For hearing before Master K - Hong Kong Court of Final Appeal

For hearing on 5 September 2018 at 10am

FACV 5 / 2018

IN THE COURT OF FINAL APPEAL

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL APPEAL NO. 5 of 2018

(ON APPEAL FROM CACV NO. 154 OF 2016)

BETWEEN

SECURITIES AND FUTURES COMMISSION Appellant

and

YIU HOI YING CHARLES 1st Respondent

WONG NAM MARIAN 2nd Respondent

MARKET MISCONDUCT TRIBUNAL 3rd Respondent

_____________________________________

2ND RESPONDENT’S WRITTEN CASE

_____________________________________

Filed on 4 May 2018 pursuant to rule 25 of the Hong Kong Court of Final

Appeal Rules (Cap. 484A).

2

A. This Appeal

1. This appeal concerns the application of the affirmative defence in

section 271(3) of the Securities and Futures Ordinance (Cap. 571)

(“SFO”).

2. Section 271(3) at the material times stated that:

“A person shall not be regarded as having engaged in

market misconduct by reason of an insider dealing taking

place … if he established that the purpose for which he dealt

in … the listed securities … was not, or where there was

more than one purpose, the purposes for which he dealt in …

the listed securities … did not include, the purpose of

securing or increasing a profit or avoiding or reducing a

loss … by using relevant information.” (underlining added)

3. The section has since been amended where “relevant information”

has been relabelled “inside information”. The definition remains

the same. For ease of expression, this written case will mostly use

the more descriptive phrase “inside information”.

4. Section 293(3) applies in civil proceedings which the Appellant the

Securities and Futures Commission (“SFC”) may institute before

the Market Misconduct Tribunal (“MMT”/ “Tribunal”). There is

an equivalent section, section 292(3), which in materially identical

terms applies in criminal cases.

5. This defence is also known as the “no profit motive defence” or the

“innocent purpose defence”. See, e.g.: Butterworths Hong Kong

Securities Law Handbook, 5th ed., 293.07; Securities and Futures

Ordinance: Commentary and Annotations, 3rd ed., 271.07.

3

6. In short, a person whom the prosecution shows to have dealt in the

shares of a listed company while possessing information which he

knew to be inside information, has a defence if he can establish that

the purpose of his dealing was not and did include any purpose of

making a profit or avoiding a loss by using inside information.

7. The burden of establishing the defence lies with the person alleged

to be guilty of insider dealing. In practice and almost by definition,

the defence is only rarely available.

8. The defence becomes relevant only after the prosecution proves its

case. The prosecution must prove that the person has dealt in shares

of a listed company while possessing information which he knew,

if disclosed to the public, would likely to materially affect the share

price. In most circumstances, the inference from these facts would

already be that the person’s purpose was or included a purpose to

make a profit or avoid a loss by using inside information.

9. The present case involves truly exceptional circumstances. It was

in those circumstances that the 1st Respondent (“Charles”) and 2nd

Respondent (“Marian”) were able to establish his/ her defence.

B. Background Facts

10. The background facts of this case are set out in the detailed Report

of the MMT dated 26 November 2015 and the 2 judgments of the

Court of Appeal dated 26 April 2017 (dismissing the SFC’s appeal)

and 23 August 2017 (refusing leave to appeal). The Court is invited

to refer thereto. A brief summary appears below.

A/1/1-120

A/2/121-

146

A/5/159-

165

4

ATML

11. Charles was an executive director and the director of finance, and

Marian was the company secretary, of a company then-named Asia

TeleMedia Ltd (“ATML”), whose shares were listed on the Stock

Exchange of Hong Kong (“SEHK”).

12. ATML was a “listing shell” – a company with little business and

whose value is attributable to its listing status. In fact, ATML was

at all material times insolvent, having negative assets and making

a net loss. This state of affairs was fully disclosed in its financial

statements. What value the shares had, it was due to company’s

listing status.

13. ATML’s substantial shareholder, Chairman, and Chief Executive

Officer Mr. Lu Ruifeng (“Mr. Lu”) acquired control of it in 2002.

The company, then-named Mansion House Group Ltd, was already

in a precarious financial position. Mr. Lu’s plan was to inject new

businesses into it. But his plan never materialized.

Charles and Marian

14. Marian joined ATML as company secretary in 2002, shortly after

Mr. Lu acquired control. Charles joined and became an executive

director in 2004.

15. In 2005, ATML granted some employee stock options, including to

Mr. Lu, Charles, Marian, and others. The options were exercisable

at HK$0.20 per share. The market price of the shares would for a

long time remain well below this level. As the Tribunal put it, “the

options were at best aspirational.”

A/1/89/

¶222

A/1/98/

¶244

A/1/31/

¶55

A/1/31/

¶56 et seq

A/1/31/

¶57

A/1/89/

¶222

A/1/98/

¶244

A/1/40/

¶82

A/1/114/

¶283

5

The Debt

16. Since before Mr. Lu acquired control of ATML, the company had

owed a Ms. Liu Lien Lien (“Madam Liu”) a substantial debt of

some HK$80 million.

17. From time to time, Madam Liu asked for repayment, including by

statutory demands. Mr. Lu would inject some money into ATML,

which would pay Madam Liu small amounts and make promises of

future repayment. Correspondence ensued. The result was always

that the debt would be extended or otherwise go back to sleep.

18. As the Tribunal put it, “the tactic … enabled the Company to stall

Madam Liu’s persistent claims” and “the matter would somehow,

however slow and muddled the process, be dealt with behind closed

doors.”

19. This behaviour of the two principals, Mr. Lu and Madam Liu, was

understandable. Since the value of ATML was in its listing status,

Mr. Lu had an incentive to keep the company “on life support”. On

the other hand, Madam Liu could not expect ATML suddenly to

become able to repay a substantial amount.

20. The issue of the debt lingered on. Over the years, “wolf” was cried

a number of times but none really appeared.

A Further Demand

21. On around 5 February 2007, ATML received a letter from Messrs

Woo, Kwan, Lee & Lo (“WKLL”). WKLL had acted for Madam

Liu in corresponding with ATML. On this occasion, it purported

to act for a BVI company Goodpine Ltd (“Goodpine”). The letter

A/1/32/

¶58 et seq

A/1/32/

¶¶58-67

A/1/38/

¶¶77-81,

83-93

A/1/101/

¶249

A/1/103/

¶255

A/1/36/

¶69

A/1/44/

¶¶94-96

6

stated that the debt had been assigned to Goodpine and repayment

within 21 days was demanded.

22. Goodpine was in fact controlled by Madam Liu. But this could not

be known with any certainty at the time.

23. The deadline of 21 days as stated the letter came and went. Those

within ATML did not treat the matter with any haste. On 26 April

2007, WKLL for Goodpine served a statutory demand. On 7 May

2007, ATML through solicitors made an offer to pay HK$8 million

in 5 installments. On 22 May 2007, it improved the offer slightly

by proposing to pay HK$8 million in one installment.

Share Price Surge

24. In contrast to this relative inactivity about Goodpine’s demands, a

fury of activity was occurring in the market for ATML’s shares.

25. As the Court of Appeal summarized from the MMT’s Report, the

prices of ATML shares on some key dates were:

(1) 1 February 2007: HK$0.20;

(2) 5 February 2007: HK$0.18;

(3) 16 February 2007: HK$0.31;

(4) 9 March 2007: HK$0.43;

(5) 26 April 2007: HK$0.40;

(6) 7 May 2007: HK$0.40;

(7) 17 May 2007: HK$0.61;

A/1/46/

¶102

A/1/52/

¶121

A/1/53/

¶124

A/1/54/

¶129

A/2/128/

¶22

A/1/47/

¶104 et seq

7

(8) 22 May 2007: HK$0.69;

(9) 29 May 2007: HK$0.97;

(10) 6 June 2007: HK$0.83.

26. This fivefold surge in ATML’s share price was part of a “craze for

small caps” and “frenzy” in “short-term speculation”. There was

no justification in the company’s fundamentals.

Employees Exercising Options

27. The surge caused considerable excitement among the employees.

Between 16 and 22 February 2007, 13 employees exercised their

stock options and sold the resultant shares.

28. Marian first exercised her options and sold shares on 28 February

2007. Thereafter she did the same from time to time, on a total of

27 occasions. She did not exercise all her options.

29. On 7 May 2007, ATML granted its employees a further tranche of

stock options exercisable at a higher price of HK$0.40.

30. In total, between 28 February and 26 April 2007 (date of statutory

demand), Marian exercised options for and sold 6.2 million shares

at prices between HK$0.37 and HK$0.494. Between 27 April and

5 June 2007, she exercised options for and sold 3.8 million shares

at prices between HK$0.395 and HK$0.98.

31. Charles held out until 28 May 2007, when ATML’s share price rose

above HK$0.90. In the next few days, he exercised options for and

sold 6 million shares at prices between HK$0.85 and HK$0.91.

A/1/47/

¶¶108-112

A/1/115/

¶¶284-287

A/1/116/

¶289-291

A/1/53/

¶123

A/1/50/

¶114

A/1/56/

¶137

A/1/109/

¶268

A/1/8/¶14

8

Winding-up Petition

32. On 6 June 2007, Goodpine presented a winding-up petition against

ATML. Trading in its shares was suspended. An announcement

was made.

33. ATML has since been put into but also taken out of liquidation. Its

new majority shareholder injected new businesses. The company

is now named Reorient Group Ltd.

34. In the words of the Tribunal, “Even if it was at the eleventh hour, it

appears that the Company’s value as a listed shell prevailed.”

C. Trial before the MMT

35. By a Notice dated 16 January 2014, the SFC instituted proceedings

before the MMT against Mr. Lu, Charles, Marian, and the assistant

company secretary of ATML (“Cecilia”).

36. The SFC alleged that each of the 4 defendants (called “implicated

persons”) had engaged in insider dealing by virtue of his/ her sales

of ATML shares while possessing information which he/ she knew

was inside information, namely Goodpine’s demands by WKLL’s

letter dated 5 February 2007 and by the statutory demand dated 26

April 2007.

37. After a 14-day hearing, the Tribunal (Hartmann NPJ as chairman,

sitting with 2 lay members) decided for the 4 persons. It found that

Mr. Lu was seriously ill and could not have the requisite reasonable

opportunity to be heard, and Cecilia did not know the information

constituted inside information.

A/1/58/

¶145

A/1/59/

¶147

A/1/62/

¶¶154-155

A/1/62/

¶154

A/1/12/

¶¶6-54

A/1/104/

¶¶256-263

9

38. As for Charles and Marian, the Tribunal rejected many aspects of

their cases. In fact, it was quite scathing of the larger parts of their

evidence. It found that each of Charles and Marian dealt in shares

while in possession of information which he/ she knew to be inside

information. In other words, the SFC had proved its case.

39. In the exceptional circumstances of the case, however, the Tribunal

accepted each of Charles’ and Marian’s evidence that he/ she dealt

in shares without any regard to inside information.

40. The important background was, as the Tribunal summarized:

“… Having been granted options to purchase shares in Asia

TeleMedia, a company that for several years had been a

laggard in the market, they [Charles, Marian, and Cecilia]

had the very great fortune to witness an unexpected surge in

the share price, a surge that put the price beyond anything

that rationally they could have expected other perhaps than

in a very long term if the Company was able (problematically)

to fully establish itself as a debt free, profitable enterprise.

Bearing in mind their relatively modest salaries, the

exercise of the share options was … for them quite literally

the chance of a lifetime and all three chose to exercise their

options and sell their shares to seize that chance of a

lifetime.” [Report §266 (underlining added)]

41. The Tribunal accepted Marian’s evidence:

“It was the central assertion of Marian Wong’s evidence

that all the Asia TeleMedia employees, both in Hong Kong

and the Mainland, exercised their options – including herself

– for one very obvious reason, a reason that had nothing to

do with their faith in the longer term viability of the Company

or indeed their fear that it had no viable future. That reason

was the desire – at last – to exercise their options at a time

when, unexpectedly, the share price was surging. Put simply,

it was to seize upon an expected opportunity to make a profit

when independent of any matter they knew or could control,

A/1/89/

¶¶222-243

A/1/98/

¶¶244-255

A/1/108/

¶266

A/1/116/

¶292

10

a profit presented itself; as the Tribunal has described it

earlier – to pick the gift of manna from the desert floor.”

“Even taking into account Marian Wong’s less than

impressive evidence, her evasiveness in answering questions

being very evident, nothing of substance arose during the

course of the hearing to give the Tribunal reason to question

her assertion that she had exercised her options for the

single reason given above, a reason that was not in any way

coloured by the price sensitive information in her

possession.” [§§292-293 (underlining added)]

42. The Tribunal specifically addressed the issue of why Charles and

Marian had no regard to the inside information:

“In the context of all the evidence, the Tribunal is satisfied

that, as with Charles Yiu, while [Marian] knew that, if news

of the deed of assignment and subsequent statutory demand

fell into the public domain, it would be likely to have a

material effect on the price of the Company’s shares, she

believed that – as it has been in the past with Madam Liu –

the matter would somehow, however slow and muddled the

process, be dealt with behind closed doors.”

“… an insider may know that information in his possession

is price sensitive (in the sense that, if passed into the public

domain, it will likely have a materially adverse impact on

the share price) but, for his own reasons, whether sound or

suspect, believe that the information will not pass into the

public domain; put another way, whatever threatens the

share price will be resolved behind closed doors.”

“… the Tribunal is satisfied that Charles Yiu believed that

what was known to him would, by one means or another, be

sorted out behind closed doors (as it had been in the past

with Madam Liu) and would not therefore become a matter

to influence the market.”

“As to how it could be that her possession of price sensitive

information played no role, the Tribunal reiterates what has

A/1/117/

¶293

A/1/103/

¶255

A/1/111/

¶274

A/1/112/

¶276

11

been said in respect of Charles Yiu. The Tribunal is satisfied

that, while Marian Wong was in possession of information

which she knew should properly form the basis of a public

announcement by the Company, she nevertheless believed

that somehow, in some way, any threat presented by

Goodpine would be dealt with behind closed doors. On

balance, therefore, the Tribunal is satisfied that Marian

Wong demonstrated that her sales were motivated by the

single reason amplified above.” [§§255, 274, 276, 294

(underlining added)]

43. These passages are quoted in full as they highlight the exceptional

circumstances which made Charles’ and Marian’s defence credible.

44. First, ATML had long been insolvent. This fact has 2 implications.

(1) The company’s lack of prospects meant the employee stock

options were worthless – “at best aspirational”.

(2) It strengthened the belief that Madam Liu/ Goodpine would

prefer to negotiate and not follow through on their threats.

45. Second, in fact, demands for repayment had always and on divers

occasions before been put back to sleep. As the Tribunal said, “the

matter would somehow, however slow and muddled the process, be

dealt with behind closed doors.”

46. Third, because “wolf” was cried many times but never came, it was

understandable for one to think no wolf would come this time, and

to think that the inside information would not be made public and

not “become a matter to influence the market.”

47. Fourth, there was a sudden, unexpected fivefold surge in ATML’s

share price.

A/1/117/

¶294

A/1/114/

¶283

A/1/103/

¶255

A/1/112/

¶276

12

48. Fifth, Charles’ and Marian’s salaries were modest and the surge in

ATML’s share price turned the previously worthless stock options

into “manna on the desert floor” and “the chance of a lifetime”.

49. Sixth, what Charles and Marian had were options, not actual shares.

This made the change in value, from worthless papers to chance of

a lifetime, all the starker. It also means they were not seeking to

avoid any losses.

50. Seventh, the surge in share price had nothing to do with ATML’s

fundamentals. It was “beyond anything that rationally … could

have [been] expected”. This explains the timing. The opportunity

was random and would not last long.

51. Eighth, many other employees were exercising options and selling

the resultant shares. In fact, Charles and Marian were not the first.

At least 13 employees preceded them.

52. Ninth, Charles did not exercise options to sell shares until ATML’s

share price rose to above HK$0.90. Marian did not exercise all her

options. These further supported their explanations of being solely

motivated by the spectacular surge in share price [§§272, 291].

53. As the Tribunal noted, section 271(3) required it to decide, taking

into account all the circumstances, whether to believe Charles’ and

Marian’s explanations. After careful consideration, despite some

misgivings about other aspects of their evidence, it found each of

them truthful. This is a finding of fact.

A/1/108/

¶266

A/1/112/

¶276

A/1/117/

¶292

A/1/108/

¶266

A/1/110/

¶272

A/1/116/

¶291

A/1/112/

¶276

13

D. The Court of Appeal’s Judgment

54. The SFC appealed. It did so with a new line of argument that, by

withholding or not disclosing Goodpine’s demands to the market,

Charles and Marian was “using” the inside information and could

not have come within section 271(3).

55. The Court of Appeal had little hesitation in rejecting this argument.

It gave several reasons.

56. First, reading “use” to include “withholding” or “not disclosing” is

a strained interpretation.

57. Second, to do so would render the defence in section 271(3) largely

otiose and come close to equating “possession” and “knowledge”

of inside information with “use” of it.

58. Third, what the SFC was advocating was to use the insider dealing

offence to catch failure to disclose inside information – specifically

an executive’s failure to cause his/ her listed company to disclose.

The situation is addressed not by the statutory provisions on insider

dealing, but at the material time by the Listing Rules of SEHK and,

under a recent amendment, now by a new Part XIVA of the SFO.

59. Fourth, it would be unfair to allow the SFC to run this new line of

argument. See: Browne v Dunn (1893) 6 R 67. See also: Flywin

Co. Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356, at ¶38

(new point not allowed unless no reasonable possibility that state

of evidence would be more favourable to the other side).

60. As the Court observed, although there were some questions put to

Charles and Marian that they knew the share price would go down

A/2/140/

¶52

A/2/138/

¶46

A/2/138/

¶¶47-50

A/2/139/

¶51

A/2/140/

¶¶52-59

A/2/140/

¶¶53, 56

14

if the inside information became public and this was why they sold

their shares, the issue being canvassed at the time was whether they

knew the information to be price sensitive – not whether they were

withholding the information, still less whether they were doing so

in order to bide time for exercising options and selling shares.

61. Had the SFC raised this new argument at the time of trial, evidence

could have been adduced on, e.g., whether Charles or Marian ever

consciously caused ATML not to disclose the information, whether

they ever in their minds linked the nondisclosure to the (surging)

share price in the market etc.

62. In any event, the Court of Appeal affirmed the Tribunal’s finding

of fact that Charles and Marian genuinely believe that Goodpine’s

demands would be “resolved behind closed doors” and the inside

information would not be a matter of influence to the market.

63. There are also other problems with the SFC’s argument which the

Court of Appeal did not highlight. They will be addressed in the

submissions further below.

E. Section 271(3): Predecessor and Similar Provisions

64. The affirmative defence in section 271(3) has a long history in the

statute books. The provision was consolidated into the SFO from

section 10(3) of the Securities (Insider Dealing) Ordinance (Cap.

395) (“SIDO”). See: Consultation Document on the Securities

and Futures Bill, April 2000, at 11.6 and 11.14; Bills Committee

Paper No. 12/01, 4 May 2001, at ¶¶38-40.

65. Section 10(3) of the SIDO stated that:

A/2/141/

¶¶55-59

A/5/161/

¶5;

A/2/133/

¶¶33,

61-66, 68

15

“A person who enters into a transaction which is an insider

dealing shall not be held to be an insider dealer if he

establishes that he entered into the transaction otherwise

than with a view to the making of a profit or the avoiding of a

loss (whether for himself or another) by the use of relevant

information.” (underlining added)

66. The section in the SIDO can, in turn, be traced to section 141C(3)

of the Securities Ordinance (Cap. 333) (“SO”), which provided:

“A person who enters into a transaction which is an insider

dealing … may not be held culpable if his purpose is not, or

is not primarily, the making of a profit or the avoiding of a

loss (whether for himself or another) by the use of relevant


67. This section in the SO was adopted from section 14(1) of the UK

Companies Bill 1973 and section 57(6) of the UK Companies Bill

1978. Those bills were not enacted. But the sections eventually

became section 65(8) of the UK Companies Act 1980.

68. Section 14(1) of the 1973 Bill stated:

“Neither section 12 nor section 13 above shall preclude a

person from entering into any transaction if his purpose is

not, or is not primarily, the making of a profit or the

avoiding of a loss (whether for himself or another) by the use

of any such information as is mentioned in those sections.”

(underlining added)

69. Section 57(6) of the 1978 Bill stated:

“The provisions of this section shall not prohibit an

individual by reason of his having any information from (a)

doing any particular thing if he does that thing otherwise

than with a view to the making of a profit or the avoidance of

a loss (whether for himself or another) by the use of that


16

70. Section 65(8) of the 1980 Act was in the same language:

“The provisions of this section shall not prohibit an

individual by reason of his having any information from (a)

doing any particular thing otherwise than with a view to the

making of a profit or the avoidance of a loss (whether for

himself or another person) by the use of that information.”

(underlining added)

71. It is worth noting that section 65(8) of the 1980 Act in due course

became, in materially identical terms, section 3(1) of the Company

Securities (Insider Dealing) Act 1985, which stated:

“Sections 1 and 2 do not prohibit an individual by reason of

his having any information from (a) doing any particular

thing otherwise than with a view to the making of a profit or

the avoidance of a loss (whether for himself or another) by

the use of that information.” (underlining added)

72. The concept, expressed in slightly different words when the section

was carried from one piece of legislation to another across time or

across the seas, remains in substance the same. An insider is guilty

of insider dealing only if he has a purpose to (or “a view to”) make

a profit or avoid a loss by using inside information.

73. That this concept has been embodied in an affirmative defence is

easily understandable. The insider himself is in the best position to

speak to his subjective state of mind. It is reasonable to place the

burden of proving his innocent purpose on him.

74. There are few legislative materials on the relevant sections in Hong

Kong law. The UK materials may shed a little light on the original

thinking.

17

75. Command paper 7037 for the 1973 Bill set out the government’s

views. It explained at ¶¶25-26 one reason for the defence:

“25. … Also it will be possible for a person to offer as a

defence that his purpose in dealing was not to make a profit

or avoid a loss by the use of his inside information.

“26. … In making these proposals the Government has

recognised that the creation of insider dealing as an offence

must not be such as to inhibit dealings which are not under

criticism. It has particularly in mind that the directors and

employees of a company will not infrequently hold shares in

the company for which they work. By the very nature of their

employment they will usually be in possession of

confidential information and they could be inhibited from

dealing perfectly innocently unless their special position

was recognised. The difficulty is a real one, but the

Government believes that the defence set out in the

preceding paragraph will afford a suitable measure of

protection in relation to innocent dealings by directors and

employees.” (underlining added)

76. This sentiment was echoed in Hong Kong. The Companies Law

Revision Committee, whose recommendations led to enactment of

the SO, stated in its Second Report at 7.131:

“7.131. … In Hong Kong there are many companies

with interlocking interest and directorships, and directors of

such companies could find it very awkward if the provisions

do not indicate with sufficient clarity the types of dealing

covered by them. We would therefore emphasise that the

provisions should be restricted so as to apply to people

acting with a guilty intention. The difficulties are also fully

realized in Britain …” (underlining added)

77. In any event, with or without references to the legislative materials,

the statutory sections have always made clear that an inside dealer

is guilty only if he acts with guilty intentions – if in his dealing he

18

has a purpose of making a profit or avoiding a loss by using inside

information.

F. Section 271(3): Plain Meaning

78. Even without tracing section 271(3) to its predecessor and similar

provisions, its own wording is clear. It applies if the insider dealer

can establish that “the purpose for which he dealt … was not [and

did not include] … the purpose of securing or increasing a profit or

avoiding or reducing a loss … by using relevant information”.

79. The word “purpose” of course makes clear the section is concerned

with subjective intent. This is further emphasized by the structure

of the section. It juxtaposes 2 purposes:

(1) The purpose for which the insider dealt in shares – being the

innocent purpose which he has to prove; and

(2) The purpose of making a profit or avoiding a loss by using

inside information – being the culpable purpose which the

person has to prove his purpose was not and did not include.

80. The culpable purpose may be examined further. What is culpable

lies not with making a profit or avoiding a loss. A purpose to profit

or limit loss is a given in any dealing in securities. The culpability

is in seeking to achieve this “by using inside information”.

81. The all-important connector is the phrase “by using”. The purpose

is made culpable not because the insider had inside information, or

because the information is not known to the public, or because the

information if known to the public would likely to materially affect

19

share price. These are elements of the offence which would have

already been proved.

82. The purpose is culpable if and because the insider seeks to make a

profit or avoid a loss “by using” inside information. His motive is

tainted when he in his mind makes a causal connection between the

effect (profit or loss) and the means (by using). Put in another way,

the use must be part of the purpose.

83. The Chinese version of section 271(3) is to the same effect: “他進

行…交易…的目的，並非在於（亦不包括）利用内幕消息為自己或他人

獲得或增加利潤或避免或減少損失” (purpose … of his entering into

… dealing, was not (and did not include) to use inside information

to make or increase a profit or to avoid or reduce a loss for himself

or another person).

G. Section 271(3): Purposive Construction

84. The modern approach to statutory interpretation is, of course, the

purposive approach. See: HKSAR v Cheung Kwun Yin (2009) 12

HKCFAR 568, at ¶¶11-12. See also: China Field Ltd v Appeal

Tribunal (Buildings) (No. 2) (2009) 12 HKCFAR 342, at ¶36.

85. The purpose of our laws on insider dealing, embodied in sections

270 to 273, being Division 4 of Part XIII of the SFO, is of course to

prohibit it. But this begs the questions: What exactly is prohibited?

Towards what purpose?

86. An examination of section 270 and its various limbs highlights 2

consistent elements to the definition of insider dealing. First, there

must be an “information connection” – the relevant information is

20

about a listed company or its securities. Second, there must be a

“person connection” – the alleged wrongdoer must be an insider or

knew that the person who gave him the information was an insider.

See: Leung Chi Keung v MMT [2012] 2 HKLRD 786, at ¶26.

87. The need for a person connection highlights that the purpose of the

prohibition is to counter abuse of position. But this raises another

question: What constitutes abuse of position?

88. Section 271 carves out a number of situations from culpable insider

dealing. If it is an abuse simply whenever an insider deals while in

possession of inside information, there would not be this section.

89. Thus the purpose of sections 270 to 273 should be said to prohibit

insider dealing, except certain insider dealings which are regarded

to be not culpable. Put another way, the sections prohibit culpable

insider dealing. Culpability is defined by a combination of section

270 (which requires that the person knows the information to be

inside information) and sections 271 to 273 (which provide various

defences).

90. An examination of sections 271 to 273 will be helpful.

(1) Section 271(1) provides that it is not culpable for an insider

to deal while in possession of information which he knows

to be inside information, if he does it to qualify as a director,

to perform an underwriting agreement, or as a liquidator or

receiver or bankruptcy trustee (“qualifying share defence”,

“underwriting defence”, and “liquidator defence”).

21

(2) Section 271(2) states that it is not culpable for a corporation

to deal while in possession of information which some of its

people know to be inside information, if the people deciding

to deal do not have the information and arrangements exist

to (and do) block sharing of the information (“Chinese wall

defence”).

(3) Section 271(3) is the section now at issue (a.k.a. “innocent

purpose defence”).



to be inside information, if in his dealing he acts only agent

to another person, he does not select or advise the dealing,

and he does know the other person is also an insider or has

inside information (“innocent agent defence”).



to be inside information, if he deals directly with a counter-

party who knows or should reasonably know the information

too (“equality of information defence”).



to be inside information, if he deals directly with a counter-

party who knows or should reasonably know him to be an

insider (“caveat emptor defence”).

(7) Section 271(7) provides the same defence as subsection (6)

in the context of counseling and procuring to deal in shares.

22


to trade on inside information arising from his own dealings

or intended dealings (“market information defence”).


to enter into a contract with a recognized clearing house (in

practice, to settle a trade) (“market contract defence”).

(10) Section 272 states it is not culpable for a trustee or personal

representative to deal while in possession of information that

he knows to be inside information, if he does so on advice of

another person whom he does know is also an insider or has

inside information (“trustees defence”).

(11) Section 273 states it is not culpable for an insider to exercise

stock options (or other similar rights) while in possession of

information that he knows to be inside information, if he had

those options from before he came into possession of inside

information (“preexisting rights defence”).

91. There are some noteworthy features about these defences.

92. First, none of the defences is concerned with compliance (or not) of

any duty to disclose inside information. A director having inside

information can acquire shares to qualify as a director. An under-

writer can underwrite. An insider can deal with others who are “in

the know”, who should be “in the know”, or who know him to be

“in the know”. An agent or trustee can deal even if he is an insider

and has information which he knows to be inside information, if he

does so on advice by someone who is not an insider or has inside

information.

23

93. Second, equally none of the defence is concerned with whether the

market may not know the inside information (which by definition it

is, else the information would no longer be “inside”) or be trading

at any level different than had disclosure been made.

94. Third, the concern of all these defences is that in each situation, the

dealing, whilst by an insider in possession of inside information, is

not due to such possession of inside information.

95. Fourth, there is no common element of compulsion or inevitability.

A director can choose not to qualify as a director. An underwriter

can refrain from entering into an underwriting agreement. Same in

the other defences (except perhaps the market contract defence).

96. Fifth, the common element in all the defences is that the insider’s

purpose in dealing is unconnected with inside information. This is

regardless that the information is nonpublic and the market is likely

at a level different from if the information had been disclosed.

97. The purpose of section 271(3) – and indeed section 271 as a whole

or even sections 270 to 273 overall – is to make culpable only those

instances of insider dealing which is motivated by, and only those

insider dealers who have the subjective motivation of, misusing the

inside information.

98. In the words of the Company Law Revision Committee, there must

be “guilty intention”.

24

H. Section 292(3): Defence in Criminal Cases

99. Section 271(3) has an equivalent, section 292(3), which applies in

materially identical terms in criminal cases. This has 3 important

implications.

100. First, the principle against penalization under a doubtful provision

applies in case there is any ambiguity or alternative interpretations.

See: Pacific Sun v SFC (2015) 18 HKCFAR 138, at ¶¶48-49.

101. Second, more importantly, it reinforces the point that the defense is

not concerned with any duty to disclose inside information.

102. Suppose a director sees that the company’s management account

shows a loss. But he believes (rightly to wrongly) that it is due to

an accounting error or a misunderstanding with a counterparty. He

genuinely expects (with or without basis) the issue to be corrected

and the loss reversed. Suppose also the information of the loss is

inside information and the director has a duty to cause the company

to disclose it (perhaps with explanations).

103. Given his genuine belief that the information is moot (the loss will

be reversed), if he deals in shares, surely his purpose cannot be said

to be “by using” the information.

104. Moreover, suppose he is wrong and he has no reasonable basis to

believe as he did, he would be negligent. Yet he can be prosecuted

under section 291. If section 292(3) were somehow interpreted as

not applicable because of his breach of duty, he would be convicted

for negligence. This would be against legal norms and inconsistent

25

with other parts of the SFO which do not criminalize negligence.

See: sections 295 to 302.

105. Third, as mentioned earlier, the duty to disclose inside information

is now in Part XIVA of the SFO. It was an express commitment by

the government not to criminalize failure to disclose. See: LegCo

Brief for Securities and Futures (Amendment) Bill 2011, 22 June

2011, at ¶6.

106. To read sections 271(3) and 292(3) in effect to penalize a director

or officer for not causing disclosure of inside information would be

inconsistent with the stated purpose of another part of the SFO.

107. The above considerations further support the plain and purposive

reading of affirmative defence as explained earlier.

I. Case Authorities

108. Understanding the meaning and effect of the affirmative defence

correctly, case authorities have been consistent and also supportive

of its purpose.

Hong Kong

109. The first case which the MMT’s predecessor, the Insider Dealing

Tribunal (“IDT”), decided was Re Success Holdings. See: Report

dated 24 June 1994.

110. Two insiders sold (or caused to be sold) shares while in possession

of inside information about a forthcoming privatization, in order to

suppress the market price and thereby facilitate the privatization a

low price. The insiders argued that the purpose of their dealing was

26

to suppress share price, not to make a profit or avoid a loss by using

the information. See: Report, at 8.4.4 to 8.4.16.

111. As the tribunal, per Stock J (as he then was) recognized, the facts

were peculiar. The insiders sold shares against positive information

which would raise the share price. Nonetheless, the dealing was

still connected with the inside information. The purpose was still

to make a profit (from the privatization) “by using” the information

(namely by selling ahead of the information).

112. The importance of a causal connection is reflected in the passages

of textbooks which the tribunal quoted, by the reference to section

53(1)(c) of the UK Criminal Justice Act 1993 (which is in different

terms from previous provisions in UK law and the sections in Hong

Kong law, and which required the insider to show “he would have

done what he did even if he had not had the information”). See:

8.4.8, 8.4.9, and 8.4.13.

113. The holding of the tribunal accords with the meaning and purpose

of the affirmative defence.

114. The tribunal at one point referred to an argument in the 4th edition

of Gower’s Principles of Modern Company Law, suggesting that a

convenient test would be whether the dealing was compelled. The

tribunal remarked that this appears what section 10(3) of the SIDO

was “primarily” about. By the word “primarily”, the tribunal made

clear it was not adopting the argument in Gower’s as a definitive or

exhaustive interpretation. Indeed, the tribunal had equally quoted

other academic comments. See: 8.4.8, 8.4.14, and 8.4.15.

27

115. In the next IDT case, Re International City, the tribunal again had

occasion to construe section 10(3) of the SIDO. The tribunal held

that the question was whether the insider “was consciously making

use of relevant information for the purpose or primarily for the

purpose of making a profit or avoiding a loss”. If not so, “the

Tribunal should find that dealer not culpable.” See: Report dated

27 March 1986, vol. 1 at 2.9 (underlining added).

116. The tribunal also endorsed the explanation of the Ontario Court of

Appeal on what it means to “make use of” inside information in the

Canadian case of Green v Charterhouse Group Canada (1976) 12

OR (2d) 280, 68 DLR (3d) 592. See: vol. 1 at 2.9. The submissions

further below will return to this Canadian case.

117. The facts of Re International City are worth noting. One of the

insiders sold shares while possessing information he knew to be

inside information. In fact, he knew the information would correct

certain misrepresentations made to the market, without which, the

market was “artificially stimulated”. He even had an active part in

making the misrepresentations to artificially stimulate the market.

See: Report vol. 2 at 10.177-178.

118. The insider said that he had “compartmentalized” his mind so that

his decision to sell shares was not tainted by his knowledge of the

inside information. Not surprisingly, the tribunal rejected this. See:

vol. 2 at 10.181.

119. Relevant also is that the tribunal did not simply equate knowledge

of inside information, and/or an artificial level in the market caused

by nondisclosure, with use of inside information. The tribunal did

28

what the statutory provision required it to do – to determine, on all

the evidence, the insider’s subjective state of mind. See: vol. 2 at

10.179-181, in particular 10.180.

120. It was not until some years later, in Re Chevalier, that any insider

succeeded in establishing the innocent purpose defence. There, the

insider sold shares while in possession of what he knew to be inside

information. He mounted a defence that his purpose in dealing was

to realize funds for another investment. See: Report dated 10 July

1997, pp81-82.

121. Logic dictated that his defence must fail if he had both a purpose to

avoid a loss and a purpose to raise funds, e.g., to realize more funds

by avoiding the loss. He had to show that his only purpose was the

latter. This was obviously an uphill task. The person could not and

did not claim to have been compelled to sell. He had other choices.

The tribunal, however, by a majority of 2 to 1, chose to believe the

insider. See: pp42-43 and pp81-82.

122. It may be that this finding of fact is subject to debate. But for our

purposes, it is the law as applied to the facts which is material.

123. The law, as the decision made clear, does not look for compulsion,

but purpose. What is key is not whether the insider was compelled,

but whether he can show his purpose to be untainted. Innocence is

a state of mind, not a lack of choice.

124. The point was explained by the Court of Appeal in Henry Tai Hon

Leung v IDT, CACV 333/2004, 3 November 2005. The tribunal

below had held that the innocent purpose defence required showing

29

compulsion. Rogers VP, with whom Le Pichon JA and Tang JA

(as he then was) agreed, corrected this at ¶28:

“Of course, if a person can establish that he had no choice

but to sell securities he will, no doubt, be in a strong position

to establish a defence under section 10(3) on the basis that

there was not an intention to make a profit or avoid a

loss. However, the subsection is clear. What has to be

determined is whether there was any desire or intention to

make a profit or avoid a loss by use of the relevant

information. The section does not incorporate any test as to

whether the person was compelled to or had no choice but to

sell securities. In those circumstances it seems to me it

would be wrong to interpret the Ordinance as if it

incorporated this as part of the statutory defence.”

(underlining added)

125. Another variant of the issue of choice came up in SFC v Lam King

Hung [2010] 2 HKLRD 623. The magistrate below had directed

himself that an insider, who is in possession of information which

he knows to be inside information, simply may not deal.

126. On appeal, D. Pang J criticized what the magistrate said as contrary

to SFO section 292(3) and “wrongly excluded the possibility that

the purpose for which the person having relevant information dealt

… was not, or, did not include, the purpose of securing a profit by

using relevant information.” However, he found the magistrate’s

findings of fact precluded the defence in any event. See: ¶¶46-51.

The UK

127. The Hong Kong magistrate’s mistake was, in fact, similar to that of

the Crown Court judge in R v Cross [1990] BCC 237. The insider

was the managing director of a listed company. He sold shares in

the company. The judge directed that jury that if they found him to

30

have dealt while in possession of information which he knew was

inside information, the inference was that “surely must have used it

[the information]”. See: 248B-248F.

128. The Court of Appeal quashed the conviction, pointing out that:

“… [What the judge said was] based on a false premise,

because it was perfectly open to this jury to find that the

defendant had price-sensitive information (in other words,

the prosecution had proved their side of the case) but that

the defendant had in turn proved that he had not used that

information in order to make his profit or avoid his loss …”

(underlining added)

129. The SFC’s attempt now to distinguish this case is not understood.

At the hearing of its application for leave to appeal, its Counsel

argued that R v Cross was concerned with section 3(1) of the 1985

Act “which is different in wording from s271(3) of the SFO)”. See:

Reply Skeleton dated 23 January 2018, ¶11(3) (underlining in the

original). This point does not appear in the SFC’s case now.

130. Instead, the SFC points to facts which are not relevant to the issue

and to the Court of Appeal’s holding quoted above. (There were 5

grounds of appeal. The judge’s misdirection as to the availability

of the affirmative defence was the fifth.)

131. The case well demonstrates the point the Tribunal in this case made

– even for an insider who dealt while in possession of information

which he knew to be inside information, in some circumstances it

is possible for him to prove that he “had not used that information

in order to make his profit or avoid his loss”.

31

Canada

132. As mentioned earlier, there is an instructive Canadian case Green v

Charterhouse Group Canada. The case concerned section 113 of

the Ontario Securities Act 1966, which provided for a private right

of action against insider dealing in terms that:

“Every insider of a corporation or associate or affiliate of

such insider, who, in connection with a transaction relating

to the capital securities of the corporation, makes use of any

specific confidential information for his own benefit or

advantage that, if generally known, might reasonably be

expected to affect materially the value of such securities, is

liable to comp” (underlining added)

133. At both the trial and appellate levels, the Canadian Court decided

that to “make use of” inside information meant “the information

must be a factor in the insider’s participation in the transaction …

either by inducing him to enter into it or by assisting him or other-

wise influencing him in the manner in which he performs it”. The

Court added that, although the section made this an element for the

claimant to prove, the burden rested on the insider to explain that

“he did not make use of the information”. See: Westlaw, p19.

134. All the above case authorities, whether from Hong Kong, the UK

or Canada, illustrate the same point. The innocent purpose defence

is concerned with the person’s subjective purpose and whether that

purpose is tainted by his using inside information in his dealing.

J. Answers to SFC’s Arguments

135. The analysis above already serves to address most (if not all) of the

SFC’s arguments in this appeal. Three points may be highlighted.

32

“Using” vs. “Withholding”

136. The SFC makes much abo about “using” vs. “withholding” (which

the SFC further spins as “consciously withholding”). There are 3

short answers to this.

137. First, the simplest is that an insider cannot use inside information

without withholding it. If the information is released, by definition

it is of no use to the insider.

138. The point is, in a manner of speaking, analogous to the situation in

this case. Since Charles and Marian thought Goodpine’s demands

would not become public, logically the information would be of no

relevance to them in their dealings.

139. Second, even if “using” is construed to include “withholding”, the

relevant enquiry under section 271(3) remains whether the insider

in his dealing has a purpose of making a profit or avoiding a loss

“by withholding” inside information. The question is still whether

he made in his thinking a causal connection.

140. Consider the hypothetical of a management account loss discussed

earlier. The director even “consciously withheld” disclosure. This

was because he, rightly or wrongly, thought the loss erroneous. It

does not follow that his purpose was to make a profit or avoid a loss

“by withholding” the information.

141. Third, as the Court of Appeal below pointed out, the SFC is again

shifting its case. It was never argued or put to Charles or Marian at

trial that his or her purpose in exercising options and selling shares

A/5/163/

¶10

A/2/140/

¶¶52-59

33

was to make a profit or avoid a loss “by withholding” (still less “by

consciously withholding”) inside information.

142. It is unfair for the SFC, even if its new argument finds favour with

the Court, to now belatedly seek to convict Charles and Marian on

such a basis.

143. In this regard, it may be further noted that the no question is before

the Court on whether the Court of Appeal correctly found it unfair

for the SFC to run its new argument. (The SFC sought certification

of 2 questions to this effect before the Court of Appeal. It dropped

the questions in its application to this Court.)

144. In any event, a hearing before the final appellant court cannot be an

occasion to argue over nuances in the questions and answers during

a length cross examination at first instance. The SFC cannot now

reopen the issue.

“Taking Advantage of Artificial Conditions in the Market”

145. The SFC’s other main point is that Charles and Marian ought not be

allowed to “take advantage of artificial conditions in the market”

which allegedly were due to their breach of duty for disclosure of

Goodpine’s demands. There are 6 short answers to this.

146. First, it is a quantum leap from the fact that inside information had

not be disclosed, to saying there were “artificial conditions” in the

market. Whether a market is “artificial” is a matter under sections

274 and 295 of the SFO, which the SFC invoked, let alone proved.

147. At the material time there were no legal requirement for disclosure

of inside information. The matter was regulated under the Listing

A/4/151/

¶¶1.1-1.6

A/7/170/

¶¶1-4

34

Rules of SEHK. It is wrong in principle to base the application of a

statute on the content and interpretation of a non-statutory rule, and

not even a rule of a public body.

148. Indeed, SEHK can waive complaint of its rules. See: Listing Rule

2.04. It cannot be that the MMT’s or the Court’s interpretation of

section 271(3) (and the criminal equivalent section 292(3)) turns on

SEHK’s application or otherwise of its non-statutory rules.

149. Second, the SFC’s point misses the essence of section 271(3). The

issue is not whether an insider benefited from “artificial conditions”

(in the sense that information had not be disclosed). By definition,

that must be the case for all insider dealing. The issue is whether

the insider meant – whether it is his subjective purpose – to benefit

from any such “artificiality”.

150. Third, as analyzed earlier, the plain as well as purposive meaning

of section 271(3) is not concerned with whether the market were

informed or whether the insider has breached any duty.

151. Fourth, even going along with the SFC’s language, the issue under

section 271(3) would be whether Charles and Marian in his or her

exercising options and selling shares had as his or her purpose the

purpose of making a profit or avoiding a loss “by taking advantage

of the artificial conditions in the market”. In light of the Tribunal’s

finding of fact that Charles and Marian genuinely thought the inside

information would not become public, it follows that they would

not have thought of the conditions in the market as “artificial”, and

hence they could not have as their purpose the purpose of taking

advantage of “artificial conditions”.

35

152. Fifth, there is no evidence – because the point was never raised at

trial – whether Charles and/or Marian can properly be said to have

caused the nondisclosure of Goodpine’s demands. In this regard, it

should be borne in mind that the duty to disclose was on ATML.

See: Listing Rule 13.09 (version applicable at the time, before it

was amended in light of new Part XIVA of the SFO).

153. In the case of Marian, as company secretary, at most it can be said

that she had a role to advise the board about disclosure. She owed

no duty under the SFO or the Listing Rules of SEHK to ensure that

ATML made disclosure. See: Listing Rules, App. 14 (“Principles

of Corporate Governance, Code Provisions, and Recommended

Best Practice”), section F on company secretary (current version).

154. Sixth, in any event, the SFC’s point is another new one. It would

be unfair to allow the SFC to run it now, still less to seek to base a

finding of guilt on it.

Appeal against a Concurrent Finding of Fact

155. Ultimately, the SFC is actually seeking to mount an appeal against

a concurrent finding of fact. The MMT made a finding of fact as to

Charles’ and Marian’s genuine belief and subjective state of mind.

The Court of Appeal affirmed the finding.

156. As this Court has made clear, it would not revisit a concurrent of

finding unless the appellant shows the finding to be the result of a

violation of some principle of law. See: Chinachem Charitable

Foundation v Chan Chun Chuen (2011) 14 HKCFAR 798, at ¶37.

The SFC has not shown any such violation.

36

K. Answers to the Certified Questions and Conclusions

157. In the premises, it is respectfully submitted that the answers to the

certified questions may be as follows.

158. Question 1. The reference to “using” in section 271(3) of the SFO:

(1) Does not encompass “withholding” or “taking advantage of

the withholding or nondisclosure” if what is meant is that a

person uses information merely because he has not disclosed

or caused to be disclosed the information;

(2) Can encompass those concepts if what is meant is to allow

for the possibility (subject to it being found as fact) that the

person withholds disclosure so that – it being his purpose –

he can deal before the information is disclosed.

159. Question 2. The effect of the interpretation contended for by the

SFC would be to equate “use” with mere possession for the reason

explained above.

160. Question 3. The defence provided in section 271(3) is intended by

the legislature to be exceptional and of limited application. (This

has never been in dispute.)

161. Question 4. The adoption of the SFC’s interpretation would indeed

read into the provisions on insider dealing an objective that is and

is properly to be achieved by the Listing Rules of SEHK at the time

of this case and by the provisions in Part XIVA of the SFO now.

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162. It is further respectfully submitted that the SFC’s appeal should be

dismissed with costs.

Dated 4 May 2018.

LAURENCE LI

Counsel for the 2nd Respondent

For hearing before Master K - Hong Kong Court of Final Appeal

Documents

Transcript of For hearing before Master K - Hong Kong Court of Final Appeal