WOO HING KEUNG LAWRENCE v. CEF BROKERAGE LTD

HCCL 39/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 39 OF 2004

(formerly High Court Action No.7335 of 2000)

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J U D G M E N T

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Introduction

1. This case raises an interesting, and apparently unsettled, question as to the legal obligation upon a stockbroker arising from the trading in Hong Kong of shares on the ‘grey market’ which, as at the date of such trading, have not yet been the subject of their initial public offering (‘IPO’), and thus are not yet issued and available for trading upon the Hong Kong Stock Exchange.

2. The subject-matter of the present case involves the purported trade, in late September 1997, of 980,000 soon-to-be-issued shares in China Telecom (Hong Kong) Ltd, (‘China Telecom’), a stock which first was listed on the Hong Kong Stock Exchange on 23 October 1997, its first day of official trading, or ‘opening day’.

3. The protagonists in this action are the plaintiff, Lawrence Woo Hing Keung, a trader and speculator, and the defendant, CEF Brokerage Ltd, the employer of Mr Woo’s then broker (and erstwhile friend), one Mr David Wong, an account executive with CEF with whom Mr Woo maintains he effected a binding trade in such shares.

4. In essence, Mr Woo’s case is that, in light of the agreement reached with his broker, Mr Wong, the defendant brokerage personally must honour the ‘grey market’ deal as was struck through its agency, notwithstanding that such putative trade in this China Telecom stock went off by reason of the default of the intended counterparty buyer – a fact which Mr Woo maintains is of no concern to him.

5. For its part the defendant brokerage disagrees. 

6. The brokerage maintains that, as agent, it has no personal liability in the circumstances, and that any such trade on the ‘grey market’ does not embrace the characteristics of normal trading in currently-listed stocks, whereby the rules and regulations of the Hong Kong Stock Exchange apply to govern the rights and obligations thus arising; accordingly, in the circumstances of this case it denies that any binding contract(s) for purchase of ‘grey market’ shares were entered by the defendant personally with Mr Woo, or that it bears any personal responsibility for the failure of such transactions arising by reason of the putative buyer declining to complete.

7. This case, therefore, requires resolution of these diametrically opposing contentions. 

8. The plaintiff’s claim in this action involves a significant sum of money – in the particular case the sum of approximately HK$9 million, plus interest – the basis for this claim being formulated in terms of the difference between the sale price of the China Telecom shares that Mr Woo says were sold through the defendant broker, and the market price of the stock on opening day, 23 October 1997, on which date the price of this stock was very substantially lower.

9. This is a case of some age. 

10. This litigation was commenced by writ issued on 21 July 2000 in HCA No 735 of 2000, and was transferred to the Commercial List in 2004, hence its present action number.

11. Nor is this the first occasion upon which Mr Woo, the present plaintiff, has been before this court in such a case. 

12. A strikingly similar claim, in HCCL 38 of 2004, was brought by Mr Woo against another Hong Kong brokerage with regard to a similar ‘grey market’ trade in the soon-to-be-issued China Telecom shares.  This was heard, in part, in April 2006 prior to being settled – on terms endorsed on counsels’ brief – on the 3^rd day of that trial.  As a consequence there was no opportunity then for this court to consider the virtually identical questions as were raised in that litigation.

13. In contrast to that earlier action, however, this particular case has gone the distance, and accordingly this judgment represents the court’s concluded view upon the arguments variously raised by the parties as to the obligations arising from such ‘grey market’ trading activity.

14. More precisely, this court is required to determine if the plaintiff correct in his primary contention that in terms of the obligations upon a broker a ‘grey market’ transaction is no different from a ‘normal’ transaction on the stock market save and except that the obligation to cross the transaction on the market, and subsequently to deliver the shares, does not arise until the first day of public trading in such shares, which in the instant case was 23 October 1997. 

15. This fundamental proposition lies at the heart of this case. 

The factual background

16. Although the central issue thus raised is crystal clear, the factual background is less so, and this is one of those instances in which the court must wrestle with the merits of competing factual assertions.

17. Essentially introductory matters, however, are not in dispute.

18. Mr Lawrence Woo is a share trader and speculator.  He describes himself as an ‘investor’.  He struck me as a clever and perceptive man, and he has, I apprehend, to-date enjoyed considerable success in his speculative activities on the local share market.

19. The present story begins with the imminent launch of the China Telecom IPO in late October 1997.  

20. It is not in dispute that this IPO was then the largest such offering in Hong Kong’s history; history will record, also, that this was the first IPO in Hong Kong to perform so poorly, largely as the result of the onset and impact of that which now is commonly referred to as the ‘Asian financial crisis’.

21. It is fair to say that the two years prior to October 1997 had witnessed a hugely buoyant market in IPO’s, which in turn had stimulated a significant volume of ‘grey market’ trading, wherein there was an active unofficial market in the particular share issue prior to its formal ‘opening day’. 

22. This had been the more so for initial public issues with a China PRC theme or interest; many such offerings had been heavily oversubscribed, and the result of the euphoric atmosphere thus created was that ‘China-related IPO’s’ had traded ‘off-market’ well above the anticipated price at which the share was likely to be brought to market on its first day of official trading.

23. In September 1997 it was perceived that the forthcoming China Telecom IPO would be no different. 

24. One ‘investor’, however, who did not share the general euphoria as to the assured success of this new public issue was Mr Woo, the plaintiff herein.

25. He declined to jump on the bullish bandwagon, taking the view that this issue was too highly-priced, and would not sustain its projected level.  Mr Woo told the court that although the market generally was of the view that this China Telecom issue would be as oversubscribed as the recent Beijing Enterprises float, to the contrary, he considered that with a far greater quantity of shares available this IPO would be far less oversubscribed, and that any analogy with Beijing Enterprises was misplaced; in the circumstances he thought that there was ample scope to make some money by betting against the prevailing sentiment.

26. Accordingly, Mr Woo decided that a potentially highly profitable gamble effectively was to ‘short’ the market, and to sell in the ‘grey market’ a quantity of China Telecom shares which, at the time of entering into such ‘grey market’ trade he then did not possess, believing that subsequently he could purchase/obtain such shares the subject of these sale transactions at a lower price, whether in terms of an allotment within the IPO or by purchasing such shares within the market on opening day; his projected profit, therefore, would be the difference between the ‘sale’ price achieved per share, and the significantly lower actual cost of purchasing such shares in order to complete the bargain as had been struck.

27. This, then, is the immediate background to the disputed transaction(s) with the defendant broker which form the focus of this litigation.

28. On 30 September 1997, some 23 days prior to the China Telecom ‘opening day’ – which was to be its first as a publicly issued share on the Hong Kong market – Mr Woo had a telephone conversation with his old friend, David Wong, then a senior account executive with CEF Brokerage Ltd.

29. It is disputed that there were two such conversations on the telephone on 30 September 1997 (although ultimately I do not think that the precise date or dates of these telephone calls much matters), and that which ultimately was agreed between these two men, when and in what capacity, in due course will require specific findings of fact by this court.

30. For present purposes, however, suffice to say that in the first Woo/Wong telephone conversation of that day Mr Woo placed a ‘sell order’ with Mr Wong for 1 million China Telecom shares at $20 per share, which as far as Mr Woo then knew represented the prevailing ‘grey market’ price of these shares.

31. It is asserted that later on the same day Mr Wong telephoned Mr Woo and reported that he had managed to locate purchasers to buy a total of 400,000 China Telecom shares at HK$20 each, and 1 million shares at HK$19.00 per share.

32. Whenever such subsequent call in fact took place, it is common ground that Mr Woo agreed with these figures, in terms of numbers and price per share, and accordingly he says that, whilst he had no idea of (and indeed had no interest in) the identity of the individual counterparty purchasers who had been lined up by Mr Wong, there thus were in place binding transactions (which the brokerage was bound to honour in the case of counterparty default) whereby he was to sell a total of 1.4 million China Telecom shares on the ‘grey market’, with delivery of such shares to take place on ‘opening day’ or within one day thereafter (‘T+1 settlement’).

33. So far, so good.  Had the China Telecom public float proceeded in like successful fashion to other public issues of that period, no doubt these particular transactions would have proceeded in normal course, and the present case would not have seen the light of day.

34. History records, however, that this did not happen.

35. In or about mid-October 1997, the contagion from the ‘Asian financial crisis’ began to bite in Hong Kong, and the ‘grey market’ price of China Telecom shares began to drop quickly and significantly, initially from around HK$20 to around HK$15 per share, although subsequently it went considerably lower.

36. The result of this is that purchasers of China Telecom shares who had agreed to buy in the then-prevailing, and highly bullish, ‘grey market’ began to run for cover – indeed, many ultimately were to default, rather than to proceed with the pre-listing deals as struck, and thus to assume crystallized losses – and on 20^th October 1997 Mr Wong called Mr Woo and informed him that it might not prove possible to procure all the intended purchasers to complete the ‘grey market’ agreements which had been struck on Mr Woo’s behalf, although Mr Wong emphasized that he would press such purchasers to complete these transactions.

37. That which in fact occurred was that on the ‘opening day’ of formal public trading in China Telecom stock, on 23 October 1997, out of the projected sale by Mr Woo of 1.4 million China Telecom shares, the sale of only 420,000 such shares successfully was achieved at a price of HK$19.00 per share.

38. The end result, so far as Mr Woo was concerned, was that a significant proportion of the deals which he believed had been entered into for him by Mr Wong of CEF Brokerage had not been honoured; his case is that the ‘flopped deals’ in question were those relating to the ‘grey market’ sale of 400,000 China Telecom shares at HK$20.00 per share, and the balance of 580,000 China Telecom shares at HK$19.00 per share.

39. Given that it is asserted that the likely cost to Mr Woo in the open market of 980,000 China Telecom shares would, on average, have been HK$10.0836 per share, and after taking into account all necessary disbursements and expenses which it would have been necessary to have incurred in such sale (ie. commission, stamp duty, SEHK levy and CCSS fee), Mr Woo estimates his ‘loss’ – in truth, his failure to gain – as the result of these events as HK$9,018,164.85, which is the sum, together with interest and costs, which now is claimed in this case against the defendant brokerage.

40. When, subsequent to these defaults, Mr Woo was informed by Mr Wong that, as a matter of policy that CEF Brokerage did not recognize any ‘grey market’ deals, and also declined to disclose the identities of the defaulting purchasers, Mr Woo decided to stand upon that which he perceived were his rights in this matter, and began to contemplate litigation.

41. To this end, there is in evidence certain transcripts of tape recordings covertly made by Mr Woo of certain of his conversations with Mr Wong, and on 13 November 1997 he instructed his solicitors to issue a formal demand for compensation to CEF Brokerage.

42. Upon the refusal by the defendant so to compensate him, Mr Woo commenced this action by the issue of the writ herein on 21 July 2000.

The issue of principle for decision

43. Although this case will decide upon the specific liability of the defendant brokerage, CEF, to its client, Mr Woo, arising from his failure to gain the profit which he maintains should have enured from the transactions entered into by CEF on his behalf, the underlying issue of principle requiring decision may be formulated thus :

In situations wherein transactions entered into on the ‘grey market’ are dishonoured by the default of counterparty purchasers, does the brokerage which arranged such transactions on behalf of its client bear the responsibility of formally ‘crossing’ such ‘grey market’ transactions on the market on ‘opening day’, and thus, by virtue of such ‘crossing’, incur personal liability to its client under the prevailing rules of the Hong Kong Stock Exchange regarding the trading of listed stocks?

44. It is important to isolate and to identify this underlying issue at the outset.  Nor is there any question but that this represents the required approach in the circumstances; in his helpful final written submission (at paragraph 52 thereof), Mr Westbrook SC, who, with Mr Patterson, appears for the plaintiff, agrees with the necessity to focus on the “critical obligation” to cross the trades on opening day, because, as he put it, “it is this that triggers the personal liability of the stockbroker.”

45. It is also equally useful to identify the arguments as to liability which the plaintiff does not raise in this litigation.

46. It is not contended, for example, that such ‘grey market’ transactions as were entered into by CEF on behalf of Mr Woo were binding on the brokerage ‘come what may’.

47. If, for example, the onset of the Asian financial crisis had impacted on Hong Kong somewhat earlier than in fact was the case, and if this had resulted in the China Telecom IPO being withdrawn by its underwriters prior to ‘opening day’, it is not asserted otherwise than that these purported transactions necessarily would have fallen to the ground, with no liability enuring therefor; in principle, therefore, the plaintiff accepts that such ‘grey market’ deals were no more than ‘conditional contracts’, subject to a ‘condition subsequent’, which was that the relevant public listing would in fact proceed upon the due day.

48. Nor is it said that there is or was a particular ‘custom and practice’, or ‘market convention’ within the Hong Kong share market that a brokerage such as CEF, which is participating in ‘grey market’ trading on behalf of its clients, ultimately bears personal liability to such clients should such transactions go off and be dishonoured by the counterparty’s failure to complete.

49. In this regard Mr Westbrook SC also expressly disavows any such argument.

50. Nor is it said that in Hong Kong there is in place any specific regulatory framework – whether of the HK Stock Exchange or of the Securities and Futures Commission – which expressly governs the factual situation whereby ‘grey market’ trades are dishonoured, and which delimits who shall be liable to whom, when and why.

51. To the contrary.  It is accepted that there is no such relevant regulatory regime applicable to the ‘pre-listing’ market – unlike, for example, the situation in London, wherein there are specific rules and regulations as to the rights and obligations arising from the trading of IPO stocks in the ‘grey market’, also known as ‘the when issued market’, such term implying that trades which are made prior to listing day are to be governed by the rules of the exchange “when issued”.

52. Nor, finally – and in my view significantly – is any alternative case now sought to be made by the plaintiff to the effect either that in terms of the ‘grey market’ transactions in question that the defendant brokerage acted qua principal to those transactions, or that in such share allocation as did take place there had been any breach of fiduciary duty on the part of CEF, or that there had been negligent conduct of the defendant brokerage, for example in failing to retain any or any proper records or ‘paper trail’ of such failed ‘grey market’ transactions, thereby resulting in the plaintiff’s ‘loss of the chance’ successfully to pursue the defaulting purchaser in the ‘grey market’ trade in question; initially I had thought that such ‘loss of chance’ contention would be prayed in aid as part of the plaintiff’s argument in this case, but in response to queries from the Bench Mr Westbrook SC once more disavowed reliance upon such argument. 

53. In short, therefore, the plaintiff’s analytical case wholly is premised upon the perceived obligation of the broker, in this instance CEF Brokerage Ltd, to honour the ‘grey market’ bargain it earlier had purported to enter on behalf of its client, Mr Woo, by ‘crossing’ the putative transaction on ‘opening day’, the first day of trading of the listed stock – notwithstanding that it was known that such transaction would be dishonoured by the counterparty – and thereby to incur personal liability to the client seller, Mr Woo, by reason of the operation of the existing rules of the Hong Kong Stock Exchange regulating the trading of listed stocks; these rules lay down that all trades have to be settled through Hong Kong Clearing and Settlement procedures, thereby guaranteeing that clients remain at ‘arms length’ from each other, and within the Clearing House system which is in place in order to provide certainty of settlement between market participants.

The issue of fact for decision

54. The foregoing formulation of the issue of underlying legal principle with which this court must grapple in order to decide this case proceeds on the assumption that the plaintiff’s factual case has been made out on the balance of probabilities.

55. However, whilst there is indeed a significant amount of common ground within the factual matrix raised by this case, this is not all one-way traffic, and the defendant brokerage, in the person of its account executive, Mr David Wong, firmly disputes certain aspects of Mr Woo’s account of what was said between them during their telephone conversations with regard to such ‘grey market’ trading in China Telecom shares.

56. It follows, therefore, that if Mr Wong is correct in his recollection of that which transpired between them, the importance of any decision in principle falls away because, as a matter of contract, the terms of the agreement thus telephonically struck between Mr Woo and Mr Wong on or after 30 September 1997 would, on the defence case at least, inevitably result in the finding that the defendant brokerage was not liable to Mr Woo on the facts, thereby removing the necessity to consider as ‘live’ the fundamental issue as has been invoked in this case.

57. There thus is a significant issue of fact at stake, the resolution of which may, or may not, be dispositive of the current litigation between these parties; as Mr Westbrook sagely remarked during his final submission, if he should lose on the facts his client will lose this case, but if he should succeed on the facts in itself this does not mean that his client necessarily will win.

The evidence : factual and expert

58. I should at this stage indicate the ambit of the viva voce evidence which was led before the court at trial.

59. For the plaintiff but one factual witness was called, namely Mr Lawrence Woo himself.

60. For the defendant, Mr David Wong, now a former employee of the defendant brokerage, also was the sole factual witness to give evidence to the court.

61. During the preparation for this case it had been anticipated by both parties that there would be a necessity for expert evidence to assist the court in its deliberations.

62. In this regard, on behalf of the plaintiff expert reports were prepared by two experts : Mr David White, on the general issue, and by Mr Wong Kam Wing, whose views sounded solely to the issue of quantum of damage.

63. For the defendant but one expert report was prepared, namely that of Mr Clive Rigby.

64. In the event none of these experts went into the witness box, although the report of Mr White, in substantially edited form, was placed before the court on behalf of the plaintiff.

65. For present purposes there is, I think, no necessity to go into the detail of the argument mounted by Mr Huggins SC, who appeared with Mr Lam on behalf of the defendant, regarding the admissibility of substantial parts of Mr White’s report, and supplemental report, much of which debate centered upon what had, or had not, been pleaded, the issues thereby perceived to be ‘live’ at this trial, and thus that which was permissible to be advanced in terms of expert opinion.

66. Suffice to say that after entertaining Mr Huggins’ objections at the conclusion of the factual evidence, and upon Mr Westbrook clarifying his position in terms of relevant issues, the court was persuaded (contrary to its usual practice) to give an immediate ruling as to admissibility – the terms of which appear upon the trial transcript – the end result of which was that parts only of Mr White’s report and supplemental report survived, and thus formally were admitted into evidence.

67. In light of this ruling, Mr Huggins did not seek to pursue the evidence of his own expert, Mr Rigby, and he called no such expert evidence on behalf of the defendant; in fact, he suggested that the report of Mr Rigby could be removed from the trial bundle.

68. The overall result, therefore, was that in evidential terms this court heard but two witnesses of fact, Mr Woo and Mr Wong, who were the two persons most directly concerned with the trades in question, and in addition, consequent on its ruling upon the admissibility objections raised, the court also received in evidence the edited (and very substantially reduced) expert report of Mr White, who by consent was not required to go into the witness box for cross-examination upon such parts of his report as remained available for scrutiny by the court.

69. As to the issue of quantum – which is put on the basis of the difference between the sale price of 30 September 1997 and the market price on ‘opening day’, 23 October 1997, of a total of 980,000 China Telecom shares – in the event that it became necessary to assess quantum, it was accepted by Mr Huggins that the plaintiff’s disavowal of the ‘loss of the chance’ argument greatly simplified matters, and that for this purpose the court could work on the basis of ‘Method 2’ within Section D of the plaintiff’s Schedule of Damages [at Exhibit P1], the calculations therein producing a figure, before interest, of HK$8,913,837.40, and that interest thereon, if relevant, should run from the date of the writ, 21 July 2000, at the rate of 1% over US dollar prime.

70. It followed, therefore, that if and in so far as it became necessary to fix upon a quantum figure, that the foregoing would represent the agreed sum (or, more accurately, perhaps, the sum to which no objection would be taken), absent the need for further evidence on the point.

Factual determination : the telephone conversations of on or around 30 September 1997

71. Almost every case requires specific determination of some facts, and this is no exception, albeit in this instance the ambit of such factual dispute is within relatively small compass.

72. The central factual disagreement in this case goes to that which actually was said in the telephone call, or calls, between Mr Woo, the plaintiff, and Mr Wong, his then friend and broker, on 30 September 1997.

73. The plaintiff, Mr Woo, says that on 30 September 1997 he called his old friend David Wong at CEF Brokerage and asked if he would look for potential purchasers interested in buying China Telecom shares on Listing Day.  In that initial conversation Mr Wong had asked Mr Woo for the number of shares he was wishing to sell, and at what price, and Mr Woo had said words to the effect of 1 million shares at $20 per share.

74. Subsequently Mr Woo says that David Wong had called him back and informed him that he could only match, in total on two separate deals, some 400,000 shares at $20 per share.

75. However, Mr Woo further says that later that same day, 30 September 1997, David Wong had called him when Mr Woo was in the Pacific Place Mall, and that during that conversation he had asked Mr Woo if he would be willing to sell another 1 million shares at $19 per share.

76. Mr Woo said that at this juncture he had responded “yes”, and that both men then had uttered the hallowed phrase “Done deal”.

77. It was at that point that Mr Woo maintains that he believed that he had a binding agreement, achieved through Mr Wong, for the sale and purchase of these shares, which deal CEF Brokerage was bound to complete on opening day, and which including ‘crossing’ these trades on the Stock Exchange via the Automated Matching System or ‘AMS’.

78. In his evidence Mr Woo strongly denied that David Wong had given him a warning of any kind that CEF would not accept any risk of default, nor had he said that there would be no binding agreement unless the purchaser duly confirmed and executed the deal on Listing Day; nor, or that matter, had any other stockbroker – and he had been dealing with several within the context of the forthcoming China Telecom public issue – given him any such warning.

79. Mr Woo said that it was only as ‘opening day’ approached for the China Telecom listing that various brokerage executives, including David Wong, had indicated to him that some purchasers were going to walk away from and default upon their ‘grey market’ deals, and it was at this stage, therefore, that he had begun to take legal advice, and had begun the covert recording of telephone conversations, including those that he had had with David Wong.

80. Mr Woo left the court in no doubt but that he had been ready, willing and able to complete his ‘grey market’ trades on opening day, and that against his wishes (and contrary to his view of what was proper and correct in terms of binding obligation) David Wong – with whom sadly he now had broken off his long friendship – and CEF had completed only on 420,000 shares, and that this was solely by reason of the refusal of CEF personally to underwrite all the deals which had been struck when the erstwhile purchasers had refused to complete the transactions in question.

81. For his part, Mr David Wong said that he had been a stockbroker for only about 21 months, and had done only about 5 ‘grey market’ deals before the China Telecom issue.

82. His version of events was that Mr Woo, whom he had known and with whom he had been friends since their schooldays, had telephoned him at the end of September 1997 and had requested that he look for potential purchasers of China Telecom shares. 

83. During that conversation Mr Wong said that he had told Lawrence Woo that he would conduct a “sounding out exercise” on a “best efforts” basis, and that this could amount to no more than “mere talking” at this stage.  Mr Wong further said that he had reminded Mr Woo that CEF as a brokerage would not recognize any ‘grey market’ trades unless such trades were recorded on ‘Listing Day’.

84. Mr Wong said that a few days later, in early October, he had reported to Lawrence Woo that there was sufficient buying interest for 1 million China Telecom shares at HK$19 and for 400,000 at HK$20 per share.  Mr Wong added that he had stopped accepting ‘sale requests’ from Mr Woo at this stage because that which was in place already exceeded the defendant brokerage credit limit of HK$25 million which was available to Mr Woo, and at this point, in what was a then rising market, he was more concerned with the seller’s potential ability to complete.  He says again that he specifically reminded Mr Woo that these arrangements were no more than “mere talking” (口噏噏) or, in transliterated terms, “hau ngap ngap”.

85. This then, is the ambit of the disagreement about the sequence and content of the telephone conversations between these two men.

86. Thereafter, the story once more attains common ground.  Mr Wong says that in mid-October 1997, in the wake of the burgeoning Asian financial crisis, the market turned, and prices began to collapse; in this context the forthcoming China Telecom float was a conspicuous victim.

87. Mr Wong related that in the circumstances then prevailing the Managing Director of the defendant, CEF, had instructed all brokerage staff that specific approval from him was required before any ‘grey market’ trades were to be ‘crossed’ through the market by CEF, and, further, that all sales staff and directors handling such trades were to be held individually liable by CEF in the event of default by customers – a directive that Mr Wong said was an entirely new policy for CEF solely resulting from the contemporary collapse in the China Telecom ‘grey market’ prices.

88. Mr Wong said that during the run-up to ‘opening day’ for the China Telecom listing that his brokerage had contacted potential purchasers to see if they were willing to honour the ‘grey market’ positions they had taken, and that the result of his inquiries/efforts in this regard was that eventually he was able to confirm the purchase from Lawrence Woo of 420,000 China Telecom shares only at HK$19 per share, an outcome with which, he says, Lawrence Woo earlier had indicated that he would be content.

89. During his evidence about the reaction to the sharply-dropping ‘grey market’ in China Telecom, Mr Wong also said that within the defendant brokerage that potential buyers and sellers had been “pooled”, and that on ‘opening day’ those trades in China Telecom as did go through were allocated to his customers at his discretion, in a manner akin to a ‘placement’ exercise; however, as earlier observed, no case on breach of fiduciary duty is mounted by the plaintiff by reason of such exercise, Mr Westbrook expressly having disavowed any argument that, for example, Mr Wong should have allocated to Mr Woo a greater proportion of the entire tranche of 700,000 shares that BNP then was willing to take up.

90. From discovery on the part of the defendant immediately pre-trial it appears that of the actual trades done by CEF on ‘opening day’ that the 420,000 share sale which went through on behalf of Lawrence Woo formed part of a larger ‘buy’ order of 700,000 shares which then was being honoured by BNP.

91. Mr Wong further said in cross examination that he had destroyed all his contemporaneous rough notes relating to the transactions with Lawrence Woo because no immediate formal complaint had been lodged, and that, so far as he was concerned, Lawrence Woo, subsequently the only one of his clients to complain, had told him that he was “happy” with the result achieved for him by David Wong.

Factual determination

92. There is something strikingly artificial in the court attempting to make a finding of fact relating to undocumented broker/client telephone calls of almost a decade ago, not least because, in the fetid ‘bull market’ atmosphere of late September/early October 1997, the overwhelming probability is that the telephone conversations in question – now so carefully isolated, dissected and purportedly recalled for the purpose of this litigation – were part and parcel of tens, perhaps even hundreds, of daily calls which I surmise were made both by Mr Woo and by Mr Wong during the hectic ‘grey market’ trading days of that particular pre-listing period.

93. Nor is this process assisted by the fact that both witnesses of fact made a not-unfavourable impression upon the court, and I certainly did not form the view that either Mr Woo or Mr Wong was attempting positively to mislead, nor to do other than to attempt to recall that which had happened which, from a stock market trading perspective, had occurred several lifetimes ago.

94. Equally, however, it was very obvious to me that each of these gentlemen was acutely conscious of the relevance and effect of their evidence to the desired result of this case, and, as is not unusual in such cases, it struck me that in certain instances evidence of what should have been said may well have seamlessly ‘morphed’ into what must have been said, and thence to what positively was said.

95. Leading counsel on each side persuasively has pressed upon the court the obvious veracity of their respective witnesses. 

96. For his part Mr Huggins has stressed the potential pot of gold waiting for Mr Woo at the end of this litigation rainbow should his account be believed, suggesting strongly that financial motive within commercial litigation generally successfully overwhelms any innate instinct for veracity, and that it is incredible that Mr Woo could purport to recall events of 9 years ago with the sort of detail which did not even find its way into his pleadings. 

97. On the other hand Mr Westbrook has submitted that Mr Wong is not to be believed in his account of events, in particular in his assertions that he repeatedly had emphasized to Lawrence Woo that their conversations amounted to no more than “non binding expressions of interest” or “mere talking”, without any obligation on the part of CEF to complete these ‘grey market’ transactions unless there was confirmation of and acceptance by the “indicative prices” by the buyer on ‘opening day’; he further points out that in the 78 pages of tape transcript that have been placed before the court that not once does Mr Wong suggest to Mr Woo that which now is being suggested to the court on his behalf, and that throughout these transcripts Mr Wong’s tone is apologetic, in effect pleading with Mr Woo for understanding of CEF’s position.

98. At the end of the day the court has to grasp what is a very prickly nettle, and I confess that in the circumstances I have not found it an easy task.  I should say, also, that I have not been greatly assisted in my conclusions by the content of the tape transcripts; whilst perhaps of some use in terms of their overall tenor, save and except when something is said in express terms, I have an instinctive resistance to according particular weight to inferences sought to be drawn by the plaintiff from covert tape recordings wherein the recording process was known to the plaintiff only.

99. In the event, having had the opportunity to see and hear the witnesses, and having reflected for some time upon the evidence and – not least – upon that which I perceive to be the commercial probabilities arising in the overtly ‘bullish’ market atmosphere prior to the market ‘turn’, and the consequent marked reversal of investor sentiment, I have concluded that the sequence of events in terms of the timing of the telephone calls at the end of September 1997 in all probability took place as the plaintiff, Lawrence Woo, has recounted.

100. It strikes me as difficult, if not impossible, to divine exactly what was said, in terms of the precise words used, between the two men at the time – whether, for example, the term ‘done deal’ featured as prominently, or indeed at all, as Mr Woo now insists, is moot, or indeed whether the term “hau ngap ngap” was used by either, and I cannot fairly do so.  However, I have no difficulty in believing, and I so find, that the overwhelming probability is that conversations of this nature between these two men, who at the time knew each other well both personally and professionally, must have been couched in the normal broker/client argot customarily in use between them, absent the necessity for the relatively formal recitation of warnings/qualifications which Mr Wong now insists that he gave.

101. Equally, whatever form of words in fact was used, there is no doubt in my mind, and I so find, that whilst agreement was reached between these two gentlemen as to numbers and price per share of the China Telecom shares at issue, by the same token I do not believe that at that time it would have crossed (or indeed did cross) the mind either of Mr Woo or of his friend Mr Wong that the conversations between them, without more, could or would constitute a contractual obligation potentially binding on the defendant brokerage in the event of default, and enforceable at the behest of Mr Woo, wherein such obligation was to crystallize with the brokerage having to ‘cross’ these ‘grey market’ transactions on the opening day of the listing; whilst I tend to doubt that the words “mere talk” (“hau ngap ngap”) actually were said, I take the view that this sentiment is precisely what both parties would have thought of the point had it then been canvassed.  And certainly (and for the avoidance of doubt) I reject any contention to the effect that in this telephone conversations Mr Wong accepted, or otherwise indicated approval of, the concept of the brokerage’s personal liability in the event of any default in the ‘grey market’ trades which Mr Woo then was instructing Mr Wong to enter upon his behalf.

102. In reaching this conclusion, however, and in broadly preferring the recollection of Mr Woo to that of Mr Wong, I do not say that I am imputing to the latter gentleman any specific intention to mislead; to the contrary, faced with a situation of a telephone call which occurred many years ago, I simply take the view that in the circumstances it is more likely than not that Mr Woo’s evidence on the issue is broadly the more accurate, and I so find.

103. I would also add that I have come to this conclusion notwithstanding my further view that Mr Woo was at the very least disingenuous when, in being cross-examined upon a collateral matter relating to an incident involving mutual friend, one Victor Tung – whom, it seems, had not honoured earlier ‘grey market’ dealings with Mr Wong/CEF – Mr Woo disavowed any knowledge of this particular incident, nor of the fact that when Mr Wong had asked him for help in sorting out the matter (since it had been Mr Woo himself who had introduced Mr Fung, his friend, to Mr Wong), that Mr Woo himself had dismissively categorized such ‘grey market’ trading as “hau ngap ngap”, and, as such, non-binding.

104. The result of preferring Mr Woo’s denial of the existence of warnings being given in his telephonic exchanges with Mr Wong is that this case is unable to be decided on its facts alone – as would have been the situation if and in so far as the court had concluded, on the facts, that the Woo/Wong exchanges as to the relevant ‘grey market’ deals in China Telecom were girt about with the potentially exculpatory warnings and qualifications which, Mr Wong now suggests, were understood and accepted by Mr Woo – and thus it is necessary to move to the second stage, wherein consideration is required of the arguments put forward by the plaintiff in terms of that which earlier I have described (at paragraph 43 herein) as the issue of underlying principle raised in this case.

105. In other words, having accepted that CEF was instructed, through Mr David Wong, to enter into ‘grey market’ contracts on behalf of the plaintiff, the question is whether this provides any basis for asserting that CEF had personal liability thereunder in the event of counterparty default.

The legal obligation to cross on ‘opening day’?

106. In answer to this issue the plaintiff’s position is clear : on Mr Woo’s behalf Mr Westbrook says, in terms, that the defendant brokerage’s obligation to cross the ‘grey market’ trades on opening day constituted the “critical obligation” which triggers the personal liability of the stockbroker, “without which the plaintiff cannot get home in this case.”

107. Is this contention correct as to the obligation of the broker in such circumstances?  If not, as Mr Westbrook has accepted, the plaintiff’s case, as run at this trial, must fall.

108. As a matter of principle, an agent is not normally liable upon contracts entered into by principals through him : see, for example, The “Santa Carina” [1977] 1 Lloyd’s Rep 478 (CA).  See also Wilson v. Avec Audio Visual Equipment Ltd [1974] 1 Lloyd’s Rep 81, at 83, wherein Edmund Davies LJ (as he then was) observed :

“It requires clear and precise evidence of a very special relationship before an agent can be rendered personally liable in respect of a contract entered into on behalf of his principal.”

109. The juridical basis for saying that the defendant brokerage, CEF, ultimately incurred personal liability in the situation revealed on these facts is, if I may say so, less than obvious; as Mr Huggins commented, the bald assertion, without more, that there is a ‘duty to cross’ does not take the analysis very far, and it is common ground that once a trade actually is ‘crossed’ on listing day, the broker then becomes personally liable under the existing rules of the Stock Exchange even if the counterparty defaults.

110. Nor, as earlier observed, is it presently contended that trading in ‘to-be-listed’ securities on the ‘grey market’ on behalf a client transmutes into personal liability on the part of the broker agent by reason of any express rule to that effect, or by reason of prevailing custom or practice within the brokerage industry in Hong Kong, whilst I have also found, as a fact, that there was no acceptance of putative personal liability on the part of the broker by reason of the content of the telephone conversations between Mr Woo and Mr Wong.  Nor is any breach of fiduciary duty arising out of the agency alleged, and in any event, absent any independent source (for example, in contract) sounding to personal liability, mere invocation of the concept of fiduciary duty seems to me to add nothing; unless as a matter of law personal liability is incurred by the agent, merely to assert the existence of any agent’s fiduciary duty not to act other than in the best interests of his principal takes the argument no further.

111. Against this somewhat unpromising backdrop, therefore, Mr Westbrook is obliged to rely upon the fact that Clauses 1 and 6 of the Client Agreement entered into between Mr Woo and CEF refer to, and “import”, the Rules of the Stock Exchange.

112. Mr Westbrook submits that it is a fundamental part of the plaintiff’s case that he was dealing with, and through, a stockbroker, and hence that the rules of the Hong Kong Stock Exchange and the Regulations and Codes of Conduct of the Securities and Futures Commission apply to the contract, “with such modifications as are required to reflect the fact that completion was necessarily to be delayed until Opening Day.”

113. He noted the terms of the Client Agreement entered into between the plaintiff and CEF, in particular clause 6 thereof ,which provides :

“All transactions in Investments made for or on my behalf in Hong Kong shall be subject to the relevant provisions of the constitution, Rules, regulations, bye-laws, customs and usages of The Stock Exchange of Hong Kong Limited (“the Exchange”) and the Hong Kong Securities Clearing Company Limited (“HKSCC”) and of the Laws of Hong Kong as amended from time to time.  The Rules of the Exchange and HKSCC, in particular those rules which relate to trading and settlement, shall be binding on both yourself and myself in respect of transactions concluded on my instructions…”

114. It is not disputed, said Mr Westbrook, that ‘grey market’ trades fall within the definition of ‘Investments’, as found on the opening page of the Client Agreement, whilst he noted, further, that ‘grey market’ trading clearly is within the definition of “securities” and “dealing in securities” within the Securities Ordinance, Cap 333, which then was in force.

115. Against this background the Mr Westbrook contended that clause 6 of the Client Agreement necessarily “imported” into the contractual relationship between client/broker the Stock Exchange requirement, pursuant to Rules 526 and 544, that on listing day, that the defendant broker was obliged to cross all ‘grey market’ trades on the market – and thus, Mr Westbrook contended, triggered a corresponding obligation to make good any default by buyer or seller, as the case may be.

116. This argument is ingenious and was persuasively mounted, but, with respect, I doubt that that the conclusion thus sought to be drawn is correct, nor am I convinced that the Rules invoked in aid of the argument enable Mr Westbrook to reach the position that he wishes now to reach in order to get home in this case.  In my judgment, it is tolerably clear that that which Clause 6 of the Client Agreement does not do is to modify the wording of the Rules so that a rule which otherwise on its terms does not apply to a particular transaction somehow becomes implicitly modified and applicable.

117. Rule 526 of the Stock Exchange Rules (1997 edition) deals with the rules relating to ‘direct business transactions’ – defined as business transacted by a member of the exchange who acts both for buyer and seller, whether as principal or agent – and, in particular, when details of such transactions are to be input into the Automatic Matching System installed and operated by the Exchange for securities trading.

118. Rule 544, entitled ‘Transactions Not Recognised’, has as its focus the point at which the Exchange will recognize securities transactions conducted on the Exchange. 

119. It lays down, at subrule 544(1), that the Exchange will only recognize “those transactions which are duly recorded or concluded through the System within the trading hours stipulated” in the rules, whilst 544(2) requires that, save for direct business transactions, that “members shall cause transactions in securities listed on the Exchange…to be input into the System at the earliest opportunity” and that any transactions not so recorded “shall not be recognized”.

120. Subrule 544(3) is significant in the present context.  It provides that “Any transaction relating to any dealing in any securities the subject matter of a new issue…shall not be recognized until such securities have been granted a listing by the Exchange”, whilst 544(4) states that “The Exchange will not entertain disputes between Members…in connection with or arising from any transactions that are not recognized.”

121. With respect, I am unable to read into Rule 544, in particular subrule 544(2), whether taken in conjunction with Rule 526 or on its own, the requirement that a transaction in securities not so listed on the Exchange at the time of such transaction, albeit ‘to-be-listed’, must be input into the System, that is, ‘crossed’ by the broker at the earliest opportunity. 

122. To the contrary.  It seems to me that all that this particular rule is doing, and all that it seeks to do, is to delimit the precise moment when the Exchange assumes a regulatory jurisdiction, whereby it will entertain disputes which have arisen between Members in relation to such ‘crossed’ transactions in listed shares.

123. However, what this rule does not achieve, in my view, is to impose upon a Member who has engaged in a ‘grey market’ transaction in a then-unlisted security the personal obligation subsequently to input that transaction into the System upon that security formally being listed, and thereby to ‘cross’ it on the market, notwithstanding that that by that stage the Member well knows that the trade in question will be dishonoured.

124. Mr Westbrook suggests that these Rules are not to be approached as if they were legislation, and accordingly that a “more liberal” construction is required.  I can appreciate why he says this, but I do not think that these Rules are susceptible to such a strained interpretation. 

125. That Mr Westbrook may be correct in further suggesting that in terms of ‘grey market’ trading there effectively exists “a legislative and regulatory black hole” also is nothing to the immediate point.  It might be thought that the authorities seized with overseeing the operation of our share market should enact rules relating specifically relating to the “when issued” market, but the fact remains that thus far they pointedly have not chosen to do so, and I do not regard it as the function of the Commercial Court to purport to fill any such legislative lacuna because in the circumstances of any particular case the court might take the view that justice in any particular case might be served in so doing.

126. Although far from conclusive on the point, I further note that such information as has been publicly promulgated by the Stock Exchange tends to suggest that in the view of the Exchange the Rules of the Exchange have no applicability to ‘grey market’ trading.  In this connection the website of the Exchange expressly states (at Q&A 34 in ‘Frequently Asked Questions’) :

“Investors should note that the legal enforceability of a grey market trade comes merely from the agreement between the parties.  They are advised to seek legal opinion in advance to understand fully their rights and obligations.”

127. As Mr Huggins observed, this does not sit comfortably with the suggestion as now is advanced that the Stock Exchange Rules import a general and overriding legal duty to cross ‘grey market’ trades or the Exchange on ‘opening day’, and thus incur personal liability upon the particular brokerage.

128. Accordingly, at the end of the day (and after some reflection), I reject the fundamental premise upon which the present case as to liability is based, and I do not conclude, on the particular facts as found by this court, that David Wong/CEF Brokerage Ltd was under any obligation to execute the ‘grey market’ sales agreed by Mr Woo, its client, by subsequently ‘crossing’ the full 1.4 million China Telecom shares on the first day of listing, that is, 23 October 1997.

129. True it is that, of the anticipated 1.4 million shares, 420,000 shares were so ‘crossed’ by this brokerage at the behest of David Wong, whom, it seems to me, in the difficult and wholly unanticipated circumstances then prevailing, had gone out of his way to try and secure the best result for his old friend, Lawrence Woo; in this regard the evidence is that, as per the instructions of his Managing Director, David Wong personally had countersigned the relevant slip, so that if (which in fact did not occur) the particular counterparty had not honoured the trade in 700,00 such shares (of which the 420,000 represented a designated tranche) Mr Wong personally would have had to have underwritten the entire transaction.

130. Clearly, however, the fact that indeed some 420,000 shares successfully went through does not, in itself serve to constitute the plaintiff’s case, nor does it exemplify or establish the proposition as to the defendant’s personal obligation to ‘cross’ the complete 1.4 million shares, such as now is advanced on the plaintiff’s behalf.

131. I agree with the submission of Mr Huggins that, were this to be the legal position, all brokers who participate in ‘grey market’ transactions would be regarded as ‘on the hook’, and thus personally bound to remedy any counterparty default from the moment that any such ‘grey market’ deal purportedly is done, which effectively would mean that the brokerage industry (no doubt unwittingly) would be underwriting millions of dollars in ‘grey market’ trades, and thus would be assuming personal liability for any subsequent default, in instances in which any such default may not occur for days, or perhaps even weeks, from the date of the ‘grey market’ trade in question.  I further accept the proposition that, if the plaintiff now were held to be correct, such brokerages would appear so to have acted without (as the instant case exemplifies) having obtained any security prior to the entry into such ‘grey market’ trades – an eventuality which moved Mr Huggins rhetorically to ponder how such a conclusion appropriately would ‘fit’ within the requirements of the Financial Resources Rules, as imposed by legislation upon brokerages which trade in our markets, which Rules are strictly enforced by the Securities and Futures Commission.

132. It follows that I have come to the view that the plaintiff’s thesis relating to the broker’s implicit underlying obligation to cross, and thus the consequent incursion of personal liability on the part of that broker – a thesis which in terms did not see the light of day either in the pre-litigation solicitors’ correspondence or (save by generous implication) within the existing pleadings – has emerged during the course of this case; more accurately, perhaps, the germ thereof first saw the light of day at the beginning of the previous trial, in HCCL 38 of 2004, albeit this earlier dispute was settled before the full implications of the proposition were argued out, as now they have been in the present case.

133. Nor do I find persuasive the argument, adumbrated by Mr Woo in his evidence in response to a question in cross-examination, and adopted in submission, to the effect that if he were not to be correct in his contention as to the legally binding nature of ‘grey market’ transactions, and the obligation thereby imposed upon participating brokers, that it would make “no commercial sense” for anyone to trade on the ‘grey market’ in the manner as now so obviously occurs.

134. Whilst forensically attractive, I do not consider that argument founded upon the concept of that which is perceived as ‘commercial sense’ inevitably is reflective of underlying legal obligation. 

135. The short point is that, as a matter of fact, some ‘grey market’ transactions are honoured and some are not, but that some deals go through successfully in my view does not, and cannot, mean that this represents acceptance by any particular broker of a legal obligation to honour the trade ‘come what may’. 

136. It is obviously fair comment that different people may have differing perceptions as to the obligations arising from such trading, and equally clearly, in any given instance much depends upon what is, or is not, specifically agreed/said between broker and client; there is, it must be recognised, a far greater risk of default in instances of ‘grey market’ trades wherein bargains relating to the to-be-issued share are struck days, or perhaps even weeks, in advance of ‘opening day’. 

137. As earlier observed, the fact that in many instances (as, indeed, with the transaction in the 420,000 China Telecom shares as was honoured in the instant case) specific deals do indeed go through successfully is not indicative per se of the legal obligation so to complete.  It may, for example, be indicative of punters not wishing to be seen to compromise their trading reputation, lest they be denied future opportunities to trade in the ‘grey market’; alternatively, it may be the case (as, I suspect, may have been the situation in terms of the 700,000 shares which on the instant facts were taken by BNP at HK$19 per share) that a seeming ‘loser’ on one ‘grey market’ transaction may in fact be a net ‘winner’ if account is taken of other transactions completed by the same player, perhaps through another broker or brokers.

138. Accordingly, the short point requiring emphasis is that in this area specific instances are not to be regarded as probative or otherwise indicative of an immutable underlying principle; as a matter of practical politics there may be differing and perfectly valid explanations for any particular course of conduct.

139. On the facts of the present case, therefore, I have concluded that there is no liability to the plaintiff on the part of the defendant broker.  I have arrived at this view because, in the absence of an express Stock Exchange rule binding upon brokers which imposes personal liability upon such broker in instances of ‘grey market’ trading (and there is none), and in the absence of any agreement by the broker with its client in any particular instance of ‘grey market’ trading as to assumption on the part of the broker of contingent personal liability (and there is none), and in the yet further absence of any evidence of market practice or convention governing personal liability of the broker in instances of ‘grey market’ trading (and there is none), it seems to me that no proper analytical basis exists to underpin the plaintiff’s contention regarding the alleged personal liability of the defendant brokerage in this case.

140. If this be correct, it follows that, on these particular facts, the plaintiff’s case must fail, and I so hold.

141. In so holding, I naturally do not purport to make any general findings as to the enforceability of all ‘grey market’ trades, and I have attempted solely to base my decision on that which I consider represents the correct response to the particular arguments mounted within the present factual matrix.

142. Should I be wrong in the conclusion I have reached, however, I now move to a discrete legal argument mounted by the defendant which, it further is said, is sufficient in itself to negate any finding of personal liability against the brokerage in the present case.

The ‘section 76’ argument

143. The defendant brokerage says that, by virtue of the operation of the then existing section 76(1)(b) of the Securities Ordinance, Cap 333, the trading in the ‘grey market’ of China Telecom securities fell foul of, and is prohibited by this legislation, and that by virtue of section 76(4), a contract entered into in contravention of section 76(1) shall not be enforceable by, inter alia, the other contracting party.

144. Section 76 of the Securities Ordinance, as it then existed, provided :

“(1)      Except as provided in regulations, a dealer (including an exempt dealer) shall not transact in Hong Kong, or hold himself out as being prepared to transact in Hong Kong –

(a)        any dealing whereby the dealer confers on any person an option to purchase from or sell to the dealer any securities listed on the Unified Exchange; or

(b)       any dealing in any such securities which is completed later than the end of the next trading day after the dealing was entered into.

(2)       Any dealer who contravenes subsection (1) shall, subject to subsection (3), be guilty of an offence and shall be liable on conviction to a fine of $5000.

(3)        It shall be a defence to any criminal proceedings brought under subsection (2) in respect of a dealing mentioned in paragraph (b) of subsidiary (1) for the accused to prove that he took all reasonable and practicable steps to secure completion of the transaction within the period permitted by that paragraph.

(4)       A contract entered into in contravention of subsection (1) shall not be enforceable by either the dealer or the other contracting party.”

145. Mr Huggins further points out that, in relation to “dealing in securities”, section 2(1) provided :

“dealing in securities, in relation to any person (whether acting as principal or agent), subject to section 3(1), means making or offering to make an agreement with any person, or inducing or attempting to induce any other person to enter into or offer to enter into any agreement –

(a)   for or with a view to acquiring, disposing of, subscribing for or underwriting securities:

(b)   the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of the securities.”

whilst section 2(2) further provided, in relation to the meaning of “securities”, that :

“(2)    In this Ordinance a reference to securities of a corporation is a reference to securities –

(a)   issued, made available, or granted by the corporation;

(b)   proposed to be issued, made available, or granted by the corporation;

(c)   proposed to be issued, made available, or granted by the corporation when it is formed.”

and, in relation to the word “listed”, section 2(3) also provided :

“(3)   In this Ordinance a security is regarded as listed on the Unified Exchange when the Exchange has, on the application of the company which issued the security, or on the application of any holder of the security, agreed to allow, subject to the requirements of the Ordinance, dealings in that security to take place on the Unified Exchange.”

146. Against this statutory backdrop, Mr Huggins argued that, on the facts of the plaintiff’s present case, the prohibition within section 76(1)(b) plainly applied, and hence, pursuant to section 76(4), any contract was unenforceable. 

147. His argument proceeded thus :

a.       there was here a dealing in securities because, on the plaintiff’s case, CEF, acting as agent, made an agreement with the purchaser; similarly, CEF, acting has agent, had made an agreement with the plaintiff as seller;

b.       this agreement was for, or with a view to, acquiring securities (on the part of the purchaser) and disposing of such securities (on the part of the seller);

c.       the purpose of the agreement was to secure a profit to the purchaser or to the plaintiff as seller, as the case may be, by reference to fluctuations in the value of such securities;

d.       the dealing was a dealing in listed securities because the agreement was made for, or with a view to, acquiring and disposing of listed securities, being China Telecom shares after they could be traded on the Exchange; and

e.       the dealing was entered into on 30 September 1997, whilst the next trading day was 6 October 1997; however, on the facts, the dealing in the present case was not to be completed until 27 October 1997, which plainly was later than the next trading day after the dealing was entered into.

148. I do not consider that this discrete ‘section 76’ argument succeeds.

149. The very short point upon which I decide this issue is that in my view section 76 does not sound to a dealing in unlisted, as opposed to listed, securities, and in the present case of China Telecom shares there is no question but that there was no such ‘listing’ until 23 October 1997, well after the so-called ‘dealing date’ in question in this case, which was 30 September 1997.

150. Nor do I consider that the fact that these China Telecom shares were ‘soon-to-be-listed’ securities affects the analysis; this listing could have come off – indeed it may well have come close to being pulled by the underwriters given the rapid onset of the ‘Asian financial crisis’ – and it seems to me that until such listing on the Main Board in fact takes place, the trading in the ‘grey market’ of the China Telecom shares simply does not fall within the ‘listed’ rubric required for section 76 to ‘bite’.

151. I therefore reject this argument on this basis alone, and in so doing echo the like point which was made by Mr Westbrook in trial submission.

152. If, as I believe it to be, it is correct to say that in the particular circumstances section 76 is not engaged, this view is consistent with the defendant’s alternative argument, which I accept, to the effect that ‘grey market’ trading in unlisted securities is not the same as, and for all purposes is not to be equated with, the normal (and regulated) trading on the Exchange in listed securities.

153. In arriving at this conclusion I should add that I have not been greatly assisted by two decisions which have been referred to during the course of this argument : first, the decision of Waung J in Tullett & Tokyo International Securities Co. Ltd v. APC, unreported, HCA 12467 of 1997, judgment dated 27 April 2000 (wherein the learned judge appears to have rejected the point taken on section 76(1)(b) principally on the ground that the plaintiff in Tullett had the benefit of the professional exemption in terms of trading as principal provided for in section 3(1) of the Securities Ordinance); and second, by an earlier decision of this court in IBI Asia (Securities) Limited v. Bank of Credit and Commerce Hong Kong Limited (in liquidation), unreported, HCCL 249 of 1995, judgment dated 15 September 1999, wherein the securities in question in fact were listed, but were suspended at the material time.

Decision

154. It follows from the foregoing that although the defendant fails in its ‘section 76’ submission, nevertheless it prevails against the plaintiff in terms of the plaintiff’s case as founded upon the implied obligation of the defendant subsequently formally to ‘cross’, on the first day of listing, the relevant ‘grey market’ trades as struck by the brokerage as agent for and on behalf of the plaintiff.

155. The fact that, on the basis of the case as now mounted against this defendant, this court has held that the plaintiff does not succeed against the defendant brokerage does not mean, however, that conceptually the plaintiff is left without recourse.

156. Not only would he have an action in contract against the defaulting counterparty, but it seems to me that an investor in a situation such as the plaintiff may in appropriate circumstances also have a remedy against a brokerage for failing adequately to document the ‘grey market’ trades in question, thus leading to the argument that by reason of such negligence/contractual breach, the actions of the brokerage have resulted in loss of the chance successfully to pursue the defaulting counterparty for breach of any such ‘grey market’ bargain.

157. Whether on the present facts either course is, or was, open to this plaintiff is not for me to speculate; suffice it to say that, on the basis of the present case advanced by this plaintiff against this defendant, in my view, for the reasons given herein, the plaintiff does not succeed.

158. Accordingly, the plaintiff’s action against the defendant is dismissed, and I so order. 

159. As to costs, I make an order nisi that the costs of this action are to follow the event, such costs to be taxed if not agreed.

160. I further make an order that the reserved costs referable to the defendant’s specific discovery application, which was mounted very shortly before trial and which was dismissed by this court, are to be to the plaintiff, to be taxed if not agreed.

161. I thank counsel for their assistance.