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HKSAR v. FU KOR KUEN, PATRICK AND ANOTHER
Posted on November 8, 2016 by admin
CACC179/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 179 OF 2010

(ON APPEAL FROM DCCC 981-1020 OF 2008)

������������

BETWEEN

HKSAR Respondent
and

FU KOR KUEN, PATRICK (???) 1st Applicant


LEE SHU YUEN, FRANCIS (???) 2nd Applicant
������������
Before : Hon Stock VP, Yeung JA and Lunn J

Date of Hearing : 18 November 2010

Date of Judgment : 23 December 2010

��������-

JUDGMENT

��������-

Hon Lunn J (giving the judgment of the Court) :

1. The applicants seek leave to appeal their convictions after trial in the
District Court by Deputy Judge Sham on 7 May 2010 on 20charges of false trading,
contrary to section 295(1)(a) and (6) of the Securities and Futures Ordinance, Cap.
571 (�the Ordinance�) and the sentences of imprisonment imposed in consequence,
namely two years� imprisonment in respectof each charge and a total sentence of
imprisonment of two years and nine months in respect of the 1st applicant and three
years� imprisonment in respect of the 2nd applicant.

THE CHARGES

2. Each of the charges alleged that on various dates in the period in and between
January 2004 and January 2005 the applicants jointlyplaced or caused to be placed
orders to buy and sell derivative warrants issued by Macquarie Bank Limited
(�Macquarie�) :

�� with the intention that, or being reckless as to whether, such orders had, or
were likely to have, the effect of creating afalse or misleading appearance of
active trading in respect of these warrants traded on the stock market operated by
the stock exchangeof Hong Kong Ltd.�

3. At the trial much of the evidence was placed before the judge by way of witness
statements and admitted facts, pursuant to section65B and 65C respectively of the
Criminal Procedure Ordinance, Cap. 221. Oral evidence was given by three witnesses
permitted to give evidence as expert witnesses, namely Mr Clive Rigby forthe
prosecution, Mr David White for the 1st applicant and Dr Tom Vinaimont for the 2nd
applicant. The applicants did not avail themselves of their right to give evidence.

4. There was no dispute that the applicants bought and sold warrants issued by
Macquarie in the period alleged in the charges. Theydid so from desks that they
occupied in the Dealing room of Grand Investment (Securities) Limited (�Grand�) on
the 22nd floor of Entertainment Building, 30 Queens Road, Central. The 1st
applicant had an account with Grand and the 2nd applicant an account with Shun
Loong Securities Company Limited (�Shun Loong�).

5. The overwhelming majority of the purchases and sales by the applicants of the
warrants issued by Macquarie, the subject of the charges,were between each other at
the same price back and forth throughout the day. At an early stage of each day of
the trading the subjectof the charges one or other of the applicants bought such
warrants, overwhelmingly from Macquarie. Before the end of each tradingday the
warrants were disposed of (exit) either by sale to Macquarie, to a third party or
to a combination of the two. The exitprice was generally at the same as or very
close to the original purchase price. As a result, profit or loss was not made by
thetrading itself. Rather, it was made as a result of rebates that ultimately were
paid to the applicants for the fact of their trading.

6. Under an agreement with the two brokers, Grand and Shun Loong, Macquarie paid a
rebate to brokers which matched the commission chargedof that client for trading by
the brokers. In their turn, the brokers passed on that rebate to the applicants. In
addition, underseparate agreements with the applicants, contingent on their trading
reaching a certain level, the two brokers paid a rebate of thecommissions they had
charged the applicants for their trading. In the result, since the total amount of
rebates paid to the applicantswas greater than the transaction costs that they
incurred, they were able to make a profit.

7. The prosecution�s case was that on each of the dates the subject of the charges
by the �circular trading� between the applicants,by which they dominated the market
turnover, they intended to create a false and misleading appearance of active
trading in thosewarrants or were reckless as to whether it had or was likely to
have that effect. Such appearance of �active trading� did notreflect the forces of
genuine supply and demand. One of the purposes of their �circular trading� was to
create a misleadingappearance of liquidity in trading in the warrants thereby
encouraging buyers of the warrants to enable them more easily to disposeof (exit)
the warrants at the end of the day.

The applicants� case

8. The applicants� case, in particular as advanced through the experts, was that
the trading between the applicants was legitimateand a form of arbitrage. The
commission rebate schemes operated by Macquarie, Grand and Shun Loong were lawful
and created a positionwhereby trading at the same price between the applicants
nevertheless generated a profit to the applicants. The applicants did nothave the
requisite intention nor were they reckless as required by section 295. The
applicants trading did not create a false ormisleading appearance of active trading
in the warrants. Rather it was real trading creating real liquidity. Neither
applicantswas not an �associate� of the other, as defined in section 295(5) of the
Ordinance. The evidential burden required of the applicantsin respect of the
defence afforded by section 295(7) of the Ordinance was satisfied and the
prosecution had failed to discharge thepersuasive burden placed on them to prove
that one of the purposes of the trading included the creating of a false or
misleadingappearance of active trading.

REASONS FOR VERDICT

9. In his admirably succinct and focused reasons for verdict the judge determined
that the actus reus of the offence, namely the trading, was not an issue. What was
an issue was the applicants� state of mind or mens rea (paragraph 28). Of that
issue, he determined that it, �� can be resolved by taking a commonsense approach
without the help ofan expert.� (paragraph 30).

10. Of the applicants� multiple trading of warrants with each other at the same
price, the judge determined that �� they simplytraded with each other to earn the
excess of rebates� � (paragraph 48). He went on to find that such trading, �� can
neverbe regarded as real trading� (paragraph 51). Having noted that they occupied
neighbouring desks in the dealing room at Grand andco-owned a property, he found
that they were �� acting in concert to conduct the game together.� (paragraph 56).
Further,he found that, although on occasions unavoidably the applicants traded with
third parties, they wanted to trade with each other andto do so �as many times as
possible so as to maximise their profit.� (paragraphs 57-8).

11. Of the issue of their intention in so trading, the judge found that the
applicants� knew it to be a �virtual certainty� thattheir trading resulted in
active trading in the warrants and, since he determined that their trading was not
�real�, �� theyintended their orders to have the effect of creating a false or
misleading appearance of active trading in the warrants.� (paragraph61).
Alternatively, he found that the applicants were reckless as to creating such an
appearance. (Paragraph 63.)

12. The judge said that he was satisfied (paragraph 68) that each of the applicants
was an �associate� of the other, as definedin section 285(1)(e) of the Ordinance,
namely a :

�� person with whom the person has an agreement or arrangement�

(i) with respect to the acquisition, holding or disposal of such securitities or


such interest;��

13. Further, he determined (see paragraph 66) that the provisions of section 295(5)
(b) and (c) were operative, namely that where a personoffers to sell (buy)
securities at a price that is substantially the same as the price at which he has
made or proposed to make,or knows an associate of his has made or proposes to make,
an offer to buy (sell) the same or substantially the same number of them,then for
securities traded, inter-alia, on the Stock Exchange of Hong Kong the person
shall :

�� be regarded as doing something or causing something to be done, with the


intention that, or being reckless as to whether, ithas, or is like, the effect of
creating a false or misleading appearance.�

14. The judge went on to determine that the burden of proof imposed on the
applicants in respect of the defence provided for by section295(7) of the Ordinance
was an evidential burden only, not the persuasive burden. The sub-section provides
that :

�� it is a defence to the charge for the person to prove that the purpose for which
he committed the act was not, or, where therewas more than one purpose, the
purposes for which he committed the act did not include, the purpose of creating a
false or misleadingappearance in active trading in securities��

15. The judge determined that, as day traders, unless they were sure that someone
would buy the warrants at the end of the day, theapplicants ran the risk that they
would be unable to �exit the market�. He noted that although Macquarie had bought
back allthe warrants sold to the applicants on the majority of the 20 trading days,
nevertheless on five of the days third parties had beenthe buyers and on four days
third parties and Macquarie had been the buyers. Having found that an active liquid
market would beeasier to exit than a illiquid market the judge determined that is
what the applicants wanted and, in particular that by their tradingthe applicants
had �� a purpose to create a false or misleading appearance in active trading in
the warrants.� Accordingly,the applicants were unable to avail themselves of the
defence creating provision.

GROUNDS OF APPEAL AGAINST CONVICTION

The 1st applicant

Ground 1: �active trading�

16. By ground 1, Mr Lok SC submitted on behalf of the 1st applicant that the judge
had failed to make a finding of the meaning of the phrase �active trading�, as used
in section 295 ofthe Ordinance. It was contended that the phrase fell to be
construed in the same way in which the Court of Appeal of Western Australiain
Braysich v The Queen [2009] WASCA 178 construed the phrase in the context of
section 998 of the Corporations Law, namely that ��active� � requires something
morethan ordinary volume or price changes in the securities in question�. Further,
he failed to make a finding that the trading ofthe applicants had or was likely to
have the effect of creating a false or misleading appearance of active trading.
Alternatively,if he had made such a finding he erred in so doing.

Ground 2: intention

17. By ground 2, it was submitted that the judge had erred in determining that the
appropriate test for determining �intention�was that set out in R v Woollin [1998]
1 AC 82, as summarised in Archbold Hong Kong 2010 at 20-19. It was argued that, in
consequence, the judge erred in determining that theapplicants intended their
trading in the warrants to create a false or misleading appearance of active
trading. It was contendedthat the appropriate test was that articulated by
Sackville J, in the context of section 998 of the Corporations Law, in the
FederalCourt of Australia in Australian Securities Commission v Nomura
International PLC (1998) 89 FCR 301 at 303-4, namely the contravener�s �sole or
dominant purpose, or �central object��. Application of that test would haveresulted
in the judge determining that the applicants traded the warrants between themselves
for the �sole or dominant purpose�of earning the excess of monies of the rebate
commissions over the transaction costs.

Ground 3: reckless

18. By ground 3, it was contended that the judge erred in finding in the
alternative that the applicants were reckless as to whethertheir trading in the
warrants had or was likely to have the effect of creating a false or misleading
appearance of active trading. It was submitted that the judge made no finding that
the conduct of the applicants had or was likely to have that effect. He waswrong to
determine that their trading was not genuine and to do so by the application of
�commonsense�, not having regard tothe evidence of the expert witnesses. There was
evidence that the pattern of the applicants� trading, namely to maximise
rebatecommissions was known in the market and practised by other participants.
Accordingly, the judge erred in determining that the 1st applicant was aware that
his conduct carried with it the risk of creating a false and misleading appearance
of active trading.

Ground 4: section 295(7)�the statutory defence

19. Ground 4 of the 1st applicant�s grounds of appeal is common to that taken by
the 2nd applicant, under whose grounds of appeal it is considered.

The 2nd applicant

Grounds 1 to 3: expert evidence

20. By grounds 1-3, Mr Duncan SC submitted that, having admitted the testimony and
reports of three expert witnesses, the judge erredin ignoring that evidence. The
testimony of the experts constituted a �science or body of knowledge outside the
normal boundsof knowledge to the expected that the average citizen.� That evidence
was relevant to the central issue of whether the applicants�trading constituted a
genuine form of trading. The judge had erred in failing to make findings in respect
of the evidence, on theone hand of Mr White and Dr Vinaimont, that the applicants�
trading was an accepted and normal form of arbitrage and that, on theother hand of
Mr Rigby, it constituted a form of market manipulation. In this case, the judge�s
was not entitled to approach theresolution of the central issue by deploying
commonsense only. Further, he failed to give reasons as to why he had rejected
evidenceof the experts led on behalf of the applicants.

Ground 4 : section 295 (7)�the statutory defence

21. By ground 4, it was contended that whilst the judge had determined correctly
that the burden of proof imposed upon the applicantsat trial by section 295(7) of
the Ordinance to avail themselves of the statutory defence was an evidential burden
only, he had erredin determining that the applicants had failed to discharge that
burden. The judge was in error to determine that there was no evidenceto support
such a defence (see paragraph 72). Reliance was placed on the evidence of Dr
Vinaimont and Mr White that the purposeof the applicants� trading was �arbitrage�.
Given that Macquarie, as liquidity provider, had to respond to requests for
quotesin respect of the warrants and, having regard to the evidence that before the
end of each respective trading day Macquarie had boughtback 70% of the warrants
sold to the applicants, there was evidence that raised a reasonable doubt that the
one of the purposes ofthe applicants� trading was to create a false or misleading
appearance of trading activity, thereby implying liquidity, in orderthat they could
dispose of the warrants, if necessary to third parties, and thereby �exit� each
trading day. Also, there wasevidence from Mr Rigby that the prices quoted by
Macquarie in that exercise were �reasonable�. There was no evidence that
theapplicants had any difficulty in disposing of their warrants at the end of the
day�s trading. In any event, the appearance of liquiditycreated by the applicants�
trading was merely a consequence not the purpose of that trading. The purpose of
the trading was tomake a profit from the fact that the monies received by way of
rebates were greater than the costs of the transactions.

A CONSIDERATION OF THE SUBMISSIONS

�Active trading�

22. As the judge noted, the trading activities of the applicant in respect of the
warrants the subject of the charges was undisputedand was set out in the schedules
attached to his reasons for verdict (paragraph 26). The schedules speak for
themselves. The judgenoted their significance at paragraph 59. On the 19 days on
which the applicants traded in the 20 warrants, the subject of the charges,their
trading accounted for 75% or more of the total market turnover in those warrants on
all but two occasions. Even on those twooccasions, their trading was more than 50%
of the total market turnover in the warrants. The lowest number of warrants they
tradedon a particular day was 14 million, whereas on most occasions they traded in
many tens of millions of warrants and on a number ofoccasions in hundreds of
millions of warrants on a single day.

23. Whilst the judge did condescend to articulate the dictionary definition of
�trade�, namely the activity of buying and selling,and he did note that the phrase
�active trading� was not defined in the Ordinance he did not seek to define the
word �active�. He did not need to do so. It is a simple English word, the meaning
of which is readily understood. Similarly, he did not determinespecifically that
the applicants� trading fell within the phrase �active trading�. Again, he did not
need to do so. No sensiblesuggestion to the contrary was sustainable. There was no
doubt whatsoever that the applicants� trading had, or was likely to have,the effect
of creating an appearance of active trading in those warrants.

�False or misleading appearance�

24. In the context of a consideration of the phrase �false or misleading


appearance�, the judge cited passages from the judgmentof Mason J, as he was then,
with whose judgment the other judges concurred, in the High Court of Australia in
North v Marra Developments Ltd [1981] 148 CLR 42, in which consideration was given
to the ambit and object of a provision in section 70 of the Securities Industry Act
(NSW) thatproscribed conduct calculated to create �� a false or misleading
appearance of active trading�. In particular, he noted thatMason J stated that the
object of the section was to seek �� to ensure that the market reflects the forces
of genuine supplyand demand�. Also, that he had observed that �� it is in the
interests of the community to the market for securities shouldbe real and genuine,
free from manipulation.�

25. We are satisfied that Mason J�s observations in respect of the object of
section 70 of the Securities Industry Act (NSW) are appositeand applicable to a
consideration of the objects of section 295 of the Ordinance.

26. Having noted that the pattern of trade between the applicants was to buy and
sell to and from each other frequently and at the sameprice, the judge determined
that such trading was not �real� (paragraph 54). In reliance on that finding, he
went on to determinethat the applicants intended their orders to have the effect of
creating �� a false or misleading appearance� of active trading(paragraph 61).
Clearly, the trading of the applicants did not reflect the forces of �genuine
supply and demand�. It was not�real�. That trading had or was likely to have the
effect of creating a false or misleading appearance of active trading.

Intention

27. The criticism of the judge�s acceptance of the summary of the law in respect of
intention as set out in Archbold Hong Kong 2010, 20-19 (paragraph 32 and 36) is
ill-founded. The same description is to be found in the 12th edition of Smith and
Hogan�s �Criminal Law� at page 98, namely :

�(1) A result is intended when it is the actors purpose to cause it.

(2) A court or a jury May also find that the result is intended, though it is not
the actor�s purpose to cause it, when�
(a) the result is a virtually certain consequence of that act, and

(b) the actor knows that it is a virtually certain consequence.�

28. As this Court explained in its judgment delivered by McMahon J in Securities


and Futures Commission v Zou Yishang [2007] 3 HKC 409 the description of the law at
item (2) has its origins in the judgment of the Court of Appeal of England and
Wales in R v Nedrick [1986] 1 WLR 1025 and R v Woollin [1999] AC 82. In particular,
McMahon J noted (paragraph 38) :

�It is plain that the direction is a rule of evidence which allows a finding of the
requisite intention where the defendant appreciatedthat the results of his act were
virtually certain.�

Further, McMahon J went on to note that although the rule was developed in the
context of the offence of murder, given that it wasan evidential rule (paragraph
40) :

�� it is a rule which logically would apply to proof of specific intention whatever


the offence.�

29. In Zou this Court rejected an argument that the magistrate had erred in
determining that the defendant was possessed of the intention requiredby section
135 of the Securities Ordinance, having found that he, �� knew that the creation of
a false or misleading appearance of active trading was a virtually
certainconsequence of his deliberate actions.�

30. As was pointed out in oral argument, the reliance placed by Mr Lok on
statements by Sackville J in Nomura is misplaced. The full context of those
statements is made apparent from the judgment of Sackville J (page 394C) :

�Mr Bathurst submitted that, having regard to the fact that s. 998(1) creates a
criminal offence, �intended� should be construedas referring to the alleged
contravener�s �sole or dominant purpose� or �central object�. I do not think it is
necessaryto express a final view on this issue. I am content to proceed on the
basis that Mr. Bathurst�s submission is correct.�

31. In the result, we are satisfied that the judge was correct in approaching the
issue of intention in the manner in which he did.

Reckless

32. No quarrel was taken with the judge�s reliance on or summary of the description
of the law of recklessness set out in the judgmentof Sir Anthony Mason NPJ in Sin
KamWah & Another v HKSAR (2005) 8 HKCFAR 192 at paragraph 44. Contrary to the
submissions made on behalf of the 1st applicant, in making a finding that the
applicants were reckless, alternative to his primary finding that they were
possessed ofintention, the judge did make a determination that the applicants were
aware of the risk that their trading was �� likely tohave the effect of creating a
false or misleading appearance of active trading� and that it was not reasonable
for them to takethat risk. (See paragraph 63.)

The expert evidence

33. It is to be noted that, on being informed during the prosecution opening that
it was proposed to lead evidence from Mr Rigby, thejudge immediately expressed
misgivings about the need for the receipt by the court of expert evidence
(transcript 15N) :
�But is it really a matter for the experts to tell me the phenomenon, from the
trading pattern of the defendant?�

He went on to observe (transcript 16P) :

�But at the end of the day, I will ask the question myself, whether people would �
say, private investor, would trade in this way,genuine investor would trade in this
way.�

34. Further, it is to be noted that objection was taken on behalf of the applicants
to the receipt of such evidence from Mr Rigby, inter alia, on the basis that the
court could reach his own conclusions :

�� without the assistance of a witness possessing special knowledge or experience.�

(Transcript 44D-G; 40 4S-T; 90M-N)

35. In ruling that Mr Rigby was suitably qualified to give expert evidence in
relation to �financial instruments, including derivativewarrants, and trading of
these instruments�, the judge said that he would give full reasons for so doing in
due course. (See transcript96J-L.) Significantly, the judge made no ruling in
respect of the need for the court to receive such testimony.

36. In the course of evidence-in-chief, Mr Rigby testified in respect of reports of


Mr White and Dr Vinaimont, to which he had madereference in supplemental reports of
his own. (Transcript 123-7.)

37. In face of Mr White�s oral testimony, counsel for the prosecution stated that
he did not object to its admissibility. (See transcript183.) No statement was made
by the prosecution in prospect of Dr Vinaimont�s testimony. However, in his closing
speech for theprosecution, having noted that none of the factual evidence led by
the prosecution had been disputed and that the applicants hadnot given evidence,
counsel noted that the evidence led from the experts was the only area in issue. In
that context, he submittedthat the central issue was the �state of mind� of the
applicants in respect of which issue the evidence of the experts was of�little
assistance� or �inadmissible� (transcript 346K-348A; 352K-353A).

Ruling: voir dire

38. In his reasons for verdict, as he had promised to do, the judge provided his
reasons for permitting Mr Rigby to give expert testimony. Of the issue of the need
at all for the receipt by the court of expert testimony, the judge noted (paragraph
20) :

�The question to be asked regarding the trading activities of the defendants at the
end of the day May well be within the experienceand knowledge of a jury, but not
until all the evidence has been adduced before the court, could the court be so
sure that in thefinal analysis of the matter, it would not touch on any of the
technical aspects of warrants which may require expert assistance.�

The need for the court to have the assistance of expert testimony

39. Having noted that there was no dispute as to commission of the actus reus of
the offence, the judge identified the �real issue� as being (paragraph 28) : the
�question of mens rea and for what purpose(s) the Ds traded in the way as they
did.� [Underlining added]. In the result, he determined (paragraph 30) :

�Despite the expert evidence, I do not think that the real issue in the present
case really touches on the finer points nor thetechnical aspects of derivative
trading; in other words, the above question can be resolved by taking a commonsense
approach withoutthe help of an expert.�

40. Of the issue of the purpose(s) that the applicants traded, the judge posed the
rhetorical question (paragraph 40) :

�Was it just for the purpose of earning the rebates and nothing else?�

41. In a subsequent analysis of the evidence, the judge explained his determination
that he did not require the assistance of experttestimony. Of the applicants�
multiple purchases and sales between each other at the same price, the judge
determined (paragraph48):

�They simply traded with each other at the same price to earn the excess of
rebates-such game, in my view, does not require anyadvanced mathematical training
to understand. Furthermore, it does not really touch on the finer points of warrant
trading��

42. In the context of his consideration of the issue, arising out of the statutory
defence provided for by section 295(7) of the Ordinance,of whether or not it was
one of the purposes of the applicants in trading as they did to create a false or
misleading appearanceof active trading in the warrants, the judge stated (paragraph
74) :

�Again I do not need an expert to tell me that comparatively speaking, an active


market of any warrant, other things being equal,is more attractive than that of an
illiquid one for the simple reason that in a liquid market with more market
participants takingpart in the trading activities, it would be easier to exit the
market.�

43. Clearly, having received not only the reports of the three experts but also
their oral testimony, the judge was best placed to determinewhether or not he
required their expertise in resolving what he had identified as the �real issues�
in the case. Given the natureof the issues involved, namely the applicants�
intention/recklessness and purpose(s) in their trading and in all the
circumstancesof this case, we are satisfied that the judge was entitled to
determine that he was not assisted by the expert evidence and thathe could
determine the matters himself by the application of common sense.

The hierarchy of the judge�s findings: relevance of the statutory defence, section
295(7)

44. In its closing submissions, both written and oral, the prosecution invited the
judge to approach the issue of determining the mens rea of the applicants and the
conduct of their trading on the following basis (paragraph 10; transcript 331) :

�(i) D�s purpose and intention was to create a false or misleading appearance of
active trading ;

(ii) alternatively, even if D�s purpose was confined to make a profit, they
nevertheless intended to create a false or misleading appearance of activetrading
for the reasons set out in R v Nedrick [1986] 1 WLR 1025 and R v Woollin [1999] AC
82;

(iii) alternatively, D�s were reckless as to whether their trading caused a false
or misleading appearace of active trading;

(iv) there is in any event a deeming provision as to D�s intention : Section 295
(5).� [Italics added]

45. Further, in making submissions in support of items (i) to (iii) (paragraph 18;
transcript 338) the prosecution specifically invitedthe judge to leave �� the
deeming provision aside�. Finally, and only after he had invited the judge to make
findings basedon his primary submissions, counsel for the prosecution invited the
judge to have regard to the �deeming provision�, section295(5) and the statutory
defence provided for by section 295(7) of the Ordinance (paragraphs 23 and 54;
transcript 342 and 351).

The judge�s findings

46. In his analysis of the evidence the judge made it clear that his findings were
hierarchical. First, he addressed the issue of intentionin the applicants. He
determined (paragraph 60-1) :

�� the virtual certainty of the increase in the number of trades is that the
trading becomes more active as the volume of tradegrows-the relationship is one of
direct proportion.

61. I am sure that the Ds knew that this was a virtually certain consequence of
their actions. Since I found their trading wasnot real, I have no difficulty in
drawing the only conclusion that they intended the orders had the effect of
creating a false ormisleading appearance of active trading in the warrants.�

47. In going on to consider the issue of recklessness, the judge made it clear that
he did so lest his determination in respect of intentionbe found to be wrong
(paragraph 62). Having approached his determinations in that sequence and on that
basis, the judge determinedthat the applicants were, in any event, reckless in
their conduct.

48. Then, but only then, the judge went on to consider for the first time the
�deeming provision� of section 295(5)(b) and (c) ofthe Ordinance (paragraph 66-8).
In consequence of his determination that the deeming provision was operative, the
judge went onto consider the operation of the statutory defence provided for by
section 295(7) of the Ordinance. Nevertheless, before doing sohe stated :

�Even without the deeming provision, I would have come to the same conclusion as
stated above.�

49. We are satisfied that it was appropriate for the judge to approach his
determinations in that sequence and manner. For the reasonsset out above, we are
satisfied that there is no merit in the proposed grounds of appeal against
conviction of the applicants, inparticular that the judge erred in determining that
they were possessed of the requisite intention and/or recklessness. Accordingly,it
is not necessary for this court to go on to consider the grounds of appeal arising
out of the judge�s consideration of the statutorydefence provided for by section
295(7) of the Ordinance.

REASONS FOR SENTENCE

50. In his reasons for sentence, delivered on 30 May 2010, the judge noted that the
applicants� conduct had occurred on 19 days ina period of 13 months. The trading in
all of the 20 warrants had resulted in a profit to the applicants, in a total
amount of $1million. The judge said that, on information available to him, he was
unable to determine that �� nobody suffered any loss asa result� of the applicants�
trading (see paragraph 24). However, he said that in his view �the false trading
provisions aregeared to deal with market manipulation rather than the actual
losses, if any, that is occasioned by such manipulation.�
51. Although he acknowledged that, since the rebate system operated by the warrant
issuers had been banned by the Securities and FuturesCommission (�SFC�) in 2006,
there was little likelihood of re-offending, he said that, �Unless the market
manipulators aredeterred, the investors cannot be said to be sufficiently
protected.� (Paragraph 27.)

52. In determining that the delay in bringing the proceedings was not a relevant
mitigating factor in this case, the judge noted the�voluminous documentary
evidence� adduced at trial and observed that the investigation into the applicants�
conduct was onlypart of a �large-scale investigation� which required the SFC to go
through �an avalanche of documents and interviewing a numberof suspects.�

53. Having sentenced each of the applicants to 2 years� imprisonment on each of the
20 charges the judge said that the sentences ofimprisonment should be made
consecutive to one another but, having regard to the totality principle, by making
one month only ofsome of the sentences consecutive to the sentence imposed in
respect of Charge 1, he sentenced the 1st and 2nd applicants to a total sentence of
two years and nine months and three years� imprisonment respectively. He afforded
the 1st applicant a discount of two months� imprisonment �to reflect his clean
record� and one month �for his generosity�. Thelatter was a reference to sizeable
charitable donations made by the 1st applicant.

54. The applicants did not oppose the order sought by the SFC and made by the judge
that they pay the SFCs costs of the investigation. In the event, the judge ordered
each of the applicants to pay $694,498 to the SFC.

GROUNDS OF APPEAL AGAINST SENTENCE

1st Applicant

55. It was submitted on behalf of the 1st applicant that the judge erred in
determining that it was appropriate to order a deterrent sentence, given that the
1st applicant was a man of 40 years of age of previous good character. Further,
that he had given insufficient weight to the fact thatthere was no prospect of re-
offending by way of the same conduct given that the system of rebates had been
prohibited. Finally,it was contended that the judge erred in failing to give weight
to the fact of delay in bringing the prosecution. The 1st applicant had been served
with a notice by the SFC that he was a person under investigation in September 2005
and an interview conductedof him in October 2005. However, the summonses against
him were not issued until October 2008 and, after the transfer of the caseto the
District Court, the hearing did not commence until February 2010.

2nd Applicant

56. It was submitted on behalf of the 2nd applicant that the judge had erred in not
giving weight to the fact that there was no proof of loss to other investors in
consequenceof the offences. Further, that the judge ought to have given weight to
the fact of the absence of aggravating features in the commissionof the offence,
namely that there was no evidence of a breach of trust, the use of corporate
vehicles as camouflage for the activitiesor of corruption. The 2nd applicant merely
took advantage of an opportunity to make profit from a legal arrangement for the
rebate of commissions for tradingin selected warrants on selected dates. It was
contended that the judge was wrong to distinguish between the applicants on the
basisof previous good character, given that the convictions of the 2nd applicant
for blackmail and assault occasioning bodily harm were in 1985 when he was 15 years
of age. Finally, the 2nd applicant joined the 1st applicant in contending that the
judge had erred in not giving weight to the issue of delay, he too having been
served with a noticethat he was a person under investigation by the SFC in
September 2005.

A CONSIDERATION OF THE SUBMISSIONS

Delay

57. We are satisfied that the judge was correct in determining not to have regard
to the fact of delay as a mitigating factor in favourof the applicants. Although
the delay of about 4� years from the time that the applicants became aware first of
investigation intotheir misconduct until the commencement of their trial is
undesirable, in the circumstances of this case it was both explicable
andunderstandable. From the �Chronology� provided by the respondent, with which no
issue is taken, it is apparent that, prior tothe applicants being informed in
September 2005 that they were persons under investigation, the Surveillance
Department of the SFChad conducted enquiries for some six months. Initially, the
investigation encompassed the month of December 2004 only in respectof five
warrants. The SFC interviewed many witnesses and in August 2006 the ambit of the
enquiry was enlarged to cover trading intwo additional warrants. In January 2007,
following legal advice it was expanded further to encompass the period 1 April 2003
to31 July 2005 and trading in all warrants issued by Macquarie. In April 2007, the
enquiry was expanded to cover 25 additional warrantstraded on 35 trading days. All
the while, the interviewing and re-interviewing of witnesses continued apace.
Advice was first soughtfrom a market expert as early as November 2005.

The seriousness of the offence

58. It is clear that, in context, the judge had noted that the issue of whether or
not other investors suffered loss �is a questionof proof� and that there was
insufficient evidence in that respect to make a determination.

59. We are satisfied that the judge was correct to identify the primary objective
of the false trading provisions to be directed atthe fact of market manipulation
itself. It is difficult to see in the circumstances of this case how loss, if any,
could be calculated. As the judge noted, (paragraph 21) the observations of Sir
Anthony Mason in North are apposite (page 59) :

�It is in the interests of the community that the market for securities should be
real and genuine, free from manipulation.�

60. As a significant financial services centre, those interests are of considerable


importance to Hong Kong. Misconduct that threatensthose interests jeopardises Hong
Kong�s reputation for integrity in its markets. Contravention of those provisions
is to be treatedseriously.

61. Given the fact that the 2nd applicant�s convictions occurred when he was 15
years of age, for which a probation order was made, and were about 20 years priorto
the misconduct the subject of the charges, we are satisfied that the judge erred in
distinguishing between the applicants andaffording the 1st applicant a further
discount of two months� imprisonment. In respect of their character, they ought to
have been afforded the sametreatment.

62. We are satisfied that, in all circumstances, the sentence of two years�
imprisonment imposed upon the applicants in respect ofeach of the charges was
manifestly excessive. In our judgment, the appropriate sentence for each of the 20
charges is 15 months�imprisonment. Having regard to the appropriate totality of
sentence in our judgment, an uplift of 8 months� imprisonment wouldbe appropriate,
subject to the discount of two months� imprisonment afforded by the judge in
respect of character, now to be affordedto each applicant, and in addition one
months� imprisonment for the 1st applicant for his charitable donations. From the
resulting total of 23 months� imprisonment, 3 months and 2 months� imprisonmentis
to be deducted for the 1st and 2nd applicants respectively.

CONCLUSION

63. For the reasons set out above, the applications made on behalf of the
applicants for leave to appeal against conviction are dismissed. In relation to
sentence, we grant each applicant leave to appeal, treat the applications as the
hearing of the appeal; allow theappeals and quash the sentences imposed hitherto;
and in place thereof we order that each applicant serve a sentence of 15
months�imprisonment in respect of each of the charges. In respect of the 1st
applicant, we order that one month�s imprisonment of the sentences of imprisonment
imposed in respect of Charges 2 to 6 be servedconsecutively with each other and the
sentence of 15 months� imprisonment imposed in respect of Charge 1. In respect of
the 2nd applicant we order that one month�s imprisonment of the sentences of
imprisonment imposed in respect of Charges 2 to 7 be servedconsecutively with each
other and the sentence of 15 months� imprisonment imposed in respect of Charge 1.
Accordingly, the totalsentence of imprisonment imposed on the 1st and 2nd
applicants is one year and 8 months and one year and 9 months respectively.

(Frank Stock)
Vice-President (Wally Yeung)
Justice of Appeal (Michael Lunn)
Judge of the Court of First Instance

Ms Wong Kan Hing, SADPP of the Department of Justice, for the Respondent.

Mr Lawrence Lok, SC and Mr Peter Ip, instructed by Meesrs K and L Gates, for the
1st Applicant

Mr Peter Duncan, SC and Mr Edwin Choy, instructed by Messrs Haldanes, for the 2nd
Applicant

(I) Court of Appeal invited by the 1st and 2nd Applicants to certify that a point
of great and general importance is involved. Courtof Appeal declined to certify.
Please refer to CACC179/2010 dated 2 March 2011 (II) Please refer to FACC4/2011 for
the relevant appeal(s)to the Court of Final Appeal.

Posted in (HKSAR) ???????, 23 December 2010, CHIEF BAILIFF OF THE HIGH COURT, COURT
OF APPEAL, FU KOR KUEN, PATRICK (???), LEE SHU YUEN, FRANCIS (???) Tagged (formerly
High Court Action No. 7335 of 2000), COURT OF APPEAL, CRIMINAL APPEAL NO. 179 OF
2010
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