Regulatory Framework (AF5511)

Discussion Problems (2022/23 Semester 3)

Market Misconduct and Insider Dealing

Alan is the managing director of PollyU Limited (“PollyU”), a company listed on the Hong
Kong Stock Exchange since May 2010. He also owns 90% of the shares in PollyU. His
grandmother, Betty, at the age of 90, was seriously ill and was sent to LoveCare Hospital. After
she underwent an operation, Betty believed that she was unlikely to survive and was very
worried about Alan’s career. She asked him about his current job and future plan.
Alan told Betty that he is the managing director of PollyU. Alan also told Betty that his
company is the drug manufacturing company listed on the main board of the Hong Kong Stock
Exchange. His company is inventing a new drug which is an effective relief for those who
suffer from depression. Alan would expect that his company will earn more than HK$100
million after the new drug will be patented and widely used in public and private hospitals.
Then any purchase of shares in PollyU would be worthwhile.
After 3 months, Betty recovered from her illness and she could even recall Alan’s company
information. On 3 April 2023, Betty called her granddaughter, Candy and told her to buy some
shares of PollyU Limited because she was told about a good prospect. Candy followed Betty’s
instructions and bought 100,000 shares of PollyU on the Hong Kong Stock Exchange.
On 17 April 2023, Alan called his sister, Diana, and said “Hey, Diana, buy PollyU shares now.
Good news is forthcoming”. Diana immediately bought 200,000 shares for herself.
Elaine is a business student who works for 4 hours each week in the Legal Department at
PollyU as an intern. She told her boyfriend, Frankie, “PollyU is really a good company. It
focuses on Research and Development in medical drugs”. On 25 April 2023, Frankie bought
PollyU’s shares.
On 2 May 2023, PollyU publicly announced that PollyU can successfully obtain a patent for a
new drug for those who suffer from depression. The share price of PollyU rose sharply on 3
May 2023. Candy was instructed by Betty to sell the 100,000 shares she had bought and to
transfer all proceeds to Betty’s bank account at HK Bank. Diana and Frankie also sold their
shares at about the same time. Betty, Diana and Frankie made a good profit from the sale of
their shares.

REQUIRED
a. Advise Alan, Betty, Diana, Elaine, and Frankie whether or not they have committed
insider dealing. Cite relevant provisions of the Securities and Futures Ordinance (Cap.
571) (SFO) and relevant decided cases to support your answer.

b. If any of the above parties were to be found liable under the SFO, what penalties may
be imposed under the SFO?