Court of Final Appeal ruled that penalties imposed by Insider Dealing Tribunal were against Bill of Rights

On 18 March 2008, the Court of Final Appeal (CFA) in Hong Kong ruled in the case of KOON WING YEE v. INSIDER DEALING TRIBUNAL AND ANOTHER that the penalties imposed by Insider Dealing Tribunal against Koon Wing Yee (Koon) in the sum of HK$15 million and Sonny Chan Kin Shing (Chan) in the sum of HK$ 1.5 million were invalid. However, the CFA restored the adverse findings of insider dealing made by the Tribunal against Koon and Chan who have to pay the following sums:

Background of the case

The SFC launched an investigation after suspicious dealings in the shares of Easy Concepts International Holdings Ltd (Easy Concept) and Easyknit International Holdings Ltd (Easyknit). The purchases took place in 2000 before the announcement of the acquisition of 75% interest in Easy Concept (which was owned as to 75% by Easyknit). Koon was the chairman of Easy Concepts and Easyknit. Chan was a business acquaintance of Koon.

In 2005, the Insider Dealing Tribunal found that Koon and Chan had committed insider dealing under the Securities (Insider Dealing) Ordinance (SIDO) in respect of the purchases of Easy Concept shares. Chan was also found to be an insider dealer in his purchase of Easyknit shares.

Koon and Chan appealed to the Court of Appeal. In May 2007, the Court of Appeal concluded that the Insider Dealing Tribunal inquiry was criminal in nature. Koon and Chan were entitled to the protection of Articles 10 and 11 of the Bill of Rights in the Insider Dealing Tribunal inquiry. Accordingly, the evidence obtained by the SFC in relation to which Koon and Chan had claimed the privilege against self incrimination under s.33(4) of the Securities and Futures Commission Ordinance, was inadmissible in the Insider Dealing Tribunal inquiry. The Court of Appeal also held that Koon and Chan should not have been compelled to give evidence under s. 17 of SIDO in the Insider Dealing Tribunal inquiry and that, in the inquiry, the appropriate standard of proof should be proof beyond reasonable doubt (which is the criminal standard of proof) instead of a civil standard of proof, i.e. on a balance of probability.

CFA's decision

The Financial Secretary appealed to the CFA. CFA gave its unanimous decision on the following issues.

1. CFA held that the Insider Dealing Tribunal inquiry involved the determination of a criminal charge within the meaning of Articles 10 and 11 of the Bill of Rights by reason of the Tribunal's power to impose a penalty.
   
   Article 10 of the Bill of Rights gives everyone a right to a fair and public hearing by a competent, independent and impartial tribunal established by law in the determination of any criminal charge against him. Article 11 of the Bill of Rights provides, among other things, that everyone charged with a criminal offence shall have the right to be presumed innocent until proved guilty according to law; and that the person shall not be compelled to testify against himself or to confess guilt.
   
   
2. However, CFA held that the inquiry was not criminal within the meaning of Articles 10 and 11 of the Bill of Rights by reason of the Tribunal's power to order disqualification. Unlike the power to impose penalties, CFA held that the power to disqualify is protective rather than punitive.
   
   
3. The CFA held that the evidence obtained by the SFC in relation to which Koon and Chan had claimed the privilege against self incrimination under s.33(6) of the Securities and Futures Commission Ordinance was inadmissible in Insider Dealing Tribunal inquiry as it involved the determination of a criminal charge. CFA concluded that the use of such evidence had violated Article 10 of the Bill of Rights. CFA also decided that Koon and Chan should not have been compelled to give evidence under s. 17 of SIDO in the Insider Dealing Tribunal inquiry as s.17 violates both Art 10 and 11(2)(g) of the Bill of Rights.
   
   
4. Regarding the standard of proof, CFA held that the Insider Dealing Tribunal should apply the criminal standard of proof, i.e. proof beyond reasonable doubt.
   
   
5. Despite the conclusions reached in respect of the above matters, CFA disagreed with the Court of Appeal and held that it is appropriate only to invalidate the penalty provision under s.23 (1)(c) of SIDO and not the other sections of SIDO. Accordingly, the Insider Dealing Tribunal Inquiry, its adverse findings against Koon and Chan and the other orders that the Insider Dealing Tribunal had made remain effective. CFA held that once s.23(1)(c) is declared to be invalid, then the reason for characterising the proceedings as criminal is eliminated. It then follows that the true character of the proceedings in the light of the relief granted is civil and the Tribunal was correct in applying the civil standard of proof.

Comments

This case was governed by the old regime under SIDO. Since 1 April 2003, insider dealing has been governed by the Securities and Futures Ordinance (SFO). Insider Dealing Tribunal was replaced by the Market Misconduct Tribunal (MMT) which has power to deal with various types of market misconduct, including insider dealing. Also, under the SFO, insider dealing can be a criminal offence. The first criminal insider dealing case was brought before the Court in February this year and the pre-trial review will be heard on 7 May 2008 in the District Court.

Unlike the Insider Dealing Tribunal, MMT does not have the power to impose a penalty. The power to impose a penalty was removed from the MMT during the drafting of the SFO as there was concern by the Government that the penalty provision might violate the Bill of Rights as the CFA has now held. It appears that the same objection against the Insider Dealing Tribunal inquiry might not be made against MMT inquiry due to the absence of power by the MMT to impose penalty.

Although the MMT does not have the power to levy penalty, if the person who has engaged in insider dealing is a licenced person, the SFC has power to impose a penalty up to 3 times of the profits made or loss avoided or HK$10 million (whichever is greater) in any disciplinary action which may be brought against the licenced person.

The MMT has commenced the first inquiry last year but no case has been determined as of today.

By the end of 2006, those involved in 21 insider dealing cases had been ordered to pay penalties of about HK$571 million in total, out of which only about HK$178 million were paid. In light of CFA's judgment, those who have paid penalties may consider taking action to recover the money. For those who have not paid, they may have a defence in not paying the penalties levied against them by the Insider Dealing Tribunal.