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					                                                FACV No. 23 of 1998



            IN THE COURT OF FINAL APPEAL OF THE
         HONG KONG SPECIAL ADMINISTRATIVE REGION

              FINAL APPEAL NO. 23 OF 1998 (CIVIL)
             (ON APPEAL FROM CACV No. 41 OF 1998)


                      _____________________


Between:

          THE INSIDER DEALING TRIBUNAL                       Appellant

                        - and -

                    SHEK MEI LING                            Respondent


                      _____________________


Court:                  Chief Justice Li, Mr Justice Litton PJ,
                        Mr Justice Ching PJ, Mr Justice Bokhary PJ
                        and Lord Nicholls of Birkenhead NPJ

Date of Hearing:        8 March 1999

Date of Judgment:       16 March 1999




                         JUDGMENT
                                   - 2 -




Chief Justice Li :
             I agree with the judgment of Lord Nicholls of Birkenhead
NPJ.




Mr Justice Litton PJ :
             I agree with the judgment of Lord Nicholls of Birkenhead
NPJ.




Mr Justice Ching PJ :
             I agree with the judgment of Lord Nicholls of Birkenhead
NPJ.




Mr Justice Bokhary PJ :
             I agree with the judgment of Lord Nicholls of Birkenhead
NPJ.




Lord Nicholls of Birkenhead NPJ :
             The purpose of the Securities (Insider Dealing) Ordinance,
Cap. 395, is to combat the insidious mischief of insider dealing. The
Ordinance defines insider dealing in wide terms. For present purposes the
definition in section 9 can be sufficiently summarised as follows. Insider
dealing takes place when a director or employee of a listed corporation,
who has information regarding listed securities of the corporation that is
                                    - 3 -

not generally known and that he knows is price sensitive, deals in any
listed securities of the corporation. Similarly, if he counsels or procures
another person to deal in such listed securities. Insider dealing also takes
place when a person who is contemplating or has contemplated making a
take-over offer for a listed corporation, and who knows that the
information that an offer is contemplated or is no longer contemplated is
price sensitive, deals in listed securities of that corporation or counsels or
procures another person to do so. Insider dealing may also take place
where price sensitive information, or information that a take-over is
contemplated or has been abandoned, is disclosed to another person, and
where the recipient of such information deals in listed securities of the
corporation in question or counsels or procures another person to do so.


             The Ordinance has not made insider dealing a criminal
offence. Instead, the Ordinance has established procedures whereby
those who engage in insider dealing may be subjected to penalties,
including potentially swingeing financial penalties. When it appears to
the Financial Secretary that insider dealing in relation to a listed
corporation may have taken place, he may require the Insider Dealing
Tribunal, which is chaired by a judge, to inquire into the matter. The
object of the inquiry is to determine whether insider dealing in relation to
a listed company has taken place, the identity of every insider dealer, and
the amount of any profit gained or loss avoided as a result of the insider
dealing.


             At the conclusion of the inquiry the tribunal has power,
under section 23, to make all or any of three types of order in respect of a
person identified by the tribunal as an insider dealer. First, the tribunal
may disqualify him from acting as a director or being concerned in the
                                     - 4 -

management of a listed company or any other specified company, for up
to five years. Secondly, the tribunal may order that the insider dealer
‘pay to the Government an amount not exceeding the amount of any
profit gained or loss avoided by that person as a result of the insider
dealing’ (section 23(1)(b)). Thirdly, the tribunal may make an order
imposing on the insider dealer ‘a penalty of an amount not exceeding
three times the amount of any profit gained or loss avoided by any person
as a result of the insider dealing’ (section 23(1)(c)). Thus, as can be
seen, the formula of ‘profit gained .. as a result of the insider dealing’ is
common to both forms of financial orders. An order under section
23(1)(a) or (c) may also be made against an officer of a corporation
identified as an insider dealer (under section 24). The aggregate amount
of all the penalties imposed under section 23 (1)(c) and section 24 may
not exceed three times the profit gained or loss avoided by all persons as
a result of the insider dealing.


             This appeal concerns the interpretation of section 23(1)(b)
and (c), and the proper manner of calculating in one particular
circumstance the amount of profit gained by an insider dealer. The
Ordinance gives no specific guidance on how the calculation is to be
made.


             In the present case Ms Shek Mei Ling and four others were
identified as insider dealers by the tribunal after an inquiry into suspected
insider dealing in relation to the listed securities of a garment
manufacturing company known as Hong Kong Worsted Mills Limited
(‘Worsted’). The material facts can be stated shortly. By early May
1993 Shek became aware that her employer Ng Kwong Fung was acting
for the Beijing Municipal Treasury Department in identifying a suitable
                                    - 5 -

company for acquisition and that Worsted had been mentioned in this
context. Between 6 and 11 May Shek, using borrowed money, bought
100,000 shares in Worsted for a total of HK$408,873, at an average cost
of $4.08 per share. On 31 May Worsted announced that its majority
shareholder had received an approach from an independent third party to
acquire a controlling interest in Worsted. The identity of the third party
was not disclosed. On 3 and 4 June Shek sold all her shares for a total of
$640,619, at an average price of $6.40 per share, and thereby made a
profit of $231,745 on her dealings. On 17 June a public announcement
was made that the majority shareholder had agreed to sell its shares in
Worsted to a state-owned company which was an investment vehicle of
the Beijing municipal government. The price was net asset value plus a
premium of $100 million. Dealings in the shares of Worsted were
suspended, at $9.50. Trading resumed on 22 June, and at the end of that
day Worsted shares closed at $15.10. The average price of Worsted
shares over the following few days, between 22 June and 30 June, was
$16.80.


             The tribunal held that the profit gained by Shek as a result of
the insider dealing was $1,262,643. This sum comprised the profit she
would have realised, after deduction of sale expenses, had she sold her
shares at $16.80 per share. The tribunal made an order against Shek for
payment of $600,000 under section 23(1)(b) and $1.2 million under
section 23(1)(c). The tribunal also made financial orders against the three
others. All four appealed against these orders. The Court of Appeal,
comprising Nazareth V-P, Mortimer V-P and Rogers JA, dismissed the
appeal of the three others, but allowed Shek’s appeal. The court held
that the tribunal had erred in its calculation of the profit gained by Shek.
The correct measure of her profit was the amount of $231,745 she
                                   - 6 -

actually realised. The court substituted for the tribunal’s orders against
Shek an order for payment of $231,745 under section 23(1)(b) and
$150,000 under section 23(1)(c). From that order the tribunal appealed to
this Court.


              The sequence of events in the present case is unusual. An
insider dealer may derive profit from insider dealing in many ways. For
instance, where the insider dealing comprises disclosure of information,
or counselling someone else to buy shares, the insider dealer may be paid
for the information or advice. The present case concerns dealing in
shares. Here, the insider dealer sold her shares before the price sensitive
information had become fully available to the market. In the nature of
things, this is exceptional. The insider dealer who buys shares
improperly by misusing confidential information seeks thereby to steal a
march on the market. Fulfilment of this object normally requires
retention of the shares until the market has had an opportunity to receive
all the hitherto confidential information and respond favourably to it.
That is not what happened here. Nevertheless, in order to identify the
proper approach to calculation of the profit gained by Shek in this
unusual case it is necessary to consider the position generally.


              The basic scheme of the Ordinance is clear enough. The
purpose of an order under section 23(1)(b) is to strip from the insider
dealer the amount of the profit gained by him as a result of the insider
dealing. He is not to be allowed to retain his ill-gotten gains. An order
under section 23(1)(c) goes further than this. Although not so described,
an order under section 23(1)(c) is comparable to a fine. Its purpose is to
deter insider dealing, and it seeks to do so by leaving a person who
engages in such conduct substantially out of pocket. The amount of the
                                     - 7 -

penalty can be up to treble the amount, not of the benefit gained by the
insider dealer himself, but of the benefit gained by the insider dealer and
anyone else as a result of the insider dealing. Thus, an insider dealer can
be subjected to a substantial penalty order even though he himself gained
no profit.


              To be within the scope of a financial order there must be a
‘profit’ that is ‘gained’ by the person in question, whether the insider
dealer or someone else, and it must have been gained ‘as a result of the
insider dealing’. A comparable limitation applies to a ‘loss avoided’. As
a matter of statutory interpretation, two points seem clear. The first point
can best be explained by taking the simple case of a person connected
with a company who acquires confidential price sensitive information and
buys shares in anticipation of a rise in the market price. In due course,
when the information becomes public knowledge, the price rises and the
insider dealer sells the shares. Prima facie the difference between the
purchase and sale prices, neither more nor less, is the amount of the profit
gained by the insider dealer as a result of the insider dealing. That is the
natural reading, in this context, of the phrase ‘profit gained by [the insider
dealer] as a result of the insider dealing’. The insider dealing comprised
the improper purchase of the shares. Prima facie the profit, if any, gained
by the insider dealer as a result of this dealing is the profit, if any, he
made when he sold the shares.


              I must amplify the qualification ‘prima facie’. Markets do
not operate in a sterile vacuum. The difference between the purchase and
sale prices is likely to be affected, for better or worse, by many factors
beside the disclosure of this information. The longer the period of time
that elapses between the purchase and the sale, the more likely it is that
                                     - 8 -

there will be fluctuations in the market price for other reasons. The
factors involved may be general, affecting share prices of most
companies or most companies in the relevant sector of the market, or they
may be peculiar to the particular company but unrelated to the price
sensitive information. In one sense, any increase in the insider dealer’s
profit due to favourable extrinsic factors such as these might be said not
to form part of the insider dealer’s profit gained ‘as a result of ’ the
insider dealing. On this approach, when calculating the insider dealer’s
profit for the purposes of section 23, the profit made on the sale should
be adjusted, downwards or upwards, to reflect the extent to which the sale
price was increased or diminished by favourable or unfavourable
extraneous factors.


              This is not the approach adopted in practice by the tribunal,
nor do I think it would be correct. I do not believe the Ordinance
envisages that any such problematical exercise is to be undertaken for the
purpose of section 23. The context of section 23 is dealings with listed
securities. References to profit gained are to be read, naturally and
consistently with the purpose of financial orders, as references to profits
arising from buying and selling in the market, without any allowance for
the ordinary incidents affecting market prices. When the insider dealing
consists of an improper purchase, the profit gained comprises the
difference between the cost of purchase and the net sale price. That is the
general rule, although I would not exclude altogether the possibility there
might be exceptional circumstances when some allowance would be
called for.
                                     - 9 -

                  The second point which is clear concerns the position
where an insider dealer, having bought shares in anticipation of a price
rise, chooses to retain them rather than realise his profit when the
information becomes public knowledge. Take a case where the insider
dealer retains the shares and thereafter, over the period of months or even
years that elapses before the tribunal makes a financial order under
section 23, he sells the shares either in one parcel or gradually. Or he may
still own the shares, or some of them, when the tribunal makes its order.
The approach adopted by the tribunal in this type of situation, in my view
correctly, is to treat the relevant profit as that gained by the insider dealer
when the information was made public and the market had had a
reasonable opportunity to digest the information. The gain is to be
measured by reference to the market value of the shares at that date. At
that date the amount of the insider dealer’s profit, whether realised or not,
is fixed once and for all. Subsequent changes in market prices are
irrelevant for the purpose of a section 23 calculation. They are irrelevant,
because such changes are not to be regarded as flowing from the original
improper purchase of shares. Rather, they flowed from the insider
dealer’s decision to retain the shares at a time when the effect of the
misuse of the confidential information had become spent and the insider
dealer was on an equal footing with every other investor.


             The matter can be tested in this way. Had the insider dealer
sold the shares when the information became public, his subsequent use
of the proceeds would be regarded as irrelevant for the purpose of the
section 23 calculation. Successful investment of the proceeds by the
insider dealer would not increase the amount of the profit gained as a
result of the insider dealing, nor would a disastrous investment decrease
the amount. If this is right, it would make no sense that a different
                                      - 10 -

principle should apply if the insider dealer chose to leave his profit
invested in the wrongfully acquired shares. His position should be no
better, and no worse. The subsequent fortunes of the company in whose
shares he improperly dealt should no more affect the assessment of the
amount of the profit gained for the purpose of section 23 than do the
fortunes of any other investment made by the insider dealer with the
proceeds of the shares he improperly acquired.


             This approach accords with the view taken by the tribunal in
previous cases, in the inquiries into dealings in shares in Success
Holdings Limited, Public International Investments Limited and
Parkview Group Limited. In those cases the tribunal applied what is
known as ‘the American approach’. Section 21(d)(2)(A) of the Securities
Exchange Act 1934, introduced by section 2 of the Insider Trader
Sanctions Act 1984, empowered the courts to impose a penalty not
exceeding three times the profit gained as a result of the unlawful
purchase or sale which constitutes the insider dealing, and provided in
section 21(d)(2)(C) that
      "For purposes of this paragraph ‘profit gained’ … is the difference between
      the purchase … price of the security and the value of that security as measured
      by the trading price of the security a reasonable period after public
      dissemination of the nonpublic information."


This was the approach adopted by the United States Court of
Appeals for the First Circuit in SEC v MacDonald (1983) 699 F 2d 47, in
a decision which ante-dated the enactment of this statutory definition.


             In the present case the view of the tribunal, chaired by
Burrell J, was that in every case the same method of calculation should be
adopted, regardless of whether or not the shares had been disposed of,
regardless of when they were disposed of, and regardless of the price
                                     - 11 -

actually received at the time of sale. Mr Lunn S C, appearing for the
tribunal on this appeal, sought to uphold this approach. He submitted that
the act of wrongdoing was complete when the insider dealer improperly
bought the shares. At that date the insider dealer caused loss to the seller,
by buying from him at a lower price than the price at which the shares
would have been available had the confidential information been
generally known. The insider dealer at once gained a profit, being the
difference between the price paid and the higher price he would have had
to pay if the information had been generally known. In practice, the best
evidence of the amount of this difference is the difference between the
price paid and the market price when the information in fact becomes
available generally. The insider dealer ought not to be able to ‘unlock’
this profit, and diminish the potential amount of a financial order, by
selling at a reduced price before the information is published.


              I cannot accept this approach, which seems to me at odds
with the language of the section. As already described, the section
envisages that the profit gained as a result of an insider dealing is to be
calculated by the essentially simple exercise of comparing the actual cost
of purchase and the actual sale proceeds. This is subject to a cut-off date,
and a calculation by reference to unrealised market value, if the shares
were retained after the information had become generally known. The
same simple comparison is to be carried out when the sale takes place
before the information is fully known. A sale at the earlier date may well
yield a smaller profit, but that is not a sufficient justification for rejecting
this approach. The Ordinance has adopted ‘profit gained’ as the yardstick
when fixing the maximum amounts of financial orders. Consistently with
this, when the profit gained by an insider dealer is less than it would have
been had he waited until the information was generally available, the
                                   - 12 -

maximum amount of the financial orders is correspondingly less. Had
the legislature intended that the amount of profit was to be fixed once and
for all at the time of the improper purchase, very different language
would surely have been employed, as in the abortive section 140 of the
Securities Ordinance 1974.


             Thus far I have been addressing the calculation of the
amount of profit gained. Section 23(1)(b) and (c) also applies to the
amount of any loss avoided as a result of the insider dealing. This could
arise if the confidential information were unexpectedly bad news about a
company’s business. Of necessity, calculation of the amount of a loss
avoided is different from calculation of the amount of profit gained. The
amount of profit gained by an insider dealer is an actual amount and can
be calculated accordingly. By way of contrast, the amount of a loss
avoided by an insider dealer is a notional exercise, because ex hypothesi
the loss was not actually sustained by the insider dealer: the loss was
avoided. Thus, in the case of a dealing in shares, calculation of the
amount of loss avoided will typically involve comparison of two
elements, one actual (the shares were sold), and the other notional (what
would have happened if the shares had been retained). The actual
element in the calculation will comprise the amount realised by the
insider dealer from the shares sold before the market learned the bad
news. The notional element will comprise the market value of the shares
at a date which has to be identified as the appropriate date. Failing
cogent evidence that, in any event, the shares would have been sold
before the market announcement, the date will usually be the date by
which the market learned and absorbed the information. This will usually
be the appropriate date because it can normally be expected that, save for
the misuse of the confidential information, the insider dealer would still
                                   - 13 -

have held his shares at that date and, hence, would have suffered loss
accordingly. The need to make a notional calculation along these lines in
the case of a loss avoided does not, however, cast doubt on making the
calculation by reference to actual figures in the case of profit gained.


             Nor, I add for completeness, does the American approach, as
set out in section 21(d)(2)(C) of the Securities Exchange Act, assist the
tribunal’s argument in the present appeal. It is true that the definition of
‘profit gained’ in section 21(d)(2)(C) makes no express exception for the
case where the shares are sold before public dissemination of the
nonpublic information. Whatever the reason for this, the terms of this
definition do not assist materially in interpreting section 23 of the
Ordinance which stands alone without the assistance, or limitations, of a
legislative definition.


             For these reasons, I agree with the Court of Appeal and
would dismiss this appeal with costs.




Chief Justice Li :
             The Court, being unanimous, dismisses the appeal with costs.




                (Andrew Li)                   (Henry Litton)
                Chief Justice                Permanent Judge




  (Charles Ching)           (Kemal Bokhary)         (Lord Nicholls of Birkenhead)
  Permanent Judge           Permanent Judge             Non-Permanent Judge
                              - 14 -




Mr Michael LUNN, SC, instructed by Department of Justice
 for the Appellant
Mr Alfred CHAN instructed by Messrs Boase, Cohen and Collins
 for the Respondent

				
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