To Disclose or Not to Disclose? That's the Question: Hong Kong District Court rules that self-report made to the SFC and associated materials do not enjoy legal professional privilege

 

Under Hong Kong law, documents or information may enjoy legal professional privilege ("LPP"), if the dominant purpose of their creation is for seeking legal advice or for use in the conduct of or in relation to existing or contemplated adversarial litigation.

 

In a recent District Court ("Court") case, the Court decided that a self-report made by a licensed corporation to the Securities and Futures Commission (“SFC”) under Paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC ("Code of Conduct"), together with the associated materials, are not subject to LPP, notwithstanding that the self-report was prepared and submitted by the licensed corporation’s external counsel.

 

This article discusses the Court's reasoning and the implications of the Court's decision.

 

Background

 

The decision arose from an ongoing criminal prosecution by the SFC of insider dealing against certain individuals an investment fund and its two individuals, who are a fund manager and its trader and Chief Investment Officer.

 

The SFC’s case was that the Defendants made use of certain allegedly inside information provided to them by bankers at Merrill Lynch Far East Limited ("MLFE") relating to a block trade of shares in a Hong Kong listed company to conduct a series of trades and obtain profit in June 2017.

 

Shortly after becoming aware that its employees might have mishandled the block trade, MLFE made a self-report to the SFC pursuant to Paragraph 12.5 of the Code of Conduct. Its in-house lawyers and external lawyers also conducted interviews with the relevant employees. In August 2017, MLFE sent to the SFC an 18-page report ("Report") compiled by its external lawyers. It was expressly stated, amongst others, in the Report that:

 

• The Report was subject to legal professional privilege and was provided to the SFC on the basis of a limited waiver of privilege.

 

• MLFE was not waiving, and should not be deemed to have waived, LPP in the Report and associated materials

 

• The Report could not be disclosed with MLFE's expressed prior written consent.

 

Despite the Limited Waiver of Privilege, during the disclosure process in the criminal prosecution, the SFC provided the Defendants with the Report and some associated materials, such as records of communications between the SFC and MLFE or their external lawyers (collectively "Disclosed Materials"), without seeking MLFE's prior consent. It only informed MLFE's lawyers many months later.

 

Upon knowing the same, MLFE's lawyers wrote to the Defendants, informing them of the Limited Waiver of Privilege and asking them not to use the privileged materials and to have them destroyed. The Defendants disputed MLFE's LPP claim.

 

Although the Prosecution initially acknowledged that the Disclosed Materials were disclosed to the Defendants by mistake, the Prosecution subsequently changed its stance to say that MLFE's LPP claim was unsustainable.

 

The Defendants also requested:

 

• MLFE to submit further materials, namely 25 sets of interview notes ("Interview Notes") which MLFE's lawyers or in-house lawyers made after speaking to various witnesses; and

 

• the Court to declare that LPP did not apply to the Disclosed Materials so that the Defendants could make use of them at trial; and

 

• MLFE to un-redact certain redacted materials that had been provided to the SFC or Prosecution.

 

In view of the above circumstances, MLFE intervened in the criminal proceedings.

 

The Court's Decision

 

At the outset, the Court affirmed the position in HKSAR v Lee Ming Tee and SFC (2003) 6 HKCFAR 336 that under Hong Kong law, the Prosecution's duty to disclose is limited to materials in the possession or control of the Prosecution; and if there are circumstances suggesting that any other government department or agency has disclosable materials, the duty will be extended accordingly. The Court rejected the Defendants' argument that such duty would include digging out disclosable materials not in the Prosecution’s possession for the Defendants, which is the current position in the United Kingdom.

 

The Court ruled that the Report and associated materials (including the Interview Notes and communication records) were not subject to LPP for the following reasons:

 

• Although the Report contained some advice on the steps MLFE would do to prevent recurrence of employee misconduct, it was not clear who formulated them; and the advice was also brief.

 

• The Report ought to be regarded as a self-report under Paragraph 12.5 of the Code of Conduct, as part of MLFE's continual compliance. Notably, Paragraphs 47 and 48 of the Report provided that the MLFE was evaluating the conduct of employees involved and would keep the SFC apprised of its evaluations and any subsequent action.

 

• Viewed holistically, the Report and the associated materials (including the Interview Notes and communication records) were not created with a dominant purpose of seeking legal advice but only a review of the block trade.

 

In relation to documents that had not been provided to the SFC or the Prosecution (such as the Interview Notes) but were in MLFE's possession, the Court found that it had no jurisdiction to compel MLFE to produce the same, as MLFE was not a party to the criminal proceedings. In the same token, the Court ruled that it had no jurisdiction to compel MLFE to un-redact certain redacted materials previously submitted to the SFC. The SFC may apply to the Court of First Instance for an enforcement order under s 185 of the Securities and Futures Ordinance if necessary.

 

Key Takeaways

 

As this is a decision made by the District Court, it remains to be seen whether it will be appealed to or followed by a higher court, given the potentially significant ramifications of the decision.

 

Nonetheless, this decision serves as a timely reminder that not all documents prepared by lawyers are necessarily subject to LPP; and that it is always essential to consider in advance how the purpose for creating certain documents in the course of an investigation should be documented, as any post-creation unilateral limited waiver of privilege is inconclusive. Caution should also be exercised in presenting in-house and external counsel’s work product to maximise the application of LPP.

 

 

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