Introduction

In our November 2018 Regulatory & Compliance newsletter, we discussed the judgment handed down by the Court of Final Appeal (the “CFA”) in Securities and Futures Commission v Yiu Hoi Ying Charles and Others (2018) 21 HKCFAR 475, in which the CFA held that two former senior executives of Asia Telemedia Limited, Mr Charles Yiu and Ms Marian Wong (the “Respondents”), could not rely on the innocent purpose defence under section 271(3) of the Securities & Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”), allowed the appeal by Securities and Futures Commission (the “SFC”) and remitted the case to the Market Misconduct Tribunal (the “MMT”) to deal with the question of sanctions on the basis that the Respondents had been found culpable of market misconduct.

To briefly recap, between 2002 and 2007, Asia Telemedia received statutory demands for its default in loan repayment. Such demands constituted insider information but such information was not disclosed to the public. Subsequently, Asia Telemedia’s share price rose sharply. The Respondents took advantage of the rare opportunity and made a net profit of over $10 million.  It is accepted that the Respondents’ decision to sell was motivated by grabbing the once in a life-time opportunity, as opposed to making use of the inside information. Further details of the background and CFA judgment are set out in our newsletter: The CFA clarifies the ambit of the innocent purpose defence against allegation of insider dealing.

On 31 March 2021, the MMT made the sanction orders against the Respondents. This newsletter will discuss the principles and factors considered by the MMT in determining the sanction orders in this case.

Nature of the sanctions

The MMT emphasized that the proceedings are civil but not criminal in nature. The essential purpose of civil sanctions in the present context is to protect the integrity of Hong Kong's securities market against those who, by reason of their culpable actions, have been shown to pose a threat to the market. Any sanctions to be imposed are civil in nature. The special circumstances in this case are focused essentially on two areas of contention, the issue of delay and “moral culpability”.

The MMT noted that there was a period of six years and six months of delay in instituting formal proceedings against the Respondents by the SFC, during which the Respondents were not found culpable of any other form of market misconduct, and a period of nearly 14 years has lapsed since the act of insider dealing took place, during which there was no further allegation of market misconduct made against the Respondents. The MMT considered it as a fact of material relevance in determining the degree of the threat, if any, still posed to the integrity of the market by the Respondents.

In respect of “moral culpability”, although insider dealing amounts to a very serious misconduct and is a dishonest conduct, not all conduct under the generic heading of “dishonest conduct” carries the same moral culpability. In this case, the MMT considered that the Respondents had no calculated intention to withhold the information that was likely to materially affect the share price in order to obtain a trading advantage. Further, the law as to the innocent purpose defence was not unequivocally defined at that time. It could be said that the Respondents acted in ignorance of the law.

Individual sanctions sought by the SFC

Disqualification orders under section 257(1)(a) of the SFO

The MMT has power to make disqualification orders to restrict people from being involved in any way as a director, liquidator, receiver or manager of a listed corporation for a period not exceeding five years, unless with leave of the Court. It must consider the danger of future misconduct on the part of the person found culpable and the deterrent character of the order.

In this case, the Counsel for Mr Charles Yiu submitted that there had been no premeditation or implementation of a sophisticated scheme on his part, and the length and complexity of the proceedings had been a tremendous burden to him financially and emotionally. The MMT gave due weight to the factor that the manner in which the proceedings have unfolded has created an exceptional set of circumstances for the Respondents personally. It also considered the fact that Mr Charles Yiu was at the centre of decision-making and must bear principal responsibility, thus ordered that he shall be subject to disqualification for 3 years.

“Cold shoulder” orders under section 257(1)(b) of the SFO

A “cold shoulder” order has the effect of prohibiting a person from any direct or indirect dealings in the Hong Kong financial market, unless with leave of the Court. The MMT was of the view that the acts of the Respondents were not to be judged as seriously as insider dealing which results from a premeditated and planned misuse of inside information and made the “cold shoulder” orders against the Respondents for three years.

“Cease and desist” orders under section 257(1)(c) of the SFO

Under the SFO, the MMT can order that a person identified as having engaged in market misconduct shall not again perpetrate any conduct which constitutes specified market misconduct. This type of order is preventative and not of a penal nature. As the Respondents did not object to such orders, the MMT made cease and desist orders against Mr Charles Yiu in respect of any conduct constituting insider dealing and against Ms Marian Wong in respect of a wider ambit, including but not limited to insider dealing, false trading, price rigging, disclosure of information about prohibited transactions.

Orders for disgorgement under section 257(1)(d) of the SFO

Pursuant to section 257(1)(d) of the SFO, the MMT can order the Respondents to pay an amount not exceeding the amount of any profit made or loss avoided by them as a result of the misconduct to the Government.

In this case, the Respondents made, amongst the others, the following submissions on the existence of exceptional circumstances enabling the MMT to exercise its discretion in this matter to order either that there be no disgorgement orders or that they be materially reduced in value:

1.         The Respondents had suffered grave financial loss due to the “enormous legal costs” incurred in defending themselves instead of securing any financial advantage by the market misconduct.

2.         The SFC having shifting grounds of argument during the appeal process undermined the procedural fairness.

3.         The Respondents had paid salaries tax on the financial advantages.

However, the MMT was of the view that (i) compensation for the reasonable expenditure of legal costs was a separate matter from the assessment of sanctions, (ii) it was almost invariable that there be some shift in emphasis given that the arguments on the interpretation of the innocent purpose defence proceeded to the CFA stage, and (iii) the payment of salaries tax on the substantial gains was an incidental to the illicit conduct and did not constitute an exceptional circumstance. Accordingly, the MMT did not accept the submissions above and granted the disgorgement order.

Recommendation on further disciplinary action

The MMT has the power to recommend a professional body under section 257(1)(g) of the SFO to take a disciplinary action against its member who is found culpable of market misconduct. Ms Marian Wong has been a member of the HKICS. The MMT noted that she had been disciplined by the HKICS for the same matter and determined to respect the reservation of right by the HKICS.

Conclusion

The recent report of MMT on the Asia Telemedia case discussed the principles and factors considered by the MMT when determining the sanctions and a range of orders against the persons who had been found culpable of market misconduct, including disqualification orders, “cold shoulder” orders, “cease and desist” orders, orders for disgorgement and recommendations to professional bodies to take disciplinary actions. It can be seen that despite being acknowledged as not seriously culpable, the sanctions in this case could not be said to be light. The case serves as a reminder that very high standard is expected of the conduct of market participants and those involved in management of listed companies.