3 January, 2018
What you need to know
On 9 November 2017, the Hong Kong Court of Appeal upheld the decision of the Court of First Instance (CFI) in The Securities and Futures Commission – v – Young Bik Fung and ors in which three of the four defendants were declared to have contravened insider dealing and fraud provisions of the Securities and Futures Ordinance (SFO). The Court of Appeal also upheld a restoration order against the fourth defendant, even though the Securities and Futures Commission (SFC) had not established that she had committed the relevant offences.
The Court of Appeal decision reconfirms the extensive powers of the SFC to pursue conduct involving insider dealing, including where this involves trading in overseas-listed shares and a substantial measure of the elements of the offence occurred in Hong Kong.
The decision also affirms the breadth of the SFC's powers to seek remedial orders against anyone who is involved in such offences, even where the person is unaware of the particular contravention.
What you should do
Ensure that your organisation has adequate systems and controls in place to prevent and detect the disclosure or use by employees of confidential material price-sensitive information (CMPSI), including strong information barriers, where appropriate.
Insider dealing policies should expressly cover both Hong Kong and overseas-listed securities and employees should also be given regular training to ensure that they are aware of their obligations in respect of CMPSI and the prohibition on trading on, or tipping off in respect of, inside information. In particular, employees should be aware that, even where they are not directly involved, remedial orders may be made against them to deprive them of any profits obtained from transactions involving the use of inside information.
Background and Court of First Instance decision
The defendants were two solicitors, Betty Young (Betty) and Eric Lee (Eric) and Eric's two sisters, Stella and Patsy. In 2006, Betty was seconded to a client, Standard Chartered Bank (SCB), and worked on SCB's intended tender offer for shares in the Taiwanese listed bank, Hsinchu International Bank Company Ltd (Hsinchu Bank). Patsy subsequently opened a securities account in Hong Kong which allowed her to trade in Taiwanese shares. Betty, Eric, Stella and Patsy then transferred funds into the account and purchased six lots of shares in Hsinchu Bank one week prior to the public announcement by SCB of the tender offer. Once the offer was made, Patsy accepted it and all four defendants made a total profit of over HK$2.6 million.
Later that year, Eric's former law firm began working on a transaction to privatise a Hong Kong listed company, Asia Satellite Telecommunications Holdings Limited (AsiaSat). Eric was not on the deal team; however his supervising partner and secretary were members of the team, he shared office facilities with deal team members and he sat near deal team members. On the evening that the deal team sent a second draft public announcement regarding the transaction to the SFC, Betty and Eric met for dinner and Eric then telephoned Patsy. The following morning, Betty and Patsy (the latter acting for Stella and herself) purchased shares in AsiaSat accounting for 73 per cent of the trading that day in AsiaSat shares. Trading in AsiaSat shares was suspended later that day and a public announcement of the privatisation was made five days later. Betty, Patsy and Stella eventually sold their shares, making a total profit of about HK$217,000.
The SFC brought proceedings under section 213 of the SFO, seeking declarations that the defendants had contravened, or had been concerned in the contravention of, section 300 of the SFO with respect to the purchase of Hsinchu Bank shares (Hsinchu Bank Transactions) and section 291 of the SFO with respect to purchase of the AsiaSat shares (AsiaSat Transactions). The SFC also sought remedial orders to return the profits from the dealings in Hsinchu Bank shares and to restore the counterparties to their pre-dealing positions in respect of the AsiaSat shares. Significantly, as the offence of insider dealing under section 291 only covers Hong Kong listed shares, the SFC had to allege contravention of section 300 in respect of the Hsinchu Bank Transactions, which concerns the offence of employing fraudulent or deceptive schemes or devices in securities transactions.
The CFI handed down its decision on 15 January 2016. With respect to the Hsinchu Bank Transactions, the CFI held that Betty had contravened section 300 of the SFO and that Eric and Patsy had also committed, or aided and abetted Betty to commit, the same offence. As to the elements of the offence, the CFI found that Betty's decision and misuse of CMPSI constituted a fraud or deception, which was consummated when the information was deployed in the purchase of the Hsinchu Bank shares, and that SCB was defrauded and deceived by Betty's conduct.
With respect to the AsiaSat Transactions, although Eric was not a "connected person", the CFI inferred from the evidence that he had received information directly or indirectly from persons he knew were connected to AsiaSat and that he had counselled or procured Betty and Patsy to deal in the AsiaSat shares. The CFI therefore held that Eric, Betty and Patsy had committed insider dealing in contravention of section 291(5) of the SFO.
The CFI found that the SFC's case in respect of Stella had not been proven as it could not be shown that she knew that the information that she received from Eric was inside information. The CFI nevertheless held that Stella was "involved in" the contraventions for the purposes of section 213 of the SFO and accordingly made restoration orders against all four defendants.
Court of Appeal decision
Betty, Eric and Stella appealed the CFI decision (with Patsy deciding not to pursue her appeal). The three defendants raised four grounds of appeal, namely whether: (1) the conduct involved in respect of the Hsinchu Bank shares occurred "in a transaction involving securities" for the purposes of section 300 of the SFO; (2) section 300 applied to the sale and purchase of overseas-listed securities (and therefore whether the Hong Kong courts had jurisdiction over such a transaction); (3) the restoration order was correctly made against Stella; and (4) certain factual inferences had been correctly drawn against the defendants.
With respect to the first ground, the defendants argued that the purchase of the Hsinchu Bank shares and subsequent acceptance of the tender offer constituted two separate transactions. Further, there had been no deception of SCB because, by the time the tender offer was made, the information had ceased to be CMPSI. The Court of Appeal found, however, that section 300 of the SFO is a general catch-all provision and should therefore be construed widely. The term "transaction" comprised the full course of trading, including buying the shares and accepting the tender offer. Further, there was a real and substantial nexus between the defendants' misuse of inside information and subsequent acceptance of the tender offer – the defendants' objective in purchasing the shares was to make a profit on acceptance of the tender offer. The Court of Appeal noted that Betty owed a continuous duty to SCB to disclose the inside information even after the tender offer was made public and SCB was therefore deceived when the defendants accepted the tender offer without disclosing the same. The Court of Appeal stated that, in any event, liability can be established under section 300 of the SFO where the fraud or deception is practised on a person other than the counterparty who is directly engaged in the transaction.
As to the second ground, the Court of Appeal noted that the Hong Kong courts have jurisdiction over a crime if a substantial measure of the activities constituting the offence took place in Hong Kong. The Court of Appeal found that a series of actions involved in the Hsinchu Bank Transactions took place in Hong Kong, including the transfer of funds into the securities account and the provision of instructions to make the purchase offer in Taiwan. Contrary to the defendants' submissions, these were not preparatory acts, but were instrumental in making the offer to purchase the Hsinchu Bank shares in Taiwan. Patsy's subsequent confirmation of acceptance of the tender offer by SCB also took place in Hong Kong. The Court of Appeal further confirmed that section 300 of the SFO covers dealings in shares listed in an overseas market, noting Hong Kong's status as an international financial centre where financial services are often marketed and provided in relation to overseas-listed products.
The Court also took a purposive approach to interpreting section 213 of the SFO and found that whether a restoration order should be made against Stella depended upon the extent to which she acted independently in her decision to trade in the shares. On the facts, it was clear that Stella's decision to purchase the Hsinchu Bank and AsiaSat shares was influenced by the provision of advice or tips based on inside information. In view of this, depriving Stella of the profits of her trading would not unfairly prejudice her and, accordingly, the restoration order was appropriate.
Finally, the Court of Appeal upheld the factual inferences made by the trial judge and noted that the judge had performed a thorough analysis of the defendants' evidence and that he had been right to conclude that it was illogical and implausible. In particular, their conduct in respect of the Hsinchu Bank Transactions contrasted markedly with their usual investment habits. Further, despite the lack of direct evidence, it was open to the trial judge to infer that Eric had obtained inside information through his employer's involvement in the AsiaSat Transactions as there were multiple opportunities for him to acquire this information. The only explanation for Betty's and Patsy's trading conduct in respect of the AsiaSat shares, which demonstrated a desire to acquire a maximum number of shares as quickly as possible, was that they possessed inside information. The inference that Eric was the source of this information was "inevitable" in the circumstances. On this basis it could not be shown that the trial judge's approach to the evidence had been plainly wrong and the defendants' final ground of appeal failed.
Comments
The Court of Appeal decision reconfirms the SFC's extensive powers to pursue conduct involving insider dealing as well as the wide range of persons against whom the SFC may seek restoration orders in respect of such conduct.
In response to the decision, the SFC has indicated that combating insider dealing remains an enforcement priority and that the regulator will vigorously pursue violations of the SFO accordingly. You should ensure that your organisation has adequate systems and controls in place to detect and prevent any disclosure or use by staff of CMPSI, including strong information barriers, where appropriate. Insider dealing policies should expressly cover both Hong Kong and overseas-listed securities and employees should also be given regular training to ensure that they understand their obligations in respect of CMPSI and the prohibition on trading on, or tipping off in respect of, inside information. In particular, employees should be aware that, even where they are not directly involved in commission of the offence, remedial orders may be made against them to deprive them of any profits obtained from transactions involving the use of inside information.
For further information, please contact:
James Comber, Partner, Ashurst
james.comber@ashurst.com
