Introduction

On 22 December 2017, the Court of First Instance (the “CFI“) in case SFC v Wong Hung HCMA 664/2016 handed down its reasons for judgement and allowed the Securities and Futures Commission (the “SFC“)’s appeal against the acquittal of Mr. Wong Hung (“Mr. Wong“) of naked short selling and ordered that the case be remitted back to the Magistrates’ Court for a re-trial.

Section 170 of the Securities and Futures Ordinance (the “SFO“) (“Section 170“) prohibits the sale of securities when the person does not have a presently exercisable and unconditional right to sell them, more commonly known as naked short selling.

Background Facts

Mr. Wong is licensed as a representative under the SFO to carry on Type 1regulated activity (dealing in securities). He was a licensed representative with Hung Sing Securities Limited (“Hung Sing“) at the material time.

On 4 August 2009, Mr. Wong opened a securities cash account with Hung Sing under his own name. The SFC alleged that between 6 and 20 January 2012, Mr. Wong placed sell orders in five listed companies through his securities account when the number of shares he sold was more than the shares he held in 20 different transactions, all of which he keyed in and then cancelled shortly thereafter.

According to the interview notes between Mr. Wong and the SFC (the “Interview Notes”), Mr. Wong alleged that:-

• he was relying purely on his memory and made mistakes when confirm the sell orders;
• he was handling too many transactions (a total of 1,581 transactions from 6 to 20 January 2012) and it was difficult for him to calculate how many sell orders which in fact have not been completed;
• he forgot how many sell orders which in fact have not been completed and as a result he sold more than what he had;
• he might have misplaced a buy order as a sell order, or that he might have entered a wrong number for the sell orders by adding an extra “0”;
• he mistakenly entered the wrong stock code;
• he cancelled those sell orders shortly after he placed those sell orders because he realised that he made mistakes.

The SFC prosecuted the case in the Eastern Magistrates’ Court relying on Section 170 (short selling restriction), in particular Section 170(1)(b) and Section 170(3)(a).

According to Section 170(1), a person shall not sell securities at or through a recognized stock market unless at the time he sells them (a) he has or, where he is selling as an agent, his principal has; or (b) he believes and has reasonable grounds to believe that he has or, where he is selling as an agent, that his principal has, a presently exercisable and unconditional right to vest the securities in the purchaser of them.

Section 170(3)(a) states that Section 170(1) does not apply to a person who acts in good faith, believing and having reasonable grounds to believe that he has a right, title, or interest to or in the securities which he sells within the meaning of Section 170(1) (the “Good Faith Defence“).

Mr. Wong did not testify at trial and did not call any witness.

Magistrates’ Court’s Decision

The Eastern Magistrates’ Court, on 30 May 2014, found Mr Wong Hung not guilty of illegal short selling.

Magistrate Mr. David Chum Yau-fong held that the SFC has a duty to prove that the defendant was “deliberately dishonest” when conducting the short selling, not simply “negligent” and “made mistakes in calculations”.

In deciding to acquit Mr. Wong, the Magistrate found that because Mr. Wong placed a lot of orders each day, he could not exclude the possibility that Mr. Wong was careless when placing the sell orders about whether he was selling more shares than he held. Accordingly, the Magistrate found that the prosecution failed to prove that Mr. Wong deliberately and dishonestly conducted the naked short-selling beyond reasonable doubt. 3

SFC’s Arguments for Appeal

The SFC subsequently lodged an appeal to the CFI against the Magistrate’s decision, relying on Section 105 of the Magistrates Ordinance (Cap 227) (application to state case on point of law).

The SFC raised the following queries:-

• whether the Magistrate failed to correctly and duly consider the elements of the offence, the mens rea (i.e. the mental element) and the burden of proof, after ruling that the Section 170 is not a strict liability offence;
• whether the Magistrate mistakenly ruled that the SFC shall prove beyond reasonable doubt that the defendant was “deliberately dishonest” when conducting the short selling;
• whether the Magistrate mistakenly failed to make due considerations and conclusions regarding Section 170(1)(b) and Section 170(3)(a);
• whether the Magistrate mistakenly considered the matters which were not adduced as evidence and relied on these matters when reaching his decision; whether the Magistrate gave inappropriate weight to the Interview Notes;
• whether the Magistrate’s ruling can be considered as against common sense or absurd.

CFI’s Decision

The CFI did not rule on query (1), whether Section 170 is a strict liability offence as the prosecution has conceded at trial that Section 170 was not a strict liability offence and the prosecution agreed that it was required to prove the mens rea of the case beyond reasonable doubt. The CFI considered that it was inappropriate for the SFC to try to reopen this issue at the appeal and did not rule on this issue as the magistrate did not rule on the issue (as the prosecution conceded on this point). And queries (2) to (4) depended upon query (1) and thus the CFI also did not rule on those.

The CFI ruled in favour of the SFC on query (5), stating in the judgment that the Magistrate’s decision was perverse in that no reasonable magistrate, applying his mind to the proper considerations and giving himself the proper directions, would have reached the same conclusion. In particular, the CFI was not satisfied that a licensed representative with some experience would commit mistakes numerous times “carelessly” or “inadvertently”. The CFI also found that if the mistakes were careless or inadvertent ones, it would be difficult to reconcile with the fact that such mistakes did not attract the attention of the internal monitoring personnel of or the supervisors of Mr. Wong and that the mistakes only took place 4

over a short period of time. The CFI also found that the Interview Notes also revealed that Mr. Wong did not rely on the defence of good faith. The CFI also ordered that Mr. Wong’s case be remitted back to the Magistrates’ Court to be tried by a different magistrate and the parties are open to revisit whether the offence is a strict liability offence.

Case Comments

The most peculiar aspect of the case is that, apparently, the Defendant in the case did not claim the right against self-incrimination under section 187(2) of the SFO in the Interview Notes which would prevent the answers given in his Interview Notes to be used against him in subsequent criminal proceedings. While the exculpatory parts acquitted him at the trial in the Magistrates’ Court, the incriminating parts allowed the CFI to overturn the acquittal and ordered a retrial. As explained earlier in our newsletter in January 2015 (“What To Do When Required to Attend an Interview at the SFC”), interviews with the SFC are very different from interviews with other law enforcement agencies as the SFO removes the right of silence of the accused and put in place a regime where claims have to be made to the answers to prevent their use in criminal proceedings. It is strongly advised that competent legal advice and representation shall be obtained before and during such SFC interviews to ensure that answers given would not be prejudicial to the interviewee’s rights.

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Important: 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. If any advice or assistance is needed, please contact our solicitors.