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Important win for SFC as Appeal Court says SFC does not have the burden of proof in proceedings before the MMT

  • Hong Kong
  • Other



In an appeal by the Securities and Futures Commission (SFC) against the decision of the Market Misconduct Tribunal (MMT), the Court of Appeal (CA) held in favour of the SFC and reconfirmed the inquisitorial nature of MMT proceedings and as such the SFC does not carry any burden of proof at all. The duty is on the MMT to receive evidence presented by the SFC as well as evidence (if any) adduced by the respondents. Provided the MMT is satisfied on a balance of probabilities that the respondents have committed market misconduct, it shall give its finding accordingly.

The practical implication of this decision is that the usual strategy of putting the SFC to prove its case previously adopted by many persons under investigation may work against them in subsequent proceedings before the MMT. The full judgment of the CA in SFC v. Cheng Chak Ngok and another [2018] HKCA 590 can be accessed here.


Mr Cheng is the Executive Director, Chief Financial Officer and Company Secretary of ENN Energy Holdings Limited (ENN). In early 2011, ENN contemplated acquiring China Gas Holdings Limited (CGHL) and tried to find a partner to fund a takeover. Mr Cheng was responsible for negotiating a financing proposal for ENN in connection with the takeover.

Before the announcement of this price sensitive information and whilst in possession of such relevant information, the SFC suspected that Mr Cheng had used the securities account of a Ms Li to deal with CGHL’s shares.

There is no dispute that (i) Mr Cheng was a connected person to CGHL; or (ii) he had information which he knew was relevant information in relation to CGHL at material times. The only matter in dispute is whether Mr Cheng had dealt with the listed shares of CGHL.

Circumstantial evidence surrounding dealing in the shares

There was no direct evidence proving that Mr Cheng had used Ms Li’s securities account to deal with CGHL’s shares during the relevant period. The SFC was only able to adduce circumstantial evidence to the MMT, which included:

Relationship with Ms Li: Ms Li was a consultant of ENN’s parent company. Mr Cheng assisted Ms Li to open a bank account in Hong Kong. He handled all the correspondence between the bank and Ms Li, including those relating to her securities account.

Timing of placing of orders: The bid orders were placed in close proximity to Mr Cheng receiving price sensitive information and as Mr Cheng gained more and more information on the takeover.

Manner of placing orders and the location of Mr Cheng: All the orders were placed when Ms Li was not in Hong Kong. While Mr Cheng was in Hong Kong, bid orders were made from an IP address of ENN’s Hong Kong office computers; and while Mr Cheng was out of Hong Kong, bid orders were placed by a smartphone. However, this placing pattern was disrupted by six orders out of 40, where these six orders were placed by a smartphone when Mr Cheng was in Hong Kong.

Fund flow relating to the shares: Out of the total consideration of around HK$13 million for the purchase of CGHL’s shares, Mr Cheng’s wholly owned company transferred HK$8 million to a middleman, and directed him to transfer the same to Ms Li’s account. Out of around HK$16.7 million of sales proceeds of CGHL’s shares, Ms Li transferred HK$14.17 million to the middleman, who then transferred HK$615,233 (RMB500,000) to Mr Cheng.

The decision of the Tribunal

The Tribunal found the circumstances surrounding the relevant trading to be “suspicious” but, given the available evidence, it could not rule out the possibility that it was Ms Li or someone other than Mr Cheng who had used Ms Li’s account to deal with the shares. The Tribunal held that the SFC did not displace its burden to prove a case of market misconduct against Mr Cheng. The full decision of the MMT can be accessed here.

The decision of the Court of Appeal

The CA confirmed that the correct standard of proof in the conduct of an inquiry is on a balance of probabilities. Notwithstanding the Tribunal’s awareness of the requisite civil standard of proof in the proceedings, the CA held that the Tribunal had in fact applied the criminal standard.

Instead of weighing the probabilities between (i) Mr Cheng being the person who placed the bid orders and (ii) some unidentified individual (if one existed) who would have been in a position to place such orders, the Tribunal wrongly made its decision by asking itself the question whether it could rule out all possibilities that someone else might possibly be involved.

The CA also held that section 252 of the Securities and Futures Ordinance (SFO) does not impose a burden of proof on the SFC in inquiry proceedings before the MMT. The correct approach is for the MMT to satisfy itself whether someone has committed market misconduct on a balance of probabilities based on available evidence presented by both parties in the proceedings.

Even though it was the CA’s view that the available evidence points strongly to Mr Cheng as the person who had dealt with the shares, the CA remitted the case to a differently constituted Tribunal for its reconsideration since the Tribunal is vested with the responsibility of making findings of fact.

Practical Implications

This is a case that concerns the insider dealing provisions under the SFO, but the jurisdiction of the MMT covers also other market misconduct and wrongdoing. In particular, the MMT has jurisdiction to hear cases involving the disclosure of false or misleading information inducing transactions under section 277 of the SFO. The SFC normally takes enforcement action relying on such provision in cases where listed companies have disclosed incomplete or inaccurate information in their corporate documents including result announcements and circulars relating to mergers and acquisitions or other corporate transactions.

This case serves as a reminder to financial institutions, listed companies and all market participants that the SFC only needs to meet a relatively low evidential threshold to commence inquiry proceedings, and circumstantial evidence alone (without direct evidence) could be sufficient for the MMT to make an adverse finding against a person in MMT proceedings.

In the past, many persons under investigation by the SFC would adopt a defensive strategy of putting the SFC to prove its case throughout the entire enforcement process from the onset of the investigation to the actual proceedings before the MMT. Such strategy may no longer be effective in the light of this latest CA decision. Persons under investigation by the SFC may now need to take a more proactive approach as early as possible in the investigation stage in order to put themselves in the best possible position in any subsequent proceedings before the MMT.