After an 8-day trial, the High Court entered judgment in favour of Madam Li Yuhong (“Plaintiff”) against her former investment adviser and asset manager, oOo Securities (HK) Group Ltd (“Defendant”). The judgment sends a clear signal that financial institutions are held to the highest standards of conduct, particularly when dealing with retail investors. The case was divided into two distinct stages of breach, each with key legal implications.
I. Pre-Engagement Stage: Misrepresentation and Failure to Advise
At the pre-engagement stage, the Defendant induced the Plaintiff – an investor seeking to satisfy the requirements of the Capital Investment Entrant Scheme (CIES) – to liquidate a safer fund and subscribe for non-rated, high-risk bonds.
The Court accepted the Plaintiff’s submissions that the Defendant made two misrepresentations fraudulently, recklessly and/or negligently: the Early Redemption Representation (that the bonds allowed early redemption with mere notice) and the Low Risk Representation (that the bonds were a low-risk investment).
In particular, the judgment disallowed the Defendant from relying on standard terms to escape liability.
Non-Reliance and Exemption Clauses Struck Down
The Court struck down the non-reliance / exemption clauses as being “unreasonable” under the Control of Exemption Clauses Ordinance (Cap. 71) and the Misrepresentation Ordinance (Cap. 284), and/or “unconscionable” under the Unconscionable Contracts Ordinance (Cap. 458).
Crucially, the Court observed that the statutory provisions seek to protect consumers like the Plaintiff from being exploited by service providers like the Defendant. As the party relying on those clauses, the Defendant must persuade the Court that they are reasonable and only then will they bind the client in P’s position (§41).
The Court further found that, although these so-called non-reliance clauses prima facie provide that the Plaintiff has not relied on a non-contractual representation instead of directly excluding/limiting liability, they are still regulated by the above 3 Ordinances (§200).
II. Post-Engagement Stage: Fiduciary Duties and Dual Roles
At the post-engagement stage, the Court found the Defendant, as the asset manager, was effectively a trustee holding the assets for the Plaintiff and owed fiduciary duties. It ruled that the Defendant breached its duties as follows:
- Failure to Monitor: The Defendant demonstrated “an attitude of indifference”, failing to adequately monitor the bond issuer’s deteriorating financial condition or conduct proper valuations. The Court found no evidence that the Defendant had performed any “managing” at all (§§229-231).
- Failure to Act: The Defendant failed to exercise or even consider exercising early redemption options, based on a Significant Change in Core Business and/or a clear Event of Default by the issuer. This inaction, despite the Plaintiff’s repeated requests for early redemption, constituted a breach of duty (§§235, 258, 267).
- Breach of No-Conflict / No-Profit Duties: Critically, the Defendant breached the No-Conflict and No-Profit fiduciary duties. By wearing the “dual hats” as placing agent for the issuer (earning a substantial 10% commission) and asset manager for the Plaintiff (earning management fees up to 27% of returns) without obtaining the Plaintiff’s fully informed consent, the Defendant placed itself in an impermissible position of conflict (§274).
Conclusion
This judgment demonstrates the Court’s commitment to protecting investors from misconduct in the financial sector. The comprehensive finding of liability – covering fraud, negligence, and multiple breaches of fiduciary duty – sets the bar high for investment advisers and asset managers in Hong Kong.
The full judgment is available at: https://legalref.judiciary.hk/doc/judg/word/vetted/other/en/2020/HCA000475A_2020.docx
Ms Rachel Lam SC, Ms Eva Leung and Mr Jason Fee, instructed by Hugill & Ip, acted for the Plaintiff.
