Australian Securities and Investments Commission v Xiao & Ors

EX TEMPORE Judgment 1The plaintiff, the Australian Securities and Investments Commission, now applies to the court to vary orders made in this matter on 17 November 2011 under Corporations Act 2001 (Cth) s1323, to the extent that those orders affect the second defendant, Mr Calvin Zhu. The orders made on that day relating to him, are relevantly orders four and five, which provided as follows: "4. Until 5.00pm on 23 March 2012 but subject to paragraph 5 and the undertakings below, the Second Defendant is restrained from leaving or attempting to leave Australia. 5. If the Second Defendant intends to leave Australia at any time prior to 5.00pm on 23 March 2012: (a) the Second Defendant must give the Plaintiff 7 days written notice of his intention to do so, together with details of the purpose of his trip and full particulars of his proposed travel itinerary; (b) the Second Defenadnt must not leave Australia for any consecutive period of more than 10 days; and (c) if the Second Defendant's travel itinerary should charge at any time or for any reason, the Second Defendant must provide the Plaintiff with revised particulars of his itinerary as soon as reasonably practicable." 2In substance orders four and five permit Mr Zhu to travel overseas provided he gives seven days notice of the purpose of his proposed travel to ASIC. Other orders provides that his wife should give safe custody of her passport to Mr Zhu's solicitors Messrs Watson Mangioni, whilst Mr Zhu is overseas. ASIC now seeks the discharge of orders four and five and in their place seeks a restraint until 23 March 2012 upon Mr Zhu "leaving or attempting to leave Australia". The Background to ASIC's Investigations 3The background to this matter may be shortly stated. Until the commencement of ASIC's current investigations, Mr Zhu and an associate, Mr Steven Xiao, were very senior employees of Hanlong Mining Investment Pty Ltd ("Hanlong"). Indeed they were respectively Hanlong's Vice President Investments and a director (Mr Zhu) and managing director (Mr Xiao). Hanlong announced on 11 July 2011 a takeover offer of a resources company listed on the ASX, Bannerman Resources Limited ("Bannerman"). On 18 July 2011 Hanlong announced a takeover offer of another listed resources company, Sundance Resources Limited ("Sundance"). 4The plaintiff, ASIC, is undertaking an investigation into whether Mr Xiao and Mr Zhu, together with other persons, were involved in insider trading in relation to those two takeovers in contravention of Corporations Act 2001 (Cth) s 1043A. The evidence ASIC has gathered so far in its investigations appears to provide the basis to infer a number of matters at least to a prima facie level. ASIC's evidence provides a basis to infer that Mr Xiao opened and then operated a bank account between February and May this year to trade in Sundance CFDs (contracts for difference) and in Bannerman CFDs. ASIC has also gathered evidence of trading by a company called Wingatta Pty Limited ("Wingatta") in both Bannerman shares before Hanlong's takeover offer for that company and also in Sundance CFDs before Hanlong's takeover of that company. The shares and CFDs respectively were purchased leading up to the two takeover announcements and sold within a very short period thereafter. 5Very shortly after those takeover announcements ASIC commenced its investigations into the conduct of Mr Zhu and Mr Xiao, and a number of other persons. The content and product of those investigations have been summarised in the evidence before the court. There is sufficiently compelling evidence from a combination of the ASIC Act section 19 examinations the plaintiff has conducted so far and searches of corporate records and bank accounts to supports inferences: (1) that Mr Zhu borrowed moneys from Hanlong; (2) that he opened an account in the name of the company, Wingatta; (3) that he caused the borrowings from Hanlong to be deposited in Wingatta's name; (4) that at Mr Zhu's direction Wingatta undertook the purchase of the Bannerman and Sundance securities prior to the takeover; and then, (5) that, after each of the takeovers was announced, under Mr Zhu's further direction, Wingatta sold these Bannerman and Sundance securities at a substantial profit in excess of $1 million. On the present application it is not necessary for the court to make findings as to whether these inferences should be drawn. That is a matter for any later civil or criminal proceeding. 6There is also evidence supporting an inference that approximately $1.2 million was remitted from Wingatta's Australian bank account to various bank accounts in Hong Kong. No court order has yet secured these funds in Hong Kong or China. The whereabouts of those funds is currently unknown. 7ASIC's investigations in Australia have not as yet proceeded to the point of commencing any proceedings, either civil or criminal, against either Mr Xiao or Mr Zhu. The court has been told that Mr Zhu has been the subject of, and co-operated in, at least five ASIC Act section 19 examinations. ASIC has advanced evidence about the result of these examinations, through one of its senior specialists, Mr Colin Robert Luxford. The investigations are continuing. 8If Mr Zhu is ultimately the object of either civil or criminal proceedings under the insider trading provisions of the Corporations Act (s1043A), to the extent he may wish to field a Corporations Act s 1043J nominee trading defence, the examinations, especially those of other Hanlong witnesses, reveal, again to the prima facie level, that: (1) apparently no-one else at Hanlong was aware of any such nominee trading strategy; (2) no such trading strategy was recorded in any Hanlong corporate document at the time; (3) neither Mr Xiao or Mr Zhu apparently had authority to purchase CFDs for Hanlong as part of the company's takeover strategy; (4) the purchase of such securities with moneys borrowed from Hanlong did not serve any corporate purpose of Hanlong's (being an inconsequential sum compared to the size of each of Hanlong's two takeovers); (5) the profits from that trading were not returned to Hanlong; and (6) Mr Xiao and Mr Zhu were not authorised to use any Hanlong trading account on behalf of Hanlong. 9Mr Xiao was the managing director of Hanlong and Mr Zhu its Vice President - Investments, two of the senior most executive positions in the company. The evidence also supports an inference that they were both involved in and aware of Hanlong's impending takeover of each of Bannerman and Sundance. Their combined fielding of nominee trading defences under Corporations Act s 1043J, in the senior positions that they were, could potentially, strengthen each of their defences of that character. The testimony of both of them about their authority to trade as nominees on behalf of Hanlong would be of significant assistance to the quality of the s 1043J defences for each of them. The Corporation's Act s1323 Applications 10The procedural background can now be dealt with briefly. On 9 September 2011 Barrett J made the original orders imposing relevant restraints on Mr Zhu and Mr Xiao. Those general restraints were replaced by the further negotiated regime ordered on 17 November 2011 set out above. There has been debate before me about whether I should approach the present exercise of the court's discretion by looking at the matter as at the time of the original orders on 9 September 2011 or whether I should do so as at the date of the varied orders on 17 November 2011. 11It is not necessary for me to go into that debate. I am prepared, in effect, to accept the careful submissions put on this topic by Mr Beech-Jones SC on behalf of the second defendant that I should approach the matter on the basis of the existing interlocutory orders 4 and 5 made on 17 November and then ask the question the High Court requires to be addressed in the exercise of a discretion to vary interlocutory orders ( Adam P Brown Male Fashions Pty Limited v Phillip Morris Inc (1981) 148 CLR 170, at 177 to 178) namely, whether new facts have come into existence since the original order that would render its enforcement unjust. 12The application of Adam P Brown Male Fashions requires the court to identify what material changes to facts or circumstances have occurred since the Court's orders were made on 17 November 2011. The plaintiff contends that such a simple view of the applicable legal test should not be taken. The plaintiff urges the court to look back earlier than 17 November 2011. But given this is an urgent interlocutory hearing I can decide this case on the basis that the second defendant submits. Events since 17 November 2011 13The important change occurring since 17 November 2011, according to the plaintiff (and the legally irrelevant change, according to the second defendant) in the circumstances is simply this. On the same day, 17 November, that orders four and five were made in respect of Mr Zhu, orders were also made for the first defendant, Mr Xiao to travel overseas for a limited period of time between 21 and 26 November 2011. Mr Xiao was under a similar travel regime to that provided for in Mr Zhu's orders four and five, under which he could not leave Australia without his wife's passport being impounded. But Mr Xiao failed to return to Australia in accordance with those orders on 26 November. 14On 13 December 2011 Ms Deborah Richmond, a lawyer with carriage of this matter for ASIC wrote to Mr Robert Mangioni, who acts for the second defendant within the firm Watson Mangioni Lawyers. She asked whether he could advise whether the second defendant had any current intention of travelling outside of Australia between 19 December 2011 and 9 January 2012, a request which, no doubt for practical reasons, was made in advance of the holiday break. 15A quick response came back from Mr Mangioni, explaining the second defendant's reason for the proposed trip. Mr Mangioni indicated that Mr Zhu intended to leave Australia to visit his parents-in-law and others in Shanghai during the period 24 to 31 December 2011. That letter provided details of the proposed trip and particulars of his intended itinerary. The particulars provide that Mr Zhu proposes to leave Australia tomorrow on 24 December, stay in Shanghai, spend time with his parents-in-law, grandmother and friends, and then return to Sydney on New Year's Eve. 16That letter, sent in the middle of last week, triggered this application. The plaintiff's case essentially is that the 17 November 2011 order should now be varied because the second defendant is a flight risk and is unlikely to return to Australia and that Mr Xiao's non return to Australia changes a number of circumstances since the orders were made in November. 17I will shortly come to the legal test applicable here but first to some background about Mr Zhu. He says in evidence, that he was born in Shanghai in 1981, migrated to Australia with his parents in 1991, became an Australian citizen in 1995. He then ceasedo be citizen of the People's Republic of China, because China does not accept dual citizenship. 18Mr Zhu met his wife, Nancy, in Australia in 2000. She too was born in China but she became an Australian citizen in 2007. Mr Zhu and his wife both graduated from Macquarie University with higher degrees in finance in 2002 and 2003. They were married in 2005. They reside in a home they have jointly owned in Cammeray since 2007. Mr Zhu's father and mother also live in Australia. Mr Zhu's father, who is 61 years of age, has a home in Lewisham. His mother who is 57 resides in Kogarah. He also has a 15-year-old brother living with his mother. 19Thus Mr Zhu has resided for approximately the last 20 years in Australia. There is no apparent instability in his relationships with either his parents or his wife. He says and I have no reason to doubt: that he can understand and speak Mandarin but not write in that language; that neither his wife nor he have residency status in China; and that his proposed travel to China would only be on the basis of a temporary entry visa. The arrangements he has offered in relation to travel would be that his wife's passport would be impounded during the period he was away, by being provided securely to Watson Mangioni Lawyers under undertakings provided to the court. 20Mr Zhu has been unemployed since 30 September 2011. He says - and this is perhaps not entirely surprising - that the publicity from the matters the subject of ASIC's current investigations have caused irreparable damage to his professional standing. He says he now has little prospect of being able to find paid employment at any time in the near future. He gave evidence in these proceedings for a short period on Wednesday. In that oral evidence he added to his affidavit evidence on this subject and said that he had continued to search for jobs in Australia in recent weeks and as a result he thought that he had very few prospects of gaining employment. 21The precise reason for Mr Zhu's trip is advanced to the court in his affidavit. He desires to speak directly to his parents-in-law to discuss with them face to face, the current issues ASIC's investigations have raised. He says it is imperative that in conformity with Chinese culture, he does this on a face-to-face basis. He wishes to have this kind of contact with his parents-in-law, particularly his father-in-law, as soon as possible. He says - and I do not doubt - that this is an important matter in Chinese culture. He says it is neither realistic nor practicable for his father-in-law to obtain permission from the relevant Chinese authorities to travel to Australia for the purposes of that discussion. Hence the need arises for him now to go to China. 22This issue was further explored in cross-examination. Mr Zhu indicated that his father-in-law has what was described as a "public service" passport, which apparently means that some explanation for his overseas travel might be required to justify the use of that passport. Otherwise he may perhaps be required to apply for a non-public sector passport for the purpose of his overseas travel, if that is possible. Applicable Legal Principles 23The relevant law has been debated before me. The approach I will take is that which Mr Beech-Jones SC invites, in effect, to look at what has changed since the orders made on 17 November and on the basis of those changed circumstances to consider whether the discretion should now be exercised differently. But in doing so I must still re-apply, it seems to me, the principles which have been developed in cases such as Australian Securities and Investments Commission v Secured Bond Limited [2009] NSWSC 1261 (White J) and ASIC v Hawley [2008] FCA 1243 (Perram J), emphasising as they do that orders interfering with the freedom of a person's movement are not to be made lightly . 24Barrett J also conveniently set out the applicable case law in paragraph [15] of his judgment of 9 September in this matter, when he was first making orders in respect of all the defendants: ASIC v Xiao & Ors [2011] NSWSC 1067. As Barrett J there explained, the court's task in a case such as this, this is to engage in a "balancing exercise, weighing the benefits and detriment to the particular defendant against those of the aggrieved persons with whom section 1323 of the Corporations Act is concerned in this case the persons who may be entitled to compensation from the [second] defendant if and when any contravention of the insider trading provisions is proved against him": ASIC v Xiao & Ors [2011] NSWSC 1067 at [15]. Consideration 25Looking at those considerations, I can eliminate contention about some of them. The parties conveniently debated the issues under a series of factors. I will go, firstly to the issue of the alleged delay in giving notice to ASIC. In my view there is not much to be inferred against the second defendant on this count. The orders made on 17 November provided for seven days' notice of Mr Zhu's intention to travel. He was intending to travel on Christmas Eve. That required him to give notice by about 17 December. There was no delay in giving that notice. As Mr Beech-Jones SC rightly points out, ASIC were given about 10 days' notice of Mr Zhu's intention to travel. 26Related to this topic, Mr Zhu was asked questions in cross-examination as to why it was that, if he had made up his mind in November and early December 2011 to travel to Shanghai to see his parents-in-law, he did not give more notice to ASIC. But, given the form of the existing orders there was no legal requirement for him to do so. I do not believe that is a consideration to be held against him on this application. 27It does seem to me though that there are other factors in this case which are of importance. The principal of those is the failure of Mr Xiao to return to Australia. Mr Beech-Jones SC put with some force that Mr Xiao's non-return to Australia and non-compliance with the court's orders is irrelevant to Mr Zhu's application. But, in my view, that is not so. His non-return to Australia appears to me to be relevant in ways that are of considerable importance to engaging in "the balancing exercise, weighing the benefits and detriments, to the particular defendant against those to the aggrieved persons with whom s1323 is concerned" which the court must undertake. 28The structure of this investigation shows that Mr Xiao and Mr Zhu are the persons said to have been most closely involved in the transactions under suspicion. Mr Xiao's absence means the only person now left within the jurisdiction who is a principal object of investigation is Mr Zhu. The risk of prejudice to the investigation from his permanent absence is now much more significant. There are other subsidiary objects of investigation. But it can readily be inferred from Mr Zhu and Mr Xiao's positions within Hanlong and from ASIC's evidence that those two are principal objects of investigation. What that means is that, as a way of providing further information to the plaintiff in a still unfolding investigation and as a point to weigh and test information provided by others in the course of further section 19 examinations, the only person left in this country with knowledge apparently at the heart of these transactions is Mr Zhu. Any risk associated with his non-return to Australia, therefore now becomes of much greater focus. 29But Mr Xiao's absence becomes of greater focus in another way - with respect to Mr Zhu's potential Corporations Act s1043J defence of nominee trading, were insider trading charges or civil proceedings to be brought against him. The absence of Mr Xiao represents a real weakening of that defence. The evidence of some authorisation from senior personnel within Hanlong, such as Mr Xiao, that would usually assist the operation of such a defence will now not be available. This is the case with respect to potential civil penalty or criminal proceedings against Mr Zhu. 30The absence of Mr Zhu also requires re-examination of the other factors. The next factor in importance in my mind is the reasons Mr Zhu advances for the trip. They are really two-fold: one, a positive reason, that Mr Zhu must account to his parents-in-law, to whom he owes about $1.2 million. And a negative reason that Mr Zhu's parents-in-law especially his father in law, are not able to come to Australia. 31The orders of 17 November themselves contemplated, that the purpose of the trip was a matter which would require ASIC's consideration once Mr Zhu declared the purpose to ASIC. It can be accepted that some account might need to be given in person by Mr Zhu to other family members of his present circumstances. But the necessity for a trip to China for this purpose raises the negative issue as to Mr Zhu's father-in-law not being able to come to Australia. He says it is impracticable, but there is little more evidence available about why it is impracticable than just that bare statement. 32Mr Beech-Jones SC put in submissions to the court that it was impracticable because it would be embarrassing, in effect, for Mr Zhu's father-in-law to have to explain to Chinese authorities why he was coming to Australia. But there is already considerable publicity associated with this matter. The absence of any explanation in this case - of any detailed evidence - of why there is a need for Mr Zhu to account to his parents-in-law in China rather than in Australia is a factor, which makes the reasons for this trip, in my mind, less than compelling. 33The other matters mentioned by Mr Beech Jones SC are of lesser significance. He emphasises Mr Zhu's stable connections with Australia. But since the orders were made on 17 November further time has gone by in which Mr Zhu has remained unemployed in Australia and has realised that gaining employment in this country in the current circumstances is becoming more and more unlikely, given the plaintiff's continuing investigations. 34Mr Zhu's connection with China is of significance. Although he has been in Australia for 20 years, it is China to which he is proposing to go on this trip. The current state of the evidence is that he has been a controlling influence in the company Wingatta which has transferred $2.2 million of money the subject of investigation to Hong Kong, the whereabouts of which money is presently unknown. 35Apart from the diminution in the quality of Mr Zhu's potential nominee trading defence, the strength of the potential insider trading case against him has not changed materially, it seems to me, since the middle of November, noting of course that no proceedings have yet been commenced against him. 36I am mindful of the fact Mr Zhu says he would only be entering China on a temporary visa, an uncertain basis for re-establishing a longer-term connection with China. But once he leaves Australia's shores it is unclear, other than from his own expression of intention, just what would happen and where he would go. 37In my view, Mr Xiao's failure to return to Australia since 17 November 2011 in accordance with the court orders is important in the court's re-evaluation of those orders. I am prepared to accede to the plaintiff's application to vary the orders to prevent further travel of Mr Zhu under section 1323 of the Corporations Act . 38Costs are reserved. I will accordingly make the following orders:-