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Lee Kwok Wa And Others v The Securities And Futures Commission

Judgment Cited authorities 10 Cited in Precedent Map Related
Vincent
Judgment Date31 October 2018
Neutral Citation[2018] HKCFA 45
Judgement NumberFACV7/2018
Citation(2018) 21 HKCFAR 537
Year2018
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV7/2018 LEE KWOK WA AND OTHERS v. THE SECURITIES AND FUTURES COMMISSION

FACV No. 7 of 2018

[2018] HKCFA 45

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO.7 OF 2018 (CIVIL)

(ON APPEAL FROM CACV NO. 33 OF 2016)

________________________

BETWEEN
THE SECURITIES AND FUTURES COMMISSION Plaintiff
(Respondent)
and
YOUNG BIK FUNG 1st Defendant
LEE KWOK WA 2nd Defendant
(1st Appellant)
LEE SIU YING PATSY 3rd Defendant
(2nd Appellant)
LEE SIU FAN STELLA 4th Defendant
(3rd Appellant)

________________________
Before: Chief Justice Ma, Mr Justice Ribeiro PJ, Mr Justice Tang PJ, Mr Justice Fok PJ and Mr Justice Spigelman NPJ
Date of Hearing: 15 October 2018
Date of Judgment: 31 October 2018

________________________

J U D G M E N T

________________________

Chief Justice Ma and Mr Justice Fok PJ:

1. We have had the benefit of reading the judgment in draft of Mr Justice Tang PJ as well as the concurring judgments of Mr Justice Ribeiro PJ and Mr Justice Spigelman NPJ. We, too, would dismiss this appeal. The central issue in the appeal concerns the proper construction of section 300 of the Securities and Futures Ordinance (Cap.571)(“the SFO”). The main contentions of the appellants are set out in the judgment of Mr Justice Ribeiro PJ. For the reasons given by him, by Mr Justice Tang PJ and by Mr Justice Spigelman NPJ, those contentions cannot be accepted. We make the following observations:

(1) Given the analysis of the meaning of the word “transaction” contained in the judgment of Mr Justice Tang PJ, it is unnecessary to explore whether that word can also be construed in the plural: see paragraph 26 below. We express no views on this aspect.

(2) We also adopt the reasoning of Mr Justice Spigelman NPJ in relation to the proper approach to section 300 within the insider dealing scheme in the SFO as set out in paragraphs 62 to 70 of his judgment.

Mr Justice Ribeiro PJ:

2. I have had the benefit of reading in draft the joint judgment of Chief Justice Ma and Mr Justice Fok PJ as well as the judgments of Mr Justice Tang PJ and Mr Justice Spigelman NPJ. Subject to the observations made in the joint judgment of Ma CJ and Fok PJ, and by Spigelman NPJ, with which I respectfully agree, I am in respectful agreement with the judgment of Tang PJ. I gratefully adopt his Lordship’s recitation of the facts and wish to add a few words directed at the way in which the case was developed at the hearing by Mr Gerard McCoy SC.

3. The case turns on the true construction of section 300 of the Securities and Futures Ordinance,[1] which provides:

(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.

(3) In this section, a reference to a transaction includes an offer and an invitation (however expressed).

4. The objective of Mr McCoy SC’s argument was to establish that the conduct of the defendants fell outside the terms of section 300. To that end, the construction that he advanced involved three main propositions:

(a) First, that the words “a person shall not directly or indirectly, in a transaction involving securities” must be read to require that “person” – ie, the defendant – to be a party to the “transaction” referred to.

(b) Secondly, that, since the only transactions that the defendants (meaning Patsy and, through her as their agent, Eric, Betty and Stella) entered into were the contracts to purchase the Hsinchu shares and then to sell them to SCB in accepting SCB’s Tender Offer, the relevant transactions in the present case were those share dealing transactions, ie, the purchase and then the sale of the shares, taken as separate transactions.

(c) Thirdly, that the fraud or deception also had to be “in the transaction”, meaning, they had to be practised by the defendant on the counterparty to the relevant transaction.

5. Applied to the facts of this case, Mr McCoy SC’s argument was that the defendants’ share dealing transactions (i) did not involve any fraud or deception practised on their counterparties, that is, the shareholders in Taiwan or the SCB, when contracting to purchase or sell the Hsinchu shares respectively; and (ii) those transactions in any event took place outside of Hong Kong and could not found jurisdiction here. He did not have leave to argue point (ii), but sought impermissibly to raise it, purportedly as an aspect of his construction argument.

6. It will be evident that the lynchpin of the appellants’ argument is the proposition that section 300 requires the defendant to be party to the “transaction involving securities” in question. In my view, it is an unwarranted construction of the section. To produce the result desired by the appellants, section 300 would have to say something along the lines of: “A person, being a party to a transaction involving securities, shall not directly or indirectly” employ a fraudulent or deceptive scheme, etc. That is obviously not what section 300 says. The words “in a transaction involving securities” are most naturally read to mean “in connection with” or “in relation to” a transaction involving securities. There is no requirement that the defendants be parties as long as their fraudulent or deceptive scheme or course of business is employed in connection with or in relation to the transaction.

7. The reality of the defendants’ scheme is comfortably accommodated within section 300 so read. The relevant “transaction involving securities” as engaged by their fraudulent scheme encompassed Betty’s misuse and disclosure to the defendants of inside information regarding SCB’s takeover plans; their misuse of that information by purchasing, through Patsy and Hong Kong brokers, Hsinchu shares with a view to selling them to SCB at the higher tender price; and their acceptance of SCB’s offer and their fraudulent or deceptive realisation of large profits derived from their misuse of the inside information. They were indeed parties to the share dealing transactions. But those dealings formed merely a part of the overall transaction.

8. Once the premise that the defendant must be a party to the transaction referred to in section 300 is removed, Mr McCoy SC’s argument is entirely undermined. But even on his argument, it is hard to avoid the conclusion that in taking advantage of SCB’s tender offer without disclosing that they had accumulated the shares being sold through misuse of inside information obtained in breach of duty to SCB by a solicitor working on the deal, they had practised a fraud or deception on SCB, a party to the sale transaction.

Mr Justice Tang PJ:

Introduction

9. The facts are simple. They are not or can no longer be disputed. I will state them briefly. At the material time, the 1st defendant, Betty, was a solicitor in the employ of Messrs Slaughter & May (“SANDM”). The 2nd defendant, Eric, was also a solicitor and was employed by Messrs Linklaters. He was Betty’s good friend and one-time lover. Patsy, the 3rd defendant, is Eric’s elder sister. Stella, the 4th defendant, is Patsy’s younger sister and Eric’s elder sister.

10. Hsinchu International Bank Co Ltd (“Hsinchu Bank”) shares were listed on the Taiwan Stock Exchange. In 2006, Hsinchu Bank was acquired by the Standard Chartered Bank (HK) Ltd (“SCB”) pursuant to a friendly takeover which began on 29 September 2006 when SCB made a recommended tender offer for all its shares. Earlier, on 20 April 2006, Betty was seconded by her employer, SANDM to SCB’s Group Legal Department to assist with the work which led to the offer. In the course of such work, Betty learned on 14 September 2006 that the recommended tender price would be NT$24.50. This was confidential material price sensitive information (“inside information”). The SFC’s case was that Betty shared the inside information with Eric[2] about the impending offer and the proposed tender price. In other words, Betty was the tipper and Eric, the tippee. On 20 September 2006, Patsy[3] opened an account with Tai Fook Securities Co Ltd (“Tai Fook”) for the purpose of trading in shares listed in Taiwan. Between 22 and 29 September, using the Tai Fook account, 1,576,000 shares at the average price of NT$16.99 were purchased. The purchase money HK$6,381,000 was contributed by the four defendants.[4] The tender offer was made public on 29 September and the tender price became publicly known. Patsy accepted the tender via Tai Fook and made a profit of HK$2,685,000. The profits were distributed as follows: Betty $1,000,000, Eric $1,300,000, Patsy $175,000, Stella $210,000.

11. In proceedings under s 213 of the Securities and Futures Ordinance (Cap 571)(“SFO”), brought by the plaintiff, the Securities and Futures Commission (“SFC”), Mr Justice Anthony Chan found that Betty, Eric, and Patsy being persons within s 213(2)(b) had contravened s 300 of the SFO in that they, directly or indirectly, in transactions involving securities, namely the shares of Hsinchu Bank listed on the Taiwan Stock Exchange:

“(a) employed a scheme with intent to defraud or deceive or;

(b) engaged in acts which were, or a practice which was, fraudulent or deceptive or would operate as a fraud or deception,

in that in September 2006, they engaged in dealings in Hsinchu Bank shares for personal profit whilst in possession of and misusing confidential material price...

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