THE SECURITIES AND FUTURES COMMISSION v. YOUNG BIK FUNG AND OTHERS

HCMP 2575/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2575 OF 2010

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D E C I S I O N

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1. There are two applications of the defendants (“Ds”) before the court, namely, an application to strike out the statement of claim (“SOC”) and an application for determination of preliminary issues of law before the trial of this action. The two applications are in the alternative.

2. I start with a summary of the parties’ cases as contained in the pleadings, which I adopt with gratitude from the skeleton submissions of the plaintiff (“P”), who was represented by Mr Westbrook SC and Mr Li.

The dispute in this action

3. P’s case is as follows.  D1 was a solicitor at Messrs Slaughter & May.  She was seconded to the Standard Chartered Bank (HK) Ltd (“SCBHK”), a subsidiary of Standard Chartered Bank PLC (“SCB”).  As a solicitor and as a secondee, she owed fiduciary duties including a duty of confidentiality to her firm and to SCB/SCBHK (as a client of her firm and as her employer during the secondment).  In addition, she was subject to the firm’s and SCB/SCBHK’s restrictions on trading securities and had to obtain approval before doing so.

4. D2 was D1’s boyfriend.  He had worked at the Stock Exchange of Hong Kong.  He was later a solicitor in Messrs Linklaters.  As a solicitor, D2 likewise owed fiduciary duties including a duty of confidentiality to his firm and its clients.  He was also subject to the firm’s restrictions on trading securities and had to obtain approval before doing so.

5. D3 and D4 are D2’s elder sisters.

The Hsinchu Bank Matter

6. In 2006, SCB was in confidential negotiations with Hsinchu International Bank Co Ltd (新竹國際商業銀行) (“Hsinchu Bank”) in Taiwan to make a tender offer for all its shares, ie, to take over the latter bank.  Hsinchu Bank was listed on the Taiwan Stock Exchange.  D1 was seconded by Messrs Slaughter & May to their client SCBHK to work on this transaction.  She had access to highly confidential and sensitive information including the decision to make a firm offer (20 September 2006) and the exact price of the offer (NT$24.50).

7. On 20 September 2006, D3 opened a new securities account in Hong Kong which allowed her to trade shares in Taiwan. Over the following 9 days, she acquired 1,576,000 shares in Hsinchu Bank at a cost of around HK$6,330,000 and at an average price of NT$16.99 per share.  The flow of funds shows that D1-4 all contributed to the cost of buying these shares.

8. On 29 September 2006, SCB announced its takeover offer.  D3 accepted the offer for all the shares in her account, which came to HK$9,015,000, resulting in a profit of HK$2,685,000.  The flow of funds shows that D1-4 split up this profit in proportion to their contribution to the original cost.

9. There were frequent and well-timed telephone calls amongst Ds during this period.  None of Ds had traded in overseas stocks or engaged in short-term trading speculating on a potential takeover before, let alone in such a substantial amount.  P contends that in all the circumstances, the compelling inference is that this trading took place in the knowledge of and with the intention to take advantage of D1’s inside information for personal profit.

10. D1 and D2 did not obtain pre-approval for or notify their firms or SCB/SCBHK about their acquisitions of Hsinchu Bank shares.

11. P says, in summary, that D1 dishonestly breached her duties and misappropriated confidential inside information which belonged to her principals, concealed the act from her principals, and passed the information to D2, D3, and D4 to use for their (Ds’) own personal profit.

12. P contends that:

(a) D1 has contravened s300 of the Securities and Futures Ordinance, Cap 571 (“SFO”) by engaging in a fraudulent or deceptive act or scheme in misusing confidential information that she acquired for personal profit;

(b) D2 has contravened s300 by assisting D1; and

(c) D3 and D4 have aided and abetted D1 and D2 to contravene s300.

13. D1-4’s explanation of their acquisition of Hsinchu Bank shares is essentially that D2 picked the Hsinchu Bank stock on his own based on his own research; that D1 had entrusted money to D2 to (and D2 did) invest at his discretion without her knowledge; D3 opened and operated the new securities account for D2 because D2 was busy; and D3/D4 merely followed D2’s investment decision.

14. It can be seen that the primary dispute between the parties in relation to the Hsinchu Bank matter is a dispute on the facts and the proper inferences to be drawn from the direct facts proved.

The AsiaSat Matter

15. In late 2006 and early 2007, the CITIC Group (“CITIC”) and the General Electric Capital Corp (“GE”) were considering acquiring all the shares of, ie, privatizing, Asia Satellite Telecommunications Holdings Ltd (“AsiaSat”).  AsiaSat was listed on the Stock Exchange of Hong Kong and the New York Stock Exchange but was a comparatively obscure and thinly traded stock.

16. CITIC’s lawyers working on the transaction were Messrs Linklaters.  In such position, the firm had access to highly confidential and sensitive information, including the time of the announcement of the offer (9 February 2007 afternoon), the need to suspend trading in AsiaSat (at 11:19am during the morning trading session) and the price of the offer (HK$18.25).

17. D2 was working in the department within Messrs Linklaters that was working on the AsiaSat transaction, although he was not in the team for this particular assignment.  P says that he had easy access to information about the transaction, despite the usual safeguards that Linklaters had in place.

18. In the morning of 9 February 2007, shortly before trading was suspended, D1, D3, and D4 began to acquire AsiaSat shares aggressively.  Their trading accounted for 73% of the total trading that day. In fact, D1 alone already accounted for 69% of the day’s trading.

19. On 14 February 2007, immediately after resumption of trading in AsiaSat, D3 and D4 sold their shares and made profits of HK$14,594 and HK$29,188 respectively.  On 21 February 2007, D1 sold her shares and made a profit of HK$173,476.

20. There were frequent and well-timed telephone calls amongst Ds at the time.  None of D1, D3, and D4 had traded in AsiaSat shares before.

21. D1 neither obtained approval for nor notified her firm about her acquisition of AsiaSat shares.

22. In summary, P contends that D2 dishonestly breached his duties and misappropriated confidential inside information which belonged to his principals, concealed the act from his principals, and passed the information to D1, D3, and D4 to use for their own profit.

23. P further contends that:

(a) D2 has contravened ss291 and 300 of the SFO by tipping off D1, D3, and D4 about the AsiaSat deal;

(b) D1, D3, and D4 have contravened ss291 and 300 by insider dealing; and

(c) D3 has unlawfully counselled or procured D4 to deal in AsiaSat shares.

24. The case of D1-4 is essentially that they had no knowledge of the AsiaSat deal; D1 picked the AsiaSat stock on her own based on her own research; D3’s purchase was “sparkled (sic) by [a] conversation with D1 [when D1 mentioned her intended purchase of AsiaSat shares]” (paras 51(j) and 62 of Defence); and D4 followed suit after D3.

Section 213 of the SFO

25. P commenced these proceedings under s213 of the SFO by an Originating Summons dated 20 December 2010.  By an order dated 18 July 2012, Master Ho directed that these proceedings be converted into a writ action.

Applicable legal principles

26. The legal principles governing applications to strike out and to determine preliminary issues before trial are well-known and undisputed.

Strike out

27. Ma J (as he then was) summarized the principles on applications to strike out in Chuang Yue Chien Eugene v Ho Yau Kwong Kevin[2002] 4 HKC 245 at 254F-255C:

“14. In dealing with these Grounds, I bear in mind the relevant principles regarding strike out applications. The approach is set out in the notes to Order 18, rule 19 in Hong Kong Civil Procedure 2002, Vol.1. In particular, I bear in mind that:

(1) It is only in plain and obvious cases that an order should be made to strike out pleadings or parts of pleadings;

(2) Accordingly, it is wrong to expect the court to have to conduct a protracted analysis of affidavit evidence in a strike out application. Only in the rarest of cases will this ever be justified, for example where such an analysis will in the end demonstrate clearly that it is plain and obvious that an order striking out should be made. The justification for the protracted analysis would then almost invariably be that although the underlying facts may be complicated or difficult to grasp easily, the ultimate issue is quite simple.

(3) Questions of law may be dealt with in a strike out application provided that the underlying facts are certain.  It is sometimes said that the court may decline to determine difficult questions of law in a strike out application: see Hong Kong Civil Procedure 2002, Vol.1, at paragraph 18/19/4. This would therefore explain why applications such as the present one are sometimes made in the alternative under Order 14A or even Order 33, rule 3: see Hong Kong Civil Procedure 2002, Vol.1, at paragraphs 8/19/3 (at paragraph 5) and 18/19/4.  In my view, questions of law can be determined in strike out applications provided that they are crucial and the court has all the relevant facts before it and that these facts are certain.  There is, on the other hand, little point in dealing with any points of law, whether in strike out applications or applications under Order 14A or under Order 33, rule 3, if the relevant facts are either not before the court or are in dispute.”

28. The court is loath to strike out a case which involves an area of the law still in the process of developing.  Summary dismissal would deprive the Court of hearing full argument on the subject – Tadjudin Sunny v Bank of America[2010] 3 HKLRD 417, at 427 §§55-57 and Hong Kong Civil Procedure 2013 at 18/19/4(1).

29. Further, where the grounds for strike out are that there is no reasonable cause of action or that the action is unlikely to succeed, affidavit evidence is inadmissible – Hong Kong Civil Procedure 2013, at 18/19/3(4).

Preliminary Issues

30. The Court of Appeal has summarized the principles governing applications for the determination of preliminary issues in Lee Yiu Kwan v Ting Yin Wah, CACV 311 of 2002, 21 April 2004, at §§39-40:

“39.We propose to set out some of those principles referred to in Hong Kong Civil Procedure 2004:

The question of law or construction to be determined by the court under the Order should be stated or formulated in clear, careful and precise terms, so that there should be no difficulty or obscurity, still less any ambiguity, about what is the question that has to be determined …

Where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the court to split the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the court will not do …

An order for the separate trial of separate issues is a departure from the general rule that all disputes should be tried together, and therefore, generally speaking, such an order should only be made in exceptional circumstances or on special grounds …

The order, as a rule, will only be made if the objection raises a serious question of law, which, if decided in favour of the party objecting, would dispense with any further trial, or at any rate with the trial of some substantial issue in the action …

The order for the trial of a preliminary point of law should not be made where there are facts in dispute, and if made may be set aside at the hearing …

Only such questions of law can properly be raised as preliminary issues as must necessarily arise in the action and the court will not decide fictitious questions or questions in which those who are interested, or are likely to be, are not present or are not in esse …

The House of Lords has strongly protested against the practice of the Court of First Instance allowing preliminary points of law to be tried before and instead of first finding the facts, since this course frequently adds to the difficulties of the Courts of Appeal and tends to increase the cost and time of legal proceedings.

Where for the purposes of deciding questions of law it is necessary or desirable to ascertain the facts beyond those that appear in the pleadings, the court should not order the trial of those questions as a preliminary point of law, especially where the law is itself unsettled or obscure … ”

31. In Bank of America NA v Tadjudin Sunny, FAMV No 42 of 2010, 20 January 2011, it was observed by Bokhary PJ at §1: “Even a pure point of law is, at least in general, best resolved in the context of a set of facts found at trial.”

32. I agree with P’s submission that separating the issues in a case into different hearings usually only has the effect of delaying the final outcome, particularly where each hearing is then the subject of further appeals.  A single hearing allows all issues (and appeals) to be decided together, avoiding multiplicity of proceedings and the consequential additional delay and expense.

Grounds for strike out

33. Five grounds have been advanced.  The first 4 concern the viability of P’s causes of action based on s300 of SFO.  The last one attacks P’s case on the AsiaSat matter based on s291 of SFO as being speculative.

34. S300 of SFO provides as follows:

“(1) A person shall not, directly or indirectly, in a transaction involving securities, futures contracts or leveraged foreign exchange trading-

(a) employ any device, scheme or artifice with intent to defraud or deceive; or

(b) engage in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.

(2) A person who contravenes subsection (1) commits an offence.

…”

35. The first 4 grounds for strike out are as follows:

(1) The person being defrauded or deceived must be a trading party “in a transaction involving securities”. According to P’s pleaded case the persons in question were the principals of D1 and D2 and they were not parties to the securities transactions (see paras 3(a) and 22 of Ds’ skeleton submissions);

(2) The particulars of fraud and deception pleaded in the SOC are not sustainable under the common law of Hong Kong;

(3) S300 has no extra-territorial effect;

(4) P has no locus standi to sue on the allegation of assisting breach of trust and others pleaded in the SOC.

36. I would like to state at the outset that this strike out application is badly misconceived.  This court has been given 2 sets of written submissions by Ds which run to 96 pages in aggregate.  Those submissions take the court to, inter alia, the legislative history of SFO.  The effort made in compiling the submissions is admirable.  However, what is patently clear is that there is no judicial precedent on the proper construction of s300.  The arguments here involve novel issues of law.  What is contended by Ds may ultimately prevail after trial but they are in no position to say that the matter is clear and obvious such that the relevant parts of the SOC should be struck out.

37. I propose to deal with these grounds succinctly given that these matters will be fully ventilated at the trial.

38. In respect of the 1^st ground, it is reasonably clear from the natural meaning of s300 that it is intended to outlaw 2 types of conduct in transactions involving securities, etc.  Firstly, fraudulent or deceptive conduct as per s300(1)(b), which is relatively straightforward.  Secondly, any “device, scheme or artifice” employed with intent to defraud or deceive ((1)(a)).

39. I am unable to agree with the 1^st ground because there is nothing in s300 which suggests that the victim of the fraud ((1)(b)) or the device, scheme or artifice ((1)(a)) must be a party to the, in this case,  securities transactions.  I am unable to see why such limitation should be read into the section.  Such limitation would severely curtail the scope of the section.  Had it been so intended, one can reasonably expect that the section would have been differently formulated.

40. In any case, the point is certainly not clear cut so as to justify a strike out.

41. To understand the 2^nd ground, one needs to bear in mind that the “conducts” relied upon in the SOC as giving rise to the causes of action under s300 fall into 3 categories, namely, breach of fiduciary obligations, misappropriation or misuse of confidential information for personal profit and concealment.

42. Mr Chow, who appeared for Ds with Mr Brewer, submitted that such conducts do not constitute fraud or deception under Hong Kong law.  Mr Westbrook took issue with that submission.

43. However, putting aside the dispute as to what may or may not constitute fraud or deception, s300(1)(a) presents an Achilles’ heel to Mr Chow’s submission.  It is at least arguable that the “device, scheme or artifice” does not have to be a fraud or deception.  I do not agree with Mr Chow that the requirement of an intention to defraud or deceive would necessarily mean that only fraudulent conduct or deception can come within “device, scheme or artifice”.  If that were so, I fail to see why the section provides for two categories of conduct under (1)(a) and (b).

44. Mr Chow submitted that the two limbs provide for the same thing.  I cannot agree.  Such a construction strips the 1^st limb of any purpose and is inconsistent with elementary rules of interpretation.

45. As regards the 3^rd ground, it is contended that the transactions in respect of the shares of Hsinchu Bank took place in Taiwan and outside the jurisdiction of the Hong Kong court.  I agree with Mr Westbrook that the issue is whether Ds had carried out in Hong Kong substantial activities constituting a crime which would invoke the jurisdiction of the Hong Kong court.

46. In R v Smith (Wallace Duncan) (No 4) [2004] QB 1418 at 1434E, Lord Woolf CJ said:

“ … The decision in R v Harden [1963] I QB 8 was correct but it no longer should be regarded as setting out an exclusive basis of jurisdiction. (ii) For the policy reasons which he identifies particularly in relation to complex fraud, where there are no reasons of comity which require a different approach, when substantial activities constituting a crime take place in England the court here should have jurisdiction in accordance with the approach indicated by the Chief Justice of Hong Kong, Roberts CJ, in Attorney General v Yeung Sun-shun [1987] HKLR 987.”

47. The case pleaded in the SOC is that all the acts which constituted the s300 cause of action in respect of the Hsinchu Bank transaction were carried out in Hong Kong save for the actual buying and selling of the shares which were conducted via the Taiwan stock exchange.  I am quite satisfied that it is at least arguable that Hong Kong court has jurisdiction over these matters.

48. I agree with P that the 4^th ground is misconceived.  P’s action is not based on common law and therefore the common law principles as to, eg, who is entitled to sue for breach of trust is not relevant.

49. I also agree with paras 6.21 and 6.22 of P’s skeleton submissions as to the necessity for pleading the common law:

“6.21 If the facts establish a contravention of a relevant provision such as s291 or s300, then s213(2) and (8) give the Court wide remedial powers, including a power to order the wrongdoers to pay damages to any person. Before making an Order, s213(4) requires the Court to be satisfied, inter alia, that it can reasonably make the order and that it is desirable to do so.

 6.22  A finding (if it be made) that a person has breached his or her fiduciary obligations and is therefore liable to account to his principals for any secret profits made, will be relevant to the Court’s consideration of what Orders to impose on him or her.  See the principles referred to in Blake and A-G for Hong Kong v Reid [1994] 1 AC 324.  A plea to this effect ensures no surprise and a fair and proper finding on the matter.”

50. I can deal with the last ground swiftly (see para 33 above).  It is heavily based upon certain records of interview of D2’s ex-colleagues at Linklaters.  For reasons given by the court at the beginning of this hearing, the late introduction of such evidence was rejected. Accordingly, the 5^th ground was not pressed at the hearing. However, I have looked at the written submissions in this regard and would like to say that generally it is not appropriate to ask the court to evaluate the evidence on paper and come to a view whether the case of a party is or is not sustainable.

Preliminary issues

51. This application can also be deal with swiftly.  Seven preliminary issues have been advanced which broadly reflect grounds 2 to 5 of the strike out application.

52. Quite fairly, Mr Chow did not press this application at the hearing because of the recognition that a trial of preliminary issues in this case is likely to lead to further delay to the resolution of these matters.  I would add that this application is in any case unmeritorious.

53. I have no doubt that this litigation is, as submitted by Mr Chow, severely hampering the career of D1 and D2.  This litigation was started more than 3 years ago.  It must be resolved as soon as possible.

Conclusions

54. For these reasons, both of the applications are dismissed with an order nisi that the costs of and occasioned by both applications be borne by Ds with a certificate for two counsel. Given the lack of merit, such costs should be taxed if not agreed and paid forthwith.