Introduction – On 26 January 2017, the Securities and Futures Commission (“SFC“) commenced legal proceedings in the Court of First Instance (“Court“) to seek disqualification and compensation orders under section 214 of the Securities and Futures Ordinance (“SFO“) against Mr. Tse On Kin (“Mr. Tse“), former chairman and executive director of Kong Sun Holdings Limited (“Kong Sun“) and China Sandi Holdings Limited (“China Sandi“) (previous name was China Grand Forestry Green Resources Group Limited), for fraudulently obtaining a secret profit out of the companies’ share placements in 2009.
The wrongful actions – The SFC’s investigation revealed that Mr. Tse orchestrated a fraudulent scheme to use a nominee company (falsely declaring its independence) to apply for 100 million and 19 million shares placed by Kong Sun in or around June 2009 and China Sandi in or around November 2009 respectively, at a discounted price, with the intent of making a secret personal profit out of the share placements.
To this end, he procured and permitted the nominee company to make false and misleading representations to the placing agent to secure the share allotment. He also procured and permitted Kong Sun and China Sandi to make false and misleading representations (a) to the Stock Exchange of Hong Kong Limited (“Exchange“) to induce the latter to grant listing approvals with respect to the placing shares; and (b) in the public announcements of these companies.
Mr. Tse made a profit of about HK$2 million with respect to the Kong Sun shares, and a loss of about HK$200,000 with respect to the China Sandi shares.
Factors affecting disqualification period – As a starting point the Court considered the following brackets for reference:
The Court also took into account a wide range of factors, including (a) the age; (b) state of health and character of the offender; (c) the nature of the breaches; (d) the honesty and competence of the offender; (e) the length of time he has been in jeopardy; (f) any admission of liability; (g) his general conduct before and after the offence; (h) the periods of disqualification of his co-directors that may have been ordered by other courts; and (i) the interests of shareholders, creditors and employees.
Reasoning – The Court agreed with the SFC’s submission that Mr. Tse’s conduct fell on the borderline between the top bracket and the middle bracket for the following reasons:
(a) Tse’s conduct was fraudulent and dishonest. This brought the case near the top bracket;
(b) Tse carried out the fraudulent scheme not only once but twice with two different companies in which he held important positions;
(c) the fraudulent misrepresentations were not only made to the placing agent, Kong Sun and China Sandi, but also to the Exchange;
(d) Tse obtained a secret personal profit out of the share placement;
(e) on the other hand, Kong Sun and China Sandi did not suffer any financial loss.
Consequence – A disqualification order was made against Mr. Tse, disqualifying him for 10 years from being, or continuing to be, a director, liquidator, receiver or manager of any corporation in Hong Kong, and taking part in the management of any corporation in Hong Kong. He was also ordered to pay a compensation of $2,185,784.1 to Kong Sun, being the profit that he made in breach of his fiduciary duty owed to Kong Sun, and the SFC’s costs in the proceedings.