Landmark ruling on “insider dealing” in respect of overseas listed securities

In its landmark judgment of 15 January 2016 (The Securities and Futures Commission v Young Bik Fung & Others, HCMP 2575/2010), Hong Kong’s Court of First Instance found that two solicitors and others had contravened the Securities and Futures Ordinance (SFO) by insider dealing in the shares of Asia Satellite Telecommunications Holdings Ltd (AsiaSat) and had engaged in fraud and deception in transactions involving Hsinchu International Bank Company Ltd (Hsinchu Bank) shares. As a result, the Court made an order against all the defendants to return the profits from those illicit dealings in the overseas listed shares (Hsinchu Bank) and to restore the counterparties to their pre-dealing positions in respect of AsiaSat.

The matters in dispute happened between the end of 2006 and early 2007. The SFC brought the present proceedings about 4 years later in December 2010. It took another 5 years for the trial to take place at the end of 2015. This was partly due to the legal challenge on a point that was subject to the Court of Final Appeal’s ruling in the Tiger Asia case.

The significant features of this ruling may be summarized as follows:

1. This is the first reported case on s.300, which makes it an offence to employ fraudulent or deceptive schemes, etc. in transactions involving securities.  The reason why the SFC could not rely on the insider dealing provision under s.291 regarding the trading in Hsinchu Bank shares was because s.291 does not cover trading in overseas listed shares.
2. This is not a prosecution for an offence of insider dealing or breach of s.300. The SFC was seeking a declaration that s.291 and s.300 were contravened to enable the Court to make remedial orders under s.213.
3. In the Tiger Asia case, the Court of Final Appeal held that this course of action by the SFC under s.213 does not infringe the “no double jeopardy” rule. So strictly speaking, the defendants could still be prosecuted under s.291 and s.300, albeit with a criminal standard of proof.
4. The court held that s.300 was not restricted to trading in Hong Kong listed shares. The making of an offer to buy overseas listed shares in Hong Kong would trigger the application of s.300.
5. The SFC’s success in getting an order from the High Court means that it can in theory use s.300 to prosecute insider dealers of overseas listed shares even though they would not be able to do so under s.291. It is, however, doubtful if this was the intention of the legislature. 

6. It also means that the SFC can take action against an “insider dealer” of overseas listed shares, even though the overseas regulator did not take any action against such conduct.

7. The Court held that simply working in a professional firm, like Linklaters, where Eric (the 2nd Defendant) was a solicitor, but not in the team actually working on the confidential transaction in question, did not make Eric a “connected person”. This is because being in a different team of a firm that has Chinese Wall arrangements in place, would not make Eric fall within s.287(1)(c)(i) as someone who occupied “a position which may reasonably be expected to give him access to relevant information…..by reason of a professional or business relationship existing”  between Linklaters and the client.

8. Nevertheless, the Court found on the evidence that Eric had obtained the price sensitive information from his colleague in Linklaters whom he knew was connected to AsiaSat and whom he knew or had reasonable cause to believe held the information as a result of being so connected (i.e. under s.291(5) which does not depend on whether Eric was a connected person).

9. Even though the Court found that Stella (4th Defendant) did not contravene s.291 or s.300, it held that s.213(2)(b) still applied to her as an unknowing party since the provision contains the clause “whether knowingly or otherwise”.  It is, however, subject to the condition in s.213(4) that “it is desirable that the order be made, and that the order will not unfairly prejudice any person”.

10. Although similar restoration orders have been made by consent in some previous cases, such order does create rather an odd result, as it benefits only counterparties who happened to trade with the defendants, rather than all those who had sold shares during the period of time in question. It opens up a question of whether such order should be made in the first place in the absence of express legislative provision.  This would be a matter for the appellate court to consider.

Hsinchu Bank transactions

Background

• Betty was a solicitor at Slaughter & May. Eric was a corporate lawyer at Linklaters. Patsy and Stella are Eric’s elder sisters. Stella was a housewife.
• Betty Young was seconded to work for Standard Chartered Bank (HK) Ltd (SCB) by her then employers, Slaughter & May, solicitors. SCB was Slaughter & May’s client.
• While seconded to SCB, Betty worked on SCB’s takeover of Hsinchu Bank and obtained information about SCB’s intended tender offer for Hsinchu Bank shares.
• That information was non-public, confidential and materially price sensitive.
• Patsy opened a securities account with Tai Fook Securities Ltd, which allowed her to trade in Taiwanese shares. She, Betty, Eric and Stella injected substantial sums into the Tai Fook account, with which Hsinchu shares were purchased. 
• The tender offer was subsequently announced and the offer price was at a substantial premium to the market price and 44% above the average price that Patsy had acquired the shares for. Patsy accepted the tender offer for all of the shares in the Tai Fook account, making the defendants a total profit of HK$2.685 million.

Court’s Ruling

In relation to s.300, the Court held that:-

• s.300 seeks to address fraudulent or deceptive conduct used in a securities transaction.

• Given the wide definition of “transaction”, the securities transaction could be an offer to buy securities. Since the offer to buy securities happened in Hong Kong, the transaction was caught by s.300. The fact that the shares were traded overseas does not matter.

The Court found all Defendants liable under s.300, except for Stella. It held that:-

• The fraudulent or deceptive conduct employed in making an offer to buy securities in Hong Kong was caught by s.300.
• The fraudulent or deceptive conduct used in accepting the tender offer, such acceptance having taken place in Hong Kong (by Patsy via Tai Fook) could also bring the case within s.300.
• SCB was both defrauded and deceived by Betty’s conduct. In particular, her acknowledgement of the dealing restrictions applicable to her as a person working within SCB on the Hsinchu bank project was a continuous representation by her that she would not deal in the Hsinchu Bank shares.
• The Court found that Betty had tipped off Eric and his sisters with inside information to enable them to buy the shares prior to the announcement of the deal.
   
• Betty’s decisions and actions to misuse confidential, material, price sensitive information (CMPSI) secretly constituted a scheme or act of deception by reason of the duties owed to her law firm employer and their client.  This includes the duty to refrain from using the price sensitive information for personal gain.
• Eric and Patsy had also employed or engaged in the fraudulent scheme or alternatively had aided and abetted Betty.
• Although Stella admitted receiving certain information emanating from Eric regarding the shares, there was no sufficient basis to infer that she must have known about the illicit enterprise

AsiaSat transactions

Background

• Linklaters acted for CITIC in respect of the privatization of AsiaSat.
   
• Eric obtained information about AsaiSat’s proposed privatization while Linklaters were advising on the transaction.
• The information was non-public, confidential and materially price sensitive.
• Eric tipped off Betty, Patsy and Stella to buy AsiaSat shares before the proposed privatization was announced.
• Betty and Patsy (acting for herself and Stella) purchased a substantial number of shares before the privatization was announced and made a total profit of over HK$200,000 on selling them after the announcement.

Court’s Ruling

s.291(5) of the SFO is contravened where:

1. A person has information which he knows is CMPSI; and
2. he received it directly or indirectly, from a person whom he knows is connected with the corporation; and
3. whom he knows or has reasonable cause to believe held the information as a result of being connected with the corporation; and
4. deals in the listed securities of the corporation or a related corporation or counsels or procures others to so deal.

The Court found all Defendants liable under s.291(5), except for Stella. It held that:-

• Eric had received the CMPSI from Linklaters, who he knew was connected to AsiaSat and knew or had reasonable cause to believe held it as a result of being so connected.
   
• Eric had disclosed the CMPSI to Betty and Patsy, knowing or having reasonable cause to believe, they would deal in the shares, in contravention of s.291(5)(b).
   
• Betty and Patsy had received the CMPSI directly (from Eric) or indirectly (from Linklaters via Eric) from a person (Linklaters) whom they knew was connected with AsiaSat and whom they had reasonable cause to believe held such information as a result of being so connected. Their dealings therefore contravened s.291(5)(a).
   
• There was insufficient evidence that Stella had knowingly participated in any insider dealing.

Remedial Order by the Court

Since the Court was satisfied that there was contravention by the Defendants (except Stella), it acceded to SFC’s application for remedial and restoration orders. 

Notwithstanding that the SFC’s case had not been proved against Stella, the Court decided that an order for the return of profits and for restoration of the counterparties to their pre-dealing positions could still be made against her since s.213(2)(b) of the SFO enables the court to make such order against a defendant (such as Stella in this case) who has “unknowingly” got involved in a tainted transaction.

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