High Court ruled against the Magistrate’s approach in considering the charges of false trading

The Court of First Instance allowed the appeal of the Securities and Futures Commission (“SFC“) against the acquittal of a retail investor and remitted the case to the Magistrate for retrial.

In January 2012, Chan Wing Fai was acquitted of 8 charges of false trading regarding the shares of two listed companies. The SFC’s case was that during the material time, Chan had, on various occasions, bought single board lots of the shares at a price substantially higher than the then market price, causing a sharp rise in the price of the shares. Chan then sold or attempted to sell the rest of the shares in his hands making a profit.

According to s.295 of the Securities and Futures Ordinance (“SFO“), a person shall not do anything with the intention that, or being reckless as to whether it has the effect of creating a false or misleading appearance of, inter alia, the price for dealings in securities traded on a relevant recognized market.

The SFC alleged that Chan did not have a genuine intention in making the single board lot “buy” orders. Instead, the orders were made for the purpose of marking up the share price, creating a misleading appearance of a higher price.

The Magistrate fully accepted the SFC’s evidence and rejected the explanation provided by the accused. However, he was of the view that if the act of buying one board lot was a single incidence, the prosecution would at least need to prove that the trade was not executed because of other possible reasons such as inadvertence, coincidence or personal preference. Since the parties had agreed to deal with the evidence of each charge separately and independently, the Magistrate took a rather technical approach in treating each single board lot “buy” order as a single incidence and held that the prosecution had failed to prove Chan’s manipulative intent beyond reasonable doubt, given that the prosecution had failed to eliminate such other possible reasons for the trade.

On appeal, the High Court disagreed with the Magistrate’s approach in treating each of the single board lot “buy” orders as a single incidence without any reference to the facts of other charges. While the High Court agreed that the Magistrate should deal with the evidence of each charge separately and independently, the facts established by the prosecution for other charges (which was distinguished from the evidence adduced for such other charges) could not be neglected. Those facts established for other charges were circumstantial evidence for the charge, especially in considering whether the single board lot “buy” order was executed because of other possible reasons.

The Court was also of the view that one should not only focus on the act of buying one board lot in ruling on whether one has the intention to create a false appearance of the share price. Rather, the whole series of events, i.e. accumulating a certain amount of shares, trying to sell but in vain, buying a single board lot at a substantially higher price, selling the rest of shares at a relatively lower price, should be considered.

Further, the High Court pointed out that the Magistrate had only ruled on the intention of the accused without any regard to whether he was being reckless as to whether the trade had the effect of creating a false or misleading appearance of the price of the shares. In the circumstances, the High Court remitted the case back to the Magistrate for retrial.

This appeal demonstrates that in dealing with the charges of market misconduct under the SFO, particularly false trading, the Court will not take the restrictive view of only one single act or a particular trade, but that the whole series of events and the overall circumstances (including the established facts of other charges of the same or similar nature in the same proceedings) will also be taken into account.

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Joseph Kwan

Partner | Litigation and Dispute Resolution

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