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Authored by: Peter So and Victor Wong
On 9 November 2021, the Court of First Instance declared that three individuals committed the offence of insider dealing in the shares of TeleEye Holdings Limited (8051.HK) (currently known as CircuTech International Holdings Limited) (TeleEye) involving a total profit of close to HK$13 million (Profit), which was paid into Court in full before trial pursuant to an undertaking given by the 2nd and 3rd Defendants.
On 14 February 2022, the Court ordered that the Profit be paid to 63 investors who sold TeleEye’s shares to the 2nd and 3rd Defendants from 29 February 2016 to 12 April 2016 (Relevant Period) via the court-appointed administrators.
On 14 April 2016, TeleEye announced a takeover by Foxconn (Far East) Ltd. (Foxconn), a wholly owned subsidiary of a Taiwan listed company, Hon Hai Precision Industry Co Ltd., which acquired a 50.07% stake in TeleEye (Takeover). The Takeover also involved an unconditional cash offer at HK$0.55. Upon resumption of trading on 15 April 2016, the share price surged 71%, to close at HK$0.99 from the pre-suspension close.
The 1st Defendant was TeleEye’s representative in the discussion with Foxconn’s representatives on the intended Takeover. Amongst others, the 1st Defendant had knowledge of the terms of the sale and purchase agreement, the joint announcement and the closing timetable to the Takeover. The 2nd Defendant is the niece of the 1st Defendant. The 2nd and 3rd Defendants got married before the relevant events. All defendants were close to each other.
During the Relevant Period, the 1st Defendant bought TeleEye shares through the 2nd and 3rd Defendants’ brokerage accounts. The 1st Defendant was authorised to operate and control these accounts. The 3rd Defendant also acquired some TeleEye shares through his trading account during the Relevant Period. A total of 22.72 million shares, at an average cost of HK$0.4295 per share, were eventually acquired through these accounts.
Between the resumption of trading on 15 April and 20 May 2016, a total of 15.65 million shares at an average cost of HK$1.259 per share were sold resulting in the Profit.
The Securities and Futures Commission (SFC) commenced its investigation in April 2016 and commenced these civil proceedings in September 2016 against the trio under s.213 of the Securities and Futures Ordinance (SFO).
The nature of s.213 proceedings
As held in SFC v Tiger Asia Management LLC and others (2013) 16 HKCRAFR 324, s.213 of the SFO provides remedies for the benefit of parties involved in the impugned transactions, including orders that would restore all parties to the transactions to their respective former positions. In such proceedings, the SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct. The relief under s.213 of the SFO is entirely free-standing. While the standard of proof is the civil standard, where serious wrongdoing is involved, the inferences must be compelling and the Court should refrain from drawing inferences on a bare or mere balance of probabilities.
The offence of insider dealing under ss.270(1)(a)(i) and 291(1)(a) of the SFO
The essential elements are as follows: (1) a person is connected with a listed corporation (Connection Element); (2) the person has information which he knows is inside information in relation to the listed corporation (Information Element and Knowledge Element); and (3) the person deals in the listed stocks of (a) the listed corporation or their derivatives; or (b) a related corporation of the corporation or their derivatives (Dealing Element).
As regards the Connection Element, the Court clarified that the test of assessing whether a person occupies a position which may reasonably be expected to give him access to inside information under s.247(1)(c) of SFO is an objective one.
As regards the Information Element, the Court reiterated that “specific information”, as referred in s.245(1) of SFO, is information which possesses sufficient particularity to be capable of being identified, defined and unequivocally expressed. It is to be contrasted with mere rumour, with vague hopes and worries or with unsubstantiated conjecture. However, what begins as a vague hope or worry may over time acquire sufficient substance and particularity to be properly defined as specific information. Whether and when such a transformation takes place is a question of fact. Further, the fact that details of a proposed transaction (including price) were still under negotiation would not make the information fall outside the meaning of “specific information”, if the proposed transaction went beyond the exploratory stage of “testing the waters”, mere rumour or “fishing expedition”.
Besides, as regards the materiality of the impact on price of listed securities, as referred in s.245(1)(b) of SFO, the Court stated that the test is a hypothetical one. The Court must ask itself whether, had the information been generally known to the investing public on the day the insider traded, it would have been likely to have had a material impact on the company’s share price. In this regard, evidence on how investors reacted once the information became public knowledge often provides the answer. However, care must be taken to ascertain whether the investors’ response was attributable to the information released, or whether it was attributable to other extraneous events or considerations. The test is applied with reference to the ordinary reasonable investor.
As regards the Knowledge Element, the Court stated that actual knowledge at the time the insider traded is required. It is well established, that actual knowledge includes “blind eye knowledge” or “wilful blindness”, which requires a suspicion or belief that the relevant facts do exist (which must be firmly grounded and targeted on specific facts), and a deliberate decision to avoid confirmation of the facts in whose existence there is good reason to believe. The test of knowledge is a subjective one. It is established by admission or inference. One has to examine the surrounding circumstances and consider what events occurred before and after the material time to see if they throw any light on what the insider truly knew.
The tipping off offence under s.270(1)(e)(i)
The elements of the tipping off offence are as follows: (1) the person (tippee) has information which he knows is inside information in relation to the listed corporation; (2) the person received the information, directly or indirectly, from a person (tipper) whom he knows is connected with the listed corporation; (3) the tippee knows or has reasonable cause to believe that the tipper held the information as a result of being connected with the listed corporation; and (4) the tippee deals in the listed securities of (a) the corporation or their derivatives, or (b) a related corporation of the corporation or their derivatives.
In the context of the insider dealing, the first and second elements can be inferred from circumstantial evidence, which may include factors such as (1) the tippee’s background or previous share trading, (2) his access to information, (3) his relationship with the tipper, (4) timing of contact between the tipper and the tippee, (5) timing of the trades, (6) pattern of the trades; and (7) attempts to conceal either the trades or the relationship between the tipper and the tippee.
The court accepted the SFC’s contention that the 1st Defendant was a connected person within the meaning of s.247(1)(d) of the SFO because (1) the 1st Defendant had access to inside information in relation to TeleEye by virtue of her position as a director of Chinese Energy, which is a the holding company of First Top. TeleEye’s shares were charged as security for a loan advanced by First Top to TeleEye’s former majority shareholder; and (2) the inside information related to a transaction involving both TeleEye and First Top.
The Court found that the 1st Defendant had direct access to all inside information relating to the Takeover, which remained confidential to the parties and not available to the public. Further, on the date when trading of shares in TeleEye shares resumed, its share price rose by 70.7%, while the GEM market only rose by 0.2%. The turnover of TeleEye shares was 138 times the average turnover for the period in question. The above evidence shows that the subject information, if generally known to the relevant investors during the Relevant Period, would have a material impact on TeleEye’s share price. There was also evidence showing that the 1st Defendant knew that she could not buy any TeleEye shares through her own securities account. While the trades were put through the 2nd and 3rd Defendants’ securities accounts, the 1st Defendant placed almost all buy orders and placed all the sell orders herself. The Court declared that the 1st Defendant committed an offence of insider dealing under ss.270(1)(a)(i) and 291(1)(a) of the SFO.
Insofar as the 2nd and 3rd Defendants are concerned, the Court found that the only reasonable inference drawn was that they were told by the 1st Defendant about the subject information and that they knew that the 1st Defendant was a person connected with TeleEye. Further, the fact that the TeleEye shares were purchased through the 2nd and 3rd Defendants’ accounts constituted dealing in TeleEye share. The Court declared that the 2nd and 3rd Defendants committed offences of insider dealing under ss.270(1)(e)(i) and s.291(5)(a) of the SFO.
The Court also declared that all defendants are persons within s.213 of the SFO.
The Court held that a claim brought by the SFC under s.213 based on insider dealing, in contravention of ss.270 and 291 of the SFO, is a claim founded in tort. Having said that, the Court clarified that the relief which may be granted by the Court is not limited by common law principles governing a claim founded in tort. The Court granted a restoration order, requiring that the Profit together with interest accrued thereon, less remuneration and costs of the administrators, be distributed pro rata to 63 investors who sold a total of 22.72 million TeleEye shares to the 2nd or 3rd Defendants during the Relevant Period, to be distributed by the administrators, notwithstanding that the 63 investors had no means of detecting who they were dealing with at the time of selling their shares.
This case once again demonstrates the judicial attitude and the SFC’s approach in ensuring that the consequences of wrongdoing should be met by the wrongdoers and not be borne by innocent investors or the market. S.213 of SFO is a powerful tool for the SFC to protect collective interests of persons dealing in the market who have been injured by market misconduct. It also illustrates that the Court may appoint administrators to facilitate the distribution of wrongdoers’ windfalls to innocent third parties.
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