Evidence – Insider dealing – Meaning of ‘specific information’ – Test of material price sensitivity – Drawing of adverse inference where defendant does not testify – Securities and Futures Ordinance (Cap 571) s 285(2)

Magistrates Court – Review of Sentence – Review not competent after valid notice of appeal lodged – Magistrates Ordinance (Cap 227) s 104(9) Sentencing – Insider dealing – Serious criminal offence – Immediate imprisonment and fine appropriate unless exceptional circumstances

SECURITIES AND FUTURES COMMISSION v CHAN PAK HOE PABLO (陳柏浩) [2011] 5 HKC 484

Court of First Instance
Magistracy Appeal No 754 of 2010
Macrae J
22, 23 and 24 June, 23 August 2011

Adrian Bell SC and Allen Lam (Securities and Futures Commission) for the respondent.
Gerard McCoy SC, William Wong and Christopher Chain (Reed Smith Richards Butler) for the appellant.

The appellant was convicted by a magistrate of an offence contrary to s 291(5) and (8) of the Securities and Futures Ordinance (Cap 571) (Ordinance). He was sentenced to serve a community service order (CSO) for 240 hours and ordered to pay HK$44,478 prosecution costs. Pursuant to an application for review brought by the prosecution and granted under s 104 of the Magistrates Ordinance (Cap 227), the magistrate varied his original sentence by substituting four months’ imprisonment for the CSO and in addition imposed a fine of HK$120,000. The order to pay prosecution costs remained in place. The appellant appealed against both his conviction and the sentence imposed upon review. The appellant had over 10 years’ experience in securities investment and was involved in finding a potential buyer for the majority shareholding held by Globalcrest Enterprises Ltd (Globalcrest) in a publicly listed company, Universe International Holdings Ltd (Universe). In March 2008, Globalcrest entered into negotiations to sell all its shares in Universe to Goldwyn Management Ltd (Goldwyn) at a proposed price of HK$0.14 per share. The appellant knew about the proposal because he was acting as a bridge between the two parties, and was privy to a number of important negotiations, discussions and documents in relation to the same. Between 2 May and 19 June 2008, whilst those negotiations were in progress, the appellant bought shares in Universe at prices between HK$0.087 and HK$0.103 per share. On 19 June 2008, Universe made an announcement to the public that Globalcrest was considering selling all its shares in Universe to an independent third party. On 20 June 2008, the price of Universe shares substantially increased by 39.47%, to HK$0.159. On the same day, the appellant sold all his remaining shares in Universe and made a total profit of HK$120,387.63. In total, the appellant had bought and sold 7,515,000 shares in Universe within the period. On 27 June 2008, Universe published another announcement informing the public that Globalcrest had ceased negotiations to sell its shares in Universe to an independent third party, upon which the price of Universe shares dropped 35.76% to HK$0.097. The Court considered the following issues on the appeal against conviction: (1) whether the appellant was in possession of relevant information within the meaning of s 285(2) of the Ordinance and knew that he had such relevant information when he dealt in Universe shares; (2) whether, if the information had been known, it would have been likely to materially affect the price of Universe shares; (3) whether the magistrate departed without any valid basis for doing so, from the
defence expert’s evidence that there could be other reasons for the increase in the Universe share price, which evidence was neither contradicted nor challenged by the prosecution nor disbelieved by the magistrate himself; (4) whether, even if he did have relevant information, the appellant did not make use of it, thus constituting a valid defence under s 292(3) of
the Ordinance. The appellant did not take significant issue with his clear knowledge of and involvement in the negotiation process. The main thrust of the appellant’s counsel’s submission was that whatever might have been the initial intentions of the parties to the proposed deal, the transaction never had any realistic chance of coming to fruition; that the parties had
never even got close to agreeing a price; that many of the independent executive directors had said that the transaction was ‘problematic’ and might not have been approved by the Securities and Futures Commission (SFC). It was argued that even if the appellant was in possession of relevant information, the magistrate was wrong to find that he knew it was relevant information, because he could reasonably have regarded the deal as doomed. On the appeal against sentence, the Court considered whether the magistrate lacked jurisdiction to review his sentence and that, therefore, the original sentence should have stood and the substituted sentence set aside.

Held, dismissing the appeal against the conviction but allowing the appeal against the sentence passed upon review:
Knowledge of information being relevant
It was true that there were so-called ‘obstacles’ to the proposed deal but the evidence was that the parties were by the time of the announcement on 19 June 2008 still striving to reach an agreement. This was a proposed takeover deal. It would in those circumstances have been remarkable if there were no problems, set-backs or disagreements (particularly
about price) requiring sometimes difficult and protracted negotiations. What was clear was that those negotiations were continuing in earnest throughout the period cited in the summons and that the appellant must have realised the parties were trying to iron out their differences and were intent on achieving an agreement. If, as had been suggested, the appellant himself regarded the deal as ‘dead in the water’ by the time of the Board meeting of 11 June, one wondered why he should have bought, on five separate occasions between then and the announcement on 19 June 2008, 1,635,000 shares in Universe at prices between HK$0.087 and HK$0.103 per share, as well as two further tranches on 20 June totalling 2,635,000 shares at prices between HK$0.129 and HK$0.142 per share, only to sell his entire shareholding on the first day of trading after the announcement, namely 20 June 2008. Moreover, not only did he acquire 1,635,000 shares
in Universe on five separate occasions between the Board meeting of 11 June and the announcement of 19 June 2008, he did not sell a single Universe share during that same period.

Relevant information
Relevant information was defined under s 285(2) of the Ordinance as specific information about: (a) the corporation; (b) a shareholder or officer of the corporation; or (c) the listed securities of the corporation or their derivatives, which was not generally known to the persons who were accustomed or would be likely to deal in the listed securities of the corporation but which would if it were generally known to them be likely to materially affect the price of the listed securities.

Although what amounted to ‘specific information’ did not seem to have been judicially considered by an appellate court before, the term had been considered by the Insider Dealing Tribunal when dealing with a similar definition of ‘relevant information’. Specific information was information which possessed sufficient particularity to be capable of being identified, defined and unequivocally expressed. It was to be contrasted with mere rumour, with vague hopes and worries or with unsubstantiated conjecture, although what began as a vague hope or worry may over time have acquired sufficient substance and particularity to be properly defined as specific information. If and when such a transformation took place was a question of fact. The lack of precision of information did not prevent it from being specific.

There was no additional requirement that there be any foresight that the transaction would ‘probably’ or ‘likely’ come to fruition before information concerning the contemplated transaction became sufficiently specific.

The information to which the appellant was privy was clearly specific information about Universe or, for that matter, about its shareholders and officers or its listed securities. The proposed sale of all Globalcrest’s shares in Universe to Goldwyn was beyond the exploratory stage of ‘testing the waters’, mere rumour or a ‘fishing expedition’. The information to which
the appellant was privy was specific information and relevant information within the meaning of s 285 of the Ordinance. Moreover, the appellant must have known that it was relevant information. The fact that further negotiation was needed and approval needed from the Board of Directors of Universe, the minority shareholders and the regulators did not take
it outside the meaning of ‘specific information’ and in turn outside the meaning of ‘relevant information’.

Price sensitivity
There was only one realistic explanation for the significant increase in the Universe share price when trading opened on 20 June 2008 and that was the announcement on 19 June 2008 that Globalcrest was ‘negotiating with an independent third party regarding the disposal of its entire holding of the Shares’. The Court did not accept, in the light of the expert
witness’s evidence and the nature and history of this particular share, that the almost 40% increase in the share price of Universe on 20 June 2008 was insufficient to support a finding by the magistrate of material price sensitivity. The Court was mindful of the caution with which one must approach the test for material price sensitivity, to ascertain whether
the investors’ response was attributable to the information released, or whether it was, wholly or in part, attributable to other extraneous events or considerations.

Defence under s 292(3) of the Ordinance
As to the specific defence under s 292(3) of the Ordinance, it could not have conceivably been made out, with no explanation from the appellant and in the light of the whole of the evidence and the compelling and obvious inferences which could properly be drawn from it.

Jurisdiction of the Magistrate on review while an appeal was pending
The language and meaning of s 104(9) of the Magistrates Ordinance (Cap 227) was clear: no magistrate could grant an application for review after either party had commenced proceedings to appeal his decision unless those proceedings were first abandoned. The phrase ‘at any time’ in s 104(4) should be understood to mean ‘at any stage’. Further, nothing in s 104(10) impinged upon or was in any way inconsistent with the prohibition in s 104(9). Appeal proceedings in this case were commenced by the appellant on 25 August 2010: they were not abandoned. Once appeal proceedings by the appellant had been commenced by the lodging of a valid notice of appeal against conviction on 25 August 2010, the
magistrate had no power to grant the application for review of sentence thereafter by virtue of s 104(9) of the Magistrates Ordinance. It might have been strange, or even abusive of the court’s process, that a defendant could effectively prevent a magistrate from reviewing a decision such as sentence by simply putting in a notice of appeal; the more so if it was done as matter of deliberate tactic. However, it must be remembered that neither the District Court nor the High Court had such a power of review and the prosecution could not ultimately be prevented from reviewing the defendant’s sentence. Once the prosecution was frustrated in its intention to review the sentence by the operation of s 104(9), the Secretary for Justice on behalf of the SFC could have (and should have) sought a review of the original sentence under s 81A of the
Criminal Procedure Ordinance (Cap 221).

Obiter
But for the conclusion on the jurisdictional point, the Court would have upheld the sentence imposed upon review of four months’ imprisonment together with a fine of HK$120,000 as neither manifestly excessive nor wrong in principle. The Court would have regarded six months’ imprisonment as a lenient sentence in the circumstances of this particular case. A CSO was a wholly inadequate response to the seriousness of the offence, whilst the failure to impose any fine whatsoever did not even deprive the appellant of his ill-gotten gains.

Insider dealing was a serious criminal offence. Although not a specific element of the offence, insider dealing involved dishonesty. Very often (as in this case), such dishonesty would be accompanied by a breach of trust or confidence. Insider dealing was also the product of corrupt ethics and, as such, inevitably did harm to the integrity of Hong Kong’s capital market and to its financial reputation. The appropriate sentence for such an offence should, save in exceptional circumstances, be one of immediate imprisonment, coupled with a financial penalty, which at the very least removed a defendant’s unjust profits.

Lest the idea had gained any currency that this was essentially a regulatory offence, it had been made clear that when done deliberately, insider dealing was a species of fraud. Quite apart from the damage insider dealing did to Hong Kong’s capital market and financial reputation and to public confidence in the integrity of the system, it was a fraud on the public.

Sentencing – Indecent assault – Taxi driver molesting drunken female passenger late at night – Breach of trust – Bad case of its type – Deterrent sentence appropriate regardless of previous good character – Maintenance of public confidence in taxi services – Sentence required to mark public abhorrence and redress grievance of victim – Three years’ imprisonment appropriate after guilty plea

HKSAR v HO TUNG YUEN (何統源) [2011] 5 HKC 586

Court of Appeal
Criminal Appeal No 59 of 2011
Yeung VP, Line J
15 September 2011

Ng Mee Wah Memi (Director of Public Prosecutions) for the HKSAR.
Jasper Kwan (Tso Au Yim & Yeung) assigned by DLA for the applicant.

The applicant, a taxi driver, pleaded guilty to a charge of indecent assault against a female passenger who at the time of boarding his taxi, was drunk and could not recall events with precision. Evidence of the presence of the applicant’s semen was found on the victim’s underpants but he claimed that he was responding to advances made by the victim who mistook him for someone else. The applicant maintained that he had only inserted his fingers into the victim’s vagina. The applicant was sentenced to three years’ imprisonment at the District Court and sought leave to appeal against sentence.

Held, dismissing the application for leave:
The ultimate issue was whether the three year sentence imposed on the applicant was manifestly excessive on the facts of the case. The Court did not accept the suggestion that the applicant was responding to the victim’s advances. It was a clear attempt to lessen the applicant’s culpability. The applicant’s account of the event did not explain the presence of the semen on the victim’s underpants.

Whilst an accused could only be sentenced on proven facts and not on speculation, on the evidence, the gravity of what had happened was not limited to the applicant’s admission as to what he did. The sentencing judge was right to refer to the victim’s concern, including the presence of semen in her underpants.

In any event, a taxi driver indecently assaulting a drunken female passenger was in a different class of its own and sentences in most cited indecent cases were not particularly helpful. This was a bad case of the type as the applicant had molested the victim in the most repugnant of ways. The judge was right to emphasise the impact of what the applicant
did on the victim.

Taxi journeys exposed drivers and passengers to each other in circumstances which could be exploited by criminals. There was an element of trust in each other and the breach of that trust was viewed seriously by courts. That was why passengers attacking taxi drivers was an aggravating factor in robbery cases. Likewise, taxi drivers attacking passengers, particularly female passengers, should be viewed with similar degree of severity.

People under the influence of alcohol commonly travel by taxi when drunken driving was rightly discouraged and widely targeted at. Passengers, particularly female passengers, had to be able to feel safe when travelling in a taxi. The Court wished to emphasise in no uncertain terms that a taxi driver who took advantage of a drunken female passenger by
indecently assaulting her could expect no mercy from the Court and such unscrupulous behaviours would be severely punished. The interest of the society demanded deterrent sentences against taxi drivers who molest drunken female passengers, irrespective of their previous good character. The sentence had to be adequate to mark the public abhorrence of the crimes and redress the grievance suffered by the victim, her relatives and friends.