Hong Kong: Securities: Right Of Silence Before The Insider Dealing Tribunal

A recent Court of Appeal judgment in the case of Koon Wing Yee and Chan Kin Shing Sonny vs Insider Dealing Tribunal in which our firm acts for the 2^nd Appellant, has ruled that the Hong Kong Insider Dealing Tribunal’s power to summon or require an implicated person to give evidence as unconstitutional. Although the Insider Dealing Tribunal established under the Securities (Insider Dealing) Ordinance (now repealed) is now replaced by the Market Misconduct Tribunal under the Securities and Futures Ordinance, the judgment still has significant impact on cases pending under the old law.

The appeal case arose out of an inquiry by the Securities Futures Commission ("SFC") regarding the possible insider trading of shares in Easy Concepts International Holdings Ltd and Easyknit International Holdings Ltd, both listed on the Hong Kong Stock Exchange. Koon was the chairman of both the said companies and Sonny Chan was a long standing business acquaintance of Koon. When the appellants were required by the SFC to give evidence pursuant to section 33(4)(c) of the Securities and Futures Commission Ordinance ("SFCO"), they claimed that they should enjoy the right of silence as the answers to certain questions might incriminate them. However, according to sections 33(4) and (6) of the SFCO, they were obliged to answer those questions. Section 33(6) specifically provides :-

Later, both Koon and Sonny Chan were required to attend before the Insider Dealing Tribunal. The Tribunal admitted into evidence the questions and answers given by them under section 33(4) of the SFCO, including those in relation to which they had claimed might incriminate them.

After considering the evidence, the Tribunal determined that the appellants were insider dealers and ordered that they be disqualified as directors for 5 years and 2 years respectively, pay their profits of HK$31,367,553 and HK$5,090,219 and a penalty of HK$15,000,000 and HK$1,500,000 respectively all to the Hong Kong Government.

In the appeal, an important point of principle was raised, namely, are the proceedings before the Insider Dealing Tribunal criminal in nature and if so, the appellants should be allowed to exercise their rights of silence pursuant to the Hong Kong Bills of Rights ("HKBOR").

The HKBOR provided that in criminal proceedings, suspects should be entitled to a fair and public hearing and should have the right to be presumed innocent until proved guilty. Most importantly, Article 11(2)(g) provided that suspects should not be compelled to testify against themselves or to confess guilt.

The appellants argued that insider dealing inquiries are criminal proceedings because of the penal consequences in particular the Tribunal’s power under section 23(c) of the SFCO to impose a penalty of an amount up to 3 times the amount of any profit gained or loss avoided by any person as a result of the insider dealing. The court accepted that the legislature clearly regarded insider dealings under the Securities (Insider Dealing) Ordinance as civil proceedings and the Tribunal’s rulings would not result in criminal record. However, the court then went on to look into the substance rather than the form of the legislation.

The court found that the penalty was punitive and deterrent in nature, and not compensatory. There was no doubt about its severity even though the maximum penalty depended on the size of the actual or potential gain or loss. Therefore, the court held that the Tribunal proceedings were not disciplinary in nature but a criminal one. This is so even though a finding of insider dealing will not result in a criminal record. Accordingly an implicated person should not be required to testify against himself under Article 11(1)(g) of HKBOR and that requirement is unconstitutional.

The judgment is a severe blow to securities regulators. It has attracted a lot of controversy as it is expected to hand tie investigations into insider dealings which by nature of their activities are difficult to prove.

Under Part XIII of the new Securities and Futures Ordinance enacted in 2003, the Market Misconduct Tribunal replaced the Insider Dealing Tribunal for the purpose of inquiring into market misconduct including insider dealing. But it does not have the power to impose fines.

If you have any questions about the above judgement or listed companies’ compliance requirements, lawyers in our Corporate Finance and Securities Department will be happy to assist you.

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