Case Detail

HCA 2177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2177 OF 2011

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BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	LEE SUNG HO (also known as STANLEY LEE and STANLEY SUNG HO LEE)	1st Defendant
	CHANG SE LEE	2nd Defendant
	EMPRESS FAIR LIMITED	3rd Defendant
	WINWELL GLOBAL TRADING LIMITED	4th Defendant
	SSCP HOLDINGS (HONG KONG) LIMITED	5th Defendant
	STM CORPORATION	6th Defendant

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Before: Hon Barma J in Chambers

Date of Hearing: 28 June 2012

Date of Judgment: 5 September 2012

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J U D G M E N T

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Background

1. On 20 December 2011, the Securities and Futures Commission (“the SFC”) applied for and obtained ex parte worldwide Mareva injunctions against the 1^st to 6^th Defendants in support of proceedings, issued the following day, in which the SFC sought a number of declarations and orders against the Defendants under section 213 of the Securities and Futures Ordinance (Cap 571) (“the Ordinance”). Leave was also granted to the SFC to issue a concurrent writ for service on the 1^st, 3^rd, 4^th and 6^thDefendants out of the jurisdiction.

2. The SFC’s case was that the 1^st to 5^th Defendants had been involved in insider dealing in relation to shares in a company called Schramm Holding AG (“Schramm”), a German company whose shares are listed on the Hong Kong Stock Exchange, between about March and July 2011, in contravention of sections 270 and/or 291 of the Ordinance, and were thus liable to have orders made against them under section 213(2) of the Ordinance. So far as the 6^th Defendant was concerned, it was not alleged to have itself been guilty of any contravention of the Ordinance, but was said to have been involved in the insider dealing (whether knowingly or not) by receiving a substantial portion of the sale proceeds of the shares which were the subject of the alleged insider dealing, and so liable to have an order made against it under section 213(2)(b) of the Ordinance.

The SFC’s case at the ex parte stage

3. The SFC’s evidence in support of its application for a Mareva injunction consisted of an affidavit dated 19 December 2011 (“Liang’s 1^st Affidavit”) made by Liang Lu Kar, Lucas (“Liang”), a Senior Manager in the SFC’s Enforcement Division. The facts, as put forward by the SFC at that stage, can be summarised as follows:-

(1) Schramm was a subsidiary of a Korean company known as SSCP Co Ltd (“SSCP Korea”). The 5^th Defendant, SSCP Holdings (Hong Kong) Limited (“SSCP HK”), is also a subsidiary of SSCP, and has two directors – Joung Byoung Jin (“Joung”) and Park Man Ho (“Park”). It also held a shareholding in Schramm.
(2) On 30 June 2011, Akzo Nobel N V (“Akzo”), its subsidiary Salvador AG (“Salvador”) and Schramm publicly announced a possible voluntary conditional cash offer for by Salvador for all of Schramm’s issued shares at a price of HK$78.70 per share, payable in cash. It was stated in the announcement that SSCP Korea, SSCP HK and another (Malaysian) company called Humble Humanity Limited (“Humble Humanity”), who together held just over 70% of Schramm’s issued shares, had agreed to accept the offer.
(3) The announcement was the culmination of negotiations for the acquisition of Schramm by Akzo that had begun at about the end of February 2011. It is said that SSCP Korea had decided in January 2011 to dispose of its interest in Schramm, and that the 1^st Defendant, Stanley Lee Sung Ho (“Lee”) and his financial advisory firm, Stanley & Associates Limited (“SAL”) acted as SSCP Korea’s financial adviser for this purpose, and was involved in selecting potential buyers and negotiating the terms of the sale. The negotiations continued between March and early June 2011.
(4) On 14 June 2011, when an agreement appeared imminent, Schramm sought a suspension of trading in its shares pending the making of a public announcement.
(5) The 2^nd Defendant, Chang Se Lee (“Chang”), is a Korean national. She had apparently previously been employed by Schramm, and appeared to have connections with SSCP HK, and appeared to have had fairly regular telephone contact with SSCP HK and one of its directors, Joung, between February and April 2011 (and it is now alleged, in the Statement of Claim, that she was employed by SSCP Korea and SSCP HK between about 1997 and 2011).
(6) Between 18 March 2011 and 19 May 2011, the 2^nd Defendant, Chang Se Lee (“Chang”) purchased 80,080 shares in Schramm. She purchased 31,120 shares on 18 March 2011 at prices ranging between HK$22.30 and HK$23.00, 5,920 shares on 14 and 15 April 2011 at a price of HK$25.70, 14,400 shares on 19 and 21 April 2001 at prices ranging between HK$26.00 and HK$26.65, 2,000 shares on 28 April 2011 at a price of HK$26.75, 9,440 shares on 4 and 5 May 2011 at prices between HK$27.20 and HK$27.45, and 17,200 shares on 12 and 13 May 2011 at prices between HK$28.25 and HK$30.75.
(7) Between 14 and 18 July 2011, Chang sold a total of 64,720 Schramm shares at prices ranging between HK$68.15 and HK$69.80. Her remaining shares were eventually purchased by Akzo in October 2011, pursuant to its offer
(8) Prior to March 2011, Chang had previously purchased some 29.600 shares in Schramm between 23 July and 3 August 2010, and sold some 12,960 shares between 1 November 2010 and 7 February 2010.
(9) The 3^rd Defendant, Empress Fair Limited (“Empress Fair”) was said to be owned by Chang.
(10) The 4^th Defendant, Winwell Global Trading Limited (“Winwell”), was alleged to be ultimately beneficially owned by Lee, on the basis that he owned its sole shareholder and director, a BVI company called North Star Strategic Investment Limited.
(11) Between 19 April 2011 and 12 May 2011, Winwell bought 53,040 shares in Schramm. It acquired 22,400 shares between 19 and 21 April 2011 at prices ranging from HK$26.45 to HK$26.95, 17,120 shares between 27 and 29 April 2011 at prices ranging from HK$26.65 to HK$27.00, 7,520 shares on 3 and 4 May 2011 at prices between HK$27.00 and HK$27.45, and 6,000 shares on 12 May 2011 at prices between HK$29.35 and HK$29.50. All of such shares were sold between 12 and 18 July 2011 at prices between HK$68.00 and HK$69.50. Winwell’s trading in Schramm shares was carried out by Chang.
(12) The 6^th Defendant, STM Corporation (“STM”), is a Korean company. It was owned by Oh Jung Hyun (“Oh”), who was also president and chief executive officer of SSCP Korea, and chairman of the supervisory board of Schramm. According to the SFC, based on evidence obtained from their Korean counterparts, SSCP HK had acquired STM from Oh on 28 February 2011, so that from that time onwards, STM was a subsidiary of SSCP HK.
(13) It was alleged that the proceeds of Winwell’s sales of the Schramm shares in July 2011 were transferred to Chang (in part via Empress Fair). Thereafter, such proceeds, together with the proceeds of Chang’s own sales are said to have been transferred to Empress Fair, then to a company called Paker Develop Limited (“Paker”), which was also alleged to have been beneficially owned by Lee. In turn, Paker transferred the funds to a Korean company called Alkenz Co Ltd (“Alkenz”), which was said to be owned as to about 75% by STM. Alkenz is said to have transferred the funds received by it from Paker to SSCP Korea, which in turn transferred the funds on to STM.

4. The SFC’s case was summarised in paragraphs 53 to 58 of Liang’s 1^st Affidavit:-

(1) As SSCP HK was a wholly owned subsidiary of SSCP Korea, a shareholder in Schramm (along with SSCP Korea and Humble Humanity), and had, together with SSCP Korea and Humble Humanity, undertaken to accept Akzo’s offer to acquire Schramm through Salvador, SSCP HK must have had knowledge of the negotiations and likely terms of such offer at the time when Chang and Winwell purchased shares in Schramm, such information being price sensitive information in relation to Schramm which was not in the public domain.
(2) Most of the sale proceeds of the Schramm shares sold by Chang and Winwell in July 2011 ended up with STM, which was said to be a subsidiary of SSCP HK, so that SSCP HK was the ultimate beneficiary of the sales.
(3) It was therefore believed that SSCP HK had caused the information as to the sale of Schramm to Akzo to be disclosed to Chang “directly or indirectly through Stanley Lee”, in contravention of sections 270 and 291 of the Ordinance. Alternatively, it was suggested that SSCP HK had aided, abetted or otherwise assisted, counselled or procured Lee and Chang to commit contraventions of those provisions, or were knowingly involved in or a party to such contraventions, or had attempted or conspired to commit such contraventions. However, it would seem that all of these further ways of putting the case against SSCP HK are based on the same allegation –namely, that SSCP HK had caused the information to be disclosed to Chang directly or indirectly through Lee.
(4) Lee had knowledge of the negotiations by virtue of his involvement in them, and given his control of Winwell, which had purchased shares in Schramm, and of Paker, which was involved in the fund flow in relation to the proceeds of sale of the Schramm shares, was believed to have purchased the Schramm shares through Winwell, and provided the information to Chang.
(5) By reason of Chang’s connections with Schramm, SSCP HK and Lee, it was believed that she had been informed of the negotiations by Lee, SSCP Korea, SSCP HK and/or Schramm, and made her purchases of Schramm shares on the basis of such information, knowing it to be price sensitive and not known to the investing public.
(6) Lee, Chang, Winwell and SSCP had thus contravened sections 270 and/or 291 of the Ordinance.
(7) Empress Fair had aided, abetted or assisted in such contraventions, or been knowingly or unknowingly a party to them, as it was the subscriber of the IP address of the computer from which the purchase orders for the Schamm shares were placed, and had been involved in the flow of funds by which the sale proceeds ultimately found their way to STM.
(8) STM was said to have been knowingly or unknowingly involved in the contraventions as it was wholly owned and controlled by SSCP HK and had received a substantial part of the sale proceeds.

5. Although the SFC’s case was put was in broad terms, theoretically capable of encompassing a range of alternative formulations in relation to both the persons by whom and means by which the price sensitive information was supplied to Chang, and as to the exact role of each party in the alleged contraventions of the Ordinance, it was, I think, clear from Liang’s 1^st Affidavit that the gist of the case was that the information had been supplied by Lee to Chang, and that he had done so on behalf of SSCP HK, which had benefitted from the dealings in the Schramm shares by both Chang and Winwell by receiving, through its alleged subsidiary STM, the bulk of the sale proceeds.

6. On the basis of these allegations, and the evidence put forward in relation to them, I granted ex parte worldwide Mareva injunctions against each of the Defendants on 20 December 2011, together with orders for them to disclose their assets with a view to ensuring that the injunctions would be effective. On 6 January 2012, SSCP HK made a payment of funds into court in order to obtain the release of the Mareva injunction granted against it.

Abandonment of the case against Lee

7. Shortly thereafter, on 12 January 2012, Liang’s 3^rd Affidavit was filed. In it, the SFC stated that as a result of its further inquiries, it was satisfied that Lee had ceased to have any interest in Winwell or Paker by around July 2009, at which time he transferred away his interest in those companies. The SFC therefore abandoned its claim against Lee by a Notice of Discontinuance dated 11 January 2012, and now makes no allegations against him (see the SFC’s Statement of Claim, which was filed on 15 February 2012).

Dismissal of claims against STM

8. Meanwhile, STM applied to set aside the leave granted to serve the proceedings on it outside the jurisdiction, on the principal ground that the court had no jurisdiction to grant such leave. That application was heard on 31 January 2012, and was successful, for the reasons explained in my judgment dated 27 April 2012.

The SFC’s case as pleaded in the Statement of Claim

9. On 15 February 2012, the SFC filed its Statement of Claim. As I have noted, it makes no allegations against Lee. Whereas at the ex parte stage, the SFC had alleged that Lee was the beneficial owner of Winwell and Paker, in the Statement of Claim, it was now alleged (at paragraphs 2(4) and (5)) that Winwell and Paker were beneficially owned by Chang as to 50%, with the other 50% being owned by a person named Zhou Li. It was also alleged that Chang and Zhou Li beneficially owned Empress Fair as to 50% each.

10. In the Statement of Claim, the SFC maintained the allegation that STM was a wholly owned subsidiary of SSCP HK (see paragraph 6 of the pleading).

11. So far as the alleged insider dealing was concerned, the SFC’s case against Chang, Winwell and SSCP HK was set out in paragraphs 12 to 32. In summary:-

(1) Chang was alleged to have purchased the 80,080 shares in Schramm between 18 March 2011 and 13 May 2011 having price sensitive non-publicly available information in relation to Schramm, or alternatively having received such information directly or indirectly from SSCP HK.
(2) Chang was alleged to have procured Winwell to purchase its 53,040 shares in Schramm between 19 April 2011 and 12 May 2011, having the same information, or having received it in the same way.
(3) Alternatively, Winwell was alleged to have acquired its Schramm shares on the basis of such information, on the basis that Chang’s knowledge was to be attributed to it.
(4) It was alleged for the first time (this not having been alleged in Liang’s 1^st Affidavit) that Chang’s purchases of Schramm shares in April 2011 (but not those in March or May 2011) were funded in part by monies received from SSCP HK. It was said that the 14 and 15 April 2011 purchases were partially funded by funds received by Chang from SSCP HK via Empress Fair, while the 19, 21 and 28 April 2011 purchases were funded by funds received by her from SSCP HK via Empress Fair, Paker, a company called Okura Chem-Tech Corp. (“Okura”) and Winwell. The details of the fund movements by which this was said to have happened were set out in paragraphs 15 and 16 of the Statement of Claim, as follows:-
(a) In respect of the 14 and 15 April purchases, it was said that SSCP HK transferred US$1,720,000 to Empress Fair on 14 April 2011, and that Empress Fair transferred some HK$388,270 to Chang the same day, this amount being used to settle those purchases.
(b) In respect of the other April 2011 purchases, it was said that SSCP HK transferred US$1,477,500 to Empress Fair on 15 April 2011, and that on 18 and 19 April 2011, Empress Fair transferred US$1,600,000 to Paker, which transferred the same amount to Okura, which then transferred substantially the same amount to Winwell, which transferred it back to Empress Fair, and that Empress Fair then transferred HK$388,530 to Chang, which was used to settle the purchases made by Chang on 19, 21 and 28 April 2011.
(5) It was similarly alleged for the first time that Winwell’s purchases of Schramm shares in April 2011, and 3 and 4 May 2011 (but not the purchases on 12 May 2011) were funded by SSCP HK via Empress Fair, Paker and Okura. The same payments as are described in paragraph 11(4)(b) above are relied upon (apart from the last transfer from Empress Fair to Chang), together with various smaller US dollar transfers (ranging between US$10,000 and US$60,000) from Empress Fair to Winwell on 19, 20, 21 and 29 April 2011.
(6) The allegations relating to the disposal of the shares, and the movements of the share proceeds which were made in Liang’s 1^st Affidavit were also set out.

12. Thus, the SFC’s case had changed in two principal respects:-

(1) Instead of Lee being the source of the information provided to Chang, it was said that the information was provided to Chang by SSCP HK either directly or indirectly, without identifying any person at SSCP HK who was said to have supplied the information. Although it might be (and was) said that the formulation in paragraph 53 of Liang’s 1^st Affidavit as to the way in which the information was supplied to Chang was capable of being read so as to encompass this allegation, as I have indicated, a fair reading of that material clearly suggests that the source of the information was Lee, albeit he was (at that stage) said to be acting on behalf of SSCP HK in disclosing it.
(2) The allegation that SSCP HK was involved in the funding of the purchases was introduced. Given that it was still being alleged that SSCP HK ultimately benefited from the transactions by receiving the proceeds of sale through STM, this additional allegation served to strengthen the claimed involvement of SSCP HK in the transactions complained of.

The present applications

13. On 30 March 2012, SSCP HK issued its application to strike out the Statement of Claim, on the basis that it disclosed no reasonable cause of action, was frivolous and vexatious, and/or was an abuse of the process of the court. SSCP HK also applied for payment out to it of the funds it had lodged with the court on 6 January 2012 to secure the discharge of the Mareva injunction against it. It was agreed that SSCP HK’s applications should be heard at the same time as the SFC’s inter partes application for the continuation of the Mareva relief against SSCP HK, Chang, Empress Fair and Winwell, which was opposed by all of those Defendants. This was the hearing of those applications.

The parties’ evidence

14. SSCP HK’s evidence for the purposes of these applications consisted of three affirmations made on its behalf by Joung (his 2^nd, 3^rd and 4^th Affirmations). So far as Chang, Empress Fair and Winwell were concerned, the relevant evidence was contained in Chang’s 5^th Affirmation. These were responded to by Liang’s 4^th and 5^th Affirmations on behalf of the SFC.

15. Joung’s 2^nd Affirmation dealt with the following principal matters:-

(1) He explained that STM was not in fact a subsidiary of SSCP HK at any material time. Although there had been an arrangement by which SSCP HK had been intended to acquire the whole of the shareholding of STM by 31 May 2011, which was mentioned as a post balance sheet event in STM’s audited accounts for the period ended 31 December 2010 (such accounts having been supplied to the SFC by its Korean counterparts), that had fallen through and was never completed. SSCP HK therefore had not benefited from the alleged insider dealing, as it had no interest in STM and thus no interest in the monies said to represent the proceeds of the alleged insider dealing which had been said to have ultimately been transferred to STM.
(2) He also stated that he was the only director of SSCP based in Hong Kong and that he was not aware of the proposed acquisition of Schramm by Akzo until after it had been publicly announced, not having been told of it by any person at SSCP Korea, which had been responsible for the transaction. He said also that was not previously aware of Lee’s involvement as an advisor for SSCP Korea.
(3) He explained that although Chang was employed by SSCP HK, she also was involved in business transactions with it through her companies, in particular Empress Fair. SSCP HK’s business involved trading in chemical products, by itself and through subsidiaries, and also involved the manufacture of accessories and coatings for electrical appliances. In the course of this business, it had dealings with various companies, including SSCP Korea and also Empress Fair. He accepted that he had been in telephone contact with Chang from time to time during the first few months of 2011, but said that these contacts related to such business dealings, and that he did not provide Chang with any information as to the proposed sale of Schramm to Akzo (which he did not, in any event, know about until after it was publicly announced).
(4) He also said that insofar as SSCP HK was involved in the fund transfers relied upon by the SFC as indirectly funding the purchase of the Schramm shares by Chang and Winwell, the payments by SSCP HK were in respect of ordinary business transactions in the normal course of its business, and were not intended to finance the purchase of the Schramm shares. He said, however, that he was hampered in giving details of or further information in relation to such transactions because he did not have access to SSCP HK’s computers and records, which had been seized by the SFC as part of its investigation into the alleged insider dealing. In his 3^rd and 4^th Affirmations, having been provided with copies of the seized material, Joung provided details of the transactions in question, exhibiting shipping and trade financing documentation in relation to them.

16. SSCP HK also sought further and better particulars of the allegations against it in the Statement of Claim, but this request has been rejected by the SFC, which has declined to provide the particulars sought.

17. Chang’s 5^th affirmation was filed to oppose continuation of the Mareva injunctions against herself, Empress Fair and Winwell. In it, she accepted that she was the 50% beneficial owner of Empress Fair, Winwell and Paker, and that Zhou Li was the beneficial owner of the other 50%. She stated that the funds used for the purchases of Schramm shares by her and Winwell belonged to her, Winwell and/or Empress Fair. While accepting there was a business and trading relationship between SSCP HK and her companies, she denied having received any insider information concerning Schramm, and said that she had made the purchases in the light of what she considered to be positive news concerning Schramm which had been publicly announced – namely, the announcement of its financial results on 17 March 2011, the publication of its annual report (confirming such results) on 14 April 2011 and the announcement of a substantial transaction involving Schramm on 9 May 2011. Finally, she said that the sale proceeds from the sales of Schramm shares by herself and Winwell were used for business transactions involving Paker (another of her companies) and Alkenz.

18. Liang’s 4^th Affidavit was filed in response to Joung’s 2^nd Affirmation and Chang’s 5^th Affirmation. In it, the SFC (while denying having misled the court in any way) accepted that SSCP HK was not, and had never been, the owner of STM. However, the allegation that SSCP HK had disclosed the inside information to Chang was maintained. Liang stated that he believed that Joung (contrary to Joung’s denial) was aware of the proposed acquisition of Schramm by Akzo, relying on (1) an engagement letter dated 13 December 2010, signed by Joung, appointing Lee as financial adviser to implement the sale of SSCP HK’s shares in Schramm to Akzo; (2) an email from Schramm’s company secretary, Kenny Chan, to Joung dated 19 April 2011 seeking reimbursement from SSCP Korea of fees paid by Schramm to Lee; and (3) an email from Park to Joung dated 10 June 2011, in which reference was made to the impending sale of Schramm to Akzo, and forwarding emails between Park and Oh and attaching an email from Akzo’s lawyers to the SFC dated 9 June 2011. In the light of this, Liang stated that he believed that Joung Qa in possession of the inside information, and had disclosed it to Chang.

19. Liang’s 4^th Affidavit also provided material to support the allegations in relation to the fund flows which were relied upon to allege that SSCP HK had been involved in the funding of the purchase of Schramm shares by Chang and Winwell. However, as appears from that material (and as pleaded in the Statement of Claim), these fund flows related only to a total of 69,360 Schramm shares purchased in April and early May 2011. No similar allegations were made in respect of the remaining 63,760 Schramm shares (purchased in March 2011 and later in May 2011) said to have been the subject of insider dealing, although Liang simply asserted (at paragraph 24 of his 4^th Affidavit) that SSCP HK, through Joung, disclosed the inside information to Chang, who acted on instructions to purchase the other 63,760 Schramm shares as well, apparently on the basis of a stated belief (at paragraph 26 of that affidavit) that Empress Fair, Winwell and Paker were nominee companies controlled by SSCP HK and SSCP Korea.

20. Liang also rejected Joung’s explanation of SSCP HK’s dealings with Empress Fair and Okura in the context of the fund flows said to provide funding for the purchase of some of the Schramm shares by Chang and Winwell, arguing that the transactions were a sham and were not made for the purported reasons stated in the accounting ledgers, and were in fact made for no apparent commercial reason.

21. Finally, although not making it clear whether it was still being alleged that SSCP HK had benefited from the insider dealing (notwithstanding it having been accepted that STM was not SSCP HK’s subsidiary), the allegation was made (at paragraph 34 of the affidavit) that SSCP HK assisted in the transfer of the proceeds of the alleged insider dealing to Korea. No details of such assistance are given, although it might be on the basis that Empress Fair, Winwell and Paker (who were involved in the fund movements after the sale of the Schramm shares in July 2011) were now alleged to be nominees of SSCP HK.

22. Liang’s 4^th Affidavit discloses further changes in the SFC’s case, as compared to the Statement of Claim:-

(1) The allegation that SSCP HK owned STM was no longer pursued.
(2) Joung was identified as the alleged provider of the inside information to Chang on the basis of the emails mentioned in the affidavit.
(3) Empress Fair, Winwell and Paker were now said to be nominees of SSCP HK (notwithstanding that the Statement of Claim alleged that these companies were beneficially owned by Chang and Zhou Li).
(4) While apparently no longer maintaining the allegation that SSCP HK had benefited from the insider dealing, it was now alleged that it had assisted in the transfer of the proceeds of sale out of Hong Kong to Korea.

23. Joung’s 3^rd and 4^th Affirmations responded to Liang’s 4^th Affidavit. They deal with Joung’s alleged knowledge of the inside information, by pointing out that:-

(1) Although the engagement letter between SSCP HK and Lee dated 13 December 2010 was signed by Joung, this was only done in about mid-October 2011, as was apparent from the fact that a copy of that document, signed by Lee but not by SSCP HK, was emailed to Joung, with a request that he sign it, only on 14 October 2011. Similar letters signed by Lee, but addressed to SSCP Korea and the other company selling its shares in Schramm were also sent out at about the same time. Joung suggested that the letters were sent out in order to provide a record of the appointment, albeit well after the event. For these reasons, this letter did not show that he had knowledge of the intended sale of Schramm to Akzo at the time of the purchases of Schramm shares by Chang and Winwell.
(2) He said that Kenny Chan’s email to him did not directly concern him, as it related to SSCP Korea’s consolidation accounts, and he had simply passed it on to the accounts department for their action, without paying much attention to it. In any event, as pointed out at the hearing, while there is a reference to payment of fees to Lee, there does not appear to be anything to connect such fees to the proposed sale of Schramm to Akzo, which was not mentioned in the email. Further, the email was dated 19 April 2011, well after Chang’s first purchase of Schramm shares in March 2011, and after some of Chang’s purchases in April 2011.
(3) Joung accepted that the 10 June 2011 email from Park informed him of the impending sale of Schramm to Akzo prior to its public announcement. However, he said that this had simply slipped his mind, as he had not had access to the email when making his 2^nd Affirmation (it being among the records seized by the SFC). Having been reminded of it, he recollected that the purpose of the email was to ask him to liaise with SSCP HK’s bankers in Hong Kong to ensure that its Schramm shares were released from being held as security, so that the sale could proceed, and that he spoke only to the bankers and no one else about it. It was also pointed out that the email only shortly predated the suspension of trading, and was well after Chang’s and Winwell’s purchases of the shares, and therefore did not provide any basis for thinking that Joung had the inside information at the time of such purchases.

24. Joung also dealt in his 3^rd Affirmation with the provision of funds by SSCP Korea to SSCP HK, and by SSCP HK to Empress Fair on 14 and 15 April 2011, explaining the underlying transactions in relation to them (having by this stage been provided with copies of the relevant documents which had been seized by the SFC). He dealt with the transfer involving Okura and SSCP on 15 April 2011 subsequently, in his 4^th Affirmation, the documents relating to it having only been made available to him later.

25. Joung also denied that Empress Fair, Winwell or Paker were nominees of SSCP HK, explaining that a fair reading of the SFC’s interviews with Chang (which had been referred to by Liang in this context) did not support such an interpretation. At the hearing, I was not shown anything in the transcripts of those interviews that would support this allegation.

This hearing

26. At the hearing, SSCP HK was represented by Mr Manzoni, Chang, Empress Fair and Winwell by Mr Bernard Mak and Mr Isaac Chan, and the SFC by Mr Westbrook SC and Mr Beresford.

SSCP HK’s arguments

27. For SSCP HK, Mr Manzoni contended that:-

(1) The SFC’s claim against SSCP HK should be struck out on one or more of the following broad grounds:-
(a) The claim as pleaded in the Statement of Claim was premised on SSCP HK having received or retained, for its own benefit, profits from the alleged insider trades. This premise was based on the supposition, now accepted to be wrong, that STM was owned by SSCP HK. The only pleaded basis for a claim against SSCP HK having thus fallen away, the claim against them was bound to fail, and should be struck out.
(b) The claim of SSCP HK’s involvement in the alleged insider trading was, in any event, merely speculative and without any proper foundation, and should therefore be struck out as an abuse of the process. In support of this argument, Mr Manzoni relied on:-
(i) the absence of any particulars in the Statement of Claim as to how SSCP HK was said to have passed on information to Chang, or as to what else SSCP HK might be alleged to have done so as to assist, aid, abet, counsel or procure the alleged insider dealing by Chang and Winwell;
(ii) the way in which the SFC’s case had changed from its original position when making the ex parte application for the Mareva injunctions, which I have described above, and the further changes and modifications that were being suggested during the course of argument at the hearing;
(iii) the absence of any adequate evidence that SSCP HK (or Joung) knew of the alleged inside information;
(iv) the speculative nature of the case based on the alleged transfers of funds prior to (some of the) the purchases complained of; and
(v) the unfounded allegation, contrary to what was pleaded in the Statement of Claim, that Empress Fair and Winwell were nominees of SSCP HK.
(c) There was no prospect of any of the relief sought against SSCP HK being granted, given that it had not received or retained any proceeds of the insider trading; and
(d) On the footing that SSCP HK might at best have been unknowingly involved in the alleged insider trading, no order requiring it to make any payment to any party could justifiably be made against it where it had not itself received any benefit (directly or indirectly) from the alleged insider trading.
(2) The money paid into court by SSCP HK should be released because:-
(a) This necessarily followed if the claim were struck out, as SSCP HK contended it should be.
(b) Even if the claim against SSCP HK was not struck out as being completely unarguable, or an abuse of the process, it was at best barely arguable, and did not amount to the “good arguable case” needed to support a Mareva injunction. It followed that had there still been an injunction, it should not be continued, and the monies paid in to secure its release should be returned to SSCP HK.
(c) In any event, there was no real risk of dissipation of SSCP HK’s assets so as to defeat any claim that might successfully be made against it, given that it had not been involved in the alleged transfer of the proceeds of the insider dealing out of Hong Kong, and that it was, moreover, a company with an established business in Hong Kong which it had operated for over 10 years, and had substantial assets in Hong Kong. That being so, there would be no basis for the continuation of any Mareva injunction against it, and the monies SSCP HK had paid in should thus be repaid to it.
(d) Finally, the Mareva injunction granted ex parte was obtained as a result of material non-disclosure on the part of the SFC, in failing to bring to the court’s attention the true position in relation to STM not being a subsidiary of SSCP HK, which was a matter that the SFC could and should have ascertained, and should have made known to the court. On this basis also, the monies paid in should be returned to SSCP HK.

Striking out: the pleadings point

28. I shall deal first with the application to strike out the proceedings against SSCP HK. As to Mr Manzoni’s first argument, this focuses strictly on the case as pleaded in the Statement of Claim. I accept (as I think did Mr Westbrook) that the allegations to the effect that SSCP HK received for its own benefit (albeit indirectly) the proceeds of sale of the Schramm shares can no longer be maintained. However, I do not think that this of itself would justify striking out the claim if it were otherwise sustainable. While the allegation that SSCP HK received the proceeds of sale, if true, would undoubtedly strengthen the case against it, the absence of such an allegation would not, in my view, mean that there could be no case against it at all. If, for example, SSCP HK had been in possession of non-publicly available, price sensitive, information which it made available to Chang with a view to enabling her to trade in Schramm shares to her advantage, it might well remain liable to having orders made against it under section 213 of the Ordinance if such orders were, in the circumstances of the case, appropriate ones to make.

Striking out: A speculative case?

29. However, it seems to me that Mr Manzoni was on much stronger ground in suggesting that the SFC’s case against SSCP HK can, in the circumstances of these proceedings, properly be described as being speculative, and thus an abuse of the process of the court.

30. As to this, I think there is force in Mr Manzoni’s complaints that the case as pleaded in the Statement of Claim is seriously lacking in particularity. Although Mr Westbrook contended that it sufficed for the bare allegations of provision of inside information to Chang to be put forward, I do not agree that this was sufficient. The allegations being made in respect of SSCP HK, Chang, Empress Fair and Winwell involve contraventions of the Ordinance which carry with them serious consequences. They involve conduct which can properly be regarded as dishonest, and as such are allegations that should be made with a proper foundation. Where such a foundation exists, there is no reason why it should not be fully pleaded. That said, however, if it could be said that an adequate case, with a proper foundation, could be identified in the evidence put forward by the SFC, it would probably be more appropriate to afford the SFC an opportunity to formulate it and put it forward by way of an amended pleading. This leads on to the question of whether such a case can be gleaned from the evidence put forward by the SFC.

31. In this respect, it does seem to me that the SFC’s case against SSCP HK can properly be described as being, at best, speculative. There are a number of reasons for this:-

(1) First, as I have observed, the SFC’s case has undergone significant shifts. From an initial allegation that Lee provided Chang with the inside information on behalf of SSCP HK, the case has moved to a generalised allegation that SSCP HK provided that information to Chang by itself, either directly or indirectly, and thereafter to an allegation that it was Joung who provided such information on behalf of SSCP HK. This readiness to move from one case to another does, I think, tend to suggest that the SFC is far from certain as to what its case actually is.
(2) Second, it does seem to me that the case based on Joung being the provider of the inside information is lacking in any real evidential foundation. The SFC has only been able to identify three items of evidence which it says suggest that Joung had the information to pass on to Chang. But none of these are, in my view, sufficient or adequate to make out such a case:-
(a) As to the 13 October 2010 engagement letter, the covering email by which it was sent to Joung for signature was clearly dated 14 October 2011, well after the purchases of Schramm shares complained of. It does not support a case that Joung was aware of such information at the time of the purchases in question.
(b) As to the 10 June 2011 email from Park to Joung, while this does show that Joung was mistaken in thinking that he did not learn of the proposed sale of Schramm to Akzo until after it had been publicly announced, the timing of this email does not assist in making out the case that needs to be made out, since it is also well after the purchases in question.
(c) As to the 19 April 2011 email from Kenny Chan to Joung, this too is not an adequate foundation for the case that is sought to be advanced. First, it too is too late in point of time, and does not suggest that Joung had the information as at March 2011, when Chang started buying Schramm shares, which is what would need to be shown for the purposes of the claim as advanced, which involves the allegation that all of the purchases by Chang and Winwell from March 2011 onwards were made using inside information. Further, although the email refers to payment to Lee, it does not explain what Lee was being paid for, and does not expressly or otherwise indicate that there was a proposal for Schramm to be sold to Akzo.
(d) Notwithstanding that the SFC had seized SSCP HK’s records and has had them for some time, no further material has been identified which might suggest the Joung did have the inside information available to him prior to Chang beginning to buy Schramm shares in March 2011.
(e) At the hearing, Mr Westbrook suggested that it was likely that Joung knew of the information given that the Schramm shares were a fairly significant asset of SSCP HK, and that Joung was its only director in Hong Kong. However, this is not a matter that has been previously suggested in any of the various places in which the SFC’s case might be found. Nor is it a particularly compelling inference – having regard to the nature and seriousness of the allegations being made, it seems to me that this would not be an adequate basis on which to make a finding that Joung was in fact aware of the inside information at the material times. There is nothing to suggest that SSCP HK was ever involved in the decision to sell the Schramm shareholdings, and one would expect to be some record of this if it were in fact the case.
(f) Further, in the course of argument, Mr Westbrook observed that the pleaded case was that SSCP HK had made the information available to Chang, thus leaving open the possibility that the information may not have been provided by Joung, but by someone else at SSCP (for example, its other director, Park). But there is no basis shown for any such alternative supposition, and the suggestion that there might be is, to my mind, entirely speculative.
(g) Also in the course of argument, Mr Westbrook drew attention to the involvement of Oh in many of the companies involved in the chain of payments. However, it is no part of the SFC’s case, in either its pleading or the evidence it has filed, that Oh was involved in, or the person behind, the alleged insider trading, and I do not think it would be right to permit a case to be put forward, for the purposes of resisting this application, on that supposition either.
(3) It seems to me also that the alleged funding by SSCP HK of the purchases of Schramm shares in April and early May 2011 does not assist the SFC. The alleged funding involved the movement of funds far in excess of the amounts required to enable the purchases to be made. This is a matter that casts considerable doubt on the allegation that the payments were made to fund the purchases, and tends to support Joung’s explanation that the payments were (so far as SSCP HK was involved in them) in connection with transactions that formed part of its business. The trade documentation put forward by Joung also supports this, and the SFC’s assertion that the transactions were not genuine ones does not appear to have any solid basis. Further, and most significantly in my view, the alleged funding only related to about half of the purchases of Schramm shares of which complaint is made. There is nothing to suggest that Chang’s initial purchase in March 2011 was funded by SSCP HK. Indeed, there is evidence to indicate that Chang had sufficient funds of her own to make those purchases, and the first few April 2011 purchases, in any event. In these circumstances, I do not think that this point assists the SFC in showing that its case is, at this stage, other than speculative.
(4) Finally, it also seems to me that the assertion in Liang’s 4^th Affidavit that Empress Fair and Winwell were nominees for SSCP HK is likewise without any proper foundation and thus speculative.

32. I am therefore satisfied that the claim against SSCP HK should be regarded as speculative, and should on that ground be struck out, and the action against it dismissed.

Striking out: No liability if unknowingly involved and no receipt of proceeds?

33. Having dismissed as speculative the claim that SSCP HK was knowingly involved in the insider trading, I find it difficult to see how it might still be said that it was unknowingly involved therein. But even if this might somehow be the case, I would agree with Mr Manzoni that there is no prospect of an order calling for payment to be made against a person unknowingly involved in insider trading where that person has not (as SSCP HK has not in this case) received any of the proceeds of such insider trading.

Striking out: no prospect of obtaining orders sought

34. However, if (contrary to the view to which I have come) it were arguable that SSCP HK was knowingly involved in the insider trading, I would regard it as equally arguable that it might then be subject to possible sanctions under section 213 of the Ordinance, and would therefore not have been prepared to strike out the claim against it on the basis that it is unarguable that any of the orders sought could be made against it.

Payment out of funds in court

35. So far as payment out of the monies paid into court by SSCP HK is concerned, it follows from my decision in relation to the striking out application that this order, too, should be granted, and I accordingly direct that the sum paid into court by SSCP HK on 6 January 2012 should be returned to it, together with any interest that may have accrued on it while in court.

36. It is thus not strictly necessary to consider the other bases on which Mr Manzoni sought to justify an order for payment out of the sum deposited. However, as to such other bases:-

(1) Had I not come to the view that the claim against SSCP HK should be struck out, I would not have been minded to accept the suggestion that there was nonetheless no “good arguable case”. Although the tests involved are different, I do not think it would have been appropriate to seek to weigh the strength or weakness of the case against SSCP HK with such nicety.
(2) On the other hand, in all the circumstances of the case, I would have been inclined to accept, in the light of the fact that SSCP HK was not involved in the movements of funds after the sale of the Schramm shares with which these proceedings are concerned, and having regard to its financial position and fairly substantial business history in Hong Kong, that no sufficient risk of dissipation by it of its assets, so as to defeat any judgment likely to be given against it, existed for the purposes of granting Mareva relief against it.
(3) Finally, in relation to Mr Manzoni’s final argument, while I would accept that the SFC might have gone further in looking into the position in respect of SSCP HK’s relationship with STM, I would not regard the SFC as having been guilty of a material non-disclosure in this respect, and had there otherwise been a good case for Mareva relief, I would have been minded to grant it notwithstanding this.

Whether injunctions should be continued against Chang, Empress Fair and Winwell

37. That leaves the position of Chang, Empress Fair and Winwell. Mr Mak’s main submission was that if I were (as I am) with Mr Manzoni on the question of there being no proper case put forward in relation to SSCP HK having disclosed the alleged insider information to Chang, it followed that there could be no good arguable case against Chang either. I think that this is right. Absent any arguable case that inside information was disclosed to Chang, it is difficult to see how there could be a good arguable case that Chang had been guilty of insider dealing. There is no evidence or suggestion that Chang could somehow have known of the inside information herself, without it having been provided to her from some other source. In those circumstances, I am satisfied that I should not continue the Mareva injunctions against Chang, Empress Fair or Winwell either.

38. Mr Mak also submitted that having regard to the timing of Chang’s and Winwell’s purchases, and the dates on which the publicly available information which she said she had had regard to when making the purchases, there was for this reason also, no good arguable case that Chang had been guilty of insider trading. Mr Westbrook submitted that this was a matter for trial. However, it seems to me that when considering whether or not an order granted ex parte should be continued on an inter partes basis, it is appropriate for the court to have regard to the evidence put forward by a defendant, at least where such evidence is not based on disputed facts. If this were not the case, there would be little point in having an inter partes hearing at all. Here, the dates of the announcement of Schramm’s financial results for the year ended 31 December 2010, of publication of its 2010 annual report, and of the announcement of the substantial transaction it entered into in early May 2011 are all matters of public record. The very close proximity of that date to the dates on which Chang (and Winwell) made their purchases does, in my view, provide strong support for their case that they acted on such information and not other, not publicly available price sensitive information, which there is no evidence that they were given. I do not think that Chang’s trading history provides any reason to doubt this ‑ while she had previously bought some shares in 2010, part of which she sold early in 2011, she retained a holding of the originally purchased (i.e. in 2010) Schramm shares throughout. In these circumstances, I do not consider it realistic to think that the court would be prepared to infer that she had been guilty of insider trading, particularly when one bears in mind the serious nature of the allegation. This view of things provides, I think, further support for my decision that the Mareva injunctions should not be continued against Chang, Empress Fair or Winwell.

39. Finally Mr Mak submitted that as there were funds in court from SSCP HK, there was no need for an injunction to be granted against his clients. I do not agree. Had there been a good arguable case against his clients, it would have been entirely appropriate to have granted the injunctions against them without reference to the position of other defendants, particularly where, as here, that other defendant has been successful in extricating itself from the proceedings.

Disposition and costs

40. For the reasons explained above, I shall order that the claim against SSCP HK should be struck out and dismissed, the funds paid into court by SSCP HK be returned to it, together with any accrued interest, and that the injunctions against Chang, Empress Fair and Winwell not be continued. So far as costs are concerned, there would seem to be no reason why these should not follow the event, and I shall therefore make an order nisi that the costs of the 2^nd to 4^th Defendants in relation to this application, together with any previously reserved costs in relation to it, are to be paid by the Plaintiff to such Defendants, and that the 5^th Defendant’s costs of the applications before me, and its costs of this action, together with all previously reserved costs, are likewise to be paid to it by the Plaintiff. All such costs are to be taxed on the party and party basis in default of agreement.

	(Aarif Barma)
	Judge of the Court of First Instance
	High Court

Mr Simon Westbrook SC and Mr Roger Beresford, instructed by Securities and Futures Commission, for the plaintiff

Mr Bernard Mak and Mr Isaac Chan, instructed by Yu & Associates, for the 2^nd to 4^th defendants

Mr Charles Manzoni QC SC, instructed by Sidley Austin, for the 5^th defendant

HCA 2177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2177 OF 2011

____________

BETWEEN
	SECURITIES AND FUTURES COMMISSION	Plaintiff
and
	LEE SUNG HO (also known as STANLEY LEE and STANLEY SUNG HO LEE)	1st Defendant
	CHANG SE LEE	2nd Defendant
	EMPRESS FAIR LIMITED	3rd Defendant
	WINWELL GLOBAL TRADING LIMITED	4th Defendant
	SSCP HOLDINGS (HONG KONG) LIMITED	5th Defendant
	STM CORPORATION	6th Defendant

____________

Before: Hon Barma J in Chambers

Date of Hearing: 31 January 2012

Date of Judgment: 27 April 2012

______________

J U D G M E N T

______________

The background to this application

1. On 20 December 2011, the Securities and Futures Commission (“the SFC”) applied for and obtained ex parteMareva injunctions against the 1^st to 6^th Defendants in these proceedings in respect of their assets in or outside Hong Kong.

2. The Mareva injuctions were obtained in support of proceedings issued by the SFC against the Defendants the following day, in which the SFC sought various declarations and orders against the Defendants under section 213 of the Securities and Futures Ordinance (Cap 571) (“the Ordinance”).

3. Apart from the Mareva injunctions, the ex parte order also granted leave for the issue of a concurrent writ for service on the 1^st, 3^rd, 4^th and 6^th Defendants out of the jurisdiction.

4. The SFC alleged, on the basis of evidence set out in an affidavit of Mr Liang Lu Kar, Lucas, a Senior Manager in its Enforcement Division, dated 19 December 2011, that the 1^st to 5^th Defendants had been guilty of insider dealing in relation to the shares of a listed company called Schramm Holding AG (“Schramm”) in June and July 2011, in contravention of sections 270 and/or 291 of the Ordinance, and therefore liable to have orders made against them under section 213(2) of the Ordinance. The details of the allegations of insider dealing are not relevant for the purposes of the present application.

5. The case against the 6^th Defendant is not that it was itself guilty of a contravention of either section 270 or section 291 of the Ordinance, but that it has been, knowingly or unknowingly, involved in the insider dealing so as to be liable to have an order made against it under section 213(2)(b) of the Ordinance. The involvement of the 6^th Defendant is described in paragraph 58 of Mr Liang’s affidavit as follows:-

“As to [the 6^th Defendant], it is a wholly owned subsidiary of [the 5^th Defendant] is controlled by [the 5^th Defendant]. By receiving a substantial portion of the sale proceeds [of the alleged insider dealing], [the 6^th Defendant] has been involved in, whether knowingly or otherwise, the contraventions by [the 1^st, 2^nd and/or 5^th Defendants].”

6. The receipt by the 6^th Defendant of the proceeds of the insider dealing is said to have been the end result of a number of transfers of the sale proceeds of the Schramm shares which are the subject of the allegations. These involved the proceeds moving from the 2^nd and 4^th Defendants (who had dealt in the shares) to a company called Paker Develop Limited (“Paker”), which then transferred the sums it received to a company in Korea called Alkenz Co. Ltd (“Alkenz”). Alkenz in turn transferred what it received to another Korean company called SSCP Co Ltd (“SSCP”) (the parent company of the 5^th Defendant), which almost immediately transferred the funds on to the 6^th Defendant. The flow of funds is described in paragraphs 43 to 52 of Mr Liang’s affidavit.

7. For the purposes of the present application, it is important to note that the 6^th Defendant is a Korean company, with no apparent presence in Hong Kong, and which has no known assets in Hong Kong. The funds which are said to represent the proceeds of the insider dealing are said to be held by it in a bank account maintained by it in Korea.

8. The SFC has, as a result of further investigations and information obtained by it, decided not to pursue these proceedings against the 1^st Defendant. However, the proceedings are being pursued against the remaining Defendants.

9. By its summons dated 17 January 2012, issued under RHC Order 12 rule 8, the 6^th Defendant seeks orders that the service of the writ upon it out of the jurisdiction be set aside, and that the ex parte orders granting leave for the writ to be issued against and served on it outside the jurisdiction be similarly set aside or discharged, along with the other parts of the ex parte order of 20 December 2011 that affect the 6^th Defendant.

The parties’ arguments

10. At the hearing, the 6^th Defendant was represented by Mr Sussex SC. He submitted that the order of 20 December 2011 and the subsequent service of the writ on the 6^th Defendant in Korea should be set aside on a number of grounds, namely:-

(1) That the court has no jurisdiction to grant final or substantive relief against the 6^th Defendant under section 213 of the Ordinance, and thus had no jurisdiction to grant leave to serve the proceedings on it outside the jurisdiction under RHC Order 11 rule 1.
(2) That the court also lacked jurisdiction because the SFC’s claim against the 6^th Defendant did not amount to a cause of action, since it involved no claim to relief founded on a legal right, and so could not be the subject of an application for leave to serve out of the jurisdiction pursuant to RHC Order 11.
(3) There was no basis for granting leave to serve out of the jurisdiction against the 6^th Defendant because the SFC had failed to establish a “good arguable case” for granting the relief sought, in that there was no evidence to show that the 6^thDefendant had any knowledge of the alleged insider dealing, or the source of the funds transferred to it, and because (in any event), the 5^th Defendant had already paid into court an amount equivalent to the whole of the profits allegedly arising from the alleged insider dealing. There was therefore no need for any orders against the 6^th Defendant, and thus no good arguable case for granting any relief against it.
(4) (a point developed by Mr Sussex at the hearing) That there was no jurisdiction to give leave to serve the 6^th Defendant out of the jurisdiction because the case did not fall within RHC Order 11 rule 1(b) (which was the rule relied upon to obtain service out against the 6^th Defendant), since this was not a case in which the relief sought was an injunction requiring the 6^th Defendant to do or refrain from doing an act within the jurisdiction – rather, it would require the 6^th Defendant to take steps outside the jurisdiction to transfer monies to Hong Kong, whether for payment into court, or for payment to the counterparties to the alleged insider dealing transactions.

11. Two other points raised in the 6^th Defendant’s summons were not pursued by Mr Sussex at the hearing. These were:-

(1) An argument that the ex parte order should be set aside for material non disclosure on the part of the SFC when applying for the order.
(2) An argument that the affidavit of Mr Liang that formed the basis of the ex parte application did not meet the requirements of RHC Order 11 rule 4(b), so that there was no sufficient evidence in support of the ex parte application.

12. Mr Beresford, who appeared for the SFC (as he did at the ex parte application) resisted the 6^th Defendant’s application. He responded to Mr Sussex’s arguments as follows:-

(1) The court did have jurisdiction (or at least it was well arguable that it had jurisdiction) to grant final or substantive relief under section 213 of the Ordinance, and accordingly could grant leave to serve the proceedings out of the jurisdiction.
(2) A claim under section 213 of the Ordinance was a sufficient “cause of action” for the purposes of RHC Order 11.
(3) There was a good cause of action against the 6^th Defendant in the present case, as knowledge on the part of the 6^th Defendant of the alleged insider dealing was not a necessary condition for the making of an order against it under section 213(2)(b).
(4) The relief likely to be sought against the 6^th Defendant would be an order requiring the 6^th Defendant to make a payment of money into court or to the counterparties to the trades constituting the alleged insider dealing in Hong Kong, which was an order to do an act in Hong Kong (that being the location where the payment would be made), and therefore an injunction requiring the doing of an act within the jurisdiction, within the meaning of RHC Order 11 rule 1(b).

The relevant statutory provisions

13. Before considering the merits of the competing arguments, it will be helpful to set out the terms of the relevant parts of sections 213(1) and (2) of the Ordinance, and of the relief sought under the SFC’s writ.

14. Section 213 of the Ordinance provides relevantly as follows:-

“(1) Where –
(a) a person has –
(i) contravened –
(A) any of the relevant provisions [which include sections 270 and 291];
…
(ii) aided, abetted, or other assisted, counselled or procured a person to commit any such contravention
…
(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or
(v) attempted, or conspired with others, to commit any such contravention; or
(b) it appears … to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,
the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).
(2) The orders for specified for the purposes of subsection (1) are –
(a) an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);
(b) where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly of otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;
(c) an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;
(d) an order appointing a person to administer the property of another person;
(e) an order declaring a contract relating to any securities, structured product, futures contract, leveraged foreign exchange contract, or an interest in any securities, structured product, futures contract, leveraged foreign exchange contract or collective investment scheme to be void or voidable to the extent specified in the order;
(f) for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;
(g) any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).
…
(6) Where the court of First Instance considers it desirable to do so, it may grant such interim order as it considers appropriate pending the determination of an application made pursuant to subsection (1).
…
(8) Where the Court of First Instance has power to make an order against a person under subsection (1), it may, in addition to or in substitution for such order, make an order requiring the person to pay damages to any other person.”

15. In the present case, the SFC does not rely on section 213(1)(b). Nor does it rely on the part of section 213(2)(b) which provides for the possibility of an order being made under that subsection on the basis that “it appears that a person has been, is or may become” involved in one of the matters referred to in subsection (1)(a).

16. Both Mr Sussex and Mr Beresford agreed that, in this case, before any order could be made under section 213(2), it had to be established that some person had contravened a relevant provision, within the meaning of section 213(1)(a)(i)(A), or came within one of the other sub-paragraphs of section 213(1)(a). If this were established, the court would have power to make one or more of the orders mentioned in section 213(2). They also agreed, I think rightly, that the orders made under paragraphs (a), (c), (d) and (e) of that subsection could only be made against such a person (i.e. one who came within one or more of sections 213(1)(a)(i) to (v)). On the other hand, provided that some person had contravened a relevant provision, an order under section 213(2)(b) could (as its terms suggest) be made either against that person, or against a different person (i.e. someone who did not fall within any of sections 213(1)(a)(i) to (v)), where that other person had become, knowingly or unknowingly, involved in the contravention or other matter covered by those sub-paragraphs. In this case, as the 2^nd to 5^th Defendants were alleged to have contravened sections 270 and 291 or to fall within some of the other subparagraphs of section 213(1)(a), if this could be established against one or more of them, the result would be that section 213(2)(b) could be invoked against the 6^th Defendant, if the 6^th Defendant had become involved in the contravention or other matter referred to, whether knowingly or not.

The relief sought in these proceedings

17. As for the relief sought in these proceedings, the indorsement of claim on the SFC’s writ seeks, in paragraphs 1 to 4, declarations against the 1^st to 5^th Defendants to the effect that each of them is a person within (variously) section 213(1)(a)(i)(A), (ii), (iv) or (v) and section 213(2)(b). Paragraph 5 of the indorsement relates to the 6^th Defendant alone, and seeks a declaration that the 6^th Defendant has been involved in, whether knowingly or unknowingly, the contraventions of sections 270 and/or 291 of the Ordinance and is accordingly a person within section 213(2)(b). Orders are then sought against all the Defendants pursuant to sections 213(2)(a) (paragraph 6 of the indorsement), 213(2)(c) and (f) (paragraph 7 of the indorsement), 213(2)(b) (paragraph 8 of the indorsement), 213(8) (paragraph 9 of the indorsement) and 213(2)(e) (paragraph 10 of the indorsement). By paragraph 11 of the indorsement, interim orders under section 213(6) are asked for. The indorsement concludes with claims for further or other directions and costs.

18. Although paragraphs 6 to 10 of the indorsement seek orders against all the Defendants, it follows from what I have noted in paragraph 16 that, so far as the 6^th Defendant is concerned, given that the 6^th Defendant is not alleged to be a person within section 213(1)(a), an order can only be made against it pursuant to section 213(2)(b). Thus, the only relevant relief claimed against the 6^th Defendant is that mentioned in paragraph 8 of the indorsement, namely:-

“… an order requiring the Defendants to take such steps as this Honourable Court may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into”.

19. Although paragraph 9 of the indorsement, seeking an order requiring the Defendants to pay damages is expressed as an alternative to the order sought under section 213(2)(b) mentioned in the preceding paragraph, it is clear from the terms of section 213(8) that such an order can only be made against a person falling within section 213(1), and thus cannot be made against the 6^th Defendant here.

20. I turn now to consider the arguments raised by Mr Sussex in support of the 6^th Defendant’s application.

Whether the court can make a finding of contravention and grant substantive relief under section 213(2)(b)

21. Mr Sussex’s first argument was that under the scheme of the Ordinance, it was not open to the Court of First Instance, exercising its civil jurisdiction, to make a determination that there had been a contravention of the relevant provisions of the Ordinance, as the question of determining whether any such contravention had taken place was exclusively reserved to the Market Misconduct Tribunal in proceedings brought before that body, or the court exercising its criminal jurisdiction in cases brought before it. Although the Court of First Instance could make orders that might be final in nature under section 213, it could only do so where there had been a determination that there had been a contravention of a relevant provision by either the Market Misconduct Tribunal or the court exercising its criminal jurisdiction (although it might be possible to bring proceedings under section 213 and obtain interim orders pursuant to section 213(6) if proceedings had been commenced but not yet concluded in those other fora). This submission was based on the decision of Harris J to this effect in Securities and Futures Commission v Tiger Asia Management LLC (unreported, HCMP 1502/2009, Harris J, 21 June 2011).

22. Mr Sussex pointed out that in the present case, no proceedings had been commenced in the Market Misconduct Tribunal and no criminal prosecution had been brought. Declarations as to contravention were only sought in these proceedings, which the court had, he submitted, no jurisdiction to make. Consequently, there could be no good arguable case such as would enable the court to grant leave to serve out of the jurisdiction so far as the final relief claimed was concerned. Although there was also a claim for interim Mareva injunctions, the court had no jurisdiction to grant leave for service out for that limited purpose, where no substantive relief was sought: Kayden Limited v Securities and Futures Commission (2010) 13 HKCFAR 696, where the Court of Final Appeal so held, applying Mercedes Benz AG v Leiduck [1996] 1 AC 284.

23. Mr Beresford disputed this, submitting that Tiger Asia was wrongly decided, and was under appeal, and that as Tiger Asia was not binding on me, I should consider the arguments on their merits, and (if necessary) decline to follow it.

24. In the event, it is not necessary for me to consider whether or not I should follow Harris J’s decision in Tiger Asia. This is because the Court of Appeal has now handed down its decision on appeal from Harris J Securities and Futures Commission v Tiger Asia Management LLC (unreported, CACV 178/2011,CA, 23 February 2012), in which that court has held, reversing Harris J, that the Court of First Instance does have jurisdiction to determine, for the purposes of applications under section 213 of the Ordinance, whether or not there has been a contravention of relevant provisions of the Ordinance. That decision is binding upon me, and is dispositive of this point, as it means that it cannot be said that the claims for final relief under the various sub-paragraphs of section 213(2) are bad, so that there is no power to give leave to serve the writ out of the jurisdiction.

Whether there is any “cause of action”

25. As to Mr Sussex’s second point – that there is in this case no cause of action, and thus no basis for granting leave to serve the 6^th Defendant out of the jurisdiction, the argument was that the SFC’s claim against the 6^th Defendant was not a cause of action as it did not amount to a claim for relief founded on a legal right. Mr Sussex submitted that this conclusion followed from the decisions in Mercedes Benz and Kayden, relying particularly on a statement in the opinion of the Privy Council in Mercedes Benz (at page 301F-H of the judgment), where Lord Mustill said:-

“… Absent a claim based on a legal right which the defendant can be called upon to answer, of a kind falling within Ord 11 r 1(1), the court has no right to authorise the service of the document on the foreigner, or to invest it with any power to compel him to take part in the proceedings against his will.”

26. Mr Sussex suggested that here, section 213(2)(b) did not give rise to any cause of action in that it was simply a mechanism by which the court could, in its discretion, grant ancillary relief, and as such did not give the SFC any legal right to relief. He also suggested that as section 213(2)(b) was a statutory provision, it should be regarded as creating a statutory offence, which could not have extraterritorial effect.

27. I do not agree with these submissions. It is quite clear from both Mercedes Benz and Kayden that what the courts were there concerned with was the question of whether it was possible to grant leave to serve out of the jurisdiction in a case in which the only relief sought was interim in nature, and no final relief was being sought. The answer that was given was that this was not possible. Here, however, there is a claim for final relief against the 6^th Defendant, in the form of the claim for an order under section 213(2)(b) mentioned in paragraph 8 of the indorsement of claim. I do not think that the fact that there is no absolute right to such relief at the suit of the SFC (because the court has a discretion whether or not to grant it) means that there is no “cause of action” in the Mercedes Benz sense. Nor do I think that the argument as to extraterritoriality as a good one – that applies to criminal offences, whereas the remedies sought under section 213(2)(b) are matters falling within the court’s civil jurisdiction.

No arguable case because no relief against 6^th Defendant necessary as 5^th Defendant has made a payment into court

28. Mr Sussex’s third point was that there was no good arguable case for granting the relief sought, because there was no evidence to show that the 6^th Defendant had any knowledge of the alleged insider dealing, or the source of the funds transferred to it, and also because the 5^thDefendant had already paid into court an amount equivalent to the whole of the profits allegedly arising from the alleged insider dealing, so that there could be no need for any relief against the 6^th Defendant.

29. I do not think these arguments are well-founded either. So far as the lack of evidence of knowledge on the 6^th Defendant’s part, either of the alleged insider dealing, or of the source of the funds it had received, is concerned, it seems clear from section 213(2)(b), which enables an order to be made against a person who knowingly or unknowingly becomes involved in a contravention, that such knowledge is not a matter that needs to be established before relief can be granted.

30. As for the argument based on the fact that the 5^th Defendant has already paid funds into court, whether or not this would obviate the need for relief against the 6^th Defendant depends, as Mr Beresford rightly submitted, on whether the claim against the 6^th Defendant necessarily stands or falls with the claim against the 5^thDefendant. If the position truly were that the 6^th Defendant could only be liable if the 5^th Defendant were also liable, there would be force in this submission. It would not then matter that the 5^th Defendant has taken out an application to discharge the orders granted against it, and to have the monies paid into court by it returned.

31. However, I do not think that the 6^th Defendant’s liability is wholly dependent on a finding of liability against the 5^th Defendant. The involvement of the 6^th Defendant that is relied upon in order to found the claim to relief against it lies in its receipt of what are said to be the proceeds of the insider dealing, via the 2^nd and 4^th Defendants, Paker, Alkenz and SSCP. The 5^th Defendant is not said to be part of this chain of fund movements. Thus, it would be possible for the 6^th Defendant to be liable to have an order made against it under section 213(2)(b) on the basis of its receipt of the funds, and a finding of a contravention on the part of the 2^nd, 3^rd and 4^th Defendants, even if the 5^thDefendant were to succeed in having the claim against it dismissed and the orders made against it discharged. As the claim against the 6^th Defendant does not, therefore, stand or fall with that of the 5^th Defendant, the fact that the 5^th Defendant has made a payment in is neither here nor there. If that payment in is released, the relief against the 6^th Defendant could well be required.

Whether the claim comes within RHC Order 11(1)(b)

32. That leaves Mr Sussex’s final point. This was that the case against the 6^th Defendant did not fall within RHC Order 11 rule 1(1)(b), as the relief sought against it was not an injunction requiring the 6^th Defendant to do or refrain from doing an act within the jurisdiction – rather what was really being sought was an order that would require the 6^th Defendant to take steps outside the jurisdiction to transfer monies to Hong Kong, whether for payment into court, or for payment to the counterparties to the alleged insider dealing transactions. This was because there was no evidence that the 6^th Defendant had any bank accounts or other assets within Hong Kong, and the alleged proceeds of the insider dealing were said to have been transferred to a bank account held by it in Korea. Thus, in order to restore any person to the position in which he had been prior to the transactions giving rise to the contravention of sections 270 and/or 291, it would be necessary to order the 6^th Defendant to do things outside Hong Kong. This did not, Mr Sussex said, fall within the ambit of Order 11 rule 1(1)(b).

33. Although Mr Liang also relied on Order 11 rule 1(1)(d) in his affidavit in support of the ex parte application, it was rightly not suggested by Mr Beresford that this limb of Order 11 rule 1(1) could be prayed in aid against the 6^th Defendant. That limb was relied upon by Mr Liang in respect of the orders sought pursuant to 213(2)(e), which cannot be obtained against the 6^th Defendant (for reasons explained in paragraph 16 above).

34. However, Mr Beresford submitted (by way of further authorities lodged after the conclusion of the hearing) that, as the type of order sought under section 213(2)(b) was one for the making of restitution to the counterparties to the affected contracts, this would involve an order to make payment into court in Hong Kong, or to the counterparties in Hong Kong, and as such, would be an order to do an act within the jurisdiction, since the authorities showed that the place in an obligation involving payment was performed was the place in which the payment was received by the counterparty to the payment, i.e. Hong Kong. Thus, said Mr Beresford, the order to be made would be one requiring the performance of an act in Hong Kong, and accordingly should be regarded as an injunction requiring the doing of an act within the jurisdiction.

35. I do not think that this argument is well founded. This is for the following reasons:-

(1) I note first that the writ itself does not specify the acts which it is suggested that the 6^th Defendant should be ordered to do pursuant to section 213(2)(b). It seems to me that in order to found an application for service out under Order 11 rule 1, it must at least be necessary for the plaintiff to identify the acts which it is said should be done in Hong Kong. This was not done here. It is not, therefore, clear from the writ that it does in fact seek an order against the 6^th Defendant that could properly be described as an injunction requiring the defendant to do or refrain from doing anything within the jurisdiction.
(2) In any event, even if one were to proceed on the basis that the order sought would be one for the payment of money to a counterparty within Hong Kong, I do not think that, in the context of Order 11 rule 1(1)(b), an order for the payment of money should be regarded as an “injunction”. I think this follows from the fact that the sub-rule itself refers to damages (which involves the payment of money) as an alternative to the injunction claimed, and also because if an order for the payment of money to a party in Hong Kong were to be regarded as an injunction for the purposes of Order 11 rule 1(1)(b), any case in which there was a claim for damages or monetary payment to a Hong Kong based plaintiff would ipso facto fall within that sub-rule, rendering many of the other sub-rules to a large extent unnecessary.
(3) Even if this is not right, I do not think one can ignore the fact that what the 6^th Defendant would have to be ordered to do would be either to transfer the funds it received (which are alleged to be the proceeds of insider dealing) from Korea to Hong Kong, or to otherwise initiate in Korea a process that would result in payment eventually being made in Hong Kong. Neither of these acts would be an act done in Hong Kong so as to fall within Order 11 rule 1(1)(b).
(4) Alternatively, even if the correct analysis of what the 6^thDefendant would be ordered to do is (contrary to my view) something that should be regarded as being done in Hong Kong, and that (also contrary to my view) an order for payment of money should be regarded as an injunction for the purposes of Order 11 rule 1(1)(b), I think that having regard to the fact that injunctions are not usually granted where they cannot be made effective, there is not in this case a good arguable case for the granting of such relief. Here, given that the 6^th Defendant is a foreign corporation with no presence or assets within Hong Kong, it seems to me that there would be no way in which the court could grant an effective injunction against it. In these circumstances, the court would be very unlikely to exercise its discretion in favour of granting such an injunction, and there is accordingly no sufficiently arguable case made out to justify the granting of leave to serve the writ on the 6^th Defendant out of the jurisdiction.

36. I am therefore satisfied that Mr Sussex’s fourth argument is a good one.

Disposition and costs

37. It follows that this was not an appropriate case for leave to have been granted to serve the 6^th Defendant out of the jurisdiction, and I shall therefore make an order in the terms sought by the 6^th Defendant’s summons. So far as costs are concerned, I see no reason why these should not follow the event, and I shall therefore make an order nisi that the SFC should pay the 6^th Defendant its costs of this application, to be taxed on the party and party basis if not agreed.

(Aarif Barma)
Judge of the Court of First Instance
High Court

Mr Roger Beresford, instructed by Securities and Futures Commission, for the Plaintiff

Yu & Associates for the 2^nd to 4^th Defendants (Absent)

Sidley Austin for the 5^th Defendant (Absent)

Mr Charles Sussex SC, instructed by Reed Smith Richards Butler, for the 6^th Defendant

SECURITIES AND FUTURES COMMISSION v. LEE SUNG HO AND OTHERS

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