Citron Research Case – Beware of the duty of care imposed on stock market commentators

In our October 2016 newsletter, we reported the landmark decision of the Market Misconduct Tribunal (Tribunal) in the Citron Research Case. Mr Andrew Left was found by the Tribunal to have engaged in market misconduct, having published a false and misleading report (Report) regarding a company listed on the Hong Kong Stock Exchange, following which there was a substantial fall in its share price. The Tribunal found that he was reckless, if not, negligent, as to whether such information was false or misleading. 

Subsequently, Mr Left made a second appeal to the Court of Appeal (CA) to seek a judgment in his favour on questions of law (having failed to obtain leave to appeal on questions of fact-see HCMP 3195/2016, 13 January 2017). By the CA’s judgment on 25 February 2019, his appeal was dismissed (see CACV 228/2016).

In doing so, the CA affirmed that the test for recklessness in section 277(1) of the Securities and Futures Ordinance (SFO) is a subjective test, examining whether one genuinely perceives the risk that the information to be published is false and misleading. On the test of negligence, the CA affirmed that the duty of care for negligence in section 277(1) of the SFO is owed by any and all persons to the market with the legitimate aim of protecting the public and economic order. Therefore, the same objective standard of care is applied whether the person in question is a market commentator, an analyst or an unlicensed person.

This case serves as a reminder that everyone should think and write carefully and act prudently when publishing commentaries on listed companies and reasonable steps should be taken to ensure that the information is true and not misleading before the publication of such.

A reminder of the facts

As per our earlier newsletter, in this case, Mr Left was the publisher of an internet website, specialising in stock commentary called Citron Research. On 21 June 2012, he published an in-depth analytical, but negative, report on Evergrande Real Estate Group Ltd (Evergrande), a major Mainland property development company listed on the Hong Kong Stock Exchange.

On the day that the Report was published, Evergrande’s share price fell by almost 20%, and closed 11% down on the day. Volatility levels reached 22.7%.

At about the time of publication of the Report, Mr Left himself short-sold Evergrande shares and he covered his short position immediately after the publication of the Report, which netted a profit of approximately HK1.6 million.

The points that are worthy of note in the appeal are the CA’s decision on the respective tests for recklessness and negligence in section 277 of the SFO.

The test for recklessness

The Tribunal referred to the subjective interpretation of recklessness in criminal law, as stated in Sin Kam Wah v HKSAR (2005) 8 HKCFAR 192 and formulated the following test, stating that it had incorporated the common law concept of indifference to the truth:-

(a) When Mr Left published the Report, was he aware of the risk that the information in question was false or misleading?

(b) Was he further aware that in the circumstances the risk was of such substance that it was unreasonable to ignore it?

(c) Did he nevertheless, although aware of (a) and (b) above, go ahead and publish it?

The Tribunal answered yes to all three questions and found Mr Left to be reckless in his publication of the Report.

Counsel for Mr Left argued that the Tribunal applied the wrong test by referring to the test in criminal law, with the correct test being the test for fraudulent misrepresentation in civil cases, namely, that a person is reckless in making a statement if and only if he does not care whether the statement is true, i.e. he is indifferent to the truth” (the Indifference Test). 

The CA affirmed the Tribunal’s three-step test, which is ultimately a subjective test for recklessness. The test focuses on the defendant’s state of mind instead of the perception of an ordinary prudent individual. The Indifference Test has been incorporated, because being indifferent to the truth of a statement is essentially equal to ignoring the risk that the statement is untrue. After all, in order to close one’s mind to a risk, one must logically be aware of that risk first

The CA reasoned that although market misconduct in section 277(1) of the SFO is not a criminal offence, the equivalent market misconduct offences in Part XIV of the SFO also provide for recklessness as a culpable state of mind. It is entirely appropriate that the same test should apply for recklessness in respect of the same prohibited act. 

The test for negligence

The Tribunal applied the objective test of: whether Mr Left exercised the level of care to avoid the inclusion of false or misleading information as to material facts that is “realistically required of a reasonably prudent person carrying out the function of a market commentator and/or analyst”. 

Counsel for Mr Left argued that it was wrong to apply the standard of care of a market commentator or analyst to Mr Left who was an unlicensed individual just like any member of the public. Furthermore, Counsel for Mr Left suggested that the primary purpose of section 277 of the SFO was to regulate information disseminated by listed companies and insiders and that outsiders should be subject to a lower standard of care. The fundamental constitutional right of freedom of speech was relied on to argue in favour of a more lenient test. 

The CA affirmed the Tribunal’s construction that section 277 of the SFO creates a duty of care on any and all persons who choose to disseminate information and that is likely to impact on the market to ensure that such information is not materially false or misleading. The duty of care is owed to the market. The legitimate aim of such a provision in limiting the freedom of expression is to protect the public at large from the potentially very damaging effect of false or misleading information, thus protecting economic order. To carry out the duty, reasonable steps must be taken before the publication of information to ensure that the information is true and not misleading.

Commentary

The CA’s judgment is significant as it confirms that the law regulating the dissemination of information about listed companies does not only govern dissemination by listed companies, market commentators or analysts, but also the general public as well. In the age of social media, members of the public are keen to share their views and commentaries on different subject matters, including listed companies. Such commentaries are disseminated rapidly to a potentially large audience in seconds with the help of the Internet. The CA stated in its judgment that the law creates a duty of care on any and all persons (not only people who have assumed special responsibility to the market) who choose to disseminate information that is likely to impact on the market to ensure that such information is not materially false or misleading.  

One could perhaps take, albeit a little, comfort from the fact that the Tribunal took the view, which was affirmed by the CA, that a person would only be held liable in negligence when the information he or she disseminates is proved to be false or misleading as to a material fact of significance, but “not merely an expression of opinion” and the information must also be shown to be influential and likely to induce others to deal in the securities. However, the line between fact and opinion is in most cases difficult to draw.

This case serves as a reminder that everyone should think and write carefully and act prudently when publishing commentaries on listed companies and reasonable steps should be taken to ensure that the information is true and not misleading before the publication of such. That includes negative and also positive information alike.