Introduction

Insider dealing is both a market misconduct civilly [1] and an offence criminally [2]. A common form of insider dealing involves a tipper, who is the insider who discloses insider information to another person knowing or having reasonable cause to believe that the other person will deal in the relevant listed securities or their derivatives. Opposite to the tipper is the tippee who receives such insider information from the insider and deal or counsel or procure another person to deal with the relevant listed securities or their derivatives. Whilst it might seem that the role of tipper and tipper are distinct, the recent judgment in SFC v Yik Fong Fong and others [2021] HKCFI 3351 demonstrates the intricate relationship between a tipper and a tippee: even if a tippee remains inactive and allows a tipper to deal with the securities on his / her behalf, the tippee could still be liable and be caught under the offence of insider dealing in contravention to sections 270(1)(e)(i) and 291(5)(a) the Securities and Futures Ordinance (Cap. 571) (“SFO”).

Background facts

TeleEye Holdings Limited (“TeleEye”) was incorporated in the Cayman Islands with its shares listed on the GEM Board of Hong Kong Stock Exchange (stock code: 8051). TeleEye (through its subsidiaries) engaged in the business development and sales of audio and video monitoring systems.

Wei Juan (“Wei”), the 2^nd Defendant, is the niece of Yik Fong Fong (“Yik”), the 1^st Defendant. Wei and Huang Yi (“Huang”), the 3^rd Defendant got married in 2010. At the material times, Wei maintained securities accounts with Kingsway Services Group Limited (“Kingsway”, “Kingsway A/C”) and China Everbright Securities (HK) Limited (“Everbright”, “Everbright A/C”), while Huang maintained his securities accounts at UOB Kay Hian (Hong Kong) Limited (“UOB”, “UOB A/C”) (collectively “Wei/Huang’s A/Cs”).

Through Fast Upgrade Limited (“Fast Upgrade”), a Chen Haining (“Chen”) held 419,060,100 shares in TeleEye, which amounted to 50.07% of its issued shares (the “Subject Shares”). Since or around February 2016, there had been a discussion regarding the sale and purchase of the Subject Shares (the “Takeover”) from Chen / Fast Upgade to Foxconn (Far East) Limited (the “Foxconn”). Yik had been the representative of Fast Upgrade / Chen and played an active role throughout the negotiations with Foxconn.

From 29 February 2016 to 12 April 2016 (the “Relevant Period”), despite her active and ongoing involvement in the Takeover, from meeting with the relevant parties for negotiation and requesting for a non-disclosure agreement, to approving and commenting on the draft sale and purchase agreement and arranging for the closing of the deal, Yik placed orders to purchase 17,720,000 TeleEye shares through Wei’s Kingsway A/C and Everbright A/C. Huang also placed orders to purchase 5,000,000 TeleEye shares through his UOB A/C. The average purchase price of the 22,720,000 TeleEye shares was HK$0.4295 per share.

For better or worse, the Takeover negotiation went well and the sale and purchase agreement was executed on 12 April 2016. The Takeover was subsequently announced on 14 April 2016. As expected, the price of TeleEye shares skyrocketed – Yik placed orders to sell 15,650,000 TeleEye shares from Wei/Huang’s A/Cs and the average sale price was HK$1.259 per share, resulting in a total profit of HK$12.9 million.

The legal principles  

The legal principles of insider dealing are well established. The Court gave a comprehensive and detail illustration of the applicable principles in this case. In short and for the purpose of this article, the core elements are: (1) The tippee has information which he knows is inside information in relation to the listed corporation; (2) The tippee received the information, directly or indirectly, from a tipper whom he knows is connected with the listed corporation; (3) The tippee knows or has reasonable cause to believe that the tipper held the information as a result of being connected with the listed corporation; and (4) The tippee deals in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives.

Tippers’ liability

Applying the above principles to the current case, the starting point is Yik’s liability. The Court has demonstrated no difficulty in finding (1) Yik as a person connected with TeleEye; (2) the information about the intended Takeover (“Subject Information”) was material and price-sensitive information, i.e. if known to the general investors during the Relevant Period, there would be a material impact on TeleEye share price; (3) the Subject Information was inside information, especially in the circumstances where a non-disclosure agreement was signed since the early discussion stage of the Takeover. There was also incontrovertible evidence suggesting that Yik knew she could not deal in TeleEye shares during the Relevant Period, but as it turned out that she did so by using Wei / Huang’s A/Cs.

Tippees’ liability

On the basis of the establishment of Yik’s liability [3], what makes this case particularly interesting is that Yik, the tipper, was heavily involved in trading TeleEye shares for and on behalf of Wei / Huang, the tippees. It could even be described that Yik had complete control of Wei/Huang’s A/Cs in purchasing and dealing with TeleEye shares during the Relevant Period. Of course, this could be counted as the tipper’s own dealing of securities, i.e. the wrongdoing by Yik as the principal recipient who dealt with the securities using the insider information, but the more important point is, whether Wei and Huang, as the tippees, are liable in such circumstances. In particular, Wei and Huang’s defence were, amongst others:

1. After Wei and Huang got married in 2010, Huang was responsible for all of Wei’s securities accounts. Wei even provided the PINs of her securities and bank accounts in Hong Kong to Huang, who operated the accounts without any reference to her. She did not know nor care about what securities were brought in the securities account.
2. During the Relevant Period, Wei was giving birth to her baby and hence did not meet or have any conversation with Yik about her securities accounts in Hong Kong. She had authorised Yik to operate her Kingsway A/C and Everbright A/C, because Wei simply was not concerned about what securities were purchased or sold through such accounts.
   

The main issues

As a matter of fact, it was not disputed that Wei/Huang dealt in TeleEye shares during the Relevant Period as the TeleEye shares were purchased through Wei/Huang’s A/Cs.

The issues that concern most were: (1) whether Wei / Huang had the Subject Information during the Relevant Period which they knew was inside information in relation to TeleEye; and (2) whether Wei / Huang knew or had reasonable cause to believe that Yik held the Subject Information as a result of being connected with TeleEye.

It is clear that the SFC’s has to prove that Wei and Huang had actual knowledge of the Subject Information during the Relevant Period which they knew was inside information. Whilst Wei and Huang did not make any admission on knowledge and there was no such direct evidence, the Court accepted the SFC’s suggestion to draw inferences that Wei and Huang did have the requisite knowledge on the basis of the circumstantial evidence:

1. There was an unusual coincidence between the timing of the purchases of TeleEye shares through Wei/Huang’s A/Cs and the progress of the parties’ negotiations on the intended Takeover. The purchase pattern and the events happened during the Takeover are objective facts, but when they were tied together, the Court was persuaded by the story. To illustrate, Wei and Huang did not buy any TeleEye shares before; on 1 March 2016 and 3 March 2016, Yik instructed Kingsway to purchase TeleEye shares through Wei’s Kingsway A/C bit by bit every day; on 31 March 2016, the sale and purchase agreement of the Takeover was nearly ready, and at that point of time, both Yik and Huang placed orders to buy as many TeleEye shares as possible. Yik even exerted pressure on the senior sales manager of Everbright, to expedite securities’ firm approval procedures in order to purchase more TeleEye shares. The above purchases were made during the Relevant Period when TeleEye was loss-making without any particular public news. Huang’s sudden confidence in purchasing so many TeleEye shares was simply unexplained as he was determined to keep purchasing solely TeleEye shares at such large quantities even when the price was rising during the Relevant Period. The Court determined that the only reasonable inference was that Huang had been told by Yik about the Subject Information, which gave him confidence to buy a large number of TeleEye shares with little regard to their prices during the Relevant Period.
2. The fund-flow exercise showed that all the funds used to purchase TeleEye shares through Wei/Huang’s A/Cs originated from Yik. Simply put, Yik deposited money, whether directly or indirectly, into Wei/Huang’s A/Cs and these funds were ultimately used in the purchase and settlement of TeleEye shares through these accounts during the Relevant Period. For Wei’s Kingsway A/C, Yik was even the only person who liaised with and arranged for the funds deposit and purchase and settlement of the relevant TeleEye shares.
   
3. Wei / Huang allowed Yik to have complete control over Wei/Huang’s A/Cs, and cooperated with Yik in moving funds into and out of Wei/Huang’s A/Cs. The intimate trust built amongst these parties was sufficient to impute knowledge on Wei / Huang. At the outset, Yik introduced and arranged Wei/Huang’s A/Cs to be opened. Wei authorised Yik to operate Kingsway A/C and Everbright A/C without any restriction or limit and Yik could trade freely in these accounts. Similarly, Huang wanted to authorise Yik to operate his securities account at UOB at the outset and Yik prepared such authorisation form for the UOB A/C. Their business and working relationship also intertwined with each other. The closeness between Yik, Wei and Huang suggested that Wei / Huang knew what securities had been purchased by Yik through Wei/Huang’s A/Cs as well as the movements of funds into and out of such accounts.
   
4. Most important of all, Wei and Huang had or ought to have constructive or even actual knowledge. They had all the securities accounts statements. They should know and have known that a large number of TeleEye shares had been purchased through Wei/Huang’s A/Cs. They had signed the relevant withdrawal forms for money to flow out of the securities accounts, and they have statements to check the movements in the securities accounts (as Wei did admit that he had read at least some of the statements).
   

Conclusion

From this case, it appears that the Court is willing to go quite far in imposing liability on tippees based on circumstantial evidence in the context of the insider dealing. Tippees are liable even if they have no direct involvement in the dealing in the relevant shares. Relevant factors the Court would consider include: (1) the tippee’s background or previous share trading; (2) his / her access to information; (3) his / her relationship with the tipper; (4) timing of contact between the tipper and the tippee; (5) timing of the trades; (6) pattern of the trades; and (7) attempts to conceal either the trades or the relationship between the tipper and the tippee. After all, the Court is ready to presume that a securities account holder ought to know and have adequate control of the transactions happened in his / her accounts and inevitable be responsible for such.