GRAND SECURITIES CO. LTD. v. TAM SIU WING DAVIS

HCA 544/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 544 OF 1998

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J U D G M E N T

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1. The Plaintiff is and was at all material times a broker and a member of The Stock Exchange of Hong Kong Limited carrying on the business of stock brokerage in Hong Kong. By an agreement in writing dated 8th September 1995 between the Defendant and the Plaintiff ("the Cash Account Agreement") the Defendant opened and the Plaintiff on the Defendant's behalf operated a cash securities trading account ("the Cash Account") subject to the terms and conditions of the Cash Account Agreement. By another agreement in writing of the same date between the parties ("the Margin Account Agreement") the Defendant opened and the Plaintiff on behalf of the Defendant operated a margin securities trading account ("the Margin Account") subject to the terms and conditions of the Margin Account Agreement.

2. It is the Plaintiff's pleaded case that, pursuant to the said Agreements, the Defendant traded under the aforesaid cash and margin securities trading accounts with the Plaintiff but wrongfully failed to make payments to the Plaintiff on the relevant settlement dates and/or failed to pay the margin deposits upon demand, thereby leaving a debit balance in the cash securities trading account in the sum of $1,120,394.78 as at 14th November 1997 and a debit balance in the margin securities trading account in the sum of $537,356.02 as at 16th November 1997. In this action, the Plaintiff claims against the Defendant the said outstanding sums with interest and costs.

3. The defence case, put simply, is that the Defendant was introduced as a client to the Plaintiff by one Lee Ying Kit ("Lee"). Lee was a senior accounts executive with the Plaintiff. It was Lee who handled trading in the Cash Account and the Margin Account on the instructions of the Defendant until 3rd November 1997. On 3rd November 1997, the Defendant informed Lee that he would cease trading on either account and from the same date he had not since given any instruction to Lee to trade. It was Lee who traded using the said accounts without the authorization of the Defendant. The Defendant's position in the Cash Account was liquidated as of 3rd November 1997 leaving a zero balance. As to the Margin Account, there was a debit balance of $537,356 as of 3rd November 1997 but that deficit should be reduced by one payment of $280,278.97 by the Defendant through Lee to the Plaintiff and another two payments of $120,394.78 and $160,000 respectively by Lee on behalf of the Defendant to the Plaintiff. Moreover, there were proceeds amounting to $155,324.52 from the sale of shares held to the credit of the Defendant in the Margin Account realized after 3rd November 1997. It follows that the Defendant denies liability for any outstanding balance in any account.

4. The main issue for the court, apart from subsidiary accounting questions, is whether the debit balance in the Cash Account accrued as a result of authorized trading by Lee. It is a plain factual issue. After hearing all the evidence, by consent judgment was reserved pending written final submissions to be filed by counsel. On 12th April 1999, I have all the written submissions to hand. I now render judgment.

5. The managing director of the Plaintiff ("Mr. P") is the only witness for the Plaintiff. He confirmed the amount as outstanding balance in the Cash Account and that the pleaded outstanding balance in the Margin Account should be reduced by $155,324.52. He also confirmed that a cheque had been issued to the Defendant for $280,278.97 representing the net credit due to the Defendant on the Cash Account after squaring the Defendant's positions on 3rd November 1997. In other words, the outstanding balance in the Cash Account indeed accrued after 3rd November 1997 as a result of trading after that date. He added that he had a telephone conversation with the Defendant on or about 6th November 1997 during which the Defendant, allegedly, promised to later settle the then balance in the Cash Account. Such evidence, if believed, means that trading after 3rd November 1997 was sanctioned by the Defendant and he should be liable. Mr. P stated in evidence that it was only on 13th November 1997 or thereabout when he met the Defendant and Lee that the Defendant denied liability and Lee admitted using the Cash Account to trade for his own benefit or loss without authority from the Defendant. However, Mr. P said that he did not believe what he was told. He took the view, put bluntly, that the Defendant and Lee could be colluding to save the Defendant harmless. When questioned why he attributed such sinister motives to the Defendant and Lee, Mr. P gave the reason that he could find no evidence to support the assertions by the Defendant and Lee.

6. Mr. P also admitted under questioning that Lee and at least one other employee of his had been known to him to have used clients' accounts to trade for their own purposes and incurred losses. For those irregularities, he accepted undertakings from his employees to make good the loss without recourse to the clients concerned.

7. The defence called two witnesses - the Defendant himself and Lee. The evidence of the Defendant accords with the pleaded defence and can be summarized as follows:

(a) The Defendant had been acquainted with Lee for over 12 years. Lee was a senior accounts executive with the Plaintiff. Through Lee the Defendant opened the Cash Account and the Margin Account with the Plaintiff.

(b) Since the opening of the said accounts, the Defendant executed stocks dealings through Lee until 3rd November 1997.

(c) The usual practice was for the Defendant to give Lee oral instructions for purchasing or selling certain stocks by telephone. Thereafter Lee would confirm to the Defendant completion of the deals through telephone. Moreover, since the Defendant was required to settle accounts and receive payments for stocks dealings, in order to save banking leg work for the Defendant, the Defendant and Lee had a savings account in their joint names with a bank and the Defendant signed a number of blank cheques drawn the Defendant's own current which were entrusted to Lee to complete and use for payments on behalf of the Defendant to the Plaintiff. Lee would pay into the joint savings account any cheque issued by the Plaintiff in favour of the Defendant. Lee would also transfer funds in the joint savings account to the Defendant's own current account if blank cheques drawn by the Defendant used by Lee to pay the Plaintiff required cover.

(d) Lee performed the Defendant's instructions with such excellent efficiency and good attitude that gained the Defendant's confidence.

(e) As the Defendant did not want his wife and his employer to know that he speculated on shares, he directed Lee to keep the monthly statements of account for him and reported to him the position of the said accounts through telephone. Sometimes when the Defendant went to lunch with Lee or to Lee's office, Lee would show the Defendant the status and the balance and they were always correct.

(f) Towards the end of October 1997, the stock market was volatile. On 3rd November 1997 the Defendant instructed Lee to sell all the shareholdings held under the Cash account and settle the outstanding balance. Lee later on that date confirmed that he had done so.

(g) On 5th November 1997, the prescribed settlement day, the Defendant received a cheque for $280,278.97 from the Plaintiff being the net proceeds of the stocks held under the Cash account as of 3rd November 1997.

(h) On or about 13th November 1997 the Defendant received a phone call from Mr. P who told the Defendant that there was a recorded debit of $1,120,394.78 with the cash account and a recorded debit of about $537,356.00 with the margin account ("the debit balance"). Mr. P demanded immediate settlement of the said sums. The Defendant immediately called Lee for an explanation. Lee admitted that he used the said accounts to trade stocks for his own benefit from 4th November 1997 to 12th November 1997. He begged the Defendant not to report the matters to the police nor to the Securities and Futures Commission. On the same day Lee and the Defendant went to meet Mr. P in his office. There, the Defendant told Mr. P that the debit balance was not incurred by him but by Lee. Lee confirmed to Mr. P that was the case.

(i) Lee later promised the Defendant that he would settle this matter with the Plaintiff immediately. A few days later Lee told the Defendant that he had paid a sum of $120,394.78 to the Plaintiff to settle part of the debit balance under the Margin account and would arrange to settle the remaining sum by instalments. The Defendant believed this was the case until in mid-January 1998 he received a sealed copy of the Writ of Summons in respect of the action herein from the Plaintiff.

(j) The Defendant was later informed by Lee that in or about mid-April of 1998 he paid a further sum of about $160,000.00 to the Plaintiff to settle the debit balance under the Margin account.

8. The evidence from Lee corroborated with that of the Defendant in all essential details. Lee added that, contrary to instructions from the Defendant, he paid the $280,278.97 cheque into the joint savings account and then withdrew this money from the account for his own use. Furthermore, prior to his giving evidence in court, Lee had written to the Stock Exchange admitting that he had used the two said account in trading for his own purposes without authority from the Defendant.

9. As to the two payments of $120,394.78 and $160,000 respectively, Lee stated that they were by cheques drawn by him for repayment to reduce the outstanding balance of $1,120,394.78 in the Cash Account to $1,000,000 and the outstanding balance in the Margin Account by $160,000. He denied that these payments were for repayments of his own debt due to a finance company which is associated with the Plaintiff. He said the Plaintiff failed to credit the two payments for the Cash Account and the Margin Account as he requested. In this regard, Mr. P's evidence is that Lee made the payments to reduce Lee's indebtedness to the finance company which is associated with the Plaintiff. Mr. P, however, admitted that Lee used to repay his debt to the finance company by cheques drawn specifically in favour of the finance company but the two payments in question were drawn specifically in favour of the Plaintiff.

10. I am, therefore, faced with on the one hand the evidence of the Defendant who claimed that he is an innocent victim, supported by the evidence of his long time friend and stock agent who frankly admitted liability for misuse of client's accounts and, on the other hand, the evidence for the Plaintiff that the Defendant had admitted liability during a telephone conversation. That telephone conversation, it should be noted, is not otherwise verifiable and is denied by the Defendant. There is also conflict between the evidence of Lee and that of Mr. P on what were the purposes of the two payments by Lee to the Plaintiff.

11. It has been said on behalf of the Plaintiff that there is no evidence to support the assertions by the Defendant and Lee relating to responsibility for dealings in the said accounts after 3rd November 1997. I think the fact that the Cash Account was squared by the issue of the $280,278.97 by the Plaintiff to the Defendant thereby reducing the balance in the Cash Account to zero as of 3rd November 1997 goes a long way to support the Defendant's case.

12. It is very difficult to believe that Lee would impose upon himself the disastrous consequences of personal bankruptcy, career destruction and even criminal prosecution just to relieve the Defendant liability for less than $1.5 million if he had not truly misused the said accounts.

13. Regarding the two payments of $120,394.78 and $160,000 respectively by cheques drawn specifically in favour of the Plaintiff, it would require considerable imagination to link them to repayment of debts owed by Lee to the finance company, a separate corporate entity. Moreover, it would be an extraordinary co-incidence indeed if the cheque for $120,394.78 was not related to the outstanding balance in the Cash Account of $1,120,394.78 when one compares the last 7 digits in the larger figure with the smaller figure.

14. On the other hand, Mr. P appeared to be rather unscrupulous for he has a record of continuing to hire staff known to have misused clients' accounts. I have, therefore, little difficulty in rejecting the evidence from Mr. P and the Plaintiff in so far as such evidence are inconsistent with those for the Defendant.

15. Taking into account all factors and circumstance, including the fact that Lee has owned up to his improper conduct, I accept the Defendant's case as proven. I find as facts that (1) all stocks dealings in the Cash Account and the Margin Account after 3rd November 1997 were executed by Lee without the authorization of the Defendant, (2) contrary to the instructions of the Defendant, Lee failed to pay $280,278.97 to the credit of the Margin Account, (3) The payment of $120,394.78 by Lee to the Plaintiff was for the credit of the Margin Account, and (4) the payment of $160,000 by Lee to the Plaintiff was also for the credit of the Margin Account.

16. Mr. Osmond Lam for the Plaintiff argued that Lee was at the material times agent of the Defendant, so that all stocks dealings by Lee after 3rd November 1997, even though without authorization by the Defendant, should still be attributed to the Defendant who must bear liability for the outstanding balances in the said accounts and that, by the same token, the failure of Lee to pay $280,278.97 to the credit of the Margin Account is a loss for which the Plaintiff cannot be held accountable to the Defendant. However, the Plaintiff has not pleaded such defence. Ironically, Mr. Lam also contended that the court should not hold the Plaintiff vicariously liable for the misappropriation of $280,278.97 by Lee because the Defendant has not pleaded vicarious liability. For authority, Mr. Lam relied on the decision of Yuen J in Denis M.P.C. Ho and Jan G.W. Blaauw, joint liquidators v. CHAN Kam Tim and another, HCCW 36 and 37 of 1998 where it was held that a securities broker is the agent of the customer. Counsel further relied on Armagas Limited v. Mundogas SA, The Ocean Frost [1985] 1 Lloyd's Rep 1, where Robert Goff LJ (as he then was) stated at pages 70 and 71:-

"In my judgment, however, ............ In cases of fraud at least, involving as they do a representation by the servant in reliance upon which the third partly has acted to his detriment, the master can only be vicariously liable for the servant's fraud where he has acted within his ostensible authority. If this were not the law, in many cases where the servant has warranted his authority, fraudulently or even negligently, the master would be vicariously liable for the tort, there is no trace in the authorities of this being so. Similarly, if this is not the law, it is difficult to understand how, in certain cases where there has been an unsuccessful attempt to establish a servant or agent acted within his ostensible authority, there was no alternative claim for damages on the basis of vicarious liability for deceit; ...... In other cases, the reasoning of the Court is consistent only with the proposition that the criterion for the master's vicarious liability is that the servant acted within his ostensible authority ......

"It is right that we should ask ourselves: why should ostensible authority, which prima facie appears to be relevant to the question whether the servant's unauthorized act should be imputed to the master, also provide the criterion for the master's vicarious liability for his servant's deceit? In considering this question, we must bear in mind the circumstances in which a servant's fraudulent act may fall within his ostensible authority when it is within that class of acts which a person in his position usually has authority to perform; it will not be within his ostensible authority, either when it does not fall within that class of acts, or where, in the case of the particular servant, his authority is limited, and the third party has notice of the limitation on his authority ......"

17. Mr. Simon Lam for the Defendant referred to the unreported case of Tong Chun Chung et al v. Onshine Securities Limited, HCA 4343 of 1991. A "runner" who played the role similar to that of Lee misappropriate the shares of a customer he handled was held to be an employee of the defendant company in that case. Liu, J. (as he then was) further held the defendant company vicariously liable for the misdeed of the "runner". Mr. Osmon Lam, on the other hand, said that this case is distinguishable.

18. As a matter of pleading, the Plaintiff's case is that the Defendant traded in the Cash Account and the Margin Account after 3rd November 1997. The Plaintiff's pleaded case is not that even if the Defendant had not himself traded, the Defendant should still be held liable for trading by Lee who should be treated as agent for the Defendant. On the basis of the pleaded claim, I think my only duty is to determine as a matter of fact whether the Defendant did trade after 3rd November 1997. I need not go into the even if case that has not been pleaded. For the reasons I have given, I have held that the Defendant did not himself trade after the said date. That is sufficient to determine liability for the outstanding balance in the Cash Account.

19. However, in deference to counsel's submissions, if required, I would hold that Denis M.P.C. Ho and Jan G.W. Blaauw, joint liquidators v. CHAN Kam Tim and another is distinguishable from the present case. There the court was concerned with the status of a broker who traded on behalf of clients. It is clear from the judgment of Yuen J in that case that the broker under consideration was a registered dealer governed by section 84 of the Securities Ordinance, Cap. 333. Lee in the present case was not that sort of broker with right to himself deal on the trading floor of the Hong Kong Stock Exchange. Lee was an account executive, a salesman, for the Plaintiff which is the dealer/broker in the sense used by Yuen J. I have no doubt that Lee was much more akin to the "runner" in Tong Chun Chung et al v. Onshine Securities Limited.

20. It is indeed true that the Defendant has not pleaded anything in relation to the $280,278.97 except that the same amount by way of a cheque was received by the Defendant. The facts of instructions given by the Defendant to Lee to apply the money represented by the said cheque in payment on behalf of the Defendant to the Plaintiff and the misappropriation of the money only came out from the evidence during trial. Thus, irrespective of the question of whether vicarious liability should be pleaded, I should not give credit to the Defendant for this amount.

21. I have studied the terms and conditions of the Cash Account Agreement and those of the Margin Account Agreement. I do not think they advance either party's case further in any respect.

22. In the premises, the Plaintiff fails to recover any amount in relation to the Cash Account. On the Margin Account, the Plaintiff is entitled to $537,356.00 - $120,394.78 - $160,000.00 - $155,324.52 = $101,637.70. Thus, there is judgment for the Plaintiff for $101,637.70 only plus interest.

23. On the question of costs, if costs should follow the event, the Plaintiff should be entitled to costs but in view of the amount adjudged due which is within the District Court civil jurisdiction, the relevant scale for taxation purpose if costs cannot be agreed should be the District Court scale. However, I accept what Mr. Simon Lam for the Defendant has said that in the exercise of my discretion I should look at the overall picture. Here, the Plaintiff has acted oppressively in pressing its claim for over $1.5 million. Had the Plaintiff put its claim at the much more realistic and reasonable level, I have no doubt the Defendant would have settled without much ado. To reflect that the Plaintiff has lost over 90% of its claim and the court's disapproval of the Plaintiff's conduct in this case, but by no means as any criticism towards those acting for the Plaintiff, I make an order nisi that the Plaintiff do bear the Defendant's costs in this action, such costs to be taxed on the High Court scale if not agreed. The order nisi becomes absolute unless either party applies for variation within 21 days from the date of handing down judgment.