SECURITIES AND FUTURES COMMISSION v. CHENG CHAK NGOK AND ANOTHER

CACV 95/2017

[2018] HKCA 590

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 95 OF 2017

(ON APPEAL FROM THE DETERMINATIONS OF THE MARKET MISCONDUCT TRIBUNAL MADE ON 23 MARCH 2017)

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J U D G M E N T

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Hon Cheung JA :

1.  The 2^nd respondent the Market Misconduct Tribunal (‘the Tribunal’), at the request of the appellant Securities and Futures Commission (‘SFC’), conducted an inquiry to determine whether the 1^st respondent Cheng Chak Ngok (‘Mr Cheng’) had engaged in market misconduct activities in the nature of insider trading in respect of dealings in the securities of China Gas Holdings Limited (‘China Gas’).  The Tribunal concluded that Mr Cheng had not committed market misconduct by way of insider trading.  SFC now appeals against that decision. 

I. Background

2.1   China Gas is a company listed on the Stock Exchange of Hong Kong Limited (‘SEHK’).

2.2   ENN Energy Holdings Limited (‘ENN’) is also listed on the SEHK.  Mr Cheng was the Executive Director, Chief Financial Officer and Company Secretary of ENN.

2.3   In early 2011, ENN contemplated acquiring China Gas and tried to find a partner to fund a takeover (‘Project 128’).  Initial talks were held with China National Offshore Oil Corporation but failed in May 2011, after which ENN approached China Petroleum & Chemical Corporation (‘Sinopec’). 

2.4   At the end of October/early November 2011, Sinopec agreed to form a consortium with ENN for Project 128.

2.5   Mr Cheng was involved in Project 128 and was responsible for negotiating a financing proposal for ENN in connection with the takeover of China Gas.

2.6   On 11 November 2011, Mr Cheng attended a meeting with the senior management of ENN.  He was made aware of, amongst other things,

1)  the resurrection of Project 128 to take over China Gas and ENN’s intention to form a consortium with Sinopec to take over China Gas at the ratio of 55% (ENN) and 45% (Sinopec);

2)  there would be a ‘Kick‑Off’ meeting on 17 November 2011; and

3)  Mr Cheng was to assist in the bridging loan arrangement for Project 128.

2.7   On 14 November 2011, Mr Cheng received an email from Mr Jeff Na of Citigroup Global Markets Asia Limited (‘Citi’) the financial advisor for Project 128, which gave the information that the offer price would be in the range of HK$3 to HK$3.75 for the voluntary general offer for the shares of China Gas.

2.8   On 5 December 2011, Mr Cheng received emails suggesting that ENN and Sinopec were about to proceed with the proposed general offer and that the formal announcement of the general offer would be imminent.

2.9   On 6 December 2011, Mr Cheng received an email confirming that Citi had received final approval from its credit committee on the bridging loan to ENN for the general offer.

2.10   On 7 December 2011, before the market opened, trading in China Gas’s shares was suspended pending the release of a price sensitive information announcement.

2.11   On 12 December 2011, ENN and Sinopec issued a joint Pre-Conditional Voluntary General Offer announcement (the ‘announcement’) regarding their offer to acquire all of the outstanding shares in China Gas at HK$3.50, representing a premium of 25% to the previous closing price of China Gas’s shares.

2.12   On 13 December 2011, trading in China Gas’s shares resumed and the share price jumped 20.4% from the previous closing price of HK$2.80 to close at HK$3.37.

2.13   SFC alleged Mr Cheng’s market misconduct took place from 15 November 2011 to 6 December 2011.

2.14   It is SFC’s case that whilst in possession of the relevant information concerning the takeover of China Gas by ENN and Sinopec, Mr Cheng used the securities account of one Li Wei (‘Ms Li’) in the Bank of China (Hong Kong) Limited to purchase China Gas’s shares, provided the funds for the purchase of China Gas’s shares, and received the proceeds from the subsequent sale of the shares.  Ms Li is a resident in the Mainland and former consultant of the ENN Group.  40 bid orders for China Gas’s shares were placed via her securities account from 15 November 2011 to 6 December 2011 when she was not in Hong Kong.  A total of 4,930,000 shares were purchased for HK$13,763,605.60.

2.15   From 13 to 16 December 2011, all of China Gas shares held in Ms Li’s securities account and purchased during 15 November to 6 December 2011 were sold for a total of HK$16,752,442.26.  A total profit of around HK$3 million was made.

2.16   SFC relies on the following to show that Mr Cheng used and controlled Ms Li’s securities account to purchase China Gas’s shares :

1)  All the internet orders from Ms Li’s securities account for the shares were placed via an IP address belonging to the office of ENN in Hong Kong.  Ms Li was not in Hong Kong at the time the shares were purchased and thus could not have made the purchases;

2)  Among the staff working in the office of ENN in Hong Kong, Mr Cheng was the only person who knew Ms Li personally and was in close association with Ms Li including the period in which there were fund transfers for the purchase and sale of the shares;

3)  Mr Cheng was in Hong Kong during the dates when the internet transactions took place;

4)  Phone calls from the ENN office to Ms Li were made during the period in which orders for the shares were made from Ms Li’s account.  This suggested that it was Mr Cheng who made those calls as he was the only person among the staff of ENN in Hong Kong who knew Ms Li personally and the calls were made at a time when Mr Cheng’s time card suggests that he was in the ENN office;

5)  A CPA firm in Hong Kong, M Square CPA Ltd, used by Mr Cheng for receiving correspondence was also used to receive all of Ms Li’s bank correspondence and investment account statements.  Such correspondence was passed on to Mr Cheng.  This suggested that Mr Cheng had possession and control of, and access to, Ms Li’s securities account statements during the period in which orders for the shares were made from such account; and

6)  The timing of the orders for the shares coincided with Mr Cheng’s knowledge of the relevant information.  The orders started on 15 November 2011, which was very close to the time when Mr Cheng started to possess relevant information.  Further, a relatively large number of shares were purchased on 5 and 6 December 2011, just before the trading in the shares was suspended and the general offer went public.

2.17   Of the HK$13.7 million used to purchase the shares via Ms Li’s securities account, Mr Cheng had provided at least HK$8 million for the purchase.  The HK$8 million was transferred by Xinao HK Holdings Limited (‘Xinao’), a BVI company owned by Mr Cheng, to his acquaintance Mr Fong Man Chun Alen (‘Mr Fong’), who then transferred the money to Ms Li’s bank savings account with Bank of China (Hong Kong) Limited for settlement of the purchases of the shares.

2.18   In relation to the sale proceeds of the shares, HK$14.l7 million of the HK$16.7 million was transferred by Ms Li to Mr Fong, who then transferred at least HK$615,233 to Mr Cheng.

II.   Details of the acquisition and sale of the shares

3.1   On 15 November 2011, five bid orders were made from Ms Li’s securities account for China Gas shares (the first one at 10:06 from a smartphone and the next four between 11:28 and 11:56 from the IP address subscribed by ENN’s Hong Kong office for its computer terminals).  500,000 shares were acquired at the price of HK$2.8 per share via Ms Li’s account.  The ‘in/out’ records of ENN for Mr Cheng showed, inter alia, a time stamp of 18:14 under the sub-column ‘out’ under ‘Overtime’.

3.2   The Tribunal found Mr Cheng was outside Hong Kong from 16 November 2011 to 21 November 2011.  (There was a typographical error when the Tribunal stated at paragraph 96 that Mr Cheng was away from 16 to 22 November 2011 : see paragraph 116.)  On 16 November 2011, one bid order was placed at 11:34 from a smartphone.  146,000 shares were acquired at HK$2.6 per share via Ms Li’s account.  At 16:52, Mr Cheng departed from Hong Kong.

3.3   On 17 November 2011, Mr Cheng attended the ‘Kick-Off’ meeting for the takeover bid at Sinopec’s headquarters.  In the presentation materials (which Mr Cheng received), Citi based its analysis on the assumption that the offer price would be HK$3.75 per share.  Between 9:54 and 10:09, four bid orders were placed through a smartphone.  In the afternoon, Mr Cheng attended a separate meeting between ENN and Citi in respect of ENN’s financial arrangement in the takeover bid; the offer price was assumed to be HK$3.75 per share.  At 15:29, one bid order was placed through a smartphone.  500,000 shares were acquired at the price of HK$2.62 per share via Ms Li’s account.

3.4   18 November 2011, one bid order was placed at 11:09 from a smartphone.

3.5   On 21 November 2011, three bid orders were placed between 10:12 and 11:21 from a smartphone.  HK$500,000 was transferred from Mr Fong’s account to Ms Li’s account.  At 22:22, Mr Cheng arrived back in Hong Kong.  On 22 November 2011, between 10:03 and 10:06, three bid orders were placed from a smartphone.  HK$1,000,000 was transferred from Mr Fong’s account to Ms Li’s account.  HK$300,000 was transferred from Mr Fong’s account to Ms Li’s account.

3.6   On 23 November 2011, two bid orders were placed (one from a smartphone at 12:05 and one from ENN Office’s IP address at 15:33).  The ‘in/out’ records of ENN for Mr Cheng showed, inter alia, a time stamp of 17:38 under the sub-column ‘out’ under ‘Overtime’.

3.7   On 24 November 2011, seven bid orders were placed between 14:52 and 15:59, all from ENN office’s IP address.  Two tranches totalling 750,000 shares were acquired at prices between HK$2.79 and HK$2.80 per share via Ms Li’s account. The ‘in/out’ records of ENN for Mr Cheng showed, inter alia, a time stamp of 18:18 under the sub-column ‘out’ under ‘After Noon’.

3.8   On 25 November 2011, one bid order was placed at 11:35 from a smartphone.

3.9   On 28 November 2011, two bid orders were placed at 15:11 and 15:23 from ENN office’s IP address.  Two tranches totalling 420,000 shares were acquired at prices between HK$2.78 and HK$2.79 per share via Ms Li’s account.  The ‘in/out’ records of ENN for Mr Cheng showed, inter alia, a time stamp of 23:21 under the sub-column ‘out’ under ‘After Noon’.

3.10   On 2 December 2011, at 16:40, a cheque of HK$4,000,000 drawn by Xinao was deposited into Mr Fong’s account.  At 16:42, HK$3,500,000 was transferred from Mr Fong’s account to Ms Li’s account.

3.11   On 5 December 2011, at 14:30, Mr Cheng received an email regarding the management of the ENN Group travelling to Hong Kong for Project 128 and a request for a project timetable for the coming week.  Citi circulated to, inter alia, Mr Cheng the timetable of the intended takeover for the coming week via email at 15:38.

3.12   Four bid orders were placed (two from a smartphone at 10:46 and 14:54 and two from ENN’s office IP address at 11:51 and 15:21).  Three tranches totalling 924,000 shares were acquired between HK$2.82 and HK$2.84 per share via Ms Li’s account.  At 14:11, a cheque of HK$4,000,000 drawn by Xinao was deposited into Mr Fong’s account.  At 16:28, HK$4,100,000 was transferred from Mr Fong’s account to Ms Li’s account.  The ‘in/out’ records of ENN for Mr Cheng showed, inter alia, a time stamp of 21:00 under the sub‑column ‘in’ and a time stamp of 20:59 under the sub‑column ‘out’ under ‘Overtime’.

3.13   On 6 December 2011, at 10:54, Vivian Sam of Citi circulated an email to, inter alia, Mr Cheng confirming the approval of the bridging loan.  12 bid orders were placed from ENN office’s IP address between 11:52 and 15:26.  11 tranches totalling 1,690,000 shares were acquired at prices between HK$2.8 and HK$2.82 per share via Ms Li’s account.  At 16:47, HK$1,400,000 was transferred from Mr Fong’s account to Ms Li’s account.  The ‘in/out’ records of ENN for Mr Cheng showed, inter alia, a time stamp of 23:39 under the sub-column of ‘out’ under ‘After Noon’.

3.14   On 7 December 2011, trading of shares in China Gas was suspended.

3.15   On 12 December 2011, ENN and Sinopec jointly announced the takeover bid at the price of HK$3.5 per share.

3.16   On 13 December 2011, trading of shares in China Gas resumed.  500,000 China Gas shares in Ms Li’s account were sold for HK$3.43 per share.

3.17   On 14 December 2011, one million shares in Ms Li’s account were sold for HK$3.38 per share.

3.18   On 15 December 2011, one million shares in Ms Li’s account were sold for HK$3.38 per share.

3.19   On 16 December 2011, the balance (i.e. 2.43 million) of shares in China Gas in Ms Li’s account were sold between HK$3.42 and HK$3.44 per share.

3.20   On 28 December 2011, a cheque of HK$4,000,000 drawn by Ms Li was deposited into Mr Fong’s account.

3.21   On 30 December 2011, a cheque of HK$4,000,000 (dated 28 Dec 2011) drawn by Ms Li was deposited into Mr Fong’s account.

3.22   On 4 January 2012, HK$615,233 was transferred from Mr Fong’s account to the bank account of a money exchange agent, who then transferred a sum of RMB500,000 to Mr Cheng’s personal bank account in Beijing.

3.23   On 6 January 2012, a cheque of HK$4,000,000 drawn by Ms Li was deposited into Mr Fong’s account.

3.24   On 16 January 2012, a cheque of HK$2,170,000 drawn by Ms Li was deposited into Mr Fong’s account.

III.   The Inquiry

1)   Elements of insider trading

4.1   As the alleged market misconduct took place from 15 November 2011 to 6 December 2011, the relevant legislation is the 2003 version of the Securities and Futures Ordinance (‘the Ordinance’) (Cap. 571).  In order to establish insider dealing by Mr Cheng, it is necessary to show that :

1)  he was connected with China Gas by virtue of his position in ENN and his involvement in Project 128 (‘the connected person’). 

2)  he had information which he knew was relevant information in relation to China Gas (‘knowledge of relevant information’) and

3)  he had dealt in the listed securities of China Gas (‘dealing’).

2)     The finding

4.2   The Tribunal found that Mr Cheng is a connected person in relation to China Gas.  Further, the information that he had acquired in relation to Project 128 by a consortium comprising ENN and Sinopec, to issue a Pre‑conditional Voluntary General Offer Announcement to acquire all outstanding shares in China Gas at HK$3.50 per share amounted to relevant information.  He was fully aware that this amounted to relevant information.

4.3   On the issue whether Mr Cheng had dealt in the shares of China Gas, the Tribunal held that :

‘ 121. The Tribunal in the final analysis acknowledges the efforts of the SFC to investigate a very suspicious scenario but we were driven to conclude for all the reasons in the report that in all the circumstances we could not be satisfied on a balance of probabilities that the Specified Person, Mr Cheng had committed market misconduct by way of insider dealing. Therefore we so rule.’ (emphasis added)

IV.   Mr Cheng’s case

1)    Denial of dealing

5.1   The only issue before this Court is whether Mr Cheng had committed market misconduct in dealing with the shares of China Gas.  Mr Cheng had been interviewed by SFC and he had given a witness statement for the purpose of the inquiry.  In respect of the orders placed through Ms Li’s account with Bank of China for the China Gas shares, Mr Cheng stated :

‘ 16.   ......  I have no knowledge of these ‘orders’ and deny making any of the trade orders for her, and have nothing to do with these orders or Li Wei’s account as alleged by the SFC or at all.’

2)   Relationship with Ms Li

5.2   He also explained his relationship with Ms Li and Mr Fong. Mr Cheng’s understanding is that Ms Li was a consultant of ENN’s parent company and was responsible for providing consultancy services on external relation with the government and the public.  She worked at the head office of the parent company in Langfang, Hebei.  He came to know her sometime between 2001 and 2005 in some social functions or management training events.  He was told by the parent company as early as November 2000 when he joined ENN that Ms Li was an important figure in the view of the top management of the parent company, owing to her network and skill sets on public relations which inevitably was a major asset to the parent company as well as its subsidiaries.  He was therefore instructed by the parent company to always ensure that she was well taken care of when he saw her and that her request on matters within his control, either directly or indirectly relayed to him, was adequately addressed.

5.3   Mr Cheng and Ms Li had met from time to time and he had on a few occasions either by himself or through his staff, entertained Ms Li’s requests, made to him directly or indirectly.

5.4   Mr Cheng assisted Ms Li to open a bank account in Hong Kong in early December 2005, when she was in Hong Kong by informing his contact at Bank of China in Hong Kong that his colleague from China would like to open an account at the bank to facilitate her account opening.  He, however, did not recall whether he had accompanied her to open the account or not, or sent one of his staff to do so.

5.5   Further, when Ms Li asked him for assistance on making remittance to Macau for gambling purposes, he introduced her to Mr Fong, who was willing to make fund transfers on behalf of others to Macau for withdrawal.

5.6   Mr Cheng had also run some errands for Ms Li, like buying luxurious handbags and items.  She would also help him with money exchange from Renminbi (‘RMB’) to Hong Kong dollars or vice versa.

3)   Mr Fong

5.7   Mr Cheng was introduced to Mr Fong by a mutual friend.  Mr Fong was a stock broker and Mr Cheng opened an account at his brokerage firm and traded in shares.  Mr Fong and Mr Cheng became friends as they found a common interest in gambling.  Apart from securities trading through Mr Fong, Mr Cheng would travel to Macau with Mr Fong for gambling in casinos where Mr Fong had personal accounts.  Mr Cheng would sometimes seek Mr Fong’s assistance to transfer money to the Macau casinos for him.  He would pay Mr Fong and then he (Mr Fong) would transfer money to the casino’s bank account.  The casinos would then allow Mr Cheng to withdraw money from Mr Fong’s account for gambling.

4)   Funds for buying shares

5.8   Mr Cheng explained how the HK$8 million found its way from his Xinao account to Ms Li’s account.  In early December 2011, he received a phone call from Mr Zhao Xiaowen（趙小文）, the vice president of ENN Solar Energy Co., Ltd (新奧光伏能源有限公司，‘ENN Solar’), another subsidiary of the parent company, for the payment of Hong Kong dollar equivalent of US$1 million to Ms Li.  Given Ms Li’s status and that Mr Fong had had dealings with Ms Li as well following his introduction and that since he had roughly US$1 million at Mr Fong’s account (attributable to Mr Cheng’s prior transfer to him for remittance to Macau for his gambling) he asked Mr Fong to transfer a corresponding sum to Ms Li (paragraph 15 of Mr Cheng’s witness statement). 

5.9   In respect of the money that Mr Cheng had asked Mr Fong to transfer to Ms Li’s account, it was further explained in his closing written submission that :

‘ 30.2. “Earlier than early December”, Cheng issued two cheques each of HK$4 million to be addressed to Fong for gambling and post-dated them to be 02.02.12. At that point in time, ENN was about to grant Cheng a bonus of HK$17.8 million. The cheques were issued when Cheng ‘[thought] that the money was there’;

30.3 In or around early December 2011, Zhao Xiaowen, the Vice President of ENN Solar Energy Co Ltd (‘ENN Solar’), another subsidiary of the Parent Company asked Cheng to ‘exchange’ US$1 million for Li into Hong Kong dollar and deposit the same to Li’ s account: Witness Statement, §15.  It was presumably done on or around 30.11.11 as a sum of US$1million was then deposited into Xinao HK: Bank Statement of Xinao HK Holdings Limited as of 17December 2011, p. 2;

30.4. Upon request, Cheng provided the account of Xinao HK to Zhao;

30.5. As a result of this ‘intervening’ request, and because Cheng was busy with the acquisition deal at the time, he asked Fong to bank in the two cheques first to satisfy the request.......

30.6 (iv)  Whilst there is no document as such to show a transfer from ENN Solar to ENN Solar HK, it was only because the SFC did not follow up on the enquiry.  In any event, there is no dispute that in fact on 30.11.11 a sum of USD 1 million was indeed eventually deposited to Xinao HK: Bank Statement ofXinao HK Holdings Limited as of 17 December 2011, p. 2;

 ......

30.7. As to why a total sum (from the 2 cheques) of HK$8 million was used to satisfy a request to transfer US$1 million, both Cheng and Fong provided explanation thereto:-

(i) Pursuant to the request, Fong banked the two cheques, one on 02.12.11 and one on 05.12.11 (ie. the next working day as 02.12.11 was a Friday), the latter of which bounced once because of the lack of funds in the current account of the Xinao HK. Eventually all HK$8 million were deposited: Account Financial History re Fong’s Account, p. 4464;

(ii) On 02.12.11, Fong transferred HK$3.5 million and after banking in  the 2^nd cheque, Fong transferred HK$4.l million, both instances to Li, totaling HK$7.6 million: ibid., p. 4464.

(iii) That being accepted as short of an equivalent of US$1 million, Fong transferred a further HK$1.4 million to Li on 06.12.11, making a total of HK$9 million with an approximate surplus transfer of HK$1.2 million (HK$9 million - HK$7.8 million = HK$1.2 million): ibid., p. 4465;

(iv) The surplus transfer of HK$1.2 million represented payment to Li of the remainder of her money deposited with Fong for the purpose of gambling and upon payment of HK$1.2 million (within the HK$9 million), it was ‘evened out’ between Fong and Li.’

5)   Proceeds of sale

5.10   As for the money Mr Cheng received from Mr Fong, he explained that the HK$615,223 was money maintained in Mr Fong’s account on his behalf in respect of gambling.  In or about early January 2012, he requested Mr Fong to transfer RMB500,000 to him in the Mainland as he needed money.  Since he had maintained an account with Mr Fong, he asked him to arrange for the sum to be paid to him in the Mainland.  As Mr Fong had to go through money exchanger, Mr Cheng did not know which account Mr Fong used to pay him.

V.   The Tribunal’s reasons

6.   These are the reasons given by the Tribunal in its finding that Mr Cheng did not deal with the shares : 

‘ 115. The bidding for shares via the securities account of Ms Li emanated from two sources, the computers in ENN offices and by smartphone. The Tribunal noted that it was not possible to identify which terminal was used in the offices of ENN. It was clearly established that these were more than one but the exact number is not known. The Tribunal noted that there was some evidence of Mr Cheng being in the office on the days but not specifically at the time at which the orders were placed by reason of his clocking out record. The Tribunal found this not to be an entirely reliable basis, certainly not to the extent to be satisfied to the requisite level that he was in the office at the time and date on which each bid was made. We accept that on occasions he would arrange for the record when not physically present. We note he did agree the dates to be basically correct, but this falls short of full acceptance.

116. In relation to the use of the smartphone to make bids, the SFC case is that he was doing this when absent from Hong Kong as he had no access to ENN computers.  We accept bids were made in this way when he was in China between 16 and 21 November 2011.  But note also such bids by smartphone were placed on 15 and 25 November and 5 December 2011, so somewhat disrupting the pattern and chipping away at the probative value.  As we have said, the Tribunal could not rule out the possibility, in the absence of more evidence, that it was Ms Li herself or someone else using the smartphone.

117. In our final analysis we could not find on a balance of probabilities that the evidence was strong enough to draw compelling inferences that Mr Cheng used the computers of ENN or a smartphone to place orders.  We note during the time span in question other trading was taking place in that securities account of Ms Li.  There are other possibilities from the facts other than it was Mr Cheng trading.

118. In respect to the time frame for the making of the bids from 16 November to 6 December 2011 we were satisfied Mr Cheng did have the necessary relevant information and that raised suspicions against him but that in itself was not sufficient to find him guilty of market misconduct.

119. As to the flow of funds to which reference has been made in the previous chapters.  Without reciting the facts again, we did find it suspicious, given the connection between Mr Cheng, Ms Li and Mr Fong.  However, the flow from Mr Cheng to Ms Li via Mr Fong and then back again was short of providing compelling evidence of Mr Cheng’s trading.  To put it simply the only flow was HK$8 million dollars to Ms Li, for which an explanation was given which was not totally convincing nor yet was it totally discredited.  That is far short of the purchase price of over HK$13 million.  The alleged flow back to Mr Cheng was even less probative being merely just over HK$600,000.  We were not able to draw any inferences of balances being held, perhaps in Macau for later collection as seems to be implied.  We also viewed this against the background of the three parties being heavily engaged in Macau gambling which the SFC apparently accepts from the way the case was presented.

120. Perhaps the ultimate hurdle that the SFC could not overcome was the vagueness about the actual relationship between Mr Cheng and Ms Li.  We know the mechanics of the arrangements but whilst this raised suspicions we did not know the extent to which Mr Cheng had authority and control over her accounts.  Nor indeed, if Mr Cheng was the only person with any control.  Without Ms Li the picture was a blur ― the puzzle incomplete and vague.’

VI.   Principles

1)   Nature of inquiry

7.1   The nature of the inquiry on market misconduct is civil and inquisitorial.  This Court (per Ma JA as he then was) in Riady v Insider Dealing Tribunal [2003] 2 HKC 10, at paragraph 23(2), stated that the Insider Dealing Tribunal (now replaced by the Market Misconduct Tribunal) ‘does not have parties before it in the sense of a prosecution and accused or a plaintiff and defendant.  Its function is not to adjudicate between rival claims or positions but to inquire into the question of insider dealing.  The proceedings are not accusatorial but inquisitorial.  There is no lis as such.’  See also Luk Ka Cheung v Market Misconduct Tribunal [2009] 1 HKLRD 114, at paragraph 47 which followed this approach.

2)   Standard of proof

7.2   It is common ground between the parties that as the nature of the inquiry is civil, the standard of proof is on a balance of probabilities.  In Solicitor (24/07) v The Law Society (2008) 11 HKCFAR 117, Bokhary PJ further cautioned that even in such situation, there is the need for more compelling evidence to decide on serious allegations :

‘116. ....The more serious the act or omission alleged, the more inherently improbable must it be regarded. And the more inherently improbable it is regarded, the more compelling will be the evidence needed to prove it on a preponderance of probability.’

7.3   Earlier in HKSAR v Lee Ming Tee (2003) 6 HKCFAR 336 where the allegation was that senior officers of SFC deliberately and improperly terminated an investigation into a witness’s (Meocre Li) conduct in order to avoid the need to make a disclosure which might compromise his standing as an expert witness in the trial, Sir Anthony Mason addressed the nature of evidence required to decide on this serious allegation :

‘ 72. ... that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. It is not possible to state in definitive terms the nature of the evidence which the court will require in order to be satisfied, in a civil proceeding, that a serious allegation of this kind, is made out. It would not be right to say that the requisite standard prescribes that the inference of wrongdoing is the onlyinference that can be drawn ..... for that is the standard which applies according to the criminal standard of proof. In the particular circumstances, it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation into Meocre Li’s conduct for the ulterior purpose alleged, sufficient to overcome the inherent improbability that they would have done so.’ (emphasis added)

3) Burden of proof

1)   The orthodox view

7.4   The well-established and orthodox view is that the concept of burden of proof is only a tool in the adversarial jurisdiction as a last resort for the Court to dispose of a case when no findings of fact are possible or when all explanations are improbable.  In the inquisitorial jurisdiction, no party bears the burden of proof.  Phipson on Evidence, 19^th ed. paragraphs 6-07 and 6-08(k).   

7.5   The English Court of Appeal in R v Cardiff City Council [2011] EWCA Civ 1590 held that it was inappropriate to resort to burden of proof in an inquisitorial jurisdiction (which in that case was in relation to asylum seeking) :

‘ 21. …To speak in terms of a burden of establishing a precedent or jurisdictional fact was inappropriate. … It seems to me that once the court is invited to make a decision upon jurisdictional fact it can do no more than apply the balance of probability to the issue without resorting to the concept of discharge of a burden of proof. …

22. …Neither party is required to prove the precedent fact.  The court, in its inquisitorial role, must ask whether the precedent fact existed on a balance of probability.’ (emphasis added)

7.6   In Catena v Australian Securities and Investments Commission (2011) 276 ALR 25 (at paragraph 33), the Federal Court of Australia came to the same view :

‘ ..... the reference to onus obscures the tribunal’s true function…. the tribunal is “not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate” …These provisions… exclude the “introduction of concepts of onus of proof into the determination of claims under the legislation where no onus of proof in the legal sense arises.” ’ (emphasis added)

7.7   In Minister for Immigration and Multicultural and Indigenous Affairs v QAAH of 2004 and another [2006] HCA 53, the majority of the High Court of Australia (Gummow A‑CJ, Callinan, Heydon and Crennan JJ) in dealing with the operation of the Refugee Review Tribunal reaffirmed that :

‘ 40. This Court has repeatedly said that the proceedings of the Tribunal are administrative in nature, or inquisitorial, and that there is an onus upon neither an applicant nor the Minister.’ (emphasis added)

2)   Other views

7.8   There are some cases which discussed the presence of ‘practical’ or ‘persuasive’ onus or burden in an inquisitorial setting.

7.9   The Federal Court of Australia in Sun and Others v Minister for Immigration and Border Protection and Another [2016] FCAFC 52 referred to the case of McDonald v Director‑General of Social Security (1984) 1 FCR 354 at 356 where Woodward J discussed how a tribunal should address the ‘practical problem’ it faces in the context of onus of proof :

‘ The use outside courts of law of the legal rules governing [onus of proof] should be approached with great caution. This is particularly true of an administrative tribunal which, by its statute “is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate” (AAT Act, s.33(1)(c)).

    Such a tribunal will still have to determine practical problems such as the sequence of receiving evidence and what to do if it is unable to reach a clear conclusion on an issue, but it is more likely to find the answer to such questions in the statutes under which it is operating, or in considerations of natural justice or common sense, than in the technical rules relating to onus of proof developed by the courts.  However these may be of assistance in some cases where the legislation is silent.

    Whether the principles adopted by such a tribunal, arising from these various considerations, are appropriately dealt with under the heading “onus of proof”, becomes a matter of choosing labels.  It would probably be more convenient to avoid using that expression in cases such as the present.’  

7.10   In QAAH Kirby J who gave the dissenting judgment was of the view that, whilst accepting that in an inquisitorial tribunal there is no issue of the existence of a legal burden of proof, there is nonetheless the presence of a ‘forensic burden’ :

‘ 136. In an inquisitorial tribunal, the legal burden of proof typical of an adversarial trial may be missing. However, the forensic context still reflects the reality of a decision-making process. If a party that could be expected to present material in support of its case fails to do so, that party cannot then complain if the decision-maker decides that a basis for the relief claimed has not been established. A forensic burden could sometimes present procedural difficulties, particularly in the many cases where the Minister or her delegate are not present at Tribunal hearings. However, in my view, this difficulty could be resolved in the usual way. Where necessary, the Tribunal may request that additional material be provided in support of the contested matter or resolve the issue on the basis that the suggested “cessation” has not been demonstrated in a convincing way.’ (emphasis added)

7.11   Kirby J regarded this as a matter of ‘forensic practicalities’ :

‘ 141 Conclusion: No error in Full Court: It follows from this analysis that the Minister does not bear a legal burden of proving a requisite change in circumstances to attract Art 1C(5). However, as a matter of forensic practicalities, the Minister’s officials will usually be obliged to furnish affirmative evidence of a propounded change....’

7.12   In Regina (N) v Mental Health Review Tribunal (Northern Region) and others [2006] QB 468 a claimant (following his conviction for manslaughter on the ground of diminished responsibility) was made the subject of a hospital order and a restriction order under the Mental Health Act 1983.  He applied for discharge of the Mental Health Review Tribunal. 

7.13   It was common ground in that case that there is a burden on the detaining authority to satisfy the Tribunal that the conditions for detention are met.  Munby J, the first instance Judge, described this as an onus or persuasive burden.  The disputed issue in that case was that he held the Tribunal was not required to apply the civil standard of proof to all the issues before them.  The Court of Appeal at paragraph 104 held that the Tribunal should apply the standard of proof on the balance of probabilities to all the issues it has to determine.  In relation to the issue of burden, it stated at paragraph 87 that :

‘ The existence of that burden is common ground and is supported by R (H) v London North and East Region Mental Health Review Tribunal and by the decision of the European Court of Human Rights in Reid v United Kingdom 37 EHRR 211, at least to the extent that the issues that arise under sections 72 and 73 are also within the scope of article 5 of the Convention. The existence of the burden is unaffected by the fact that aspects of the tribunal’s procedures are inquisitorial in nature; for example, the requirement of a medical examination by the medical member of the tribunal and the power to require the attendance of witnesses and to call for further information.’

VII.   Grounds of appeal

8.  Mr Selwyn Yu SC (together with Mr Isaac Chan) for SFC relied on four grounds of appeal :

1)  The Tribunal has erred in law in (i) misdirecting itself that the inquiry was adversarial as opposed to inquisitorial in nature; (ii) misdirecting itself that the concept of burden of proof applies and such burden lies solely with SFC; and (iii) failing to exercise the investigative powers vested in it by the SFO.

2)  The Tribunal in substance had applied the criminal standard of proof as well as ancillary evidential principles applicable to criminal proceedings in evaluating the evidence.

3)  The Tribunal has substantially erred (or alternatively was plainly wrong) in reaching the conclusion that it could not be satisfied on a balance of probabilities that Mr Cheng had engaged in insider dealing.

4)  The Tribunal failed to consider exercising the investigative powers available under the SFO before the inquiry was concluded.

VIII.  Discussion

1)   The Tribunal in substance applied the wrong standard?

9.1   It is clear from the Tribunal’s report that it was aware of the standard of proof, namely on a balance of probabilities in the conduct of the inquiry.  The real issue in this appeal which has been the focus of the discussion before us is whether the Tribunal had actually applied the civil standard or whether it had, in fact, applied the criminal standard of proof beyond reasonable doubt?

2)   Mr Lam’s submissions

9.2   Mr Paul Lam SC (together with Mr Bernard Mak and Mr Ernest C Y Ng) for Mr Cheng disagreed that the Tribunal had applied the wrong standard.  He submitted that it is no doubt more likely than not that a judge who directs himself correctly on a certain aspect of the law in the earlier part of his judgment will apply the relevant principle properly later in his judgment when the occasion for its application arises : Rhesa Shipping S. A. v Edmunds [1985] 1 WLR 948 at 957E‑F).  Mr Lam submitted that the Tribunal had also correctly directed itself that the more serious the allegation, the more compelling the evidence needed to be (paragraph 55). More importantly, it had cited the judgment of Sir Anthony Mason in Lee Ming Tee on the proper approach to drawing inference which I have cited earlier.  

9.3   Mr Lam submitted that Mr Yu had reminded the Tribunal in his Reply Submissions that ‘the inferences to be drawn need not be the only inferences that can be drawn for that is the criminal standard of proof’.  The Tribunal had also reminded itself time and time again that the standard of proof was on a balance of probabilities.  In the circumstances, it was most improbable that the Tribunal would and could have misunderstood, or misapplied, those principles.

9.4   Mr Lam further prayed in aid the minority view of Kirby J in QAAH on the existence of ‘forensic burden’ and the view of Munby J in Mental Health Review Tribunal (Northern Region) and others on the ‘onus or persuasive burden’ and submitted that in respect of the proceedings under the Ordinance (which are ‘sui generis, their nature being dictated by the provisions of the Ordinance’ : ChauChin Hung and another v Market Misconduct Tribunal and another, paragraph 55, HCAL 123/2007 (22 September 2008, unreported)), a ‘forensic burden’ or ‘persuasive burden’ is imposed on SFC to satisfy the Tribunal by evidence and arguments that the person concerned has committed market misconduct upon a proper construction thereof (or by necessary implication from the legislative context) :

1)  SFC institutes proceedings under section 252 by giving the Tribunal a notice in writing containing a statement specifying the matters prescribed in Schedule 9 (section 252(2)).  The statement shall specify the provisions prescribing the alleged market misconduct, the identity of the person, and such brief particulars as are sufficient to disclose reasonable information concerning the nature and essential elements of the market misconduct (Schedule 9, section 13).

2)  The Tribunal must be satisfied that the allegations made in SFC’s statement have been proved on a balance of probabilities (section 252(7)).

3)  As to how the Tribunal may be so satisfied, most importantly, section 21 of Schedule 9 (though it does not use the term ‘burden of proof’ expressly) provides that the Presenting Officer represents SFC (who can be replaced any time: see section 22 of Schedule 9), and :

‘ must present to the Tribunal any evidence available to the Commission, including any evidence that the Tribunal requests the Presenting Officer to present, and make any submissions, that will enable the Tribunal to reach an informed decision as to whether market misconduct has taken place and, if so, the nature of the market misconduct.’

9.5   Mr Lam submitted that hence, even if it may be preferable not to use the label ‘burden of proof’, the Tribunal was, in substance, correct to state in paragraph 57 of the Report that the burden was on SFC to prove that Mr Cheng had committed the market misconduct as alleged and that Mr Cheng did not have the burden to prove the contrary.  Indeed, in the course of Mr Cheng’s oral closing submissions, and when the Chairman expressed the view that ‘it’s not for Mr Cheng to prove his innocence...It’s for SFC to prove his guilt on the balance of probabilities’, no objection or issue had been taken by Mr Yu.

3)   Wrong assumption of burden

9.6   I am of the view that this is one of the rare cases where the Tribunal had failed to properly evaluate the evidence because, notwithstanding its express statement that the civil standard of proof was to be applied, it had actually applied the criminal standard.  The mistake is compounded by the Tribunal imposing a burden of proof on the SFC when none is required.  I come to this conclusion keenly aware of the restraint imposed on this Court in that the Tribunal was headed by a former District Court Judge and that it was in the best position to assess and evaluate the evidence and make findings of fact and this Court will generally not interfere with findings of fact of the trial court unless such findings are plainly wrong. 

9.7   In fairness to the Tribunal, whilst Mr Yu had referred the Tribunal to the cases of Solicitor (24/07) and Lee Ming Tee on the standard of proof, it is not apparent from the submissions below that Mr Yu had addressed the Tribunal on the burden of proof (or the absence of the requirement that SFC carries any burden of proof).  Maybe for this reason, the Tribunal got off on the wrong start by stating in its report that :

‘ 57. The burden of proof, as is inevitably the case in our adversarial system, lies squarely with the SFC even though this is an inquiry. If market misconduct is to be found on the part of Mr Cheng, it is for the SFC to prove it on a balance of probabilities. Mr Cheng for his part bears no evidential burden.’ (emphasis added)

9.8   In my view this wrong assumption caused the Tribunal to stray beyond the civil standard of balance of probabilities in its evaluation of the evidence.  The fact that Mr Yu had not immediately corrected the Tribunal’s view on the burden during the closing submission does not mean this matter cannot be raised in this appeal, particularly in a matter so fundamental and which directly affects the outcome of the decision.   

9.9   I am of the view that the orthodox approach that in an inquisitorial inquiry by a tribunal there is no place for the requirement of burden of proof is the guiding principle that this Court should adopt.  It is a clear and succinct principle consistent with the nature of an inquisitional inquiry.  If there are no adversaries as such then it is meaningless to talk about a party carrying a burden.  The language in the Ordinance only goes so far as to require SFC to present evidence to the Tribunal to enable the Tribunal to form a decision on the matter.  This requirement does not mean that SFC carries a ‘legal burden’ in the traditional sense.  Certainly when the Tribunal used the term ‘burden’ it had not used it in the sense as used by Kirby J or Munby J. When the Tribunal expressly stated that Mr Cheng did not carry the evidential burden, it must have in mind SFC carrying the legal burden as understood in adversarial proceedings. 

9.10   My view is that the discussion on practical or persuasive onus in the cases is academic and not helpful.  The requirement for the presenting authority to present evidence is readily understood but it has nothing to do with the presenting authority ‘proving its case’ as such.  The use of such terms obscures the function of the Tribunal.  Even if, for the purpose of argument, in inquisitional proceedings, there is room for the existence of a ‘forensic burden/onus’ or ‘persuasive burden’, I am not persuaded that this type of ‘burden’ can be elevated to something akin to the requirement that it is for SFC to prove the guilt of Mr Cheng.  This is contrary to the inquisitorial nature of the Tribunal whose task is to find whether Mr Cheng has committed market misconduct or not.  Further as can be seen from the passage that I have cited earlier the issue discussed by Munby J and the English Court of Appeal on the burden of proof proceeded on the common ground agreed by the parties and it is based on an authority which dealt expressly with the English Mental Health Review Tribunal.  This must be the extent of the relevance of that decision.

4)   Overview of the evidence

9.11   As correctly accepted by Mr Lam the failure by a judge to act in the way he purported to have correctly directed himself is, however, not unknown and the only way to see whether a judge applied at the point of decision a principle of law which he correctly enunciated earlier is to examine his judgment and see what he has said in it.  This I will do now.  In order to demonstrate how the Tribunal went wrong, it is necessary to take an overview first of the evidence.  As rightly pointed out by Mr Yu, on all the evidence before the Tribunal, Mr Cheng was the only person who :

1)  had access to the relevant information and the timing of such access corresponded to the timing and quantity of the bid orders (Item 1);

2)  was working in the ENN Office on the dates when the bid orders were placed via the computer(s) in the office and was away from Hong Kong on the dates when the bid orders were placed exclusively via smartphone (Item 2);

3)  was in close association with Ms Li and was involved in her bank accounts (including the Subject Account) (Item 3); and

4)  had control over the funds involved in the purchase and disposal of the Subject Shares (Item 4).

9.12   The four items of evidence point strongly to Mr Cheng as the person who dealt with the China Gas shares.  Again, as rightly pointed out by Mr Yu, the Tribunal had failed to weigh the probabilities between Mr Cheng being the person who placed the bid orders and some unidentified individual (if one existed at all) who would have been in a position to place such orders.  Mr Cheng knew Ms Li personally and occupied a senior management position in ENN.  There was no evidence pointing to anyone else who could have been able to do so.  The probability that Mr Cheng was the person acquiring the shares in question far outweighed (as opposed to ruled out) any other possibilities.  The Tribunal has, however, simply focused on the mere existence of other possibilities in coming to the erroneous conclusion that it could not be satisfied on a balance of probabilities that Mr Cheng had dealt in the shares.

5)   Consideration of the evidence

1)   Timing of receipt of information and placing of orders

9.13   In respect of Item 1, I will briefly deal with the position taken by Mr Cheng at the Tribunal on whether he was in possession of price sensitive information.  The Tribunal at paragraph 68 stated that whilst Mr Cheng did not formally admit he was in possession of relevant information at the time in question he did not seem to challenge that he was in possession of such information.  The Tribunal came to the view that Mr Cheng in fact possessed price sensitive information :

‘ 79. The Tribunal took into account the nature of the information, it being an intended general offer for the shares in China Gas at a price substantially above the prevailing market rate with the intention of a takeover. Also we weighed Mr Cheng’s expertise and experience as the Executive Director, Company Secretary and Chief Financial Officer of ENN. In addition we also considered the unchallenged opinions of the expert and the status and nature of those opinions. Our conclusion was that it was inconceivable that Mr Cheng could have viewed this as anything other than relevant information. His protestations regarding the problems of the bridging loan affecting the credit rating of ENN were complete “red herrings”. We were satisfied beyond a shadow of a doubt that he knew full well the facts he possessed amounted to relevant information. We find accordingly.’ (emphasis added)

9.14   With this in mind it is striking that the bid orders were placed in close proximity to Mr Cheng receiving the price sensitive information.  On 14 November 2011, Mr Cheng knew the price range of the offer, it was followed by the bid orders made on 15 and 16 of November 2011.  On 17 November 2011, Mr Cheng came to know information that the offer price would be $3.75 per share, immediately there were bid orders placed, and further by bid orders placed on 18, 21, 22, 23, 24, 25, 28 November 2011.  On 5 December 2011, further bid orders were placed.  It was on that day when Mr Cheng received information that management of the ENN Group will be in Hong Kong for the project and Citi provided the timetable for the intended takeover.  On 6 December 2011, further bid orders were placed when Mr Cheng received information from Citi affirming the approval of the bridging loan.  Following the announcement of the takeover bid on 12 December 2011, trading of China Gas shares resumed on 13 December 2011.  The shares that had been previously acquired were disposed of on 13, 14, 15 and 16 December 2011. 

9.15   The relevance of the Item 1 evidence is that it put Mr Cheng in the spotlight in that the bid orders followed the pattern of him gaining more and more information on the takeover project.  Further the orders were made in an account which Mr Cheng helped to set up and had received all the correspondence relating to the account.  This was recognized by the Tribunal.   It held :

‘ 118. In respect to the time frame for the making of the bids from 16 November to 6 December 2011 we were satisfied Mr Cheng did have the necessary relevant information and that raised suspicions against him but that in itself was not sufficient to find him guilty of market misconduct.’

9.16   The significance of this item of evidence is that it serves as the foundation of the case against Mr Cheng.  It must be considered together with the other items of evidence to which I will turn.

2)   Manners of placing orders and the location of Mr Cheng         

9.17   In respect of Item 2, bid orders came from the IP address subscribed by ENN’s Hong Kong office for its computer terminals while Mr Cheng was in Hong Kong and bid orders placed by a smartphone while Mr Cheng was out of Hong Kong.  They are by themselves strong circumstantial evidence pointing to Mr Cheng being connected to such orders particularly when viewed with Item 1 of the evidence that the bid orders were placed as Mr Cheng gained more and more information on the takeover.  The picture that it was Mr Cheng who controlled Ms Li’s account clearly emerged.  The Tribunal, however, discounted the probative value of the office ‘in/out’ records of ENN’s office on the bases of

(1)  the lack of exact time of Mr Cheng being present in the office when the bid orders were placed through the ENN office computer(s),

(2)  Mr Cheng’s suggestion of the possibility that the records might not be 100% accurate as to his presence in the office, and

(3)  the possibility of other persons with possible connections to Ms Li visiting Hong Kong office who were not required to clock in and out.

9.18   All the orders were placed when Ms Li was not in Hong Kong.  The distinct pattern of placing orders when Mr Cheng was either present in or outside Hong Kong is another building block pointing towards Mr Cheng’s involvement with the placing of these orders.  The Tribunal discounted this pattern of placing bids by referring to three incidents on 15 and 25 November and 5 December 2011 where the bids were made by smartphone at the time when Mr Cheng was not outside Hong Kong.  Actually I note that there were two other days, namely 16 and 22 November 2011 when bids were made on the smartphone when Mr Cheng was in Hong Kong.  But with respect, even five days (with six orders) out of 13 days (with 40 orders) do not disrupt the pattern of bidding via the office computer when Mr Cheng was in the office and by a smartphone while he was outside Hong Kong.  It must not be forgotten that very often within one single day there were multiple bidding orders being placed. There was a total of 40 bids made contrasted with six bids on these five days. For the Tribunal to use these odd incidents to discount the value of the pattern demonstrates that the Tribunal is not applying the civil standard but rather the criminal standard of requiring proof beyond reasonable doubt.  By refusing to recognize this clear pattern the Tribunal had failed to take a broader view of the evidence that the 40 bid orders were made through Ms Li’s security account when she was not in Hong Kong and Mr Cheng was the only one who had a substantial connection with her in terms of his personal contact with her, his knowledge of her security account and the funds involved in the purchase and disposal of the Subject Shares.  None of the employees working in the ENN Office during the relevant period (especially those who attended the office on all of the dates when the bid orders were placed through the office computer(s)) knew Ms Li personally.

3)   Connection between Mr Cheng and Ms Li

9.19   In respect of Item 3, Mr Cheng admitted that he handled all the correspondence between Bank of China and Ms Li, including correspondence relating to her security account.  This, taken with the other three items of evidence further pointed towards Mr Cheng having dealt with the shares.

4)   Fund flow

9.20   Item 4 shows that Mr Cheng had direct control of the funds for the purchase of the shares and the proceeds after their disposal.  The total consideration of HK$13,763,605.60 for the purchase of the 4,930,000 shares in China Gas consisted of various transfers from Mr Fong to Ms Li’s savings account in the total amount of HK$10,800,000 :

1)  HK$500,000 on 21 November 2011;

2)  HK$1,000,000 on 22 November 2011;

3)  HK$300,000 on 22 November 2011;

4)  HK$3,500,000 on 2 December 2011;

5)  HK$4,100,000 on 5 December 2011; and

6)  HK$1,400,000 on 6 December 2011.

9.21   But behind the HK$10,800,000 that Mr Fong transferred to Ms Li’s savings account, HK$8,000,000 (by way of two cheques of HK$4,000,000 both dated 2 December 2011) came from the bank account of Xinao HK Holdings Limited (‘Xinao HK’) which is the bank account of Mr Cheng’s wholly owned company.

9.22   In an attempt to explain why he supplied a substantial part of the funds used to acquire the China Gas shares from his account, Mr Cheng gave the following explanation :

1)  He was asked by ENN Solar to pay Ms Li a sum of Hong Kong dollar equivalent to US$1 million.  He did not initially explain in his witness statement why he agreed to do so without any security from ENN Solar.  Then it was said that US$1 million was already deposited by ENN Solar in Xinao’s account.  Apart from showing that the sum appeared in Xinao’s bank account, there was no indication as to who deposited this sum. 

2)  He relied on the allegation contained in the letter from the legal representatives of one Mr Yang Yu to the Commission dated 27 June 2013 made in response to SFC’s inquiry that there were various deposits of altogether RMB6,381,073 (i.e. the equivalent of US$1 million) by Ms Li into Mr Zhao’s account (totally undocumented), and then by Mr Zhao into ENN Solar’s account.

3)  Instead of he himself causing transfer directly from Xinao’s account to Ms Li’s account, he asked Mr Fong to transfer money to Ms Li’s account instead.

4)  Then we have the story of Mr Fong paying HK$9 million to Ms Li : first, HK$7.6 million (by two separate sums of HK$3.5 million and HK$4.1 million said to represent Mr Cheng’s earlier gambling deposits with Mr Fong) and later HK$1.4 million.  In order to explain the overpayment of HK$1.2 million (HK$9 million less HK$7.8 million), it was said that this HK$1.2 million represented Ms Li’s money deposited with Mr Fong for gambling.

9.23   Mr Yu submitted that the route for the US$1 million to be transferred supposedly from Ms Li to her own bank account in Hong Kong was incredibly convoluted and without any valid reason.  Altogether six parties and three currencies were involved: from Ms Li to Mr Zhao in RMB, who then deposited the same amount in RMB to ENN Solar in Mainland China, which then caused the Hong Kong HSBC account of its parent company ENN Solar HK to transfer the US dollar equivalent of the same amount to Mr Cheng’s Xinao HK account, which coincidentally had funds in approximately the same amount in Hong Kong dollar in Mr Fong’s possession, who then transferred the same amount in Hong Kong dollar to Ms Li’s Bank of China account.

9.24   As to how the sale proceeds of the China Gas shares were disposed of, the Tribunal found :

‘ 32. In relation to the sale proceeds of the China Gas shares, HK$14.17 million of the HK$16.7 million was transferred by Ms Li to Mr Fong, who then transferred at least HK$615,233 to Mr Cheng:

(1)  The HK$14.17 million was transferred to Mr Fong by Ms Li through 2 cheques issued on 28 December 2011, one cheque issued on 6 January 2012 and one cheque on 16 January 2012;

(2)  On 4 January 2012, Mr Fong transferred HK$615,233 to Shing Hing Plastic Part Co (“Shing Hing”) which was a money changer.  The sum exchanged was RMB500,000;

(3)  Mr Fong then asked his mother to instruct Shing Hing to transfer the RMB500,000 to Mr Cheng’s bank account in Beijing on the same day.’

9.25   This item of evidence showing the control of the fund flow by Mr Cheng completed the evidence against Mr Cheng that he dealt with the shares.  How did the Tribunal deal with Mr Cheng’s explanation? 

1)  The Tribunal found the source of the US$1 million from the statement of Mr Cheng and his evidence while somewhat confusing, appears clearly to have been from the two cheques dated 2 December 2011 each in HK$4 million (paragraph 104).

2)  The Tribunal noted that whilst SFC challenged Mr Cheng on the basic details of this transaction, he maintained his version and kept to his main theme despite this.  It held ‘there was, we found much to give pause for thought but little real substance in SFC challenges’ (paragraph 105).

3)  As to the flow of funds, the Tribunal did find it suspicious, given the connection between Mr Cheng, Ms Li and Mr Fong.  However, the flow to and fro was short of providing compelling evidence of Mr Cheng’s trading.  The explanation for the flow of HK$8 million to Ms Li was not totally convincing nor yet was it totally discredited.  That is far short of the purchase price of over HK$13 million (paragraph 119).

4)  The flow back to Mr Cheng was even less probative being merely just over HK$600,000.  The Tribunal held that it was not able to draw any inferences of balances being held, perhaps in Macau for later collection as seems to be implied (paragraph 119).

9.26   It is apparent that Mr Cheng’s case on the flow of funds used in the purchase of the shares was convoluted and on any view can be described as inherently improbable.  In my view, the Tribunal had failed to apply the civil standard (with the further requirement for compelling evidence to deal with serious allegations) in assessing the improbability of Mr Cheng’s case in the light of all the circumstances.  The same observation can be said of the disposal of the proceeds of sale.  It must not be forgotten that it was the evidence of both Mr Cheng and Mr Fong that it was at Mr Cheng’s instructions the HK$14,l70,000 sale proceeds transferred from Ms Li’s account to Mr Fong’s account were then transferred to the casino VIP room operator in Macau. 

9.27   The relevance of the evidence on fund flow is that Mr Cheng was the only person giving instructions to Mr Fong for the transfer of HK$10.8 million to and HK$14.17 million from Ms Li’s account with Bank of China.  This is another building block pointing towards Mr Cheng’s involvement with the dealing of the China Gas shares.  The Tribunal accepted that Mr Cheng’s explanation is ‘confusing’, his version gives ‘pause for thought’, ‘not totally convincing’ and ‘suspicious’ but it dismissed the force of the evidence by saying such evidence is not ‘compelling’ enough and there is very little substance in SFC’s challenge.  One may indeed ask what more is required in the light of the compelling evidence that I have summarised.  By saying the existing evidence is not sufficient for the Tribunal to draw a compelling inference, it is in substance requiring the SFC to prove the case against Mr Cheng and on the criminal standard of beyond reasonable doubt, when both of these requirements have no place in an inquisitorial inquiry. 

5)   Other matters

9.28   Mr Lam referred to the Tribunal’s finding that ‘the evidence did not exclude the possibility of other persons being in the offices who were not required to clock in and out and that these were persons with possible connections to Ms Li’ (paragraph 95); ‘There is no evidence as to who used the phone nor indeed whose phone was used.  We could not rule out the possibility of it being Ms Li herself’ (paragraph 96); and ‘We note during the time span in question other trading was taking place in that securities account of Ms Li.  There are other possibilities from the facts other than it was Mr Cheng trading’ (paragraph 117).  Mr Lam submitted that in so holding, the Tribunal was simply referring to the existence of those other possibilities to explain why it was not satisfied that the inferences as alleged by SFC could be drawn on a balance of probabilities. He submitted that the Tribunal had never stated, in form or substance, that it refused to draw such inferences because they were not the only inferences that could be drawn.  Its approach was consistent with Dixon CJ’s judgment in Jones v Dunkel cited in Ming Siu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334, paragraph 79, that a court is not entitled to :

‘ ... choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied.’

9.29   In my view one really has to consider the substance of these findings in the light of the evidence showing the connection of Mr Cheng and Ms Li in order to see whether the Tribunal was actually applying the approach of Sir Anthony Mason on drawing of inference or whether the Tribunal had actually applied the criminal standard on drawing inference, namely, it is the only reasonable inference to be drawn in the circumstances.  I have already dealt with many of the submissions earlier. In respect of the Tribunal’s view that there were other tradings in Ms Li’s account during the relevant period and that ‘there are other possibilities from the facts other than it was Mr Cheng trading’ (paragraph 117), with respect, this is an irrelevant consideration because the focus must be on the evidence concerning the China Gas transactions.  This also demonstrated again the flaw in the Tribunal’s approach, because contrary to Mr Lam’s submission, the Tribunal required in substance the evidence to be proved beyond reasonable doubt (by excluding all other possibilities) rather than on a balance of probabilities that Mr Cheng was the one who placed the bid orders.

9.30   Another example of the Tribunal’s flaw is its view that the ultimate hurdle that SFC could not overcome was the vagueness about the actual relationship between Mr Cheng and Ms Li.  While it accepted that the mechanics of the arrangements between the two of them raised suspicions, it said :

‘ 120. ….we did not know the extent to which Mr Cheng had authority and control over her accounts. Nor indeed, if Mr Cheng was the only person with any control. Without Ms Li the picture was a blur – the puzzle incomplete and vague.’

9.31   Again with respect, the evidence is plainly laid out before the Tribunal for it to come to a proper evaluation of Mr Cheng’s involvement had it applied the correct standard of proof.  But the Tribunal once again adopted a ‘proof beyond reasonable doubt’ standard rather than on a balance of probabilities.  This is demonstrated by its view that : 

‘ 95. .....it is not incumbent on Mr Cheng to provide evidence, it is for the SFC to show there was no one connected to Ms Li.’

9.32   In my view SFC had adduced sufficient evidence for the Tribunal to decide whether Mr Cheng had dealt with the shares.  What is not required is for SFC to go one step further to adduce evidence to rule out all possibility (no matter how fanciful) that someone else might possibly be involved.  This goes beyond what is required by the civil balance of probabilities standard.  In my view, the Tribunal was plainly wrong when it found that Mr Cheng had not engaged in market misconduct by way of insider dealing.

6)   Other grounds

9.33   By reason of the conclusion that I have reached, it is not necessary to address the other grounds of appeal raised by Mr Yu.

IX.  Retrial

10.   The Court had considered in the discussion with the parties whether it can substitute a finding that Mr Cheng had engaged in market misconduct.  But I have come to the view that as the Tribunal is tasked with findings of fact, this ultimate decision should vest with the Tribunal itself.  I will, therefore, remit the matter to a differently constituted Tribunal to determine solely the question of whether Mr Cheng had dealt with the shares, as the other elements of market misconduct had been established and were not challenged in this appeal.

X.  Costs

11.  There will be a costs order nisi that SFC is to have the costs of the appeal with a certificate for two counsel.  As to the costs below, it will be SFC’s costs in the cause of the rehearing with a certificate for two counsel.

Hon Yuen JA :

12.  I agree with the judgment of Cheung JA.

Hon Kwan JA :

13.  I agree with the judgment of Cheung JA.