Introduction

Within 12 months the Securities and Futures Commission (“SFC”) suffered a setback in its relentless efforts to combat insider dealing.  In two recent cases the Market Misconduct Tribunal (“MMT”) was not satisfied that insider dealing, as alleged by the SFC, had taken place in relation to the trading of the shares in Asia TeleMedia Limited (“ATML”) held on 26 November 2015 (the “Asia TeleMedia Case”) and the trading of the shares in Warderly International Holdings Limited (“Warderly”) held on 4 August 2016 (the “Warderly Shares Case”).

The Asia TeleMedia Case

The Factual Background

The four specified persons were Lu Ruifeng (“Lu”), Yiu Hoi Ying (“Charles”), Wong Nam, Marian (“Marian”) and Ho King Lin, Cecilia (“Cecilia”). Lu was the former Chairman, CEO, Executive Director and substantial shareholder of ATML. Charles was the former Director of Finance and Executive Director. Marian and Cecilia were the former Company Secretary and the former Assistant Company Secretary of ATML respectively.

ATML owed a debt of more than HK$40 million to Liu Lien Lien (“Madam Liu”). Between July 2002 and May 2006, Madam Liu served five statutory demands on ATML demanding repayment of the debt, but none of them resulted in any further legal actions and on each occasion the parties negotiated and agreed on new repayment terms.

On 1 February 2007, Madam Liu assigned the debt by a deed of assignment to Goodpine Limited (“Goodpine”) for a consideration of HK$25,000,000 (the “Assignment”). On 5 February 2007, Goodpine’s solicitors served a notice of the Assignment on ATML together with a demand for repayment.

On 26 April 2007, Goodpine’s solicitors sent a statutory demand to ATML demanding repayment of the outstanding sum of more than HK$70 million within 21 days (the “Statutory Demand”). On 6 June 2007, Goodpine served a winding-up petition on ATML. On 7 June 2007, ATML’s shares were suspended from trading before market opened. ATML made an announcement about the Assignment, the Statutory Demand and the winding-up petition on 15 June 2007.

Back in February 2007 ATML’s share price rocketed from HK$0.2 per share to HK$0.97 per share in May 2007. The reason for the sudden rise of ATML’s share price was not identified but was believed to be not relevant to the events described above.

Between 26 February 2007 and 5 June 2007 (i.e. after the Assignment but before the said announcement was made), Lu, Charles, Marian and Cecilia exercised their share options at an exercise price of HK$0.2 per share, sold their shares and made substantial profits. The SFC alleged that they had engaged in insider dealings since they sold the shares upon knowing the Assignment and the Statutory Demand and such information was not yet made known to the public.

The MMT’s decision

MMT found the information about the Assignment and the Statutory Demand were price sensitive information, because such information would have put pressure on the sudden upward rise of the share price and would cause the material decrease in the ATML’s share price.

MMT was satisfied that Charles and Marian had the knowledge that the information constituted price sensitive information because, as director and company secretary, they should have appreciated the risk of the information materially affecting the share price and the risk of winding-up. However, MMT was satisfied that Cecilia had no knowledge that the information constituted price sensitive information because she was not involved in the communication with Goodpine’s solicitors. The fact that she did not rush to sell her shares supported her lack of knowledge.

Under section 271(3) of the Securities and Futures Ordinance (the “Ordinance”), it is a defence to insider dealings if the defendant can establish, on a balance of probabilities, that, the purpose of him trading in the shares did not include the desire to make a profit or avoid a loss by using the price sensitive information.

The MMT was satisfied that both Charles and Marian were not induced to trade in the shares as a result of their possession of the price sensitive information, but that their purpose of trading was to seize the sudden and unexpected rise in ATML’s share price and make a profit. The MMT accepted their following explanations:

1. they only had a relatively modest salary and the sudden rise of the share price was a chance of a lifetime;
2. all the other employees of ATML in Hong Kong and the Mainland exercised their options and sold the shares during the same period of time;
3. they believed that the threat by Goodpine would have been resolved by negotiations like in the past occasions; and
4. if they were motivated by the desire to avoid loss by using the price sensitive information, they would have sold the shares before the 21-day deadline of the Statutory Demand and sold the shares at once. The fact that they sold the shares on different occasions over a period of time and that they did not rush to sell the shares before the deadline of the Statutory Demand supported their assertion that they were not affected the price sensitive information.

Therefore, MMT found no insider dealings in the Asia TeleMedia Case.

The Warderly Shares Case

The Factual Background

The two specified persons were Lo Hang Fong (“Lo”) and Luu Hung Viet, Derrick (“Luu”). Lo was the former Company Secretary of Warderly. Luu was a lender and potential investor of Warderly.

The SFC identified 5 specific events comprising price sensitive information, including:

1. from July 2006, banks started to tighten banking facilities granted to Warderly and called for repayment of overdue loans;
2. on 17 November 2006, Warderly was granted a loan of HK$2 million from Mr. Liu Su Ke (“Liu”);
3. in December 2006, a further loan of HK$7.2 million was granted by Liu to Warderly;
4. Warderly was unable to repay the loans from Liu when it was due on 28 January 2007. The loans remained outstanding in April 2007; and
5. in February 2007, Luu granted a loan of HK$10 million to Warderly.

Lo sold his 1,597,500 shares in Warderly, which is the entirety of his shares in Warderly on 28 March 2007 to 30 March 2007. Luu sold his 50 million shares in Warderly held through his nominee on 3 April 2007, 4 April 2007, 30 April 2007 and 2 May 2007. The SFC alleged that the 5 specified events identified above showed that Warderly was in poor financial position and such information was not known to the public. The SFC therefore alleged that Lo and Luu engaged in insider dealings because they were in possession of the information in relation to the 5 specified events and sold their shares in Warderly.

On 14 May 2007, Warderly’s shares were suspended from trading.

The MMT’s decision

The MMT found that the 5 specified events did not constitute relevant information that would materially affect the price of the Warderly shares. The MMT was satisfied that the information regarding the poor financial situation of Warderly was in public domain after the publication of the poor annual report in August 2006 and the interim report in January 2007. The MMT was also satisfied that, by early February 2007, the price of the Warderly shares was no longer reflecting its past business but rather that of a shell company.

Therefore, MMT found no insider dealings in the Warderly Shares Case.

Lessons to learn

To establish insider dealing, 3 questions have to be asked: whether the information is price sensitive; and if so, whether it is already known to the general investing public; and if so, whether the person had made use of the information to deal in the shares to make a profit or avoid a loss.

Whether an act of insider dealing has occurred is indeed very fact sensitive. Still, it is generally difficult to defend. As noted in the decision in the Asia TeleMedia Case, “the circumstances will be rare when a person who deals in the shares of a listed company while in possession of price sensitive information will be able to demonstrate that his dealing was totally unconnected with any desire to avoid a loss or make a profit by reason of the price sensitive information.” This is a high threshold to meet. The Warderly Shares Case showed that a piece of allegedly price sensitive information may cease to be price sensitive if the “information” (that Wardely was in poor financial condition) had been made known to the public through another source and, therefore, could not affect the price of shares.