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The Securities And Futures Commission v Young Bik Fung And Others

Judgment Cited authorities 5 Cited in Precedent Map Related
Vincent
Judgment Date09 November 2017
Year2017
Judgement NumberCACV33/2016
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV33/2016 THE SECURITIES AND FUTURES COMMISSION v. YOUNG BIK FUNG AND OTHERS

CACV 33/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 33 OF 2016

(ON APPEAL FROM HCMP NO 2575 OF 2010)

________________________

BETWEEN

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

_______________________
Before: Hon Lam VP, Kwan and McWalters JJA in Court
Dates of Hearing: 5 and 6 September 2017
Dates of Further Written Submissions: 27 September and 4 October 2017
Date of Judgment: 9 November 2017

_________________

JUDGMENT

_________________

The Court:

1. In 2010, the Securities and Futures Commission [“SFC”] brought proceedings against four defendants in respect of their dealings in the shares of a Taiwanese bank, Hsinchu International Bank Co Ltd [“Hsinchu Bank”] in 2006 and in the shares of Asia Satellite Telecommunications Holdings Ltd [“AsiaSat”] in 2007. The 1st defendant [“Betty”] and 2nd defendant [“Eric”] are solicitors. The 3rd and 4th defendants are Eric’s sisters. Betty and Eric had been cohabitees up to January 2006 and remained as friends after their cohabitation ended. They worked in different solicitor firms.

2. As regards dealings in Hsinchu Bank shares, the case of the SFC was that Betty had acquired confidential material price sensitive information [“CMPSI”] when she was seconded to the Standard Chartered Bank [“SCB”] by her employer in respect of SCB’s takeover of Hsinchu Bank. Based on such information, Betty and Eric through Patsy (the 3rd defendant) acquired shares in Hsinchu Bank in September 2016. Later, when SCB made a tender offer for Hsinchu Bank shares, they accepted the offer. In so doing, they made a profit of $1 million (for Betty) and $1.3 million (for Eric). Patsy also invested in Hsinchu Bank shares on her own account and made a profit of $175,000. Further, Patsy also invested for Stella (the 4th defendant) and the latter made a profit of $210,000.

3. As regards dealings in AsiaSat, the case of the SFC was that Eric acquired CMPSI when another team of lawyers in his employer advised on a proposed privatization of AsiaSat. Eric passed on such information to Betty and Patsy who then purchased shares in AsiaSat and afterwards sold the same upon privatization. Betty made a profit of $203,747 whilst Patsy and Stella made a profit of $55,050.

4. Proceedings were brought under s213 of the Securities and Futures Ordinance Cap 571 against the defendants. The trial took place before A Chan J in October and November 2015. On 15 January 2016, the learned judge handed down his judgment finding that the SFC had established its case against Betty, Eric and Patsy. He found that in the dealings of the Hsinchu Bank shares, (1) Betty had employed a scheme with intent to defraud or deceive or engaged in an act or practice which was fraudulent or deceptive or would operate as a fraud or deception; (2) Eric and Patsy had employed or engaged in the same; (3) further or alternatively, Eric and Patsy had aided and abetted in Betty’s conducts in (1)[1].

5. In the dealings of the AsiaSat shares, the judge found (1) Eric’s colleagues working on the proposed privatisation were persons connected to AsiaSat; (2) Eric received information of the proposed privatisation, directly or indirectly, from a colleague whom he knew was connected to AsiaSat and whom he knew or had reasonable cause to believe held the information as a result of being so connected; (3) Eric disclosed the information to Betty and Patsy, knowing or having reasonable cause to believe they would deal in the shares; (4) Betty received the information knowing that its source was connected to AsiaSat and whom she knew or had reasonable cause to believe held the information as a result of being so connected. Therefore, her dealings in AsiaSat shares were in contravention of s291(5)(a) of the Securities and Futures Ordinance; (5) likewise, Patsy had the same knowledge and her dealings in AsiaSat shares were also in contravention of s291(5)(a)[2].

6. The judge granted declarations and relief against Betty, Eric and Patsy accordingly.

7. In respect of Stella, the judge was not satisfied that she had knowingly participated in any insider dealing[3]. However, the judge held that she was involved in the dealings and there was no suggestion that a restoration order would unfairly prejudice her. The judge made a restoration order under s213(2)(b) of the SFO accordingly[4].

8. Initially all the defendants appealed against the judgment. On 7 August 2017, Betty decided not to pursue her appeal and her solicitors informed the Court by letter. On 17 August 2017, the Court made an order dismissing her appeal with costs. Eric, Patsy and Stella continued with their appeal.

9. Mr Paul Shieh SC (together with Mr Derek Chan and Ms Cherry Xu) appeared for Eric, Patsy and Stella in the appeal. In this very well-argued appeal, the grounds of appeal advanced on their behalf focused on the following issues:

(a) Whether the alleged fraudulent or deceptive conduct in respect of the dealings of Hsinchu shares occurred ‘in a transaction involving securities’ for the purpose of s300 of the SFO;

(b) The applicability of s300 to the purchase and sale of securities listed on an overseas stock exchange;

(c) Whether the judge was correct to make a restoration order against Stella;

(d) Whether the judge correctly drew certain factual inferences against them.

10. The first two issues arose only in respect of the dealings in Hsinchu Bank shares. Hsinchu Bank was a Taiwanese bank and its shares were listed in Taiwan but not in Hong Kong. Hence they were not listed securities for the purpose of s291 of the SFO[5] and the SFC had to rely on s300 instead. s300 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).”

11. The salient facts concerning the dealings in the Hsinchu Bank shares were helpfully summarized at [14] to [22] in the judgment below:

“ 14. SCB was interested in expanding its operations in Taiwan. In 2006, it was in confidential negotiations with Hsinchu Bank, which was listed on the Taiwan Stock Exchange, to takeover and privatise the latter by making a recommended tender offer for all its shares (“Tender Offer”). The Tender Offer would be “recommended” in the sense that the management of Hsinchu Bank would recommend the shareholders to accept the offer.

15. SCB’s Group Legal Department in Hong Kong was involved in handling and managing the legal and regulatory work. Ms Mabel Chu (“Mabel”) (one of SFC witnesses) was the lead in-house lawyer on the matter. On 20 April 2006, Betty was seconded by S&M to SCB to assist Mabel on the transaction. She was reminded and she acknowledged that she was an insider and had access to highly confidential and sensitive information.

16. Important milestones in SCB’s negotiations with Hsinchu Bank in August and September 2006 are summarised in §11 of the Statement of Claim (“SOC”), which are admitted by Betty at §§15-16 of the Amended Defence of the 1st to 4th Defendants (“AD”). At that time (August and September 2006), Betty was spending around 70-80% of her time working on this project.

17. On around 23 August 2006, SCB and Hsinchu Bank started negotiations on the price for the Tender Offer. By 14 September 2006, the proposed tender price of NT$24.50 per share was approved by SCB and inserted into a draft press release which was circulated internally. Hsinchu Bank shares were then trading at around NT$14 per share.

18. Information about the Tender Offer, together with information about its offer price of NT$24.50 per share, constituted CMPSI about Hsinchu Bank shares before the public announcement of the Tender Offer on 29 September 2006 (the parties’ experts are in agreement on this issue).

19. There is no controversy that Betty was aware of both the Tender Offer and the proposed tender price on 14 September 2006 at the latest. In respect of her fiduciary duties, the SFC relies on:

(1) an express duty of confidentiality in her employment letter with S&M;

(2) S&M’s Dealing Rules prohibiting disclosure or misuse of confidential information, in particular in buying and selling any shares (whether directly or indirectly) without first obtaining permission from S&M and complying with insider dealing laws;

(3) an email sent by Betty on 6 June 2006 in which she acknowledged reading and understanding SCB’s Memorandum on Inside Information, imposing a duty of confidence and prohibiting disclosure or use of inside information;

(4) Principle 8.06 of the Solicitor’s Guide to Professional Conduct which prohibits a solicitor from making personal profit by using confidential information acquired in the course of a professional relationship; and

(5) the common law duties of a person in a fiduciary position to act in good faith and not to “act for his own benefit or the benefit of a third person without the informed consent of his principal” (see Bristol & West Building Society v Mothew[1998] 1 Ch 1, at 18B-C).

20. Betty was aware of her obligations...

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