IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CRIMINAL CASE NO. 981-1020 OF 2008
Reasons for Sentence
1. Both defendants, Fu Kor Kuen Patrick (D1) and Lee Shu Yuen Francis (D2), were jointly charged with 20 counts of false trading offencecontrary to section 295(1)(a) and (6) of the Security and Futures Ordinance Cap.571. They were convicted as charged after trial.
2. Both defendants engaged in trading 20 different derivative warrants (the subject matter of the 20 charges in question), all issuedby Macquarie Bank, on 19 separate days within a period of 13 months from January 2004 to January 2005 with the effect of creatinga false or misleading appearance of active trading in respect of the particularized warrants traded on the Hong Kong stock market.
3. The 20 warrants in question were all issued by Macquarie Bank Limited and Macquarie Equities (Asia) Limited (MEAL) was appointedas the liquidity provider.
4. Both D1 and D2 had securities accounts with brokerages Grand Investment (Securities) Ltd (Grand) and Shun Loong Securities CompanyLimited (Shun Loong).
5. The main feature of the pattern of Ds’ trading was that they traded the warrants with each other at the same price. And basicallythey were day trading the warrants; in one case, the number of trades they conducted went up to as high as 400 (i.e. Charge 9), thelowest being 34 (i.e. Charge 15), however, speaking in terms of market domination, the lowest trade number (34) has 90% market dominationinstead.
6. The reason they were able to trade with each other at the same price because of the rebate scheme introduced by Macquarie, the warrantissuer, and discounts offered by Ds’ own brokerages, Grand and Shun Loong, the result was that when they traded in the 20 particularizedwarrants either buy or sell, the amount they received from rebates was more than the transaction costs they incurred that resultedin a net profit. For all these transactions involving the 20 warrants in question, the Ds made a profit – a sum slightly over amillion.
7. The court found that the way the Ds traded the warrants- trading with each other at the same price-was not real trading and thenumber of trades it generated had the effect of creating a false or misleading appearance of active trading and they intended tohave that effect. And their purpose was to enable them to exit the market at the end of the day.
8. D1, a person of previous good character, was a married man but now a divorcee, there are two children in the marriage but the custodyof them has been awarded to the wife.
9. It is submitted that D1 made constant contributions to various organizations – $200,000 to his Alma Mater, La Salle College, ½a million to a Buddhist temple and a sizable amount to Living Hope Asian which is an organization looking after children.
10. Letters from Dr. C H Leung (Justice of Peace) and others were submitted, they all spoke very highly of D1; in one of the letters(Si Fong Che), it is said that D1 frequently donates to charitable causes and is eager to do good- he frequently donates to differentcharitable organizations, helps the elderly and takes care of youths, helps the poor and takes care of orphans.
11. As far as the trial was concerned, it was submitted that D1 conducted the defence responsibly by agreeing to the prosecution caseand did not give perjured evidence by taking the witness stand; it was only a battle between experts.
12. By and large, D1 was a prudent investor. This was not a case participated by a number of people and it attracted no public criticism.SFC had expressed disquiet in the past but nothing was done to prohibit such conduct; it was not until September 2006 that the rebatescheme was abolished. Any recurrence of the offence would become impossible, and therefore any need for deterrence would be renderedunnecessary.
13. It was not shown that there was a substantial increase in trade volume as a result of the false trading and the offences were stalegoing back many years ago. Because of the tremendous pressure from facing the legal proceedings, D1 has been suffering from depressionsince 4 years ago (letter from Dr. Desmond Fung submitted).
14. As there is no need for deterrence, it is submitted, the case can be dealt with by way of community service order and if imprisonmentwere to be given, it would be an appropriate case to suspend the term.
15. D2, who has 2 previous spent convictions not similar to the present offences, got married in 2006 and now has a 3-year-old daughter;he is the sole breadwinner of the family and also supporting his elderly parents. His wife is just pregnant.
16. Despite his past offences which were committed when D2 was only 15, he has rehabilitated ever since and at least up to now. D2 isa responsible father, a caring husband and son. Various letters from his wife, brothers, friends and ex-colleagues spoke very highlyof him, about his hardworking nature and how helpful a person he was.
17. It is submitted that these offences did not constitute the most serious type of market manipulation- it involves no sophisticatedmeans, no set up of dummy company, no breach of trust, no corrupt payments etc. D2 only capitalized on an opportunity which was notcreated by him. And there is no evidence to show that any investors suffered any losses as a result of these activities. Counselalso stressed that there was no likelihood of re-offending.
18. As the defence did not oppose the application for investigation costs by the prosecution, the costs order would more than wipe outthe amount of profit D2 made from these offences.
19. For the question of delay, counsel submitted that the offences committed in 2004, D2 had been interviewed by SFC 4 times from October2005 to August 2007, and not until more than a year later was D2 charged with the offences. In his submission, counsel said thatin certain circumstances delay could be regarded as a significant mitigating factor and could justify the suspension of what wouldotherwise have been an immediate custodial sentence, and the present case was one of those for since the commission of these offences6 years ago, he has moved on his life- he has married and has a 3-year-old daughter. D2 also suffered from depression during thewaiting period.
20. In the money world like the financial markets, it goes without saying that every market player is hoping to make money in it, butthere is no guarantee a success story for anyone; in fact, news of people losing money and in some instances losing substantial sumsof money are not unheard of. In a real market, the losers have got no one to blame but themselves for taking the bad move or makingthe wrong decision; however, in a manipulated market, they are not level playing-they are being misled by the market manipulator.
21. The false trading provisions are, as the Australian Courts put it, to protect the market for securities against activities whichwill result in artificial or managed manipulation and that it is in the interests of the community that the market for securitiesshould be real and genuine, free from manipulation.
22. The Hong Kong Securities and Futures Commission (SFC), being the financial regulator, are therefore charged with stopping marketmanipulation and protecting investors. The goal is to level the playing field, to ensure that anyone who wants to buy or sell securitiesincluding warrants the information they are getting is real and not false, so as to make intelligent decisions.
23. The Ds by way of false trading created a false appearance of active trading of the 20 particularized warrants in the market, thedefence argued that looking at the subsequent market data, it did not seem to have misled anyone, let alone a large number of investors,going into the warrant markets as a result of Ds’ trading.
24. I think the false trading provisions are geared to deal with market manipulation rather than the actual losses, if any, occasionedby any such manipulation. Whether or not market manipulation in fact leads to losses suffered by investors is a question of proof;as far as the instant case was concerned, it seemed to me that the prosecution in bringing the case against the Ds focused simplyon the false trading itself rather than on its consequence or its impact on the market, and just by looking at the information suppliedby the defence I cannot say for sure that nobody suffered any losses as a result of Ds’ false trading, but one thing is sure thatthe best strategy to protect the unwary investors against market manipulation, in my view, is to nip it in the bud.
25. If the financial markets were allowed to be manipulated; the manipulators would be protected at the expense of the investors whomthe law was supposed to protect. When it comes to protecting the investors and restoring public trust in the financial markets, thecourt cannot pass the buck and should be very tough by passing sufficiently deterrent sentences against any market manipulator likethe Ds.
26. It is submitted by the defence that since the rebate scheme had been banned, there was little likelihood of re-offending, and thereforeit called for no deterrence.
27. The point is market manipulation comes in many and varied forms as human ingenuity will allow and human ingenuity knows no bounds.In this kind of money world, it is just too much temptation for anyone to beat others to make money by whatever means including underhandones. Market manipulation should not be tolerated if the law were really meant for the protection of individual investor. Unlessthe market manipulators are deterred, the investors cannot be said to be sufficiently protected.
28. Defence also put forward ‘delay’ as mitigating factor, I have considered the matter and I am not prepared to reduce sentencefor this reason. Judging from the voluminous documentary evidence produced in the instant case, it is clear that this was not a simpleopen-and-shut case; and it is also clear that this case formed only part of a large-scale investigation conducted by SFC back in2005 which involved going through an avalanche of documents and interviewing a number of suspects. Given the size of the investigation,I do not think the time, even in terms of years, as SFC had taken in this case to do the investigation could be regarded as too long.
29. After the commission of the offences, the fact that D2 got married and now has a 3-year-old daughter and another one coming doesnot set him apart from the rest of us-the ordinary people, he is just doing something everybody else would normally do.
30. The maximum sentence for false trading is one of 10 years imprisonment and fine up to 10 million (Section 303).
31. Taking into account all the mitigation put forward by counsel for Ds including all the positive features mentioned about them (butI’ll deal with D1’ clean record and his generosity separately) and for the reasons given above, I sentence each D to a term of2 years for each charge.
32. They committed the 20 offences separately on 19 days in a period slightly over one year, in principle, the terms should run consecutivelyto one another, but giving effect to the totality principle, in the case of D2- I order charge (1) to run consecutively to one monthof each subsequent charges (2) to (13) and concurrently with all the rest, the total term is one of 3 years imprisonment; for D1,I order charge (1) to run consecutively to one month of each subsequent charges (2) to (10) and concurrently with all the rest, thetotal term is one of 2 years 9 months imprisonment (I have taken 2 months off to reflect his clean record and one month for his generosity).
33. Prosecution made an application for investigative costs, a sum of $1,388,996.00, to be paid by Ds; to this application, the defencedid not argue against it. Having considered the matter, I think it appropriate to make such an order; I order each D to pay halfof the amount, i.e.$ 694,498.00, to the prosecution within one month from today.
(I) Application for leave to appeal against conviction dismissed. (II) Appeal against sentence allowed. Please refer to CACC179/2010dated 23 December 2010