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Fu Kor Kuen Patrick And Another v Hksar

Judgment Cited authorities 11 Cited in Precedent Map Related
Vincent
Judgment Date24 May 2012
Year2012
Citation(2012) 15 HKCFAR 524
Judgement NumberFACC4/2011
Subject MatterFinal Appeal (Criminal)
CourtCourt of Final Appeal (Hong Kong)
FACC4/2011 FU KOR KUEN PATRICK AND ANOTHER v. HKSAR

FACC No. 4 of 2011

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 4 OF 2011 (CRIMINAL)

(ON APPEAL FROM CACC NO. 179 OF 2010)

______________

Between:

FU KOR KUEN PATRICK(傅果權) 1st Appellant
LEE SHU YUEN FRANCIS (李樹源) 2nd Appellant
and
HONG KONG SPECIAL ADMINISTRATIVE REGION Respondent

______________

Court : Mr Justice Bokhary PJ, Mr Justice Chan PJ, Mr Justice Ribeiro PJ, Mr Justice Litton NPJ and Mr Justice Gleeson NPJ
Date of Hearing : 2 May 2012
Date of Judgment : 24 May 2012

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J U D G M E N T

______________

Mr Justice Bokhary PJ :

1. I entirely agree with the judgment of Mr Justice Gleeson NPJ. All that I would add are a few words of my own on why the reverse-onus provision in question casts a persuasive rather than merely evidential burden on defendants. On its face, the burden which it casts is a persuasive one. Although they may not be common, there are situations in which it is compatible with an entrenched presumption of innocence to treat such a provision as legally doing precisely what it says. Then it is not to be struck down. Nor then is it to be read down to cast a merely evidential burden. Turning from the general to the particular, this reverse-onus provision goes to the purposes for which defendants acted as they did. Especially in circumstances like those at which this reverse-onus provision is aimed, defendants are singularly well-placed to prove what their purposes were. It would be all too easy for them merely to raise an issue as to their purposes. If that is all that this reverse-onus provision required them to do, there would be little or no point to it. The present situation isonein which it is rational to see a need for some reversal of the onus. Casting a persuasive burden on defendants is proportionate to that need. That burden is of course to be discharged on a mere preponderance of probability. Upon a fair-minded approach to what is required of defendants, they remain duly protected against wrongful conviction. This persuasive burden on defendants is therefore constitutional.

2. In thanking counsel on both sides, it is right to single out the worthy example set by the Director of Public Prosecutions, Mr Kevin Zervos SC, who, amidst all the other duties of his office, always makes time to come to court personally whenever his assistance is most needed.

Mr Justice Chan PJ :

3. I agree with the judgment of Mr Justice Gleeson NPJ.

Mr Justice Ribeiro PJ :

4. I agree with the judgment of Mr Justice Gleeson NPJ.

Mr Justice Litton NPJ :

5. I have had the advantage of reading in draft Mr Justice Gleeson NPJ’s judgment and agree with it.

“Matched trades”

6. There is no doubt that the present case is one of “matched trades” for derivative warrants made through a recognized market. The scale of the appellants’ operations was in total enormous. They were conducted on nineteen days, between 16 January 2004 and 7 January 2005. The total turnover, in relation to the twenty transactions as charged, came to well over $300 million. This brings the case squarely within the provisions of s 295(5)(b) and (c) of the Securities and Futures Ordinance, Cap 571. Hence the appellants must be regarded (i) as doing something with the intention of creating a false or misleading appearance of active trading in derivative warrants or (ii) at least were reckless as to whether their acts had or were likely to have such an effect.

Absolutely Offences ?

7. If the statute had ended there, it would have created in effect an offence of absolute liability. “Matched orders” made in the stock exchange, in terms of s 295(5)(b) and (c), would have been prohibited irrespective of purpose.

8. But the sub-section that creates the offence – subsection (6) – is expressly “subject to subsection (7)”. Turning to subsection (7) one sees that the legislature has mitigated the harshness of the “deeming” provision in subsection (5) by giving a defendant the opportunity of showing that the purpose of making “matched orders” was not and did not include the creating of a false or misleading appearance of active trading. The purpose of such activity is peculiarly within the knowledge of the defendant. The onus of showing purpose therefore rests on the defendant. If established on a balance of probabilities, this would have provided a defence, even if the ingredients of an offence under subsection (1) were satisfied.

Commission Farming

9. Here the defence case was that the appellants were quite openly taking advantage of a “market anomaly” – an anomaly created by Macquarie’s offer of commission-rebates, which had the effect of offsetting the transaction cost, enabling the appellants to make a small profit on each “trade”; their sole purpose was, as they claimed, just that : they were “commission farming”.

10. To achieve their purpose they had to make repeated trades between themselves. As the trades were in an open market there was always the possibility of an outside party taking up part of their “stock”, thus diminishing the commission-rebate payable. Hence the trades between themselves had to be rapid, and repeated frequently. This inevitably generated volume in the market. Stopping here, it would surely have appeared to an objective observer that their sole purpose was to make the small slice of commission-rebate on each trade. We know from the trial judge’s finding that when they first embarked on this operation, on 16 January 2004, their stock acquired from Macquaries was 2 million warrants (No. 9515) costing $486,000. They ended the day selling the stock back to Macquaries at virtually the same price and made a net gain of $55,784. Their next venture was ten days later, with a stock of 500,000 warrants (No. 9578), also sold back to Macquaries, yielding a net gain of $118,336. The trades on these days represented 76% and 59% of the market on those two warrants. What impact did that have on the market for those two warrants ? The judge’s finding is silent on the point.

Was there another purpose ?

11. What we do know is that the prosecution’s expert Mr Clive Rigby, when he made his first report, said that the sole purpose of the appellants’ operations was commission-farming. Such expression of opinion was inadmissible evidence, as I shall endeavour to explain later on. Nevertheless, such expression of opinion was presumably based upon facts and assumptions concerning the market in derivative warrants known to Mr Rigby, drawing on his expert knowledge of market conditions. It did not seem to have occurred to Mr Rigby at that time that there was another purpose : To create an illusion of liquidity in the market, rendering it easier for the appellants to exit the market at the end of the trading day at a favourable price : This came as an afterthought to Mr Rigby, in this form :

“…. I was asked the following question :

B) Would [the appellants] have to worry about the disposal of their warrants if the liquidity provider was always obliged to buy back from them ?

Answer B) :

Yes. Even if the liquidity provider was obliged to buy back the warrants…..before the end of the day, the liquidity provider was under no obligation …. to buy back at a price convenient or attractive to the sellers. Thus …. it would have been in [the appellants’] interest to create the appearance of liquidity in a warrant in the hopes of encouraging other buyers to bid in competition with the liquidity provider. Any such competition would tend to enhance the possibility of a more favourable exit price for [the appellants].”

12. Looking at the matter objectively, there was of course an appearance of active trading, and in one sense an illusion of liquidity, on the days the appellants performed their operation. It was the result of such operation – the inevitable result. It was not the purpose of the operation.

13. The matter can be examined in this way : The third time the appellants engaged in “commission – farming” was 4 February 2004. It was through warrant No. 9247. Assume that they had ended the day with a net loss on that warrant, because they were only able to “exit” the market at a price which effectively cancelled the gain they made on the commission-rebate : Would they have embarked on trading the next day, using a different warrant, simply for the purpose of generating an illusion of liquidity ? Surely not. If they traded the next day using a different warrant it would have been because they were reasonably confident of making a net gain at the end of the day. Which is precisely what they did. They traded warrant No. 9430 on 5 February and made a net gain of $112,619.

14. What is obvious is that, as they went along, conducting their operations on different warrants, they were gaining greater experience of the market in derivative warrants, exiting the market before it closed each day. All this suggests that, from a common sense point of view, the purpose of the appellants operations was “commission farming”. Nothing else.

The trial judge’s approach

15. In approaching the statutory defence under subsection (7) the judge said this :

“74. Again I do not need an expert to tell me that comparatively speaking, an active market of any warrant, other things being equal, is more attractive than that of an illiquid one for the simple reason that in a liquid market with more market participants taking part in the trading activities, it would be easier to exit the market.”

16. The judge said that the appellants were “clearly day trading” (§ 75) and “unless they were...

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