Hong Kong Court of Appeal Ruled on the Test of Recklessness and Negligence for Market Misconduct under SFO

March 2019

On 25 February 2019, the Hong Kong Court of Appeal handed down the judgment in Andrew Edward Left v Securities and Futures Commission & Another [2019] HKCA 224, an appeal from the decision of the Market Misconduct Tribunal under section 277(1) of the Securities and Futures Ordinance (SFO). In affirming the decision of the Tribunal in sanctioning Andrew Left, the Appellant, of market misconduct, the Court of Appeal had extensive discussion on the test of “recklessness” and the standard of care under section 277(1) of SFO.


The Appellant was a US-based internet publisher of research reports and stock commentaries on listed companies. In June 2012, the Appellant published a report online stating, among other things, that a mainland Chinese property developer listed in the Hong Kong Stock Exchange (the ListCo) was essentially “an insolvent company” and had consistently “presented fraudulent information to the investing public”. Following the report, the share price of the ListCo declined sharply. It was found that the Appellant short sold shares in the ListCo at about the time of publication of the report and made a profit of about HK$1.6 million.

The Tribunal found the Appellant culpable of market misconduct in contravention of section 277(1) of SFO by publishing false or misleading information and he was reckless or negligent as to whether the information was false or misleading as to material fact. The Tribunal imposed the penalties including a “cold shoulder” order from any dealings in the Hong Kong financial market for 5 years, a “cease and desist” order that he shall not again perpetrate any conduct complained of, and a disgorgement of profit.

Section 277(1)—Disclosure of false or misleading information inducing transactions

The Court of Appeal considered section 277(1) to contain the following requisite elements:

1. a person, whether in Hong Kong or elsewhere, must publish, that is, disseminate, information or be concerned in its dissemination;

2. the information must be likely to induce another person to buy or sell securities in Hong Kong or must be likely to maintain, increase, reduce or stabilize the price of securities in Hong Kong;

3. the information must be false or misleading as to a material fact, and

4. the person who has disseminated the information must know, or be reckless or negligent, as to whether the information is false or misleading as to a material fact.

Recklessness under section 277(1)

In arriving at the decision, the Tribunal applied a 3-question test with reference to the criminal test of “recklessness” propound in Sin Kam Wah v HKSAR (2005) 8 HKCFAR (the “3-Question Test”) as follows:

(a) When the Appellant came to publish the report, was he aware of the risk that the information in it which is the subject of these proceedings was false and/or misleading?

(b) Was the Appellant further aware that in the circumstances the risk was of such substance that it was unreasonable to ignore it?

(c) Did he nevertheless, although aware of (a) and (b) above, go ahead and publish the report?

A major ground of appeal was that the Tribunal had not applied the correct test of recklessness. It was argued on behalf of the Appellant that the correct test should be the test for fraudulent misrepresentation in civil cases, namely, whether the person making the statement is indifferent to the truth of that statement, rather than the 3-Question Test.

The Court of Appeal, rejecting the Appellant’s contention considered the Tribunal was correct in applying the 3-Question Test. The Court of Appeal acknowledged that although the 3-Question Test of recklessness was devised in respect of a culpable state of mind in criminal law whilst section 277(1) is not criminal in nature, the equivalent market misconduct offences in Part XIV relating to criminal offences (eg, false trading, price rigging and disclosure of false or misleading inducing transactions) also provide for recklessness as a culpable state of mind. In view of the potential sanctions which may flow from a finding of market misconduct as provided in section 257 of SFO, it is entirely appropriate that the same test should apply for recklessness in respect of the same prohibited act.

Negligence under section 277(1)

Having ruled that the Appellant had been reckless, the Court of Appeal also considered the Appellant to be negligent in publishing the report.

The Court of Appeal did not accept the Appellant’s argument that the standard of care required of him should be that of an unlicensed individual making a commentary, which, for the protection of the fundamental right of freedom of speech of such person, should be lower than that of a market commentator or analyst.

By applying a purposive interpretation of the relevant provision of SFO, it was held that the Tribunal was right in coming to the view that the standard of care should be one that was comparable to a market commentator or analyst in respective of whether the maker is licensed or not.