In Suruhanjaya Sekuriti v RBTR Asset Management Bhd & Ors
 9 CLJ 624, the High Court held, inter alia
, that section 200 of the Capital Markets and Services Act 2007 (‘CMSA
’) cannot be used by the Securities Commission Malaysia (‘SC
’) to commence a representative action for negligence on behalf of investors.
The fourth defendant was a company set up in New Zealand by the sixth to eighth defendants in early 2007 to offer an investment product (‘the investment product
’) in Malaysia. The second defendant, the holder of a fund manager’s representative licence, was the managing director of the first defendant, the holder of a fund manager’s licence which permitted it to make investments in securities on behalf of its clients.
The third defendant was initially a non-executive director of the first defendant. He obtained a fund manager’s representative licence on 4 July 2008 and was appointed as joint-managing director of the first defendant with the second defendant when the latter informed the first defendant of his decision to retire as its managing director. Upon the second defendant’s retirement, the third defendant became the sole managing director of the first defendant.
The first defendant and the fourth defendant entered into a joint asset management agreement whereby the first defendant would offer the investment product to Malaysians. Pursuant to this arrangement, the first defendant advertised and solicited funds from the Malaysian investing public for a product known as the Euro Deposit Investment Scheme (‘EDI Scheme
’). Among the terms of the EDI Scheme were that there would be full capital protection, and the clients’ funds would be invested by the fist defendant with Lichtenstein Landesbank, an AAA-rated European bank.
The accounts were frozen in January 2008 by the Principality of Lichtenstein for suspected money laundering. According to the SC, the fourth defendant did not inform the first defendant about the freezing of the accounts but induced the first defendant to place the funds with another bank, EFG Bank SA Zurich, under the pretext of diversifying its investments.
Subsequently, the fourth defendant made a unilateral decision to transfer the investors’ funds from EFG Bank to an account maintained by the fifth defendant (an associated company of the fourth defendant) at Barclays Bank, Singapore. This was a material change as the terms of the original investment required the funds to be placed at an AAA-rated bank, which Barclays Bank was not. Furthermore, the funds were now denominated in US Dollars and not Euros, which exposed the investors to a currency risk that they had not contemplated at the time the investments were made. By end May 2008, a sum in excess of RM27 million had been remitted to the fifth defendant’s account with Barclays Bank.
On 28 May 2008, the Malaysian custodian for the EDI Scheme raised concerns that the investments were not held in its name as required under the SC’s Guidelines on Compliance Function for Fund Manages (‘Fund Manager Guidelines
’), or that of the first defendant as the licensed fund manager, but rather in the name of the fifth defendant, an unlicensed company. The custodian also said that it had not received documentation to the effect that the investments were capital protected and were held in an account with an AAA-rated bank.
At a meeting held on 29 May 2008, the board of directors of the first defendant resolved to form a sub-committee consisting of four members (including the second and third defendants) to provide a status report on the EDI Scheme. A meeting held shortly thereafter with the seventh and eighth defendants as representatives of the fourth defendant did not provide satisfactory answers and the seventh and eighth defendants came across as evasive.
Three members of the sub-committee, including the second and third defendants, attempted to check with Barclays Bank if the EDI Scheme investor funds were secure. However, by reason of banking secrecy laws, they were unsuccessful in obtaining any information from the Barclays Bank apart from the fact that the fourth defendant and connected entities maintained an account with the bank.
Thereafter, the said sub-committee members briefed the board of directors of the first defendant and it was recommended to the board that the first defendant continues to negotiate with the fourth defendant and its representatives to secure the return of the EDI Scheme investor funds. In this regard, the possibility of reporting the matter to the SC and of taking legal action the fourth defendant and its representatives to recover the investors’ funds were discussed but were not pursued as the second defendant had expressed concern that the whole of the EDI Scheme funds may be lost if the matter was reported to the SC. Hence the approach was taken to attempt to negotiate the return of the funds.
Between May 2008 and January 2009, the EDI Scheme investors received their dividend payments and principal repayments except in January 2009 where there was a shortfall of about RM128,000 in capital repayment by the fourth defendant which was made up by the first defendant.
However, when the time came for repayment of the principal for the months of February and March 2009, the first defendant was informed that the principal amounts could only be repaid one year after their original maturity. At this juncture, the third defendant reported the delay in the principal repayment to the SC.
Subsequent investigations by the SC revealed that some of the EDI Scheme funds had been misappropriated. It was also established that the bi-annual returns to investors were in fact funded through the capital invested by subsequent EDI Scheme investors – making the whole arrangement a Ponzi scheme. Contrary to representations given to investors, the EDI Scheme funds were also invested in leveraged structured products, which were not capital protected investments. According to the SC, the failure to inform SC of the breaches of the EDI Scheme in a timely manner contributed the dissipation of USD1,430,303.82 from the Barclays Bank account between 1 July and 21 November 2008.
The decision of the High Court
The SC initiated proceedings against the first to eighth defendants to recover moneys lost by the investors in the EDI Scheme promoted by the first defendant and the fourth to eighth defendants.
After a full trial, the High Court allowed the SC’s claim against the first, fourth, fifth, sixth, seventh and eighth defendants, but dismissed the SC’s claim against the third defendant. The claim against the second defendant was withdrawn by the SC as he had passed away before the trial commenced.
As no party appealed against the decision of the High Court other that the SC’s appeal against the dismissal of its claim against the third defendant, the grounds of judgement only set out the learned Judge’s reasons for dismissing the claim against the third defendant.
The pleaded case against the third defendant
According to Justice Azizul, the pleaded causes of action against the third defendant were:
Cause of action for negligence
|the common law cause of action for negligence; and
|a breach of statutory duty by reason of the breach of the SC’s Licensing Handbook and the Fund Manager Guidelines.
The learned Judge held that the cause of action for negligence could not be maintained against the third defendant for the following reasons:
Breach of statutory duty
|even if there existed a tortious duty of care that is owed by a financial services representative to the SC by reason of the proximity of their relationship (which the learned Judge was doubtful existed), no loss was occasioned to the SC by reason of the breach of such duty. To succeed in a common law claim for negligence, the SC must prove its loss. The losses in this case were those of the EDI Scheme investors, not the SC’s;
|while section 200 of the CMSA permits the Commission to institute civil proceedings to disgorge gains, this section only applies in respect of the market misconduct offences under section 175 (false trading and market rigging), section 176 (stock market manipulation), section 177 (false or misleading statements), section 178 (fraudulently inducing persons to deal in securities), section 179 (use of manipulative and deceptive devices) and section 181 (dissemination of false information about illegal transactions) of the CMSA; section 200 does not permit the SC to commence a representative action for negligence on behalf of investors; and
|the related point was that the EDI Scheme investors, to whom a duty of care may conceivably be owed by the third defendant and who have suffered the losses claimed, were not plaintiffs in the present case.
The findings of the learned Judge with respect to breach of statutory duty by the third defendant were as follows:
|the third defendant’s first involvement with the EDI Scheme occurred when he attended the first defendant’s board meeting on 29 May 2008. At this point, the third defendant did not hold a fund manager’s representative licence and was therefore not subject to the requirements of the Licensing Handbook or the Fund Manager Guidelines, save in his capacity as a non-executive director of the first defendant;
|at that juncture, the third defendant had no knowledge that funds had been or were being embezzled by the sixth to eighth defendants, or of the Ponzi scheme that was being conducted. These facts were only established later, after investigations were carried out by the SC. Although the board of the first defendant (including the third defendant) had concerns on whether or not the EDI Scheme funds were secured, this was because there was no confirmation forthcoming from Barclays Bank that the investments were capital protected and backed by an AAA-rated bank;
|the decision for the first defendant to work with the fourth and fifth defendants to secure the return of the funds that were maturing, instead of reporting the matter immediately to the SC which ran the risk of the sixth to eighth defendants absconding with the EDI Scheme funds, was reached after discussions between the second and third defendants and another board member of the first defendant. The learned Judge was of the view that the second and third defendants and the other board member could not be faulted for having taken this decision;
|there was no evidence to suggest that this approach was taken other than with the genuine and honest belief that it was in the best interests of the EDI Scheme investors to do so. Furthermore, the board of the first defendant had been briefed and kept abreast of the developments regarding the efforts to secure the return of the EDI Scheme investments. In his Lordship’s opinion, the approach to secure the return of the funds could not have been taken without the sanction of the board, and it would be manifestly unfair to single out the third defendant to be liable for the dissipation of the USD1,430,303.82;
|the fact that the dividend and principal repayment obligations between May 2008 and January 2009 were substantially met, lent credence and affirmed, in the minds of those at the first defendant, that the negotiation approach was working;
|the third defendant was not involved in the establishment or marketing of the EDI Scheme; It was clear from the minutes of two board meetings that he was appointed joint-managing director in an effort to resolve the EDI Scheme problem;
|it was the third defendant who brought the matter to the attention of the SC when it became clear that the fifth defendant would only be able to repay the principal for the months of February and March 2009 one year after their original maturity date;
|there was no express provision in the Licensing Handbook or in the Fund Manager Guidelines that required the third defendant to report any breach of investment terms or contravention of relevant statutory obligations to the SC, much less to do so at the earliest available opportunity. The SC had not sought to argue that this was an implied statutory obligation. In the Court’s opinion, the absence of such an express statutory duty was fatal to the SC’s case against the third defendant; and
|even if such a duty existed, and the third defendant was in breach of such duty, the learned Judge would not have exercised the discretion under section 360(1)(M) of the CMSA to order the third defendant to be liable to make restitution of the USD1,430,303.82 as that would neither be fair nor just and would not constitute a proper exercise of the judicial discretion under section 360.
The SC’s appeal against the dismissal of the claim against the third defendant is pending before the Court of Appeal. It remains to be seen whether his Lordship’s decision will be upheld by the Court of Appeal. The High Court’s ruling that section 200 of the CMSA does not clothe the SC with power to commence a representative action for negligence on behalf of investors is a literal interpretation of the provision and is probably the correct decision.
Case note by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.