Part XII of the Singapore Securities and Futures Act (“SFA”) prescribes a wide range of offences relating to market misconduct. One such offence under s 201 of the SFA prohibits the use of manipulative and deceptive devices in connection with the subscription, purchase or sale of any securities. A critical threshold issue in deciding the appropriate sentence for a particular market misconduct offence is whether a fine or custodial sentence is warranted.
A recent Magistrates’ Appeal decision, Lee Chee Keet v PP1, considered this issue in the context of offences committed under s 201(b) of the SFA and held that the lack of actual market impact resulting from the offending conduct was not the decisive factor in determining whether a custodial sentence was warranted. Rather, the degree of culpability of the offender was an equally important factor that could warrant a custodial sentence.
The appellant, Lee Chee Keet, was a director and shareholder of Gennex Solutions (S) Pte Ltd (“Gennex”). In 2002, Gennex participated in discussions with other companies concerning a proposed merger for the purpose of listing (“the IPO”) on SESDAQ, the then secondary board of the Singapore Exchange Securities Trading Limited (“the SGX”). Subsequently, Gennex entered into an agreement with representatives of SNF Corporation Limited (“SNF”) and shareholders and directors of three other companies, under which SNF would acquire these companies and Gennex (collectively, “the subsidiaries”). In consideration, SNF would allot ordinary shares to the subsidiaries’ shareholders.
After SNF was granted a conditional eligibility-to-list (“ETL”), the appellant became an executive director and substantial shareholder of SNF. Pursuant to the SGX listing requirements, the appellant, together with SNF’s other directors, undertook to observe a moratorium on the transfer/disposal of his shareholdings in SNF. The purpose of such a moratorium was to preserve the promoters’ commitment to the listed issuer and align their interests with those of public shareholders.
However, through a deliberate series of steps, the appellant circumvented this moratorium: under sham share-transfer agreements, he transferred his Gennex shares to 5 nominees, with the shared understanding that these Gennex shares would be converted into SNF shares and sold after SNF’s listing. As a result, even though the appellant’s reported SNF shareholding was only 9,559,140 shares, he was the beneficial owner of 25,491,040 SNF shares.
After the IPO, the appellant began to dispose of the SNF shares held by nominees. The proceeds of sale amounted to $5.73m.
The appellant was charged with 43 offences under the Singapore Companies Act (“CA”) and the SFA. 5 charges were under s 201(b) of the SFA, which related to the appellant having deceived the SGX by concealing his beneficial ownership of his SNF shares and selling these during the moratorium. He elected to plead guilty to 14 charges, 2 of which fell under s 201(b) of the SFA. The remaining 29 charges were taken into account in sentencing. The District Judge sentenced him to 6 months’ imprisonment for each of the 2 charges under s 201(b) of the SFA, the terms to run concurrently. A fine totalling $118,000 was imposed for the rest of the 14 charges.
The appellant appealed against the District Judge’s sentencing decision.
Summary of Decision
The High Court Judge, See Kee Oon JC (“See JC”), considered the following key issues in the appeal.
1. Were custodial sentences warranted for offences under s 201(b) of the SFA committed before 2015 only if innocent members of the investing public had been defrauded?
The appellant argued that the sentencing factors set down in a 2015 High Court decision, PP v Ng Sae Kiat (“Ng Sae Kiat”),2 had changed the prevailing sentencing norm for offences under s 201(b) of the SFA, which was that a custodial sentence was only warranted when identifiable members of the investing public were defrauded and had suffered losses. The appellant contended that the pre-existing sentencing norm should apply to his case (as his offences were committed before 2015). Hence, a fine would be the appropriate sentence as the investing public did not suffer any loss through his misconduct.
After reviewing the line of authorities, See JC rejected the appellant’s arguments as there was no firm proposition that a fine would be meted out in all cases involving offences under s 201(b) of the SFA as long as the offence in question did not cause harm to innocent investors. On the contrary, the High Court had held in another case dealing with an offence under s 199(b)(i) of the SFA that a custodial sentence may be warranted even in cases where the offender did not have a fiduciary relationship with, or was not in a position of authority over, innocent lay investors. Given that s 201(b) was a “catch-all provision intended to cover any other form of securities fraud not specifically dealt with by other provisions in the [Securities Industry Act]”,3 See JC held that the sentences imposed for offences under other provisions of the SFA may be useful in determining an appropriate sentence for s 201(b) offences.
See JC further held that the decision in Ng Sae Kiat did not change the pre-existing sentencing norm for s 201(b) offences, but “merely consolidated existing principles”4. These principles did not envisage any universal sentencing norm which could be established across the broad range of s 201(b) offences, except for certain factors that affected how the public interest would be assessed and therefore the type of sentence to be imposed.
2. Was a custodial sentence appropriate in this case?
In considering whether a custodial sentence should be imposed in this case, See JC reviewed the list of non-exhaustive factors set out in Ng Sae Kiat5:
- Extent of loss/damage caused to the victim(s);
- Sophistication of the fraud;
- Frequency and duration of the offender’s unauthorised use of the relevant account;
- Extent of distortion, if any, to the operation of the financial market;
- Identity of the defrauded party (i.e. whether the defrauded party is a public investor or a securities firm);
- Relationship between the offender and the defrauded party; and
- Offender’s breach of any duty of fidelity which may be owed to the defrauded party.
As each case turned on its own facts, See JC noted that not all the factors in Ng Sae Kiat were relevant in this case and focused only on the following factors:
- Evidence of loss: See JC found that there was no evidence that SGX had suffered loss of reputation or authority as a result of the appellant’s deliberate concealment of his beneficial ownership in the SNF shares. There was also no evidence to suggest that the general investing public had sustained actual quantifiable losses caused by the appellant’s misconduct.
- Market impact: See JC found that there was a lack of evidence of actual market impact caused by the appellant’s misconduct. Although the investing public at large could have been misinformed, that did not justify a custodial sentence itself. See JC also accepted that the appellant did not owe a legal duty of fidelity to the investing public. Neither did the appellant, as a director and shareholder of SNF, owe such a duty to the SGX, as the relationship was not akin to an employer-employee relationship.
- Personal gain: See JC emphasised that even though the offender’s conduct did not harm anyone, the extent of the offender’s culpability in committing the offence could warrant a custodial sentence. Here, although the appellant had not wrongfully profited at someone else’s expense, he had given himself opportunities to cash out during the moratorium, which were “acts of deliberate deception in blatant disregard of the moratorium”6 and therefore “significant aggravating factors reflecting a serious want of probity”7. The difference between the proceeds that he actually received, and the proceeds he would have received had he complied with the moratorium, was not an insignificant sum of $573,548.40.
- Premeditation and difficulty of detection: Another significant aggravating factor in favour of a custodial sentence was the “high degree of premeditation and careful planning”8 by the appellant in devising the scheme, through which he sought to concurrently obtain an advantageous position for himself in the market and avoid detection. See JC found that the appellant’s offences were “at the higher end of the spectrum of culpability in market misconduct cases”9, given the following:
- the offences were committed over a lengthy period between 2003 and 2005;
- the appellant used sophisticated methods to avoid detection; and
- the large scale of investigations required, including the involvement of 13 financial institutions, 8 securities firms, and 47 suspects.
Despite the mitigating considerations (which included the appellant’s co-operation with the authorities), See JC held that a custodial sentence was justified in this case in view of the appellant’s deliberate deception of the SGX for personal gain and the “need for effective deterrence” of potential offenders who might otherwise take the risk of getting away with a fine10. However, See JC reduced the appellant’s custodial sentence from 6 months to 4 months for each s 201(b) charge as he was of the view that the District Judge had accorded undue weight to certain factors in sentencing.
This case is noteworthy for the principle that the degree of harmfulness of the offending conduct is not decisive in determining the appropriate sentence for the offence under s 201(b) of the SFA. As See JC observed, the extent of market impact (in terms of share price movements) caused by the appellant’s non-disclosure of his SNF shares was “difficult to estimate, let alone quantify” because “[t]he investing public’s choices and decisions are neither uniform, predictable nor always rational; often there are simply too many variables at work”11.
Accordingly, where the offender is highly culpable in committing the offence, the Singapore courts will, in sentencing the offender, take into account the objectives of the SFA, which are, amongst others, to protect public confidence in the market. This case illustrates that the courts will not hesitate to impose a custodial sentence to “deter an offender from embarking on a quest for personal gains through fraudulent or deceitful means even where there is no conclusive evidence of significant market distortion or quantifiable impact on market participants”12.