The Securities and Futures Commission v. Young Bik Fung and Others
Court of Appeal
Civil Appeal No 33 of 2016
Hon Lam VP, Kwan and McWalters JJA
9 November 2017

Court of Appeal Upholds Insider Dealing and Fraud Decision in favour of SFC against Two Solicitors

Case background

On 9 November 2017, the Court of Appeal (‘CA’) dismissed the appeal by a solicitor, Eric Lee, and Eric’s two sisters, Patsy Lee and Stella Lee, against the judgment by the Court of First Instance (‘CFI’) finding them guilty of insider dealing and fraud, following prosecution Securities and Futures Commission (‘SFC’) under s. 213 of the Securities and Futures Ordinance (‘SFO’).

The prosecution concerned their dealings in the shares of a Taiwan-listed bank, Hsinchu International Bank Co Ltd (‘Hsinchu Bank’) in 2006 and in the shares of Asia Satellite Telecommunications Holdings Ltd (‘AsiaSat’) in 2007. The CFI found that Eric, Patsy and 1st Defendant Betty Young contravened the SFO by insider dealing in the shares of AsiaSat and s. 300 of the SFO by engaging in fraud or deception in transactions involving the shares of Hsinchu Bank.

The CFI made orders (i) declaring that they have contravened or were concerned in their fellow defendants’ contravention of the SFO; and (ii) that they return the profits from those illicit dealings in Hsinchu Bank shares and to restore the counterparties to their pre-dealing positions in respect of AsiaSat shares.

Grounds of Appeal

Eric, Patsy and Stella’s grounds of appeal focused on the following issues:

  • Whether the alleged fraudulent or deceptive conduct in respect of the dealings of Hsinchu Bank shares occurred ‘in a transaction involving securities’ for the purpose of s. 300;
  • The applicability of s. 300 to the purchase and sale of securities listed on an overseas stock exchange;
  • Whether the judge correctly drew certain factual inferences against them; and
  • Whether the judge was correct to make a restoration order against Stella.

Counsel for the three defendants argued that:

  • There was no fraud or deception practised in the transaction involving securities because
    • their alleged fraudulent activities involve two separate transactions, ie the purchase and a sale; and
    • the information had already ceased to be insider information by the time of the sale;
  • • Section 300 was not applicable to their conduct in relation to the Hsinchu Bank shares because
    • the Hong Kong courts have no jurisdiction over trading activities carried out on the Taiwanese Stock Exchange;
    • the supposed victims of their alleged fraudulent activities were not counterparties to their trades conducted on the Taiwanese Stock Exchange;
    • the alleged fraudulent or deceptive activities and the trading activities were not sufficiently related to form the elements of s. 300;
  • The CFI failed to properly consider the evidence they adduced at trial.
  • Stella argued that she should not be ordered to restore her counterparties since she was found not to have participated in the insider dealing.

CA’s Decision

The CA disagreed and held that:

  • The buying and the selling of the shares constituted the transaction involving securities under section 300 and Betty owed a continuous duty to disclose the misuse of the insider information even after the sale offer was made public, thus there was deception.
  • Hong Kong courts had jurisdiction to hear this case because
    • the preponderance of the fraudulent activities involving the Hsinchu Bank shares took place in Hong Kong;
    • the application of s. 300 of the SFO would not be limited to a case in which the counterparties in the securities transaction were the victims of the fraud; and
    • there was a substantial measure of the activities constituting the contravention of s. 300 of the SFO took place in Hong Kong;
  • The CFI did properly consider the defendants’ evidence and draw proper inferences.
  • The CA also upheld the restoration order against Stella because
    • there is no suggestion that a restoration order to deprive her of her profits would unfairly prejudice her; and
    • her investment decisions were influenced, if not prompted by, the disclosure to her of information, advice or tips that were based on the inside information even though she was unaware of that.