CFA Delivers Landmark Judgment in Insider Trading Case
  1. On 12 October 2018, the Hong Kong Court of Final Appeal (“CFA”) handed down a landmark judgment in Securities and Futures Commission v Yiu Hoi Ying Charles and Others (FACV 5/2018). By a majority of four to one, the CFA reversed the Court of Appeal (“CA”)’s decision and allowed the Securities and Futures Commission (“SFC”)’s appeal, ruling that two senior officers of Asia Telemedia Limited (“ATML”) had engaged in insider dealing.


  1. ATML was a company in a parlous financial state. Yiu Hoi Ying Charles was the former Director of Finance and an executor director of ATML, whilst Wong Nam Marian was its company secretary. Since 29 July 2002, ATML owed a debt of HK$83.39 million to Liu Lien Lien (“Madam Liu”). ATML’s defaults in repayment led Madam Liu to serve five statutory demands on ATML between October 2002 and April 2006. However, on each occasion the parties negotiated and no winding up petition ensued.
  2. Two tranches of share options were granted in 2005 and 2007 respectively. Charles Yiu exercised his share options granted on 23 March 2005 to acquire 6 million shares at HK$0.20 per share.  Marian Wong also exercised her share options granted on the same day and on 7 May 2007 to purchase 8 million shares at the price of HK$0.20 and 2 million shares at the price of HK$0.40.
  3. Madam Liu assigned the balance of ATML’s debt in the sum of HK$58.08 million plus accrued interest at the rate of 7% per annum to Goodpine Limited (“Goodpine”) (the “Assignment”) for a consideration of HK$25 million stated to have been paid on 1 February 2007. On 26 April 2007, Goodpine’s solicitors served a statutory demand on ATML stating that it would issue a winding up petition against AMTL if it failed to repay the debt within 21 days (the “Statutory Demand”), i.e. by 17 May 2007. The Assignment and the Statutory Demand came to the knowledge of Charles Yiu and Marian Wong (collectively the “Respondents”) but were not publicly announced.
  4. At the same time, there was a speculative surge in the price of ATML’s shares.
  5. Charles Yiu sold a total of 6 million shares at prices ranging from HK$0.85 to HK$0.91 from 28 May 2007 to 31 May 2007, obtaining a net profit of HK$5.305 million. Marian Wong, on the other hand, started selling her shares earlier. She sold 6.2 million shares at prices ranging from HK$0.37 to HK$0.494 per share from 28 February 2007 to 26 April 2007. She also sold an additional 3.8 million shares at prices ranging from HK$0.395 to HK0.98 after 26 April 2007 until 5 June 2007. She made a net profit of HK$5.1 million as a result.
  6. The SFC therefore commenced proceedings against the Respondents for alleged insider trading in the Market Misconduct Tribunal (“MMT”).

Innocent Purpose Defence and Past Decisions

  1. Pursuant to section 271(3) of the Securities and Futures Ordinance (the “Ordinance”), a person shall not be regarded as having engaged in market misconduct by reason of an insider dealing if he can establish, on a balance of possibilities, that the purpose(s) for which he dealt in the shares did not include the purpose of securing or increasing a profit or avoiding or reducing a loss by using the price sensitive information (“PSI”). This is known as the innocent purpose defence (the “Defence”).
  2. Despite concluding that the Assignment and the Statutory Demand were PSI, the MMT found that the Respondents did not commit insider trading as they could rely on the Defence, on the basis that their dealings were solely motivated by the speculative surge in the price of the shares, and not by their knowledge of the PSI.
  3. This led the SFC to appeal to the CA on the ground, amongst others, that the MMT had erred in applying the Defence. The CA upheld the MMT’s decision. The SFC therefore appealed to the CFA.

Decision of the Court of Final Appeal

  1. The central question before the CFA was whether the Respondents were entitled to rely on the Defence. The CFA, by a majority of four to one (Mr. Justice Tang PJ dissenting), allowed the appeal on the basis that the Respondents failed to show that they did not use the PSI to secure profits.

Use of PSI

  1. Much of the debate turned on what constitutes the use of PSI. Chief Justice Ma’s reasoning in paragraph 9 lies at the core of the majority judgment.
  2. To quote his Lordship’s words at paragraph 9, the Defence is not applicable because “at the material time… when the shares were sold, [the Respondents] knew only too well that the prices at which they managed to sell the shares were artificially high as a result of the inside information not being publicly known. It was with this knowledge [which is not publicly known] that they managed to earn the massive profits they did [emphasis added].” 
  3. Mr. Justice Ribeiro PJ and Mr. Justice Fok PJ, at paragraphs 49-50 of the judgment, add that “using relevant information” in the Defence simply means “making one’s decision to buy or sell the listed securities because of the quoted market price, knowing that the price is either artificially high or artificially low because the relevant information is not generally known… By doing so, one is employing the price sensitive information to one’s own advantage in order to steal a march on the rest of the market.”
  4. In a nutshell, “it is the turning of the possession of that knowledge [of PSI] into action which constitutes the use of the relevant information [emphasis added].”
  5. This appears to suggest that, as long as officers of a listed company deal in the company shares when they possess or know about the PSI which has not been publicly disclosed, they are considered to be “using” the PSI and hence caught by the insider dealing offence.
  6. Some may interpret the word “use” in another way.
  7. In this regard, we may first turn to the two cases Mr. Justice Tang PJ referred to in his dissenting judgment at paragraphs 117-126.
  8. The Crown Court judge in R v Cross [1990] BCC 237 made a similar interpretation and directed the jury that if they found the accused had dealt in the shares when he knew and possessed the PSI, the inference was that he must have used the information. However, the CA subsequently held that the Crown Court judge had seriously misdirected the jury, confirming that it is open to the jury to find that the accused had proved that he had not used the PSI to make any profit or avoid any loss.
  9. In Green v Charterhouse Group Canada Ltd (1976) 68 DLR (3d) 592, the Ontario Court of Appeal decided that to “make use of” insider information in accordance with section 113(1) of the Securities Act 1966 (Ontario) meant “the information must be a ‘factor’ in the insider’s participation in the transaction which the insider carries out with the person alleged to be aggrieved, ‘either by inducing him to enter into it or by assisting him or otherwise influencing him in the manner in which he performs it.’”
  10. Both case authorities illustrate that merely “turning of the possession of that knowledge [of PSI] into action” does not suffice to constitute the use of the relevant information.
  11. Further, in HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568 at paragraphs 11-12, the CFA confirmed that the modern approach to statutory interpretation is the purposive approach. The CFA in Pacific Sun v SFC [2015] 18 HKCFAR 138, at paragraphs 48-49, further ruled that in an event of any ambiguity or alternative interpretations, the principle against penalization applies.
  12. In Hong Kong, the insider dealing behaviour falls under Part XIII and Part XIV of the Ordinance, whereas the failure of officers of listed companies to take all reasonable measures to ensure the companies’ disclosure of the PSI is governed by Part XIVA. Whilst the former may result in both civil and criminal sanctions, the latter only attracts civil liability.
  13. By interpreting “use” to include “non-disclosure”, the majority, in effect, makes it possible for the SFC to use the insider dealing offence to catch and penalize the Respondents’ failure to take reasonable measures to ensure ATML’s disclosure of the PSI.

Degree of Causation

  1. The majority interprets the Defence in a more stringent way than Mr. Justice Tang PJ (dissenting) does, in a sense that the causal connection between the effect (securing or increasing a profit or avoiding or reducing a loss) and the means (by using the PSI) is less apparent.
  2. In the words of Chief Justice Ma at paragraph 9 of the judgment, “in these circumstances, it is impossible not to conclude that at least one of the purposes of their dealing in the shares included making gains by the use or utilization of the inside information they had… The fact also they thought that the Goodpine indebtedness would eventually be solved ‘behind closed doors’ in the future was not to the point [emphasis added].”  Hence, his Lordship appears to suggest that as long as the PSI has played a role in the Respondents’ decision to deal in the shares, regardless of how subsidiary it is, the Defence is inapplicable.
  3. Purpose concerns a person’s subjective state of mind which may be easier to prove if Mr. Justice Tang PJ (dissenting)’s interpretation of the Defence at paragraph 160 of the judgment had been adopted, i.e. it would be a defence if the Respondents could show that they would have done what they did whether or not they had the PSI. Based on this causation test, we may then make inference based on objective factors in the circumstances as follows:-
    1. Employees of ATML who had no idea about the Assignment and Statutory Demand also exercised their options and sold the shares in the same period of time. From this we may draw the inference that the Respondents are likely to have sold the shares anyway even if they were not in possession of the PSI, like other employees.
    2. Instead of selling all of their shares in one go ahead of the deadline of the Statutory Demand by 17 May 2007, the Respondents sold their shares on several occasions before and after the deadline. Henceforth we may infer that the Respondents’ sale of shares was not driven by their desire to secure profit or avoid loss by using the PSI.
  4. As such, if one adopts the broader interpretation by Mr. Justice Tang PJ, the Respondents should arguably be entitled to rely on the Defence and the allegation of insider dealing would not be made out.

Analysis of the Judgment

  1. Equal and timely dissemination of information is at the heart of a fair, efficient and transparent market. It helps maintain a level-playing field amongst all investors. To this end, it is arguable that public confidence in the securities market would be better served by overturning the CA’s decision than by allowing it to stand. It appears the judges had to weigh allowing the appeal at the price of a broader interpretation of the Defence against dismissing the appeal and enabling the Respondents to benefit from their failure to take reasonable steps to cause ATML to disclose the PSI.
  2. Some may say that, as an alternative, the CFA could have dismissed the appeal and directed the SFC to pursue against the Respondents by virtue of their failure to take reasonable steps to ensure ATML has disclosed the PSI in accordance with section 307G under Part XIVA. Pursuant to section 307Z of the Ordinance, provided that it is fair, just and reasonable in the circumstances, officers who are in breach of a disclosure requirement are liable to pay compensation by way of damages to any other person for any pecuniary loss sustained by the other person as a result of the breach, such as the persons who purchased the shares from the Respondents. However, the remedy may not be as effective as the remedy of disgorgement of profits provided for by section 303(2)(d) of the Ordinance for officers who committed insider dealing.
  3. Eventually, their Lordships seemed to have decided the case on the basis of what they adjudged to be the right result, i.e. the Respondents should not be able to benefit from their breach.


  1. In light of stringent interpretation of the Defence, it is prudent for officers of listed companies to take reasonable steps to ensure the companies disclose any PSI to the public as soon as reasonably practicable after the information has come to their knowledge.                      
  2. In the meantime, it remains best practice for such officers who are in possession of any PSI to refrain from dealing in the company shares until the information is made public, in order to avoid any insider dealing.

Partner, Boase Cohen & Collins

Alex Liu's key areas of practice include commercial and corporate litigation, investigations by governmental bodies such as the Securities and Futures Commission, Independent Commission Against Corruption and Commercial Crime Bureau, and insolvency and debt restructuring. Among his many appointments, he is a member of the Market Misconduct Tribunal.