistrate was, to some extent, constrained by the previous levels of sentence from passing sentences which did not depart from an established pattern.

13. It was argued that the facts of this case were less serious than those in other cases where community service order sentences were imposed. And it was also said that the magistrate pre-judged the issue of sentence by indicating to counsel before hearing mitigation that he had an immediate custodial sentence in mind.

14. In his sentencing remarks, the magistrate commented on the prevalence of the offence. Nine of the 14 cases to which I have referred were committed within a 21 month period, the dates of disposal running from 31 October 2000 to 23 July 2002. There were three convictions for this offence in 1999, two in 2000, and three in 2001. To the end of July 2002, there were four cases. Clearly there is an increase in the number of these cases being successfully prosecuted before the courts.

15. It is said that the magistrate was wrong to comment that the offence was prevalent. The magistrate is highly experienced and has extensive judicial service. A chart showing the number of cases to date was put before him at the time of sentence, and it is only reasonable to infer that he himself was aware of the number of such cases and the trend of increase. It is true that the number of cases is comparatively small overall, but against that it has to be remembered that this offence is one that can only be committed by a very narrow section of the public.

16. There is no tariff for these offences. This is the first case involving section 135 of the Securities Ordinance that has been taken on appeal. Comparison of the facts of this case with the facts of the other cases is of very limited value. As I have said, in all but one, the sentences were after guilty pleas. In the one other case which resulted in a conviction after trial, the magistrate commented that, but for the fact that he felt constrained by the previous level of sentences imposed, he would have passed a sentence of immediate imprisonment upon the defendant. Each case has to be dealt with on its own individual facts. The fact that others who faced prosecution under section 135 in respect of different facts; at different times; before different magistrates and for unconnected offences received lighter sentences than the two appellants received is of little relevance.

17. The magistrate took into account the fact that the offences were committed in an unsophisticated way when, for each offence, he took a starting point sentence which was one-quarter of the maximum provided for by law, and then reduced that to a sentence for each offence which is one-sixth of the maximum.

18. I do not agree that the magistrate approached the sentencing process with a closed mind. It is not uncommon for a magistrate, or a judge, to indicate to counsel the type of sentence he has in mind before hearing mitigation. In fact, in many cases it is desirable that he does so, as it directs counsel's mind to the focus of his mitigation. I am satisfied that in this case the magistrate was doing no more than that.

19. What has to be borne in mind is this - and it may well have been forgotten by counsel both at trial and today on appeal - market manipulation is a serious offence. It is one the legislature has chosen to penalise by providing for a sentence of immediate imprisonment of 2 years' imprisonment. It is an offence that strikes at the fair and honest operation of the securities market. It is not a victimless crime; its victims are all other members of the investing public. It is an offence that can lead to large profits for the offender and to as equally large losses to the investing public. And, perhaps most importantly, it is an offence that necessarily involves those who commit it doing so by deception and dishonesty.

20. The sentences the two appellants received were well within the maximum sentence provided for in the ordinance, being four months out of a possible 24 months. They cannot be said to be manifestly excessive in view of the pleas of not guilty, the fraudulent nature of the offences and the potentially serious effect upon the investing public.

21. I am satisfied that all mitigating factors were taken into account by the magistrate. They were not so compelling as to demonstrate that the sentences must be wrong in principle. I agree with Mr Bell for the respondent, when he said in his written submission, that the existence of a clear record in a sufficiently serious case can never of itself be sufficient to save a person from an immediate sentence of imprisonment.

22. I am satisfied that in this case the sentences were neither manifestly excessive nor wrong in principle. The appellants' appeals against sentence are dismissed.