This article is written by Rachel Yu.
In a recent judgment, the Court of Appeal (“CA”) dismissed the appeal of Andrew Left (“Left”) against an earlier decision of the Market Misconduct Tribunal (“MMT”) which found Left in violation of s277(1) of the Securities and Futures Ordinance, for publishing false or misleading information inducing transactions. In doing so, the CA made some remarks of practical and legal significance.
Background: The MMT decision
Left was (and still is) the head of Citron Research, a US-based publisher of reports on listed companies. On 21 June 2012, Left published a report on Citron Research’s website that contained allegedly false and misleading information about a Hong Kong listed real estate group. The report stated, amongst other things, that the group was insolvent and had been engaging in accounting fraud. Following the publication of the report, share prices of the group plummeted.
The MMT found the allegations in the report to be false and misleading and were likely to alarm ordinary investors given the “sensationalist” language used. The MMT also found that Left had made these allegations recklessly or negligently without any understanding of the applicable Hong Kong accounting standards, checking with a Hong Kong accountant or seeking the group’s comment. Left was banned from trading in the Hong Kong securities market for five years as a result. This was the first ruling against such short seller reports in Hong Kong.
Left appealed to the CA on three grounds. Specifically, he claimed that the MMT had failed to apply the correct test for recklessness. In relation to this, the CA held that the MMT did not apply the wrong test for recklessness and confirmed that the correct test is the subjective interpretation of recklessness in criminal law as stated in Sin Kam Wah v HKSAR (2005) 8 HKCFAR 192 – that “…it has to be shown that the Defendant’s state of mind was culpable in that he acted recklessly in respect of a circumstance if he was aware of a risk which did or would exist, or in respect of a result if he was aware of a risk that it would occur, and it was in the circumstances known to him, unreasonable to take the risk.”
Left also contended that the MMT erred in the test for negligence but since the finding against Left on negligence was only an alternative to the finding against him on recklessness, and Left had failed to challenge the finding on recklessness, his appeal with regard to negligence was academic.
The CA further noted that the relevant legislative intention was to protect the public and the integrity of the market against any negligent dissemination of false or misleading market sensitive information relating to material facts by anyone. Any person disseminating information was required to carry out reasonable steps to ensure that the information was true and not misleading before publication. In considering negligence, the same standard of care would apply across the board to anyone engaging in such activities, whether you are a market commentator, an analyst or an unlicensed person.
Application for leave to appeal to the Court of Final Appeal rejected by the CA
Left sought leave from the CA to appeal to the Court of Final Appeal in March 2019 on the ground that the appeal involves questions of great general or public importance. Not persuaded that this is an appropriate case to grant leave, the CA dismissed Left’s application with costs to the Securities and Futures Commission on 24 May 2019.
This potentially puts an end to this five year battle between Left and the Securities and Futures Commission. We will continue to monitor if Left decides to take this further.
In the meantime, market players, especially market commentators and research analysts, are reminded that disclosure, circulation or dissemination of false or misleading information which induces or is likely to induce transactions may constitute market misconduct, whether this takes place in Hong Kong or anywhere else. Defence is only available in very limited situations and normally would not be applicable to market commentators and research analysts. Reasonable diligence and caution is to be exercised before dissemination of information which may affect the market.