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A Practical Approach to Understanding
Insider Dealing
22 June 2017
3
Speaker
Sherman Yan
Managing Partner
Head of Litigation & Dispute Resolution
Regulatory Framework
4
• Securities and Futures Ordinance, Cap. 571 (“SFO”) as
from 1st April 2003, as amended by Securities and
Futures (Amendment) Ordinance 2012
• dual civil and criminal enforcement systems in respect of
all types of market misconduct including insider dealing
• protection against double jeopardy
5
What is insider dealing?
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Some interesting illustrations:
Trading in shares in a listco by:
1. …a “Hacker”, who had obtained inside formation by way
of hacking into the listco’s server;
7
2. …a “Tea lady”, while serving tea in the conference room of
a lawyer’s office, overheard that the firm was preparing an
announcement on “profit warning” for its listco client;
8
3. …a “Housewife”, whose daughter had told her about an
intended takeover by a listco; it so happens that the
listco’s company secretary was her daughter’s boyfriend.
Insider Dealing: s. 270, 291 SFO
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• a person connected with a listed corporation
• having information
• which he knows to be inside information
• deals in the listed securities or counsels/procures another to deal in them
Inside Information : s. 245, 285
SFO
10
• specific information
• which is not generally known to the investing public and
• the information, if known to them, would be likely to
materially affect the price of the listed securities, i.e. price
sensitive information
Inside Information
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Information must be specific
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Information must be specific – how
specific is specific?
• Capable of being identified, defined and
unequivocally expressed with sufficient particulars
• Information on a transaction contemplated or under
negotiation can be specific information
cf. vague hopes, wishful thinking, exchange of
ideas, exploratory testing of waters
• Details and particulars need not be known entirely
e.g. broad information like “financial crisis” or “share
placing” could be considered specific enough
13
Is the following information specific?
• proposing a transaction?
• conducting a feasibility study?
• negotiating the terms in respect of a contemplated
transaction ?
• conducting due diligence for a contemplated
transaction?
• signing a non-disclosure agreement (“NDA”)?
14
Information not generally known to
the public
• “market” = actual or potential investors, i.e. those
persons who are accustomed or would be likely to deal
in the listed securities of that corporation
• rumours, media speculation or market expectation
cannot be equated with information which is generally
known to the market
• in practice, information, however detailed, unlikely to be
regarded as generally known without an official
announcement
15
Information must be price sensitive
16
Information must be price sensitive
• information must have a ‘real or substantial’ likelihood of causing
a material change of the price of the listed securities
• Materiality measured not by reference to fixed thresholds of price
movements or quantitative criteria; price movement to be judged
in historical context, taking into account of the nature of shares
“blue-chip” securities vs. small company stock
• hypothetical test: applied at the time when insider trading took
place - an assessment to determine how the general investor
would have behaved – “investor decision” test
• subsequent actual market reaction is an indicator, but not
conclusive as there may be others extraneous factors at work
Having/ knowing inside information
• C.f. previous s.9(1) Securities (Insider Dealing) Ordinance:
“…a person…who is in possession of information which he
knows is relevant information…”
• a factual issue
• court is entitled to draw inferences based on circumstantial
evidence – the sort of inference that no reasonable man
would fail to draw
• where it is found that a witness has lied which cannot be
otherwise explained, such lies may in conjunction with
other evidence tend to support an inference of guilt
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Transaction
Director/ Employee Substantial Shareholder
Corporation C
Director/Employee/Partner
Professional/Business Relationship
Individual Corporation/Firm D
Director/Employee/Partner
Officer of
Corporation C
Connected with a listed corporation 1
Director/ Employee
s. 247(1)(a)
Substantial Shareholder
s. 247(1)(b)
Subject Corporation A
Director/Employee/Partner
s. 247(1)(c)(ii)
Professional/Business Relationship
Individual
s. 247(1)(c)(i)
Corporation/Firm B
Director/Employee/Partner
s. 247(1)(c)(i)
Officer of Subject
Corporation A
Connected with a listed corporation
• director or employee of a corporation (including a related
corporation): s. 247(1)(a)
• substantial shareholder of the subject corporation: s.
247(1)(b)
• a person (including a company or firm and its employees)
having a professional or business relationship with (1) the
subject corporation or (2) an officer of the subject
corporation or (3) the substantial shareholder of the subject
corporation : s. 247(1)(c)(i)
• a director, employee or partner of the substantial
shareholder of the subject corporation : s. 247(1)(c)(ii)
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• a person connected with another corporation which is
involved in a transaction with the subject corporation
and he has actual access to inside information: s.
247(1)(d)
• Definition of connected person extended to include
persons connected with the corporation within 6
months preceding any insider dealing: s. 247(1)(e)
SFO
20
21
Was information specific enough?
Universe International Holdings Ltd.
(寰宇國際控股)
[2011] 5 HKC 484
22
Universe International Holdings Ltd.
(寰宇國際控股)
Globalcrest
Daniel Lam
Universe
100%
Pablo Chan Goldwyn
Possible Acquisition
Talks
23
Was information specific enough?
Mar 2008: Globalcrest commenced negotiations with
Goldwyn regarding sale of shares in
Universe
Mar–Apr 2008: Difficult and protracted negotiations
continued
24
2 May –
19 Jun 2008: Chan a middleman, bought shares in Universe
on 5 occasions
19 Jun 2008: Trading suspended
Universe made an announcement that
Globalcrest was considering selling shares
in Universe to a 3P
20 Jun 2008: Chan sold all the shares after resumption of
trading
Share price rose by 39.47%
27 Jun 2008: Universe made another announcement that
Globalcrest had ceased negotiations on sale of
shares
25
Was the information known to Chan specific
enough?
Held:
• Information was clearly specific; proposed sale was beyond the exploratory stage of ‘testing the waters’, mere rumour or ‘fishing expedition’;
• That proposed sale needed approval from the Board of Universe, minority shareholders and the regulators did not prevent it from being ‘specific’;
• Lack of precision of the particulars of the information did not prevent it from being ‘specific’
• Irrelevant that transaction unlikely to come to fruition
26
Was the information price sensitive?
Report of IDT:
Chinese Estates Holdings Ltd
(華人置業)
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Oct 1996 broker contacted Thomas Lau of Chinese Estates
re possible sale of Entertainment Building –
response was positive “if the price is right”
18.11.1996 broker approached Hysan
19.11.1996 Hysan informed broker of its intention to
negotiate on the price
19.11.1996 broker purchased shares
20.11.1996 formal negotiation conducted in the evening
21.11.1996 provisional agreement for sale signed: building was
sold for $3,640 m
21.11.1996 Joseph Lau of Chinese Estates bought 2 covered
warrants worth HK$65 m
22.11.1996 public announcement on sale
Sale of Entertainment Building
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Broker
Q: was the information known to the broker specific
enough?
18.11.1996 broker approached Hysan
19.11.1996 Hysan informed broker of its intention to negotiate on the price
19.11.1996 broker purchased shares
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Lau
Q: was the information known to Lau specific enough?
21.11.1996 midnight or early hours: provisional agreement for sale signed
21.11.1996 Lau bought 2 covered warrants worth HK$65 m
22.11.1996 public announcement on sale
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Oct 1996: broker contacted Chinese Estates
18.11.1996: broker approached Hysan
19.11.1996: Hysan informed broker of its intention to
negotiate on the price
19.11.1996: broker purchased shares
20.11.1996: formal negotiation conducted in the evening
21.11.1996 midnight or early hours: Provisional
agreement for sale signed
21.11.1996: Lau bought 2 covered warrants worth HK$65 m
22.11.1996: public announcement on sale
Sale of Entertainment
Building
2:30 p.m.
4:30 p.m.
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21.11.1996 $8.25 $9.05 ( 9.70%)
Rumours spread on 21.11.1996
afternoon, but price rose more on
21.11.1996 morning (5.45%) but only
3.42% in the afternoon
22.11.1996 Announcement
$9.05 $9.20 $9.05 ( 0%)
Q: Was the information price
sensitive?
32
• Bull run on property stocks in 1996
• Recommended “Buy” by newspapers
• Persistent heavy buying by Joseph Lau up to 21.11.1996
• Hedging activities
• Evergo China spin-off
• Sale at prevailing market price
Concurrent market variables
at work
The question raised by the
Tribunal:
• Has it been shown that the information of the sale, if
generally known, would have been likely materially to
affect the price of the share AND did Mr Lau know that
that information was likely to have such an effect?
• i.e. Was it price sensitive information and did Mr Lau
know that it was price sensitive?
33
Tribunal’s conclusion:
• Tribunal was NOT satisfied to a high degree of probability
that:
(a) the specific information of the sale of Entertainment
Building possessed by Joseph Lau on 21 Nov 1996 was
information that, if generally known, would have been likely
materially to affect the price of the listed securities of
Chinese Estates;
(b) Joseph Lau knew that the information, if in the
public domain, was likely to have such effect
i.e. Information NOT price sensitive and Mr Lau could not
have known it was price sensitive
34
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Was information price sensitive?
Report of MMT:
Warderly International Holdings Limited
(匯多利國際控股有限公司)
(“Warderly”) (607)
Relevant information?
Waderly (stock code 607), an electronics manufacturing company
The SFC relies on the following specific events as comprising the
relevant information:
(1) Tightening of banking facilities since July 2006, and the
subsequent events such as loans overdue, rescheduled
payments, demand letters and writs issued by banks etc; and /or
(2) The HK$2 million loan from a lender LIU on 17 November 2006 at
an interest rate of 5% per month; and/or
(3) Further loan from lender LIU totalling HK$7.2 million at an interest
rate of 5% on 11 and 28 December 2006; and/or
36
(4) Walderly was unable to repay the loan plus interest to LIU when
they became due on 28 January 2007; and/or
(5) The HK$10 million loan from another lender and potential investor,
LUU in February 2007 that carried an interest rate of 3% per
month and was secured by 50 million Warderly shares.
Meanwhile,
23.08.2006 Walderly published annual results showing net profits
had decreased from $58m to $0.4m; share price
dropped by 14%
23.01.2007 Interim results showing net profits had dropped from
$20m to $2.2 and the bank balance had reduced from
$116m to $27m; share price fell 0.214, a record low
37
12.03.2007 another announcement about a potential acquisition of
an oil project in China
05.2007 trading was suspended
Meanwhile,
03.2007 Lo, the company secretary of Walderly, sold all his
shares in Walderly in 3 batches
03-05.2007 Luu, the lender and potential investor, sold all his 50
million shares in Walderly on various dates
38
Q: Was the information “relevant information”?
• Were Lo and Luu connected persons?
• Was the information specific?
• Was it price sensitive?
• Problem: the 5 events relied on by the SFC were
never made public (except the issue of writs)
i.e. Market was not given an opportunity to “respond”
to the 5 events
39
Tribunal’s conclusion: • Tribunal found the 5 events did NOT constitute price sensitive
information, as they became irrelevant following publication of the
results:
(a) The information regarding the poor financial situation of
Warderly was in public domain after the publication of the poor
annual report in Aug 2006 and the interim report in Jan 2007
(b) Since Feb 2007, the price of the Warderly shares was no
longer reflecting its past business, but rather that of a shell
company [with share price falling below that of a shell] and it
was expected that new assets and new business model might
be injected (i.e. back door listing was anticipated by the
market)
40
IDT Report on
Asia Orient Holdings Limited
41
42
Share Swap Agreement
Lau
(Director)
Other Shareholders Swarkin
Asia Orient Holdings
Asia Orient Holdings
(AOH)
Poon
(Managing Director)
Jetcom
66%
100%
Tijia
(Director)
50% 50%
China Infobank (CIL)
42.5% 57.5%
43
13.09.99 Initial meeting between Tjia (Swarkin) & Poon (AOH) on possible acquisition
Tjia later telephoned Lau about meeting
13-20.09.99 Parties negotiated terms of SPA through lawyers
14.09.99 AOH announcement re possible investment AOH share price rose by 4.05%
14-20.9.99 Lau bought and sold AOH shares
21.09.99 Parties met at Lau’s office to finalise SPA
22.09.99 Announcement on AOH’s acquisition of 40% interest in CIL
23.09.99 AOH share price rose by 40.86%
How specific is specific?
• Did Lau have specific “inside information”?
• If yes, what was it?
• Specific information need not be precise, but precise
information will necessarily be specific (i.e. negotiation
on SPA)
• the more likely the information would affect the price,
the more likely information is found to be specific
• Lau knew about progress made in the discussion; the
public was only informed of discussions having been
entered into
• issue of SPA constituted inside information
44
Was Lau a connected person?
• Information about possible acquisition came from
Poon
• Poon the majority shareholder and manager director
of AOH; Poon was connected with AOH and Lau
received information indirectly from Poon
• Tjia received information from Poon and passed it to
Lau; Tjia himself was connected with CIL as well as
AOH by virtue of the transaction
• Likewise, Lau himself was connected with CIL as well
as AOH by virtue of the transaction and he had actual
access to information
45
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Modes of Insider Dealing
Classic mode
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• a person connected with a listed corporation
• having information
• which he knows to be inside information
• deals in the listed securities or counsels/procures another to deal in them
Insider Dealing
48
Disclosing inside information
Disclosing inside information
• a person connected with the Subject Corporation
• discloses information
• which he knows to be inside information
• to another person
• knowing or reasonably believing that that other person
• will deal in the listed securities or counsel/procure another to deal in
them
49
Insider Dealing
50
Receiving inside information
Receiving inside information
• a person receives information
• which he knows is inside information
• from a person whom he knows is connected with the Subject
Corporation and
• whom he knows or reasonably believes has obtained the
information as a result of the connection
• deals in the listed securities or counsels/procures another to deal in
them
51
Insider Dealing
52
Take-over situation
Take-over situation
• a person contemplating
• a take-over offer for the Subject Corporation
• knowing that the information about the offer is inside information
• deals in the listed securities or counsels/procures another to deal in
them
53
Insider Dealing
54
Disclosing take-over information
Disclosing take-over information
• a person contemplating
• a take-over offer for the Subject Corporation
• knowing that the information about the offer is inside information
• discloses the information
• to another person
• knowing or reasonably believing that that other person
• will deal in the listed securities or counsel/or procure another to deal
in them
55
Insider Dealing
56
Receiving take-over information
Receiving take-over information
• a person receives
• from another person whom he knows or reasonably believes is or
no longer contemplating making a take-over offer
• information relating to the offer which he knows is inside information
• deals in the listed securities or counsels/or procures another to deal
in them
57
58
Connected Person
Trainee Solicitor A of a law firm
Disclosed relevant information
to an employee B of a finance
company
B bought shares before
relevant information being
made public
A dealt in shares
through B: classic
mode
A counselled or
procured B to
deal in shares:
classic mode
A disclosed
relevant
information
to B
B received
relevant
information
and dealt in
shares
59
Director of
Dow Jones
Friend
Daughter/
Son-in-law
Purchase of
shares
Announcement of
takeover of Dow
Jones by News
Corp
Dealings in overseas market
• a person having inside information
• counsels or procures another to deal in securities in an overseas
market; or
• discloses the inside information to another knowing or reasonably
believing that that other will do so or counsel/ procure another to do
so .
60
61
Did the “Hacker”, Tea lady” and “Housewife” commit insider
dealing?
Answers:
1. “Hacker” – NO
2. “Tea lady” - YES
3. “Housewife” - Maybe
62
• Burden of proof on D
• To be proved on a balance of probabilities
• Not necessarily raised by D (due to inquisitorial nature of
MMT)
Principal defences to insider
dealing
Where the person suspected of insider
dealing:-
• obtained qualification shares for directorship (e.g. as required
by Articles), performed in good faith duties as an underwriter
(e.g. pursuant to an underwriting agreement), liquidator or
receiver (i.e. in discharge of duties or functions as a liquidator
or receiver) [s.271(1)]
• is a corporation (e.g. sponsor, investment bank etc.) as where
Chinese Walls existed between those who had the inside
information and those who dealt in the listed securities and the
inside information was in fact not so communicated between
them [s.271(2)]
63
Where the person suspected of insider
dealing:-
• dealt in the listed securities without any purpose to make/
increase profit or avoid/ reduce loss by using the price
sensitive information (i.e. would have so traded even without
inside information) [s.271(3)]
• is an innocent agent where he did not select the listed
securities in question and did not know that his principal is a
connected person or a person having inside information
[s.271(4)]
64
Where the person suspected of insider
dealing:-
• alleged to have counselled or procured a second person to
deal in the listed securities
• the second person was a connected person (e.g. majority
shareholder) and he did not further counsel or procure a
third person (e.g. an outside investor) to deal in the listed
securities
• that third person did deal in the listed securities
• that third person knew or ought to have known the second
person was a connected person [s.271(7)]
65
Where the person suspected of insider
dealing:-
• acted in connection with any dealing in the listed securities
which was under consideration or the subject of negotiation
• acted with a view to facilitating the accomplishment of the
dealing
• the inside information was the market information (i.e. a
potential transaction) arising out of his involvement in the
dealing [s.271(8)]
66
• the transaction need not be notified to the HKEx (i.e. dealing
that requires no disclosure) and
• the inside information was known or ought to have been
known to the other party [s.271(5)]; or
• was known or ought to have been known to other party
dealing with him that he was a person connected with the
Corporation [s.271(6)]
67
Where the person suspected of insider dealing
was involved in an off-market transaction and:-
Report of MMT:
Asia TeleMedia Limited
(亞洲電信媒體有限公司)
(“ATML”)
68
69
ATML (376) became indebted to one Madam Liu
Charles Executive Director
Marian Company Secretary
03.05 Charles and Marian were granted options in ATML’s shares at an
exercise price of HK$0.2 per share (exercisable till 2010)
07.02 – 05.06 One Madam Liu served 5 statutory demands on ATML demanding
repayment of debt, but none of them resulted in further legal
actions; repayment arrangements were agreed upon on each
occasion
01.02.07 Madam Liu assigned the debt of HK$58m plus interest to
Goodpine for a consideration of HK$25m
05.02.07 Goodpine served a notice of assignment to ATML with a demand
for repayment
06.02.07 ATML’s solicitors advised no defence to demand
02.07 –
05.07 Sudden rise of ATML’s share price from HK$0.2 per
share to HK$0.97 per share; Reason of the sudden
rise was not identified
28.02.07 –
05.06.07 Marian exercised her options and sold the shares
28.05.07 –
31.05.07 Charles exercised his options and sold the shares
20.04.07 ATML announced final results revealing total
assets of HK$132m vs total liabilities of HK$190m;
also qualified opinion on ATML’s accounts
26.04.07 Goodpine served statutory demand on ATML
demanding repayment within 21 days
05.07 ongoing negotiations on repayment
70
06.06.07 Goodpine served winding-up petition on ATML
07.06.07 ATML’s share were suspended from trading
15 Jun 07 ATML made announcement about the assignment
of the debt, the statutory demand and the winding-
up petition
The SFC relies on the following specific events as comprising the
relevant information:
01.02.07 Assignment of debt and service of notice thereof
26.04.07 Service of statutory demand on ATML
71
Q: Did assignment of debt and/or service of statutory
demand constitute “relevant information” ?
Problem: market was not able to respond to such information.
Factors to be considered:
Assignment: depends
•Nature of assignment of debt: any change of risk?
•Assignment to a third party
•Assignment for consideration
Statutory demand: Yes
Assignment + statutory demand: definitely yes
72
Q: Was it for the purpose of profit-making or
loss-avoiding?
• both Charles and Marian only had a relatively modest salary
• ATML had been a laggard in the market for years;
• sudden rise of the share price offered a chance of a lifetime;
• sale being motivated by desire to seize a sudden and
unexpected speculative surge in price;
• all the other employees of ATML in Hong Kong and the
Mainland exercised their options and sold the shares during
the same period;
73
• their belief that the threat by Goodpine would have been
resolved by negotiations behind closed doors as in the past;
• Neither rushed to sell the shares before the 21-day deadline
(i.e. 17.05.07); Charles did not sell until after deadline;
Some of Marian’s shares were sold after the deadline
• Some 3 million share options belonging to Marian were not
exercised
74
Tribunal’s conclusions:-
•Both Charles and Marian were not induced to trade in
the shares as a result of their possession of the price
sensitive information; otherwise they would have sought
to sell before the deadline and within the shortest time
possible
•Their purpose of trading was to seize the sudden and
unexpected rise in ATML’s share price and make a profit
75
Report of MMT:
China Gas Holdings Limited
(中國燃氣控股有限公司)
(“China Gas”)
-
Were there dealings of securities?
76
77
China Gas – a company listed on SEHK
ENN Energy Holdings Limited (“ENN”) – another company listed on SEHK
Cheng – ENN’s Executive Director, Chief Financial Officer and Company Secretary
Early 2011
ENN considered acquiring China Gas and sought a partner (“Project”)
Oct/Nov 2011 Sinopec and ENN agreed to form a consortium for the Project, in
which Cheng was involved in matters relating to finance negotiating
11.11.2011 At a meeting, the following facts were made known to Cheng:-
(1) Sinopec would be the partner of ENN in the Project;
(2) ENN and Sinopec would acquire 55% and 45% interest in China
Gas;
(3) There would be a kick off meeting for the Project on 17 Nov 2011
14.11.2011 Cheng received a draft powerpoint presentation by email from the
financial advisor of the Project advising of an offer in the price range
of HK$3 to HK$3.75 for a voluntary general offer for China Gas
shares
78
07.12.2011 Prior to market opening China Gas shares were suspended pending
release of an announcement of price sensitive information
12.12.2011 ENN and Sinopec issued a joint announcement detailing their offer to
acquire all outstanding shares in China Gas at HK$3.50 per share
which was a premium of 25% on their closing price
13.12.2011 Trading in China Gas shares resumed and the closing price was
HK$3.70 per share which was 20.4% higher than the previous closing
price of HK$2.80
13.12.2011 –
16.12.2011
All the Company’s shares held in one Ms. Li’s (“Li”) account which
had been purchased between 15 Nov 2011 and 6 Dec 2011 were sold
for HK$16,752,442.26 giving a profit of about HK$3million
79
SFC sought to rely on the following facts revealed from its investigation to infer that
Cheng had used/controlled Li’s securities account to deal in China Gas shares:-
• Li – a resident of Mainland China and former consultant of ENN Group
• All the internet orders for China Gas shares were placed via an IP address
belonging to the office of ENN in HK, but Li was not in HK at the time the shares
were purchased
• At the material times, among the staff working in ENN’ HK office, Cheng was the
only one who knew Li personally and was in close association with her
• Cheng was in HK during the dates when the internet transactions took place and
his time card suggests that he was in ENN’s office on those days
• Phone calls were made from ENN’s office to Li during the period in which orders
for China Gas shares were made from Li’s account
Suspicious dealings of shares
80
SFC sought to rely on the following facts revealed from its investigation to infer that
Cheng had used/controlled Li’s securities account to deal in China Gas shares:-
• A CPA firm in HK used by Cheng for receiving correspondence was also used to
receive Li’s bank correspondence including bank and investment account
statements
• The timing of the orders for China Gas shares coincides with Cheng’s knowledge
of the relevant information – a relatively large number of shares were purchased
on 5 and 6 Dec 2011, just before trading in China Gas shares was suspended and
the general offer went public
Suspicious dealings of shares (Cont’d)
81
SFC’s investigation further revealed that:-
• At least HK$8 million of the HK$13.7 million used to purchase shares via
Li’s securities account was transferred by Xinao, a BVI company owned
by Cheng, to an acquaintance of Cheng, Mr. Fong (“Fong”), who then
transferred the money to Li’s securities account
• In relation to the sale proceeds of China Gas shares, HK$14.17 million of
HK$16.7 million was transferred to Li to Fong, who then transferred at
least HK$615,233 to Cheng
Flow of funds from and to trading accounts
82
Q: Had Cheng dealt in the shares
MMT found that Cheng was a connected person and was in possession of
the relevant information; the only outstanding issue was whether SFC had
proved Cheng had dealt in China Gas shares to the requisite standard
SFC sought to persuade the MMT of Cheng’s dealing in the shares by
drawing inferences from:-
(1) Sources from which the bids for shares were made;
(2) Timing of bids, given Cheng’s possession of relevant information;
(3) Flow of funds between 3 principal parties – Cheng, Fong and Li;
(4) Cheng’s relationship with Li and control of her bank account and
securities account at all material times
83
Q: had Cheng dealt in the shares
MMT noted that:-
• There was no direct evidence that Cheng had used Li’s securities
accounts to purchase and then sell China Gas shares
• The evidence did not exclude the possibility of other persons being in
ENN’s office who were not required to clock in and out and that these
were persons with possible connections to Li
• Also, between 16 and 22 Nov 2011, all orders were placed through
smartphone platform with none emanating from the internal platform of
ENN computers within its HK office – there is no evidence as to who
used the phone nor whose phone was used – could not rule out the
possibility of it being Li herself
84
MMT noted that (Cont’d) :-
• Cheng, Fong and Li were heavily engaged in Macau gambling and it was
Cheng’s case that the flow of funds among them was related thereto
• SFC’s case was that from the proceeds of the sale of the shares the only
sum going directly to Cheng from Fong, not Li, was HK$615,233 which
was deposited to Cheng’s bank account in the mainland
• Cheng’s case was that this was not from the proceeds of the sale of any
shares but simply funds held by Fong and he needed money in the
mainland
Q: had Cheng dealt in the shares
85
Tribunal’s Conclusion
• The MMT could not find on a balance of probabilities that the evidence
was strong enough to draw compelling inferences that Cheng used the
computers of ENN or a smartphone to place order – there are other
possibilities from the facts other than it was Cheng trading
• The MMT did find it suspicious as to the flow of funds between the three
principal parties; yet, the flow from Cheng to Li via Fong and then back
again was short of providing compelling evidence of Cheng’s trading
• The only flow was HK$8million to Li is far short of the purchase price of
over HK$13million, and the alleged flow back to Cheng was even less
probative being merely just over HK$600,000
• Although the MMT was satisfied Cheng did have the necessary relevant
information at all material times, the MMT was not satisfied on a balance
of probabilities that Cheng had committed market misconduct by way of
insider dealing
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Civil liabilities for
insider dealing
Special features of MMT
Inquisitorial procedures
•civil standard of proof: balance of probabilities
•receipt of evidence irrespective of admissibility
•no right to silence despite self-incrimination
•protection against double jeopardy
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Possible orders made by MMT
• Disqualification from directorship/management up to 5 years
• Ban on dealing in securities up to 5 years: Cold shoulder order
• Prohibition on repeating market misconduct : a cease and desist
order
• Disgorgement order – a sum to be paid not exceeding profit gained
or loss avoided
• Payment of costs of investigation/inquiry
• Recommendation of disciplinary action to a professional body:
disciplinary referral order
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Criminal liabilities for
insider dealing
Criminal proceedings
• Criminal prosecution for insider dealing under Part XIV, SFO
• Maximum penalties: 10 years imprisonment and HK$10 million fine:
s. 303(1) SFO;
• the court may in addition make disqualification, cold shoulder and
disciplinary referral orders.
• Criminal standard of proof: beyond reasonable doubt
• Fine imposed based on notional profit rather than realized, actual
profit : Du Jun case.
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• a fine of HK$23 million imposed on Du Jun reflecting the
notional profit rather than realized profit – he in fact made a
loss of HK$31.3 million in selling the shares
• in determining the fine, the court referred to the reason in
The Insider Dealing Tribunal vs Shek Mei Ling [1999] 2
HKCFAR 205. “Subsequent changes in market prices are
irrelevant… because such changes are not to be regarded
as flowing from the original improper purchase of shares.
Rather, they flow the insider dealer’s decision to retain the
shares…”
Du Jun: DCCC 787/2008
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THE END
THANK YOU!
Important Notice:
The law and procedure on this subject are very
specialised and complicated. This article is just a very
general outline for reference and cannot be relied upon
as legal advice in any individual case.
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Sherman Yan
Managing Partner
Head of Litigation & Dispute Resolution
ONC Lawyers
Office: 19th Floors, Three Exchange Square, 8 Connaught Place, Central, Hong Kong
Direct: (852) 2107-0343
Phone: (852) 2810-1212
Fax: (852) 2804-6311
Email: [email protected]
Skype: sherman.yan.onc
Web-Site: www.onc.hk
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