20 January 2017 | Richard Keady, Jenny Zhuang

On 13 January 2017, the Court of Appeal in Hong Kong refused Andrew Left's application for leave to appeal the determination of the Market Misconduct Tribunal ("MMT"), holding him culpable for publishing a false and misleading report on a website about a Hong Kong listed company that consequently had an adverse effect on the company's shares.

While we wait for the dust to settle, we reflect on the story that is a shining example of the Hong Kong Securities and Futures Commission ("SFC") flexing its regulatory muscles against an online commentator, residing outside of Hong Kong, for making negligent and reckless statements on the internet to the detriment of the investing public.

The story began with an anonymous package Mr Left apparently received on or about March 2012. The package contained a 68 page in-depth analysis of Evergrande Real Estate Group ("Evergrande"), a company listed on the Hong Kong stock exchange, in a "racy tabloid format" that intrigued Mr Left. He decided that "it was a story that should be told" and apparently, after eliminating all information that could not be verified, he updated the numbers and released the report on the Citron Research website.

Mr Left resides in California where he runs a website, "Citron Research", which publishes online commentary and touts itself as having a "track record [in] identifying fraud and terminal business models second to none among any published source". He had never before published any commentary on a company listed on the Hong Kong stock exchange, nor is there any evidence that he had ever before traded in Hong Kong stocks. He touts himself as a "private investor with 17 years trading experience" on the Citron Research website, though it is understood that he is not an accounting expert.

The Citron Report was released online on the morning of 21 June 2012 (Hong Kong time), and was presented in a "hard-hitting tabloid style", setting out a series of power point presentations. The report boldly accused Evergrande of "intentionally and systematically" hiding important financial information from investors and of committing "fraudulent accounting". It alleged that "bribery, excessive spending, and off-balance sheet transactions are the foundation of Evergrande's financials" and further that Evergrande was insolvent. It was later determined by the MMT that (a) Evergrande was not culpable of "fraudulent accounting" and (b) that it was not insolvent. Further, before releasing the report, Mr Left did not consult any experts about relevant accounting regulations and standards, nor did he approach Evergrande for clarification.

Suffice to say, the report had a significant impact on the share price of Evergrande on the day it was released online; at one point the share price was down 19.6% from the previous day's close. The report presented Evergrande as a "good short opportunity" and it is no secret that Mr Left also short-sold Evergrande shares and netted a profit of HK$1,596,240.

The SFC then investigated, and pursued Mr Left in MMT proceedings for market misconduct under section 277 of the Securities and Futures Ordinance, which provides that a person who publishes false or misleading information about a listed corporation, who knows or is reckless or negligent as to that fact, is culpable of market misconduct if such information is likely to induce the investing public to deal in the securities of the listed corporation. This section, among others, was designed to protect the integrity of the market.

Mr Left is no stranger to litigation; he boasts of his previous successes in defending law suits by companies claiming damages against him for publications on the Citron Research website, and defended the MMT proceedings with vigour.

In August 2016, the MMT found Mr Left culpable of market misconduct. In a 109 page report, the MMT detailed its factual findings as well as its in-depth analyses of the requisite elements of section 277 and gave full reasons for its determination of Mr Left's culpability.

In October 2016, the MMT made consequential orders that:

(a) there be a "cold shoulder" order prohibiting Mr Left from any dealings in the Hong Kong financial market for five years;
(b) there be a "cease and desist" order that he shall not again perpetrate any conduct which constitutes market misconduct under section 277(1);
(c) an order for disgorgement of profit in the sum of HK$1,596,240 with interest; and
(d) an order for costs in favour of the Government and the SFC.

Unsurprisingly, Mr Left made an application to the Court of Appeal for leave to appeal the MMT's determination. Mr Left's application for leave to appeal was made late and therefore out of time (despite his legal team's argument that it was made within time). The Court of Appeal dismissed the application on this ground alone but nevertheless went into the merits of the application and determined that Mr Left's grounds of appeal had no reasonable prospect of success, and so leave to appeal would have been refused, even if the application had been made within time.

This is the second case in Hong Kong in which the regulator has pursued a market commentator in relation to comments made about a Hong Kong listed company. In March 2016, Moody's was found to have published a report about 61 Mainland companies which was false and misleading in some aspects, and which was prejudicial to the interests of the investing public. Moody's was publically reprimanded and fined HK$11 million.

These cases serve as a warning to online commentators; whilst freedom of speech is perhaps the epitome of free society and a pillar of the free market, one must be responsible for the consequences of one's words, and opinions must be expressed responsibly and diligently. The MMT in one of its rulings stated:

"..the SFC accepts that market commentators are entitled, on the information available in the public sphere at the relevant time, to disseminate their analysis of the strengths or weaknesses of a particular listed corporation. This is fair comment, no matter the perceived cogency or weakness of the comment. What market commentators are not permitted to do, however, is to distort that information so that, knowingly or being reckless or negligent as to whether it is the case, what is published constitutes false or misleading information about the corporation."

Let this be a lesson to commentators that the regulators are watching, so choose your words carefully!