In Securities and Futures Commission v Cheng Chak Ngok and Another (CACV 95/2017, 10 September 2018), the Securities and Futures Commission (the “SFC”) appealed against the decision of the Market Misconduct Tribunal (the “MMT”) that Mr Cheng Chak Ngok (“Mr Cheng”) had not engaged in insider dealing in the shares of China Gas Holdings Limited (“China Gas”). In its judgment, the Court of Appeal allowed the appeal and discussed certain principles of the MMT proceedings.
Background of the case
Mr Cheng was the executive director, chief financial officer and company secretary of ENN Energy Holdings Limited (“ENN”). ENN contemplated an acquisition of China Gas in early 2011 (the “Takeover”) and China Petroleum & Chemical Corporation (“Sinopec”) agreed to form a consortium with ENN to fund the Takeover. Mr Cheng was responsible for negotiating a financial proposal for ENN and acquired actual knowledge of (i) the consortium comprising of ENN and Sinopec to fund the Takeover; (ii) the offer price; and (iii) the timing of the formal announcement regarding the voluntary general offer (the “Announcement”).
SFC considered that Mr Cheng committed insider dealing by using a third party’s securities account to purchase shares in China Gas right before its suspension of share trading prior to the Announcement, and gained a total profit of around HK$3 million by selling those shares thereafter. Yet, based on the evidence available, the MMT decided that it could not be satisfied on a balance of probabilities that Mr Cheng had dealt with the shares in China Gas at the material times and thus insider dealing could not be proved. The SFC appealed against the MMT’s decision.
Principles of MMT Proceedings
Nature of Inquiry
The Court of Appeal is of the view that the nature of the inquiry on market misconduct by the MMT is civil and inquisitorial, which means that the judge has an examining or inquiring role to investigate the facts of the case, as opposed to an impartial role of the judge under the accusatorial system. The MMT’s function is not to decide between rival claims or positions but to inquire into the question of insider dealing. The MMT proceedings are inquisitorial.
Standard of Proof
Since the nature of the inquiry is civil, the standard of proof is on a balance of probabilities (i.e. the case that is more probable on facts should succeed). Meanwhile, it is an established practice from case laws that the standard of proof will be proportional to the seriousness of the allegations (i.e. the more serious an allegation is, the more compelling evidence will be needed).
Burden of Proof
The well-established and orthodox view is that the concept of burden of proof is only a tool in the adversarial jurisdiction. In an inquisitorial jurisdiction, no party bears the burden of proof.
Grounds of appeal
SFC relied on four grounds of appeal, namely:
- The MMT was erred in law in (i) misdirecting itself that the inquiry was adversarial in nature, (ii) misdirecting itself that the concept of burden of proof applies and lies solely with the SFC, and (iii) failing to exercise the investigative powers vested by the Securities and Futures Ordinance (the “SFO”);
- The MMT had applied a criminal standard of proof (i.e. requiring the SFC to prove the case beyond reasonable doubt) and ancillary evidential principles applicable to criminal proceedings in evaluating the evidence in this case;
- The MMT substantially erred in reaching the conclusion that it could not be satisfied on a balance of probabilities that Mr Cheng had engaged in insider dealing; and
- The MMT failed to consider exercising the investigative powers available under the SFO before concluding the inquiry.
Court of Appeal’s Decision
Wrong standard of proof in substance
The Court of Appeal found that even though the MMT was aware of and had been reminded from time to time that the standard of proof was on a balance of probabilities, it failed to properly evaluate the evidence available and wrongfully applied the criminal standard which in substance required the allegation to be the only reasonable inference to be drawn in the circumstances. The MMT accepted the fact that Mr Cheng’s explanation was confusing, not totally convincing and suspicious but still required more compelling evidence to be provided by the SFC to prove the case. Therefore, the MMT erred in requiring the SFC to prove the case on a criminal standard of proof.
Wrong assumption of burden of proof
The Court of Appeal further found that the MMT was wrong in imposing a burden of proof on the SFC. The Court of Appeal is of the view that the well-established approach should be adopted, which means no burden of proof has to be imposed on any party in such an inquisitional inquiry. The language in the SFO only requires the SFC to present evidence to the MMT so as to enable the MMT to form a decision on the matter.
The matter in this case is being remitted to a differently constituted MMT to determine solely the question of whether Mr Cheng had dealt with the shares as the other elements of insider dealing had been established and was not challenged in the appeal.
To conclude, the Court of Appeal clarified that for a market misconduct proceeding before the MMT, it is civil and inquisitorial in nature and the SFC bears no burden of proof but is only required to present evidence and information to the MMT, which should investigate the facts of the case to decide which case is more probable on a balance of probabilities.
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