SECURITIES AND FUTURES COMMISSION v. LIANG JIANG

HCMA 469/2012
and HCMP 2651/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MAGISTRACY APPEAL NO 469 OF 2012

MISCELLANEOUS PROCEEDINGS NO 2651 OF 2011

(ON APPEAL FROM ESS NOS 35247 – 35259 OF 2010)

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J U D G M E N T

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1. There were two appeals before the court. The first HCMA 469/2012 was an appeal by way of case stated, under section 105 of the Magistrates Ordinance, Cap 227, and the second, HCMP 2651/2011, was an appeal against a costs order made in favour of the respondent under section 19 of the Costs in Criminal Cases Ordinance, Cap 492. The two appeals were independent of each other.

HCMA 469/2012

2. The case was stated by Henry Anthony Mierczak Esquire, who at that time was a Permanent Magistrate of the Hong Kong Special Administrative Region under the Magistrates Ordinance, Cap 227.  Four questions of law were composed by the magistrate, as requiring to be answered by the court.

Background

3. Briefly, the Securities and Futures Commission (SFC) preferred informations against the respondent contained in 13 summonses.  The respondent placed orders to buy shares in two publicly listed companies (“the SHARES”), according to the appellant, with the intention of or being reckless as to whether such orders had, or were likely to have, the effect of creating a false or misleading appearance to the market for, or the price for dealing in the shares of the two companies.  After trial all 13 summonses, identical in form, with varied particulars, were dismissed by the magistrate and the appellant was ordered to pay the costs incurred by the respondent in defending of the 13 summonses.

4. The appellant alleged that the respondent purchased the SHARES on the last trading day of each of the months of June to December 2008 not according to principles of genuine supply and demand, but intending to push up the price of the SHARES, in particular their closing price on the last trading day of each of the months in question.  The appellant alleged that the respondent had made those purchases intending that, or being reckless as to whether, such purchases had, or were likely to have the effect of creating a false or misleading appearance of the market for, or the price of dealing in, shares of the two companies.

5. The magistrate in stating the case set out in some detail the evidence adduced before him by the oral witnesses, documentary evidence and also opinion evidence from three experts in securities trading.  It is not necessary to go into the minutiae of the material pertaining to the case stated as the evidence of the respondent’s activities was not in dispute.

6. The important question and, as the magistrate recognised, the sole issue, was what was the mens rea of the respondent at the time of purchasing the shares. 

7. The respondent ran an investment Fund which he set up on 1 January 2007.  Investors could subscribe for shares in the Fund and redeem their investment monthly.  The respondent managed the Fund by using money from the investors to purchase listed shares.  The Fund issued monthly performance reports to report the Net Asset Value (“NAV”) and the price per share of the Fund to existing shareholders, as well as to potential investors. 

8. The NAV was calculated according to the last traded price of the listed shares that the Fund held on the last trading day of a month.  The higher the closing price of those shares, the higher the NAV of the Fund would be; the better the Fund’s performance and the better its ranking with similar Funds.  From June to December 2008, apart from some cash holdings, the Fund’s investment was largely in the SHARES.

9. The prosecution contended that by acting as he did the respondent was trying to “mark the close”, that is intending to create a false or misleading appearance for the value of the shares as at the last trading day of the month.  That was said to be his sole or dominant purpose, the central object of his actions.  The respondent denied any such intention and explained his conduct in terms of his desire and his attempts to balance the allocation of shares in the Fund’s portfolio.

Law

10. The 13 summonses were laid under section 295(1)(b) of the Securities and Futures Ordinance, Cap 571 which provides:

“a person shall not … do anything … with the intention that, or being reckless as to whether, it has, or is likely to have, the effect of creating a false or misleading appearance with respect to the market for, or the price for dealings in, … (including listed shares traded on the market operated by The Stock Exchange of Hong Kong)”,

i.e. a false trading offence. 

11. The Court of Appeal in HKSAR v Fu Kor Kuen Patrick and another [2011] 1 HKLRD 655 had adopted and applied the description of such legislation as given by Mason J in North v Marra Developments Limited [1981] 148 CLR 42 @ 58 – 59:

“It seems to me that the object of the section is to protect the market for securities against activities which will result in artificial or managed manipulation. The section seeks to ensure that the market reflects the forces of genuine supply and demand. By ‘genuine supply and demand’ I exclude buyers and sellers whose transaction are undertaken for the sole or primary purpose of setting or maintaining the market price. It is in the interests of the community that the market for securities should be real and genuine, free from manipulation. The section is a legislative measure designed to ensure such a market and it should be interpreted accordingly.”

12. The appellant submitted that under section 295(1)(b), the court only needed to consider two matters:

(1)   Did the respondent do what the prosecution complained he had done?  (the actus reus issue)

(2)   Did the respondent, in doing what he had done, have the intention of, or was he reckless whether, it had, or was likely to have, the effect of creating the false or misleading appearance of which the prosecution complained?

13. The actus reus was not disputed; the magistrate only had to consider whether the respondent had the necessary mens rea for the offences.  He had made findings of facts relating to the alleged offences. 

14. The magistrate found as a fact that the respondent knew that his purchase of the SHARES on the last trading days of the months in question would boost the share price.  As the magistrate found too that those high prices were not maintained into the following month, therefore the appellant contended that the only irresistible conclusion that a reasonable jury properly directed could have reached was that the respondent did have the necessary mens rea.

15. The appellant submitted that the instant case was distinguishable from Fu Kor Kuen Patrick where the Court of Final Appeal set aside the conviction because there was a statutory defence under section 295(7) for a complaint made under the circumstances set out in section 295(5), which enabled a person to escape liability by proving an absence of a purpose to create a false or misleading appearance. 

16. Counsel for the respondent pointed out that although the Court of Final Appeal’s findings about the deeming provisions in section 295(5) and the statutory defence in section 296(7) did not apply, the court’s discussion of intention was relevant. 

Findings of facts

17. The magistrate made findings of facts which were relevant to both appeals:

(1)   The respondent gave evidence and admitted that he purchased the SHARES.  He accepted that whether the price of shares rose or dropped on the last trading day of the month, it would have a direct, significant effect on the calculation of the total value of all the shares that his Fund held but would have no effect if the price rose or dropped on trading days other than the last trading day of the month.  That was because the net asset value (“NAV”) and the share price of the Fund were valued on the last traded market price of the listed shares on the last trading day of the month. The NAV and the share price were the most important factors affecting the Fund’s monthly performance.

(2)   The respondent knew that his purchase of shares on the last trading day in each of June to December 2008 was the greatest contributing factor which caused the closing price of the SHARES to jump significantly.

18. Having made those findings, the magistrate considered the respondent’s assertion that when he purchased the SHARES, he was carrying out portfolio rebalancing for the Fund.  The magistrate eventually said that he could not be satisfied beyond reasonable doubt that the respondent had the intention that his bid orders to purchase shares had, or were likely to have, the effect of creating a false or misleading appearance of the market for, or the price for dealings in the shares.  He accepted that it was probably the case that the respondent was carrying out portfolio rebalancing. 

(1)   The respondent gave evidence that the Fund had a target to hold the SHARES equal to about 30% of the Fund’s gross value.  If and when the weighting of the SHARES in the Fund dropped below that figure he would purchase more SHARES to restore the target allocation.

(2)   On the last trading day in December 2008, apart from using the Fund to buy shares, the respondent also used his personal company, “Bridge”, to purchase shares.  The Fund and Bridge were the only purchasers of the SHARES that day.  The respondent agreed in cross-examination that Bridge had not bought any listed shares at all in 2006, 2007 and 2008. 

19. The magistrate set out the case stated and the four questions which the court was required to answer.  Counsel for the appellant advised the court that Question 1 would not be pursued as the matters raised therein were covered effectively in Questions 2, 3 and 4.  Questions 2, 3 and 4 therefore became Questions 1, 2 and 3.

Question 1 (formerly Question 2)

(1)   Did I err in acquitting the respondent of all 13 summonses of false trading without considering whether the respondent had the second category of intention defined and referred to in HKSAR v Fu Kor Kuen Patrick and Another [2011] 1 HKLRD 655, at paragraphs 27 to 31, in creating a false or misleading appearance of the market for, or the price of dealing in, the shares in question?

20. The definition of intention comprises two limbs:

(1)   A result is intended when it is the actor’s purpose to cause it.

(2)   A court or a jury may also find that the result is intended, though it is not the actor’s purpose to cause it, when:

(i)   the result is a virtual certain consequence of that act; and

(ii)   the actor knows that it is a virtually certain consequence.

21. Despite the findings of facts he had made, the magistrate was not satisfied beyond reasonable doubt that the respondent had the intention that his bid orders to purchase the SHARES had, or were likely to have, the effect of creating a false or misleading appearance of the market for, or the price of the SHARES.  The appellant submitted that the “reasonable doubt” that the magistrate had, related only to the first limb of intention, and that the magistrate should have, but failed to, consider whether the second limb of intention was applicable.  The magistrate found the respondent’s purchases of the SHARES on the last trading day of each month from June to December 2008 was the major significant contributing factor which caused the closing price of the shares to jump upward and the respondent knew that. 

22. If he had considered the second limb of intention properly, the magistrate would have come to the only conclusion which, according to the appellant, was available to him; namely, that the respondent knew that the significant price jump in the SHARES was a virtually certain consequence of his actions and therefore had the requisite intention.

23. The magistrate recognized that if it were shown beyond reasonable doubt that the respondent had been “marking the close” the first category of intention would be established.  If it were proved that the respondent had been, or may have been, engaging in portfolio rebalancing neither category of intention would have been established.

24. Throughout the proceedings the appellant based its case firmly on conduct which was intentional not reckless.  No mention was made of recklessness when the prosecution opened its case.  A fleeting reference to recklessness in the prosecution closing was apparently included for the sake of completeness.  The magistrate when delivering his verdict referred to the prosecution case being narrowed to intention only – “In fact, the prosecution case can be narrowed a little further as they say the defendant intended for such a situation to arise, as opposed to reckless whether it arose or not.” [Reasons for Verdict 18T-V]

25. Having considered the evidence and the arguments I am satisfied that the magistrate did not err in applying the subjective test.  The court is not obliged to consider intention in terms of the second test i.e. the outcome being an almost certain result of the conduct being examined, such consideration is the exception.  A court may find the result was intended, but such a finding will depend on the particular facts of the case.  I accept the respondent’s submission that there is no evidential support for the appellant’s contention that the magistrate was referring only to the first limb of intention.

26. The answer to Question 1 is in the negative.

Question 2 (formerly Question 3)

(2)  Did I err in acquitting the respondent of all 13 summonses of false trading without considering whether the respondent was reckless as to whether his conduct had, or was likely to have, the effect of creating a false or misleading appearance of the market for or the price of dealing in the shares in question?

27. The appellant’s case was that the respondent purchased the SHARES intending to push up their closing price.  However, that did not prevent the magistrate from considering whether the respondent was reckless in committing the offences.  Intention and recklessness were not mutually exclusive.

28. The prosecution [paragraph 5] in its final submission, stated that recklessness was an alternative to intention insofar as the mens rea issue was concerned.  They also relied [paragraph 6] on Sin Kam Wah and Another v HKSAR [2005] 2 HKLRD 375.

29. Accordingly the appellant argued that the magistrate should have, but failed to consider whether the respondent was reckless as to whether his purchasing conduct would, or was likely to, create a false or misleading impression about the closing price of the SHARES.  If the magistrate had applied the test of recklessness properly, namely that the respondent was aware that his conduct had or was likely to have the effect of creating a false or misleading appearance and that it was an unreasonable risk for him to take, the magistrate would have had to find him guilty.

30. The respondent argued that the magistrate had not erred by not specifically considering whether the respondent was reckless. The appellant throughout had insisted that the respondent had deliberately made his purchases to “mark the close”.  Intention was the basis of the prosecution case – the only mention of recklessness came in brief references in the prosecution closing address and in the magistrate’s oral judgment. 

31. The respondent’s evidence was that he was not aware of the risk of any false or misleading appearance being demonstrated by his conduct.  Mr Peter Duncan SC, for the respondent pointed out that this denial was not pursued by the prosecution when cross-examining the respondent.  All the magistrate had to decide was whether the respondent intended to create “a false or misleading appearance”.

32. Overall in respect of the second question I would answer it in the negative – there was no obligation on the magistrate to examine the question of recklessness.

Question 3 (formerly Question 4)

(3)   Did I err in acquitting the respondent of all 13 summonses of false trading in that such verdict was perverse in the sense as recognised in Li Man Wai v Secretary for Justice (2003) 6 HKCFAR 466?

33. The Court of Final Appeal in Li Man Wai held that where a magistrate has come to a conclusion or finding of fact which no reasonable magistrate, applying his mind to the proper considerations and giving himself the proper directions, could have come to, this would be regarded as an error of law.  Such a conclusion or finding is often described as perverse and whether a verdict is perverse or not is a question of law. 

34. The appellant invited the court to consider the case stated, which sets out the evidence adduced, in particular the following matters:

(1)   The respondent purchased the SHARES on the last trading day of each month and was the only purchaser on most of those last trading days.

(2)   As the respondent kept on placing buy orders for the SHARES with progressively higher bid prices, the nominal price of the SHARES was pushed up continuously, and eventually set the closing price of the shares on the last trading days.

(3)   The respondent made some purchases quite late in the day, near to the market closing time and his bid price was higher than the price that other intending purchasers were willing to pay at the material time.

(4)   The Fund held 11 – 12 million of the SHARES, but the respondent purchased only the minimum amount of 2,000 shares, when the market was about to close on the last trading day of the month, at a high price, and when there were many more shares available for purchase in the market.  Such purchases would have a direct significant effect on the calculation of the total value of all SHARES held by the Fund. 

35. The appellant contended that the magistrate had come to a conclusion or a finding of fact which no reasonable magistrate, applying his mind to the proper considerations and giving himself the proper directions, could have reached.  It was argued by the appellant that a purchase at a high price of the minimum quantity of the SHARES on the last trading day of a month, when the market is about to close, could not be part of a portfolio rebalancing exercise.  A relatively small outlay in buying 2,000 SHARES would result in a disproportionately large increase in the value of the Fund’s holding of SHARES.  Thus the Fund could report a better performance to its clients at year’s end.  Counsel for the appellant submitted that the only way a purchase of small board lots could contribute to any “portfolio rebalancing” of a fund which already held 11 – 12 million shares, was to create a price fixed by reference to the respondent’s targeted value for those shares. 

36. In the instant case the magistrate said he had some suspicions about the respondent’s conduct, but the appellant argued that “it was clear” that his reference to reasonable doubts related only to the first limb of intention.  The magistrate’s verdict was said to be perverse in two respects:

(1)   if he had considered the second limb of intention, the only reasonable conclusion he could have reached on the evidence was that the respondent knew that a consequence of his bid orders meant that there was likely to be a false or misleading appearance with respect to the market price; and

(2)   because the overwhelming evidence was that it was the respondent’s purchases that caused a false or misleading appearance to be created, as opposed to carrying out “portfolio rebalancing” as he claimed he was doing.

Evidence of experts

37. The magistrate was presented with the views of 3 experts and he considered their evidence in deciding whether the prosecution had proved beyond reasonable doubt that the respondent had been “marking the close” or if, as the respondent maintained, his activities resulted from his need to rebalance his portfolio.

38. The expert called by the prosecution, Mr Shek Kam Por (PW1) suggested two matters which he believed to support the allegation that the respondent had been “marking the close”:

(1)   the conduct would have a positive effect on the monthly performance report of the Fund; and

(2)   the conduct would entitle the respondent to claim a higher management fee.

39. Those matters prayed in aid by Mr Shek were fairly vague and unconvincing indicators of support for the conduct alleged and it is clear that the magistrate did not accept it.

40. Overall the magistrate was not impressed with the evidence of PW1.  Apart from PW1’s admitted lack of expertise in portfolio rebalancing, the magistrate expressed reservations in particular about his assessment of the theoretical closing price and the hypothetical closing price of the SHARES in the absence of bid orders made by the respondent.  This was relevant to considerations of whether the respondent was marking the close.

41. Because Mr Shek admitted he lacked expertise in portfolio rebalancing a second expert, Miss Winnie Pao, an expert in securities trading (PW2) gave her opinion about portfolio rebalancing.  She did not consider it a trading strategy, but a means of selling overweighted assets, thus increasing funds available to buy shares that were too lightly represented in an investment portfolio.

42. Rebalancing could be carried out at any time but had to be done regularly.  In Miss Pao’s view the respondent’s trading pattern from June to December 2008 in the SHARES was not consistent with portfolio rebalancing.

43. It was also Miss Pao’s opinion that portfolio rebalancing should be applied regardless of market conditions.  The defence disputed that vigorously, with particular reference to the unusual market conditions pertaining in that period, referred to as the Global Financial Crisis (GFC). 

44. The magistrate rejected the evidence that portfolio rebalancing must be carried out regardless of market conditions.

45. A securities expert, Mr Clive Rigby (DW2) was called by the respondent and opined:

(i)   the SHARES were illiquid stocks, their daily trading volume was thin and small;

(ii)   it was unusual to see such stocks  record a relatively high trading volume and a significant sudden increase in closing price on the last trading day of a month;

(iii)   it was unusual and not a coincidence that respondent’s purchase of the SHARES on the last trading day in most of the months in question accounted for 100% of the purchases in the market; that the trading volume of the SHARES on those last trading days was relatively high, and that their closing price on those days was suddenly increased. 

46. That being so, Mr Rigby agreed that the respondent’s conduct could indicate he was marking the close, but it was also equally the case that he was balancing his portfolio.

47. The respondent’s evidence was that the extreme market conditions meant he could not achieve his target weighting of 30% for the SHARES.  Although there was no documentary support that the target pursued by the respondent was to hold the SHARES comprising 30% of the Fund’s value the magistrate accepted it as a possibility if the period from 1 January 2008 to 31 March 2009 was looked at. 

48. Mr Rigby gave evidence that he had assumed from the outset that the respondent had in mind achieving and maintaining a certain target percentage when purchasing the SHARES, even although documentary proof was absent.  Mr Rigby gave it as his view that portfolio rebalancing could be done at any time, but it was commonly done at the end of the month as the respondent had done.

49. The evidence of the expert witnesses was important, and it was for the magistrate to evaluate it, presented, as it was, for the express purpose of assisting him to decide whether the prosecution had proved that the respondent had been marking the close.

50. Having evaluated that evidence the magistrate accepted the evidence of Mr Rigby the defence expert.  He took into account various factors which in his view militated against the respondent marking the close. He was swayed by the “hands on” experience of portfolio rebalancing that Mr Rigby had and felt able to rely on it.  Mr Rigby also supported the respondent’s concern about the atypical and very volatile trading conditions prevailing during the GFC, conditions which were described as the worst since the 1930s. 

51. There was nothing perverse about the magistrate’s verdict.  The appellant had advanced its case that the respondent was deliberately marking the close and had produced two experts in an endeavour to establish that was the case.

52. The magistrate did not accept the evidence of PW1 and PW2 for reasons which he explained and although he had some reservations about the respondent’s conduct he found that the evidence of the respondent and Mr Rigby meant he could not be sure to the requisite standard that the respondent was “marking the close”.  If he found that the respondent was, or may have been, engaged in rebalancing his portfolio he was obliged to acquit him. 

53. Mr Duncan SC submitted that no question of law arose for consideration of the court.  The issues in the case were very clear. He quoted the magistrate:

“But the question is whether his primary purpose in so doing was to set the market price or not. If yes, beyond a reasonable doubt, he’s guilty of the offences. If not to that high standard, he must be given the benefit of the doubt.”

54. Mr Duncan SC also relied on Yang Chih Chen v Securities and Futures Commission (HKMA 204 and 371 of 2005 unreported) (a case not dissimilar to the instant case) which held that an appellate court could not direct a magistrate to find facts of which he felt unsure and to convict the accused.  In the instant case, based on the evidence the magistrate was left with doubts as to whether the respondent had the requisite intention, that was not a matter of law and was not challengeable on appeal. 

55. The magistrate did not err in acquitting the respondent; the verdict was not perverse in the sense recognised in Li Man Wai.  The magistrate here applied his mind to the proper considerations and gave himself the appropriate directions.

56. Having considered the third question I would answer that too in the negative.

HCMP 2651/2011

Costs

57. Consequent on his dismissing the 13 summonses which had been filed against the respondent the magistrate acceded to an application on behalf of the respondent for a costs order.  The application was opposed by the appellant on the ground that the respondent had brought suspicion on himself.

58. The magistrate was required to consider the authorities: Tong Cun Lin v HKSAR (1999) 2 HKCFAR 531, HKSAR v Vivienne Fan FACC 8/2010 and Ting James Henry v HKSAR (No 2) (2007) 10 HKCFAR 730.

59. Mr Andrew Powner, who appeared for the respondent on the costs application, referred to those authorities with emphasis on the test which involves consideration of the conduct of an accused during the investigation and at trial.  He submitted that the respondent had given very detailed answers to questions put to him during 3 interviews with the SFC covering matters which were scrutinized at trial such as portfolio rebalancing, percentages relating to purchases and various documentary items put forward by him to the SFC during the investigatory period.

60. He referred to Vivienne Fan and in particular reminded the magistrate that merely because a prosecution case raises suspicion does not mean, necessarily, that the accused has brought such suspicion on himself.

61. Mr Powner distinguished the position of the respondent from that of Ting James Henry because a finding of dishonesty had been made against that defendant in the course of his trial on charges of which for other reasons he was acquitted.

62. The basis of the appellant’s application that the costs order should be overturned was linked to the suspicions about the respondent’s conduct which the magistrate referred to in his Reasons for Verdict.

63. The magistrate when hearing the costs application agreed that he had referred to suspicious actions by the respondent, but pointed out that he had found those actions were equally consistent with the evidence of portfolio rebalancing for which he had relied heavily on the evidence of Mr Rigby.

64. The magistrate exercised the discretion he had in relation to costs and ordered that costs should follow the event.  Accordingly he awarded costs to the respondent, such costs to be taxed if they could not be agreed.

65. On appeal the appellant contended that the magistrate erred in failing to follow the procedure, laid down in Hui Yui Sang v HKSAR (2006) 9 HKCFAR 308, to set out precisely the grounds on which he exercised his discretion, and further he had erred in failing to order costs against the respondent despite finding he had effectively brought suspicion on himself by his admitted facts.

66. The same ground was traversed by counsel for the appellant and the respondent as had been argued before the magistrate albeit in slightly more detail.

67. The magistrate was well aware of the principles relating to costs orders – he was presented with the relevant authorities and having considered them in the context of the evidence, he did not accept the appellant’s submission that the respondent should be refused his costs because he had brought suspicion on himself during the investigation and/or trial periods.

68. No cogent argument was advanced to show otherwise.  The respondent’s position was very different from that of the defendant in Ting James Henry.

69. The magistrate exercised his discretion.  I see no indication that he exercised his discretion improperly, nor is there any basis on which I should interfere with it.

70. Accordingly I dismiss the appeal.

Costs of the appeals

71. In respect of each of HCMA 469/2012 and HCMP 2651/2011 I make orders nisi, for costs of the appeals in favour of the respondent, such costs to be taxed if not agreed and the orders nisi to become absolute 14 days from the date of judgment, unless before that date application is made for some other form of order.

72. I grant liberty to apply.