Regulators’ discovery obligations in disciplinary proceedings

Introduction

It is recognised that disciplinary proceedings often involve or result in a substantial interference with the livelihood and reputation of an individual, and to that extent, they are arguably quasi-criminal in nature. This special characteristic of disciplinary proceedings has led to a line of decisions regarding what should be the extent of the discovery obligations in such proceedings, in particular whether the duty of disclosure in criminal proceedings should be adopted.

As a result of two decisions of G Lam J in Securities and Futures Commission v Wong Yuen Yee & Ors [2017] 2 HKC 332 (HCMP 241/2015, 30 December 2016) and Competition Commission v Nutanix Hong Kong Limited & OrsCTEA 1/2017, [2018] HKCT 1, 14 March 2018, the Courts and Tribunals in Hong Kong have now opted for a more extensive discovery regime for the regulators, similar to that of the prosecutors in criminal proceedings, in the hope to achieve fairness and to ensure that persons subject to disciplinary actions are given sufficient protection, particularly in cases involving serious allegations against the individuals. Such duty extends to disclosure of all materials (including unused materials) that (1) are relevant or possibly relevant to an issue in the case, (2) may raise or possibly raise a new issue in the case, and (3) would hold out a real prospect of providing a lead on evidence which goes to (1) and (2).

This may have an impact on the way regulators carry out their investigations and may affect how they gather and collect documents and information and, more importantly, how they record the information gathered during investigations.

In light of this, regulators should be reminded to take proper measures to make sure that they are able to comply with and fulfil their discovery obligations, and as G Lam J mentioned in his decision in Nutanix, regulators should also consider adopting practices to minimise the possibility that its internal documents may become relevant and potentially disclosable.

This article examines the development of the decisions concerning the extent of the regulators’ discovery obligations in disciplinary proceedings and discusses how the views of the Courts and Tribunals have evolved overtime.

Li Kwok Keung, Asser v SFC (Securities and Futures Appeals Tribunal) (19 March 2010)

In Li Kwok Keung, Asser v Securities and Futures Commission (Application No. 2 of 2009, 19 March 2010), the Securities and Futures Appeals Tribunal (SFAT) reviewed a decision by the SFC to revoke a director’s licence and to prohibit him from being licensed for a period of 10 years. Prior to the said SFC decision, the SFC issued a summons in the Magistrates’ Court charging the director for knowingly giving false or misleading answers at an interview and the director had pleaded guilty.  During mitigation in the criminal proceedings, the director provided an undertaking to the Court that he would cooperate with the SFC in its investigation in the matter. Subsequently, the director declined to cooperate with the SFC as he was uncertain as to how he would be dealt with in any disciplinary proceedings taken by the SFC. The SFC then commenced disciplinary proceedings against the director for, inter alia, failing to honour his undertaking and ultimately made the decision to revoke his licence and to impose on him a 10 year ban.

The director appealed to the SFAT. The SFC’s decision then came before the SFAT for review. The director challenged the penalty imposed by the SFC for being manifestly excessive.  Upon considering similar offences, the SFAT agreed with the director and ordered that the director be suspended for a period of 18 months instead.

The director also claimed that he had a legitimate expectation that he would not be subsequently subject to SFC’s disciplinary action if he would tell the truth and was prosecuted for his earlier falsehood. However, this claim of legitimate expectation was defeated as additional documents were provided to the director’s counsel on the first day of the SFAT hearing, which included a telephone note between the director’s solicitors and the SFC officer relating to the issue of whether or not the director would be subject to disciplinary proceedings if he cooperated with the SFC.  In light of this telephone note, counsel of the director conceded that she could no longer rely on the ground of legitimate expectation, and the SFAT concluded that there had been some misunderstanding between the parties as to whether any assurance was given to the director that he would not be subject to disciplinary action.

This additional documentation raised the issue of discovery of the unused material collected by the SFC during the course of its investigation, and in particular, the extent of the SFC’s obligation regarding the disclosure of such unused material. Although such documents have not been disclosed for the SFAT proceedings, they have in fact been provided as part of the disclosure process in the previous criminal proceedings. It was under such circumstances that the SFAT considered the SFC’s obligation in disclosing unused material.  Relying on the Court of Final Appeal’s decision in Lam Siu Po v Commissioner of Police [2009] 4 HKLRD 575, the SFAT took the view that disciplinary proceedings are similar to criminal proceedings to the extent that disciplinary proceedings also involve a determination of a person’s rights and obligations as protected by the Bill of Rights. On this basis, the SFAT came to the “preliminary view” that the requirement of fairness as enshrined in the Bill of Rights should lead to a requirement for the disclosure of unused material in disciplinary proceedings equivalent to that in criminal proceedings.

However, the SFAT did note that there had not been full argument on this particular issue in this case and that this issue may be considered in detail at another appropriate occasion.

Li Kwok Keung, Asser v SFC (Court of Appeal) (26 November 2010)

The SFC then appealed against the SFAT’s decision and the case came before the Court of Appeal (see Li Kwok Keung Asser v Securities and Futures Commission CACV 85/2010, 26 November 2010). One of the issues on appeal was whether the analogies of disciplinary proceedings to criminal proceedings were well-founded as a matter of law, or whether the SFAT had misdirected itself.

The Court of Appeal took a different view from the SFAT and concluded that it is not appropriate for the SFAT to guide itself by analogy to criminal proceedings when reviewing SFC’s regulatory decisions. The Court of Appeal clarified that the jurisprudence of the SFAT is entirely premised upon the statutory principles in the Securities and Futures Ordinance (Cap. 571), which is intended to be a self-sufficient statutory code for dealing with all regulatory disciplinary matters and shall not be confused with considerations pertinent to the criminal law. In particular, the Court of Appeal noted that there are conceptual distinctions between disciplinary proceedings and the criminal law, for example, disciplinary proceedings adopt the civil standard of proof instead of the criminal standard.

The Court of Appeal further noted that the issue of discovery in disciplinary proceedings was not and has never been a “live” issue before the SFAT and thus the “preliminary view” expressed by the SFAT was wholly inappropriate.

SFC v Wong Yuen Yee & Ors (30 December 2016)

The question of the scope of regulators’ obligation to disclose materials gathered during its investigation was reconsidered by the Court of First Instance in Securities and Futures Commission v Wong Yuen Yee & Ors [2017] 2 HKC 332 (HCMP 241/2015, 30 December 2016). This case concerned a discovery application against the SFC.

By way of background, the SFC brought a petition for disqualification orders against four directors of a company for alleged negligence, misconduct and breach of duty to exercise reasonable care in relation to matters of the company. Of the materials gathered by the SFC during its investigation, around 50 lever arch files of materials had not been disclosed by the SFC to the directors. The directors then requested the SFC to provide them with a list of all the materials it had obtained, but this was refused by the SFC.

The directors then made an application to the Court of First Instance for discovery. It was their case that the SFC’s discovery obligation extend to all relevant unused materials obtained by it during the investigation in the same way they would be disclosed by the prosecution in criminal proceedings. They relied on the requirement of equality of arms and the SFC’s duty to act fairly.

On the other hand, the SFC submitted that disqualification proceedings are civil proceedings and that it is not obliged to disclose all unused materials.

G Lam J agreed with the directors and held that the SFC is subject to a more extensive duty of disclosure, similar to the standard in criminal proceedings whereby the prosecution should disclose all materials that (1) are relevant or possibly relevant to an issue in the case, (2) may raise or possibly raise a new issue in the case, and (3) would hold out a real prospect of providing a lead on evidence which goes to (1) and (2).

He held that the SFC should take a generous view of relevance in disclosing documents and that its disclosure should ordinarily include information and documents it has obtained from the investigation except those that are “obviously irrelevant”.

In arriving at this conclusion, G Lam J considered the nature of disqualification proceedings. He recognised that such proceedings involve a substantial interference with the freedom of an individual and that they often involve serious allegations and carry a degree of stigma. Further, he noted that such proceedings were commenced for the benefit of the public rather than to protect private rights and that the SFC occupies a position analogous to criminal law enforcement agencies.

Another consideration taken into account by G Lam J was the equal access to documents and an accused’s entitlement to disclosure of relevant materials. G Lam J noted that in this case, the directors would have no means of knowing or inferring what persons had been interviewed by the SFC and what documents were gathered and possessed by the SFC, and as such, they were not in a position to specify what documents were in the SFC’s possession other than those which the SFC has chosen to disclose.

Last but not least, G Lam J also considered the approach of the courts in various foreign jurisdictions. It was observed that at least where serious disciplinary charges are concerned, the courts in various jurisdictions have been prepared to recognise a duty of disclosure on the regulators that is similar to the duty of disclosure in criminal proceedings.

G Lam J sought to distinguish his decision from the Court of Appeal’s decision in Li Kwok Keung Asser.  He took the view that the main issue in the Court of Appeal’s decision was the immunity of that particular director and did not concern disqualification proceedings or the discovery of documents. His Lordship did not read that case as laying down categorically that analogy with criminal proceedings can never be helpful.

Competition Commission v Nutanix HK Ltd & Ors (Competition Tribunal) (14 March 2018)

The approach of the Court of First Instance in Wong Yuen Yee in respect of the regulators’ disclosure obligations was affirmed and applied inthe more recent decision of the Competition Tribunal (Tribunal) in Competition Commission v Nutanix Hong Kong Limited & OrsCTEA 1/2017, [2018] HKCT 1, 14 March 2018, again decided by G Lam J.  This case concerned an application by one of the respondents for an order of discovery against the Competition Commission (Commission).

Pursuant to the Tribunal’s previous order directing the Commission to file a list of documents separating the documents that the Commission relied on and the documents that were unused material, the Commission filed four lists of documents but objected to the production of certain classes of documents on the grounds of relevance, privileged and public interest immunity.  These classes included:-

     i.          Class 1 - All without prejudice correspondence and records of without prejudice communication between the Commission and respondents in relation to the Commission’s Leniency Policy;

     ii.        Class 3 - The complainant’s original electronic complaint form submitted to the Commission;

    iii.        Class 5 - All without prejudice correspondence and records of without prejudice communications between the Commission and any respondent where an agreement had not been reached; and

    iv.        Class 6 - All confidential internal reports, minutes and correspondence relating to the Commission’s investigation and present proceedings, which includes any records of communication between Commission staff during the execution of search warrants.

One of the respondents applied for an order that the Commission should, inter alia, provide a list of documents identifying the documents under the said classes individually and specifying the originator of each document.

Before turning to each class of documents and considering the Commission’s grounds of objection for disclosure, G Lam J, in his capacity as the President of the Tribunal, considered the extent of the Commission’s discovery obligations. He affirmed his previous decision in Wong Yuen Yee and held that a generous ambit of disclosure should apply and that the standard applicable to the Commission would be the standard applicable to the prosecution in criminal proceedings, which would include disclosure of all relevant unused material. This approach was accepted by the Commission.

In particular, regarding the documents under Class 6, the Commission argued that such documents fall outside even the wide ambit of disclosure as explained in Wong Yuen Yeeas they were internal documents of the Commission and do not constitute materials gathered or obtained by it in the investigation. Whilst the Tribunal acknowledged that internal documents generated within the Commission are generally not disclosable, it nonetheless went on to say that an internal document containing information gathered during the investigation which is not otherwise recorded may be relevant and should be disclosed.

Despite the large volume of internal documents generated for the investigation, including at least 7,325 internal emails, the Tribunal took the view that the Commission has the duty to carry out a review of the content of all such documents under Class 6 for the purpose of identifying whether any of these documents contain external information that are not otherwise disclosed. If so, it was held by the Tribunal that such documents would be relevant and would also fall within the Commission’s duty of disclosure, unless they are privileged or are otherwise protected by public interest immunity.

For completeness, as regards documents under Classes 1 and 5, it was held that these documents were covered by informer privilege and/or without prejudice privilege and need not be produced. For the original complaint form under Class 3, as the identity of the complainant had already been disclosed in the Commission’s pleaded case, the Tribunal did not see the need to withhold disclosure.

Commentary

It is clear from the above line of decisions that the Courts and Tribunals have now opted for a more extensive discovery regime for the regulators, similar to that of the prosecutors in criminal proceedings, in the hope to achieve fairness and to ensure that persons subject to disciplinary actions are given sufficient protection, particularly in cases involving serious allegations against the individuals.

The recent case of Nutanix is an illustration of what is now expected from regulators in practice in terms of discovery and demonstrates the extensiveness of their discovery obligations. This may have an impact on the way regulators carry out their investigations and may affect how they gather and collect documents and information and, more importantly, how they record the information gathered during investigations.

In light of this, regulators should be reminded to take proper measures to make sure that they are able to comply with and fulfil their discovery obligations, and as G Lam J mentioned in his decision in Nutanix, regulators should also consider adopting practices to minimise the possibility that its internal documents may become relevant and potentially disclosable.