Introduction

In the recent Court of Final Appeal case of Andrew Edward Left v Securities and Futures Commission [2020] HKCFA 23, Mr Andrew Left (“Mr Left”), a publisher of a US-based research website, failed in his final attempt in appealing against the unfavourable ruling of the Court of Appeal (“CA”) in upholding the decision of the Market Misconduct Tribunal (“MMT”) as to his culpability under section 277(1) of the Securities and Futures Ordinance (Cap.571) (“SFO”).

Background

Mr Left was a publisher of an internet research website called “Citron Research” in the United States. On 21 June 2012, Mr Left published a report on Evergrande Real Estate Group Limited (now known as China Evergrande Group) (“Evergrande”), which is listed on the Main Board of the Stock Exchange. Main allegations in the report include insolvency of Evergrande and the presentation of fraudulent information by Evergrande to the investing public.

Shortly before the publication of the report, Mr Left started to short sell Evergrande’s shares. When the report was subsequently published, the share price of Evergrande fell significantly by about 11.4%. Mr Left then bought shares to cover his short position and made a net profit of approximately HK$1.6 million.

In August 2016, Mr Left was found liable by the MMT for disseminating false or misleading information about Evergrande contrary to section 277(1) of the SFO. The MMT imposed (i) a “cold shoulder” order, which prohibited him from engaging in any dealings in the financial market of Hong Kong for five years; (ii) a “cease and desist” order, which prohibited him from carrying out the misconduct again; and (iii) an order for disgorgement of profits, which required him to give up the net profits made from the misconduct with interest.

Mr Left appealed to the CA but his appeal was dismissed in February 2019. Details of this appeal was discussed in our March 2019 Newsletter.

Mr Left subsequently sought leave to the Court of Final Appeal (“CFA”) from the CA but was dismissed in May 2019. In July 2020, Mr Left’s further application for leave to appeal was again dismissed by the Appeal Committee of the CFA. Accordingly, Mr Left remains liable under section 277(1) of the SFO.

Grounds of appeal to the CFA

The present application relates to Mr Left’s leave to appeal from the Appeal Committee. Mr Left’s appeal was premised on the following questions of law:

1.        What is the test for recklessness in section 277 of the SFO? Market commentary and stock analysis inherently involves a risk of incorrectness. How does the test of recklessness apply to such context?

2.        Is the test of recklessness in the case of Sin Kam Wah v HKSAR (2005) 8 HKCFAR 192 (“Sin Kam Wah”) a purely subjective or a mixed subjective-objective test? Whether and how does the test apply to situations which inherently involve risks? In what way does the issue of unreasonableness arise?

3.        What is the test for negligence in section 277 of the SFO? In particular:

a.        How does it apply to an unlicensed public investor sharing market commentary and stock analysis who has based, and has disclosed that he has based, his commentary and analysis entirely on public information?

b.        The relevance, if any, of the constitutionally protected freedom of speech on the interpretation of the test.

On the “or otherwise” basis, Mr Left argued that:

4.        The CA has erred in construing and upholding the decision of the MMT that Mr Left was aware that it was unreasonable for him to take the risk that his market commentary and stock analysis might be incorrect; and

5.        The CA has erred in failing to differentiate between and in applying the same standard to market commentary and stock analysis published by licensed commentators as opposed to those published by unlicensed public investors like Mr Left.

Decision of the CFA

Questions 1 and 2 and point 4 above concern the meaning of “recklessness” and its application under section 277 of the SFO. Mr Left argued that the test of recklessness laid down by the case of Sin Kam Wah is a mixed subjective-objective test, which means that Mr Left would be reckless if he knew the relevant circumstances and, viewing the circumstances objectively, it was unreasonable for him to take the risk to publish information which might be false. Mr Left’s submission was that the CA erred in applying this test purely subjectively by regarding him as being reckless on the basis that he was aware of the risk and he realised that taking such risk was unreasonable.

The CFA refused to deal with this issue in this present case on the basis that even if assuming that the CA has erroneously applied the test of recklessness subjectively, it was an error in Mr Left’s favour as a subjective test was more demanding and would make it more difficult to hold Mr Left liable under section 277 of the SFO. The CFA further dismissed Mr Left’s proposition that a new “indifference test” (i.e. by asking whether the person who disseminated the information was indifferent to the truth of what was being circulated) should apply for lack of reasonably arguable basis, since there is no reason to adopt some test developed in another branch of the law for application in lieu of Sin Kam Wah.

As for question 3 and point 5 above, Mr Left argued that he had exercised reasonable care and thus was not negligent because he was an unlicensed public investor whose commentary was based on, and which was expressly stated to be based on, public information. In rejecting this proposition for being not reasonably arguable, the CFA held that “negligence” is a general legal concept which imposes a positive duty on people to take reasonable care to ensure that the information they disseminate is true and not misleading. No exception should be granted to a commentator simply on the basis that his/her commentary is allegedly based on public sources.

The CFA also dismissed the argument based on freedom of expression. Since the legitimate aims of section 277(1) of the SFO are to protect the public from false or misleading information and to protect economic order, it was held that freedom of expression does not extend to disseminating recklessly or negligently false or misleading market sensitive information.

Takeaway

This case marks the end of the well-known and controversial case of Mr Left. Throughout the proceedings, the courts have never found in favour of Mr Left. Despite the multiple aspects of law raised in this appeal, the court is reluctant to place a lighter duty on lay commentators to take reasonable care in spreading market sensitive information.

In the context of financial market, a piece of false or misleading information may have adverse impact on stakeholders including issuers and financial institutions. It is also clear that all commentators, licensed or not, should be responsible for what they say or publish as the court and enforcement bodies are ready to impose penalties in order to ensure that the financial market of Hong Kong operates in a fair and orderly manner.