Introduction

In the December 2021 issue of our Newsletter, we discussed the judgment in SFC v Yik Fong Fong and others [2021] HKCFI 3351 where the Court of First Instance (the “Court”) held that Yik Fong Fong (“Yik”), the 1^st Defendant, Wei Juan (“Wei”), the 2^nd Defendant, and Huang Yi (“Huang”), the 3^rd Defendant (collectively, the “Defendants”), were respectively found liable as tipper and tippees engaged in insider dealing in the shares of TeleEye Holdings Limited (“TeleEye”) in 2016 in contravention of sections 270 and 291 of the Securities and Futures Ordinance (Cap. 571) (“SFO”). On 14 February 2022, the Court delivered its judgment on relief ([2022] HKCFI 450; HCA 2524 / 2016), which brings a conclusion to this civil proceedings brought by the Securities and Futures Commission (“SFC”).

Relevant facts

For the details of the factual background, one may refer to the December 2021 issue of our Newsletter. TeleEye is a company listed on the GEM Board of the Stock Exchange of Hong Kong Limited and the Defendants were family members to each other. From February to April 2016, Yik was heavily involved in a potential takeover event in relation to TeleEye shares (the “Takeover”). Possessing these sensitive and inside information regarding TeleEye, Yik, whether through Wei / Huang or herself, placed orders to purchase 22,720,000 TeleEye shares at an average price of HK$0.4295 per share. After the Takeover announcement made on 14 April 2016, the price of TeleEye shares skyrocketed and Yik, whether through Wei / Huang or herself, sold 15,650,000 TeleEye shares at the average sale price of HK$1.259 per share. The Defendants together reaped a total profit of HK$12.9 million.

The section 213 reliefs

The Court has taken the chance to reiterate that the SFC’s current claim under section 213 of the SFO is a claim created by statute and tortious in nature. Yet, the Court is not limited by the tortious principles under common law. Under section 213(2)(b), the Court enjoys a very wide power to make any order to restore the parties to the position prior to the impugned transactions. Citing SFC v Tiger Asia Management LLC and others (2013) 16 HKCFAR 324, “it does not matter that SFC has not personally suffered any loss but is pursuing the claim for the benefit of the persons dealing in the market who have been injured by the market misconduct.”

The restorative order

The SFC found that Wei / Huang purchased 22,540,000 TeleEye shares from 63 counterparties during the relevant period (the “63 Counterparties”). The Court agreed with the SFC’s proposal for a restorative order under section 213(2)(b) such that the relevant profits can be paid back to these 63 Counterparties: this was because these 63 Counterparties did not know of the proposed Takeover, nor did they know that they were involved in insider dealing transactions. If they had known, they would not have sold their shares to Wei / Huang as they would have expected the price to rise and benefitted themselves instead. The question then arising was how would these 63 Counterparties’ respective position be restored in reality?

As stated above, the average purchase price of the 22,720,000 TeleEye shares was HK$0.4295 per share. A total of 15,650,000 TeleEye shares were subsequently sold at an average price of HK$1.259^[1], resulting in profits in the total sum of HK$12,975,318. The said profits, together with interest accrued, less the remuneration and costs of the administrators^[2], would be distributed pro rata to the 63 Counterparties.

At this juncture, it would be interesting to explore the SFC’s suggested approach in calculating how profits should be distributed to the 63 Counterparties. The SFC had submitted its expert evidence, which:

1.        recorded the trading (closing) prices of TeleEye shares following the publication of the Takeover announcement as follows:

15/4/2016      HK$0.99 per share

18/4/2016      HK$1.16 per share

19/4/2016      HK$1.39 per share

2.        took into account the trading volume of TeleEye shares during the 3-day period and came up with an average traded price of HK$1.151 per share (the “Re-rated Price”). This Re-rated Price was taken to mean that the 63 Counterparties could have been able to sell.

With this Re-rated Price:

1.        The Re-rated Price times the number of shares sold by the 63 Counterparties is the nominal amounts which could have been received by them (“Nominal Amounts”), i.e. HK$1.151 per share x 22,540,000 shares = HK$25,943,540.

2.        The actual amounts of the executed trades by the 63 Counterparties is equivalent to HK$0.4295 times the number of purchased shares^[3] (“Actual Amounts”), i.e. HK$9,648,250.

3.        The difference between the Nominal Amounts and the Actual Amounts, i.e. HK$25,943,540 - HK$9,648,250 = HK$16,295,290 (“Difference”).

The Court was of the view that the SFC’s approach was rather academic in calculating the theoretical price at which the 63 Counterparties would have sold the TeleEye shares. On the one hand, it is hard to comment how realistic the Re-rated price of HK$1.151 is (as it was even lower than HK$1.259, the actual price the Defendants sold their shares at); on the other hand, although the Difference is calculated to be larger than the actual profits made (i.e. HK$12,975,318), the SFC seemed not to be asking the Defendants to disgorge the higher amount to the 63 Counterparties.

Accordingly, the Court rejected the SFC’s approach, pointing out that this exercise was not only unnecessary but also inappropriate: there was no room for an articulated price when the actual price was identifiable and available. The Court wanted a simple and straight-forward way to require the Defendants to disgorge the actual profits they had made from the acts of insider dealing, in other words, the actual suffers by the 63 Counterparties.

Conclusion

A claim under section 213 of the SFO can be regarded as a statutory tort and the SFC is entitled to commence proceedings in its own name albeit not being a person who has suffered any loss. The SFC serves the role as the protector of investors who otherwise may not institute legal proceedings individually for recovery of their relatively small losses. Further, the Court has wide powers to grant remedies under section 213 beyond the scope normally applicable to a tortious claim under common law and make orders to restore the victims to their respective former financial positions.