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Insider dealing – Deal or no deal

In the Court of Appeal (CA) decision of Securities and Futures Commission v Cheng Chak Ngok (CACV 95/2017; [2018] HKCA 590), the less disputed element of insider dealing, namely the element of “dealing” was at issue.  As there was no direct evidence showing the dealing in this case, the issue was whether the circumstantial evidence was sufficient to draw inferences that there was in fact dealing in the relevant shares.  


This case concerns whether any insider dealing was committed by a Mr Cheng, who was the Executive Director, Chief Financial Officer and Company Secretary of ENN Energy Holdings Limited (ENN).  ENN formed a consortium with another company for the purpose of taking over China Gas Holdings Limited (China Gas), being a company listed in Hong Kong. 

Mr Cheng was responsible for negotiating a financing proposal for ENN in connection with the takeover.  By virtue of his involvement in the takeover, Mr Cheng had on various occasions received information concerning China Gas, including details of the financing arrangements for the takeover, the expected timetable of the takeover and the offer price range for China Gas shares.

It was the SFC’s case that Mr Cheng had engaged in insider dealing of China Gas shares: Mr Cheng was a connected person in possession of inside information and whilst in possession of the inside information, Mr Cheng used the securities account of one Ms Li to purchase China Gas shares, provided the funds for the purchases and received the proceeds from the subsequent sale of the shares.

Elements of Insider Dealing

In order to establish insider dealing by Mr Cheng, it is necessary to show that: 

(1)     He was a connected person of China Gas; 

(2)     He had information which he knew was inside information in relation to China Gas; and

(3)     He had dealt in China Gas shares.

In respect of (1), a connected person of China Gas would extend to cover connected persons of a counter-party having a potential transaction with the listed company, i.e. ENN.  Mr Cheng is a connected person with ENN as he was its Executive Director, Chief Financial Officer and Company Secretary. By reason of his positions at ENN, he also gained access to inside information in relation to the takeover which concerns both China Gas and ENN.  He would therefore be considered a connected person of China Gas pursuant to s.247(1)(d) of the Securities and Futures Ordinance (Cap. 571) (SFO). This was not in dispute by Mr Cheng. 

As for (2), it needs to be shown that the information held by Mr Cheng was inside information and that he knew that such information was inside information. Clearly, a potential takeover would be inside information. Given Mr Cheng’s expertise and experience at ENN, it was inferred that Mr Cheng must have known that such information was inside information. This was also not disputed by Mr Cheng.

Was there any dealing?

As mentioned, the main issue was on the element of dealing. An interesting point about this case is that there was no direct evidence showing that Mr Cheng did deal in the shares of China Gas.  The evidence showed that the bidding orders were in fact made through the securities trading account of another person (i.e. Ms Li).

The question was whether the circumstantial evidence was sufficient to draw the inferences that there was dealing by Mr Cheng. The circumstantial evidence included evidence showing that the timing of the orders coincided with Mr Cheng’s knowledge of the inside information, the fact that Mr Cheng had assisted Ms Li in opening her securities accounts, evidence showing that Mr Cheng may have access to Ms Li’s securities account statements, evidence showing that Mr Cheng had funded a substantial part of the purchase price of the China Gas shares (of the HK$13.7 million used to purchase the shares, at least HK$8 million was funded by Mr Cheng) and that all of the internet orders were placed from ENN’s office computers at a time when Ms Li was not in office but Mr Cheng was.

When the case was first heard by the Market Misconduct Tribunal (MMT), the MMT was not satisfied that the circumstantial evidence was convincing enough and noted that it could not rule out the possibility that the bids were placed by Ms Li or someone else.  It held that Mr Cheng did not deal in the shares.

On appeal by the SFC before the CA, the CA took a different view that there was strong circumstantial evidence pointing to Mr Cheng being the person who conducted the purchases and noted that the probability of Mr Cheng conducting the same far outweighed the possibility that such purchases were conducted by someone else. The CA affirmed that the proper standard of proof is the civil standard of balance of probabilities and held that the MMT had in substance strayed beyond the civil standard and applied the criminal standard of beyond reasonable doubt when evaluating the evidence. The CA also clarified that MMT proceedings are civil and inquisitorial in nature and affirmed the orthodox view that the concept of burden of proof has no place in such inquisitorial proceedings.

The case was remitted back by the CA to a differently constituted MMT for reassessment of the evidence according to the proper civil standard.


The MMT will soon be faced with the sole issue of whether Mr Cheng had dealt with the shares based on the evidence.  It is likely that the MMT will have to consider the three questions: 

(1)     Whether Mr Cheng directly dealt with China Gas shares by placing bids in and operating Ms Li’s securities account himself; or

(2)     Whether Mr Cheng instructed Ms Li (or someone else) to deal with China Gas shares on his behalf using Ms Li’s securities account; or

(3)     Whether there was no such dealing at all by Mr Cheng because he was unconnected to these dealings by Ms Li as he claimed.

Under scenarios (1) and (2), there would be a “deal”; and under scenario (3), there would be “no deal”.

It may be worth noting that one of the points raised by the SFC in its appeal was the alleged failure by the MMT to consider exercising its statutory investigative powers before the inquiry was concluded.  However, as the CA has already ruled on the other grounds of appeal in favour of the SFC, the CA did not find it necessary to express its views on this point.  It therefore remains to be seen as to when it would be appropriate for the MMT to consider exercising its statutory investigative powers in conducting the inquiry and as to whether (and if so, to what extent) this would amount to imposing a duty on the MMT to do so.

Key Contacts

Peter So

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9247

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