Before: Deputy Judge Cruden
 
 

B E T W E E N

JUDGMENT
 
DATED: 22 September 1988

Deputy Judge Cruden

These two originating summonses were respectively taken out by Nanus Asia Co Inc and Southridge International Inc (the plaintiffs) against the Standard Chartered Bank (the bank). In summary, they seek declarations that certain restraining orders made by the Southern District Court of New York on 27 June 1988 and thereafter are of no effect whatsoever in Hong Kong.

The plaintiffs are each incorporated in the British Virgin Islands. The bank is incorporated by Royal Charter and has its head office in London with branch offices in Hong Kong, New York and elsewhere. On 17 March 1988, the plaintiff, Southridge International Inc, opened an account with the Hong Kong branch of the bank. On 24 May 1988, the other plaintiff, Nanus Asia Co Inc, opened its own separate account at the Hong Kong branch of the bank. Mr Lee Chwan Hong, also known as Mr Fred Lee (Lee), is the president of both plaintiffs. On the opening of the bank accounts, the plaintiffs directed the bank to accept any instructions in relation to their accounts if signed severally by Mr Lee or certain other persons.

The orders made by the Southern District Court of New York (New York court orders) were granted on the application of the United States Securities and Exchange Commission (SEC) in proceedings commenced in New York against Stephen Sui-Kwan Wang (Wang) and Lee. These proceedings were instituted in the course of SEC investigations into suspected insider trading in the United States on the part of Wang and Lee. According to an analysis carried out by SEC, Lee made a profit from his alleged insider trading activities of US$ 19,418,740. At the date of the analysis, this was the second largest case of insider trading the SEC had investigated in the United States.

On 28 June 1988, the plaintiffs instructed the bank to transfer funds standing to the credit of their accounts in Hong Kong to other accounts in Luxembourg. The instructions were signed on behalf of each plaintiff by Lee. On the same day, the bank wrote direct to Lee informing him that it had received notification of the New York court order of 27 June 1988. A copy of the order had been served on the bank by SEC's Hong Kong solicitors. The bank pointed out that the order extended to any institution holding funds under Lee's control or under the control of persons listed in an attachment to the order. Nanus Asia Co Inc was one of the persons listed in the attachment. In addition, the bank knew that Lee was duly authorized to give instructions severally to the bank on behalf of Southridge International Inc. The bank informed Lee that it was considering its position and while it was urgently making further inquiries it was unable to comply with his instructions.

On 30 June 1988, the plaintiffs' former solicitors, by letter, made formal demand upon the bank for payment. The bank's solicitors replied that they had advised the bank that the accounts were subject to the New York court order and further pointed out that the funds credited to the accounts were held in the bank's nostro account at its New York branch. On 15 July 1988, the plaintiffs commenced two actions in this court to recover the balances in the accounts, founded on the bank's alleged contractual breach in failing to make payment. Under A5046/88, Nanus Asia Co Inc claimed Canadian $ 84,502.78 plus interest. In A5047/88, Southridge International Inc claimed HK$ 15,029.35 and US$ 10,041,126.60 plus interest. On 1 August 1988, Lee gave further written instructions to the bank on behalf of the plaintiffs, directing that the bank convert all current balances into Hong Kong dollars and forward the same by cashier's orders to the plaintiffs' present solicitors whereupon the accounts were to be closed. The bank's solicitors replied that the bank regretted that it was unable to comply with these instructions because of the New York court order.

The present originating summonses were issued on 8 August 1988 and came on for hearing during the summer vacation on 10 August 1988 when the hearing was adjourned to 12 August 1988. On 12 August 1988, on the application of the bank, the hearing was adjourned to 7 September 1988. At the commencement of the present hearing on 7 September 1988, pursuant to O 4 r 9 Rules of the Supreme Court, for each of the High Court actions to be stayed until after the determination of the originating summonses. Orders were made in terms of those applications. The bank had also on 1 September 1988 filed a summons under O 15 r 6 Rules of the Supreme Court, for SEC to be joined as a defendant to the originating summonses. The bank did not pursue the joinder summonses and at its request they were adjourned sine die.

The initial orders of the Southern District Court of New York granted on 27 June 1988, were made as the result of SEC investigations into suspected insider trading information given by Wang to Lee. Wang was employed by the American merchant bank, Morgan Stanley, at its New York branch from 30 June 1986 to 1 July 1988, as an analyst under an intended two-year internship programme. Wang first met Lee during February or March 1987 when Lee was already an investor in a leveraged buyout fund managed by Morgan Stanley. On 1 March 1987, Wang, at his request, was transferred to the Mergers and Acquisitions Department of Morgan Stanley. In that position he had access to sensitive information concerning proposed mergers, acquisitions and other business combinations.

The investigations produced evidence that Wang had conveyed to Lee material non-public information of actual or contemplated extraordinary corporate transactions gained in the course of his employment. Wang had earlier been informed by Morgan Stanley at an orientation session held in July 1986, of the company's strict policy against the disclosure of confidential information. On 20 April 1987, he also signed an acknowledgement of having received a written policy statement from Morgan Stanley on the handling of sensitive information. The investigation further provided evidence that Lee, with such non-public information, engaged in an insider trading scheme through 30 brokerage accounts involving 25 publicly listed companies, resulting in profits of over US$ 19m. Some of the trading was conducted in Lee's own name but a substantial portion was carried out in the names of other individuals and companies. These included 25 accounts at the brokerage house of Charles Schwab & Co where Lee maintained accounts in the names of 24 Taiwanese friends or relatives as well as in the name of a company under his control.

The alleged insider trading during 1987 and 1988 involved dealing in the stock of Utah Power & Light Co (Utah), EF Hutton Group Inc, Stop and Shop Cos Inc, Impact Systems Inc, Manpower Inc, Savannah Electric & Power Co, Sabine Corp, and Catalyst Energy Corp. A typical example of what occurred is revealed by the Utah investigation. On 8 July 1987, Morgan Stanley was retained by Public Service Co of New Mexico (PSNM) who were interested in acquiring Utah. Wang was a member of the Morgan Stanley team assigned to advise PSNM. PSNM believed that the purchase of Utah would be highly desirable and was prepared to pay a premium for the acquisition in the range of 30% to 50% above the price at which Utah's stock was then trading.

Before 28 July 1987, Utah stock was trading in the region of $ 24. Wang knew that PSNM were prepared to offer up to $ 36. During July, there was evidence that he was regularly in communication with Lee. On 28 July 1987, Utah announced that it had received merger proposals but no price was disclosed. The next day the market opened at $ 28. In the event, Utah accepted a competing bid from PacifiCorp which was publicly announced on 13 August 1987. Lee purchased 337,500 Utah shares between 20 July and 5 August 1987 Based on Utah's closing price two days after the 13 August 1987 public announcement of $ 30.625, Lee made a profit of approximately $ 1,615,465.

The New York court also had evidence that in the latter part of 1987, Lee had approached an analyst at the New York branch of The First Boston Corp whom he first met socially. This analyst stated that Lee offered him a round trip plane ticket to Taiwan so that he could visit his parents during Christmas 1987. The offer was declined. Lee knew that this young analyst was at that stage receiving a relatively small salary and offered financial assistance if required. Early in 1988, Lee asked this analyst about his work in mergers and acquisitions and inquired if he had ever considered trading on confidential information. Lee is alleged to have observed that trading through Hong Kong would be easy. The analyst stated that he told Lee that he would never consider trading on confidential information and warned Lee not to engage in such activities as they were illegal.

The impressive speed of SEC's investigations and the quick and positive response of the New York court, were at least in part due to the remarkable events which occurred in Hong Kong on 23 and 24 June 1988. On 23 June 1988, Mr Foster, an American attorney employed by the SEC, was in Hong Kong in the course of the SEC investigations. Lee at that time was also in Hong Kong. Lee while in Hong Kong was, of course, under no obligation to be interviewed by Mr Foster or any other SEC official. However, on the morning of 23 June 1988, Lee voluntarily appeared at the United States Consulate in the company of his then American attorney.

A United States Consulate official presided over the proceedings. The proceedings, which were recorded verbatim, were later described by Mr Foster to the New York court, as being the investigative testimony of Lee. The proceedings opened by Mr Foster informing Lee that his testimony had been requested on a voluntary basis and inquiring whether Lee consented to giving testimony under oath. Lee agreed and he was duly sworn by the consulate official. Shortly after Lee's testimony commenced, the proceedings were adjourned at his attorney's request, apparently for reasons of comfort and convenience, to the offices of Pettit & Martin, One Exchange Square, Hong Kong. Pettit & Martin are a firm of United States attorneys, of whom Lee's attorney was a partner, who have a branch office in Hong Kong.

During his testimony, Lee gave particulars of the various brokerage accounts he operated including those at Charles Schwab & Co. He also gave particulars of where he obtained legitimate securities information and advice. Throughout 23 June and during the morning of 24 June 1988, Lee made no admissions that he had participated in insider trading. However, Mr Foster later told the New York court that during the luncheon adjournment on 24 June 1988, he had a discussion with Lee's attorney, during which the attorney informed him that Lee now admitted he was guilty and wished to withdraw his prior testimony. Mr Foster further asserted that Lee's attorney stated Lee wanted transnational immunity, would consent to an injunction and would pay the appropriate amount of money. Mr Foster stated that he told Lee's attorney that he would have to report these proposals to his superiors in Washington.

According to Mr Foster, Lee's attorney then disclosed considerable details of Lee's dealings, information about additional telephone calls during the material period of which SEC had apparently been unaware and that $ 200,000 had been paid to Wang. Mr Foster observed that these lunchtime disclosures would live as one of the high points of SEC investigations. When the proceedings continued in the afternoon, Lee's attorney stated that Lee wished to withdraw his prior testimony and that earlier statements in relation to his knowledge of Wang and the reasons for purchasing securities, were inaccurate. The attorney offered to call Lee to confirm these admissions. Lee was not called and his attorney advised that Lee had declined further to testify. Mr Foster inquired whether he was correct in understanding that Lee admitted being guilty of insider trading. Lee's attorney, in rather convoluted terms, in effect replied that he was unable to make a broader admission in those terms.

The details provided by Lee's testimony and his attorney's later disclosures, were obviously of considerable assistance to SEC. The importance of this new information is reflected in the jubilant nature of the subsequent communications between SEC officers in Hong Kong and the United States. The time difference between Hong Kong and the United States also resulted in several other steps being taken by both parties before 24 June 1988 finally expired in the United States. Morgan Stanley received instructions in relation to five of Lee's accounts, requiring it to lodge funds totalling US$ 1,977,000 with the New York branch of the bank for transfer to the bank's branch in Hong Kong. There was also evidence that US$ 3m had been transferred on the same day from Lee's accounts at Charles Schwab & Co, San Francisco, to the New York branch of the bank for transmission on to the bank's Hong Kong branch.

Morgan Stanley, on 24 June 1988, informed SEC of the instructions it had received affecting US$ 1,977,000 of Lee's funds and agreed not to honour those instructions until close of business on 27 June 1988. On 24 June 1988, an officer of SEC also telephoned the bank's New York branch advising that it had that day obtained direct evidence that Lee was guilty of insider trading and that application would be made on 27 June to the New York court for injunctions freezing Lee's accounts with the bank. The bank was requested in the meantime not to transfer any of Lee's funds. The bank agreed to honour that request. The oral communications between SEC and the bank were confirmed in a letter from SEC to the bank dated 26 June 1988.

On 27 June 1988, SEC applied to the New York court for temporary restraining orders against Wang and Lee including an order freezing their assets. The court granted orders substantially in terms of the application and fixed 13 July 1988 as the return date for Wang and Lee to show cause why preliminary orders should not be made in terms of the ex parte temporary orders. The ex parte temporary orders recited that Wang and Lee's actions were in violation of the Securities Exchange Act 1934 and that they might be liable to civil penalties in an amount equal to three times their total profits, pursuant to the Insider Trading Sanctions Act 1984.

SEC shortly thereafter became aware that Lee had instructed his Hong Kong solicitors to make formal demand upon the bank for payment, failing which legal proceedings in Hong Kong would be commenced. The solicitors' letter asserted that the New York court order had no effect upon the contractual obligations of the bank in respect of the Hong Kong accounts which were governed by Hong Kong law. The SEC informed the bank's New York attorney that, in its view, the 27 June 1988 New York court order prohibited Lee or his plaintiff companies, making any demand or bringing any court proceedings in Hong Kong. The steps being taken in Hong Kong led SEC on 8 July 1988 to obtain a supplemental temporary restraining order from the New York court ordering that Lee, Wang, the persons and entities listed in Attachment A of the original order:

"... and their affiliates, nominees, agents, officers, directors, employees, servants, successors, attorneys, assigns, corporations and other entities under their control, and those persons in active concert or participation with them, and each of them, be and hereby are temporarily restrained from commencing or maintaining any action suit or proceeding whether within or without the United States of America, with respect to any of the assets subject to the aforesaid Temporary Restraining Order other than in the United States District Court for the Southern District of New York."

This order is expressed in unusually wide terms. The New York court expressly reserves sole jurisdiction to itself and prohibits any court proceedings being taken in relation to any of the frozen assets unless commenced in New York. The order is not merely against Lee, Wang and their nominees and agents, but extends to include their attorneys. It was accepted by counsel before me that this term included Lee's own lawyers. Further, the order purports to have extraterritorial effect as it was expressed to apply not only within but also without the United States. It was not only the view of SEC but also clearly the opinion of Owen J, sitting in the Southern District Court of New York, that the order prohibited Lee's solicitors in Hong Kong commencing court proceedings in Hong Kong in relation to the moneys in the Hong Kong accounts.

I accept that within the United States the orders were enforceable. I also record that during the New York court hearings, Lee's previous Hong Kong solicitors were described as behaving contemptuously in bringing the Hong Kong proceedings. I also record that a United States attorney in Hong Kong declined to advise the plaintiffs or their solicitors on the effect of the New York orders, on the ground that the 8 July 1988 order effectively restrained all United States lawyers from rendering any assistance to the plaintiffs or their Hong Kong solicitors. Whether the New York order of 8 July 1988 has any effect under Hong Kong law is a separate question. So far as the comparable position of Hong Kong is concerned, I am unaware of any Hong Kong court which has or would make an order prohibiting a party from bringing proceedings in any other court or rendering a party and his solicitors liable for contempt, if they commenced such proceedings. I am well satisfied that for Hong Kong to recognise or enforce the 8 July 1988 New York order, would be contrary to the well settled conflict of laws principle which is set out as r 3 in Dicey and Morrison The Conflict of Laws (11th Ed) Vol 1 p 100, in these terms:

"English courts have no jurisdiction to entertain an action:

(1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State; …"

The same principle applies in Hong Kong. When I come to the submissions of counsel on the law, I will have to return to consider r 3 in greater detail. For present purposes, it is sufficient to hold that in accordance with the principle summarised in r 3, the 8 July 1988 New York order does not have extra-territorial effect in Hong Kong. Under Hong Kong law, the plaintiffs were lawfully entitled to bring the present originating summonses, to instruct Hong Kong solicitors to act for them and in turn to instruct counsel. Under Hong Kong law, neither the plaintiffs nor their solicitors or counsel are in contempt of court, merely for exercising their fundamental legal right to come to this court.

On 13 July 1988, SEC's application to replace the ex parte temporary restraining orders with inter partes preliminary injunctions came before Owen J. Lee failed to appear to show cause to the contrary and the court, after being satisfied that service had been effected, granted preliminary injunctions in substantially the same terms as the earlier ex parte orders. At this hearing, counsel for SEC submitted to the court that Wang had breached his duty of confidentiality to Morgan Stanley and its customers; that Wang conveyed that misappropriated information to Lee; that Lee while in possession of the information traded in securities with the advantage of that information.

After the Hong Kong actions were commenced and later after the present originating summonses were issued, the bank's New York attorney informed SEC of these steps and asked SEC to intervene in the Hong Kong proceedings. SEC refused and requested the bank to pay the balances in the plaintiffs' Hong Kong accounts, into the New York court where, it suggested, the bank could interplead. The bank refused to interplead in New York and also refused to pay the amounts in the Hong Kong accounts into the New York court. SEC replied that if payment into court was not made voluntarily, it would seek a court order.

After an application by SEC, the bank, on 10 August 1988, was obliged to appear before the New York court to show cause why payment of those amounts should not be made into court. SEC explained that in view of the fact that the Hong Kong originating summonses were to be heard on 12 August 1988, it was considered necessary to obtain payment into court, to avoid the possibility of the accounts being subject to a prior conflicting order of a Hong Kong court. The bank opposed an order for payment into court on the grounds that it would be placed in double jeopardy of having to pay the same sum twice and that the funds in the accounts were subject to Hong Kong law.

Owen J adopted a robust approach to the bank's submissions. In his view, the New York court had already achieved priority by freezing the funds before the Hong Kong court had made any order. The court suspected that the funds were not sitting in a bank vault in Hong Kong, indicating that as the New York branch of the bank was subject to the court's jurisdiction, it was open to the branch to push a computer button and cause the funds to be available in New York. The bank's attorney strongly rejected this possibility, informing the court that the funds were in a Hong Kong account at the Hong Kong branch subject to Hong Kong law and could only be operated by the Hong Kong branch on receipt of instructions complying with Hong Kong law. Further, the bank considered that a Hong Kong court might well order the bank to comply with the plaintiffs' instructions which were in accordance with contract between the bank and its plaintiff customers.

The court ordered the record to be sealed and adjourned the hearing to the following day. The sealing order was made on the application of SEC to avoid Lee being aware of SEC's application for payment of the Hong Kong funds into the New York court. When the present parties appeared before this court on 12 August 1988, the bank did not disclose that there was an adjourned application in New York for the Hong Kong funds to be paid into the New York court. When this non-disclosure to my court was later criticised by the plaintiffs' leading counsel, I was informed by the bank that it considered that it would have been in contempt of the New York court, if it had made disclosure. I was informed that if the bank's solicitors had been asked about the New York position, when they appeared before me on 12 August, they would have replied that they were unable to give any reply because of the nature of the New York court order.

When the New York court hearing continued on 11 August 1988, the bank asked the court to defer to the Hong Kong court because the accounts were lodged with its branch in Hong Kong and were subject to Hong Kong law. The principal response of Owen J was that Lee had failed to appear and show cause on 13 July 1988 and the New York court was no longer concerned with what steps he might take in Hong Kong. Owen J went on to observe that insider trading was a felony in the United States and the litigation in Hong Kong merely involved civil contractual rights. Differences in approach to insider trading in the competing New York and Hong Kong jurisdictions were also commented upon. When referring to Lee's affidavit filed in the present originating summons proceedings, Owen J observed: "... in that affidavit he says I am going to fight in Hong Kong and out here in Hong Kong they practically give you a medal for doing this kind of thing. He doesn't put it that bluntly. But he says, we only get a censure. If I can take all my goodies and go to Hong Kong, oh, boy, I have made it, and I am not going to let that happen."

I would interpolate that in Hong Kong if it appears to the Financial Secretary that insider dealing may have taken place, he may, pursuant to s 141H of the Securities Ordinance (Cap 333) require the Insider Dealing Tribunal to inquire into the matter. The Tribunal is then obliged to determine the culpability of any suspected person or corporation. Under s 141H, after determining whether a suspected person or corporation is culpable of insider dealing, the Tribunal causes its report to be published and made available to the public. There is no further sanction although commentators from time to time have urged that in addition to the publishing of a finding of culpability, more stringent penalties should be enacted.

After hearing strong and reasoned opposition by the bank to payment, Owen J refused to defer jurisdiction over the Hong Kong funds to a Hong Kong court, declaring: "I am not going to do this. I'm an American judge and this is an American agency and I will keep jurisdiction and I will direct payment into court."

In making his final order for payment in, Owen J agreed to the bank's request to make the further order that on payment into court the bank's debt to Lee or any of his entities was extinguished. The plaintiffs therefore have no claim in New York against the bank for the funds paid into court.

On 15 August 1988, the bank paid into court under protest the sum of US$ 12,499,878 and also lodged an appeal against the order for payment into court. On 22 August 1988, Lee applied to the court for an extension of time to answer or plead to SEC's complaint to which he had earlier failed to appear. At a hearing on 24 August 1988, Owen J refused the application for extension of time. The court indicated that Lee's only option was to move for leave to set aside the default. On 31 August 1988, Lee's New York attorneys served on SEC a demand for jury trial and requested discovery. On 1 September 1988, Lee filed an answer which was in effect a defence to SEC's complaint in which he denied SEC's allegations and prayed for the complaint to be dismissed. The demand made, request for discovery and answer are filed subject to the court setting aside Lee's default.

On 1 September 1988, SEC filed an application for default judgment against Lee for US$ 19,418,740 plus a civil penalty to be fixed by the court pursuant to the Insider Trading Sanctions Act 1984. In support of that application, SEC filed a memorandum seeking a civil penalty equal to three times the analysed profits, namely $ 58,256,220. SEC submitted that Lee's violations were deliberate, repeated and massive, amounting to the second largest insider trading case in history. Aggravating factors listed were his attempt to importune another young analyst from a different firm; his initial perjurious testimony in Hong Kong; his attempt to transfer funds out of the United States; his defiance of the New York order by making demand for funds and commencing court proceedings in Hong Kong.

The draft final judgment filed sought two principal orders which reflect the twofold relief pursued by SEC throughout the New York court proceedings. First, there was an order for the disgorgement of the $ 19,418,740 generated as a result of the insider trading. Secondly, there was an order for a civil penalty under which the maximum sum was limited to three times the illegal profits. So far as the legal principles relevant to the present dispute are concerned this division was, according to the bank, of considerable importance.

Until 1984, SEC could only seek from an offender disgorgement of profits gained through his illegal insider trading. Congress apparently felt this was an inadequate penalty for it merely restored the offender to the position he was in before the illegal conduct. The imposition of a penalty, in addition to disgorgement, was enacted relatively recently by the Insider Trading Sanctions Act 1984 which provides for a maximum penalty equal to three times the profits gained from illegal insider trading. The amounts recovered by SEC under these twofold public remedies have different ultimate destinations. This clear dichotomy is reflected in the draft final judgment where the two principal orders sought may be summarised in these terms: (1) The $ 19,418,740 representing the disgorgement of funds was to be paid into court and then lodged with the Manufacturers Hanover Trust Co in the name of a receiver appointed by the court who would be under the duty to distribute those funds to defrauded investors pursuant to a plan to be proposed by SEC and approved by the court but in any event none of those moneys were to be returned to Lee. (2) The civil penalty up to a maximum of $ 58,256,220 was to be paid by Lee forthwith to the United States treasury.

To complete the factual chronology, the court was informed by the Bar, that Wang on 8 September 1988 pleaded guilty in New York to various charges of fraud, including one charge related to Lee's alleged illegal insider trading.

When the originating summonses were filed, the plaintiffs sought declarations that two New York court orders dated 27 June 1988 and a later order dated 8 July 1988 were of no effect whatsoever in Hong Kong in restraining compliance by the bank with the 1 August 1988 instructions to terminate the plaintiffs' accounts in Hong Kong and pay the money in the accounts to the plaintiffs' solicitors. The summonses also sought such consequential orders as the court might see fit for compliance with those instructions. By the date of this hearing, there had been further orders made in New York. On the unopposed application of the plaintiffs, the summonses were amended for the declarations sought to extend to any other orders made by the New York court subsequent to 8 July 1988.

The plaintiffs submitted that if successful they were entitled to a consequential order requiring the bank to act on their instructions to terminate the account and pay the moneys in the accounts to their solicitors. In any event, it was submitted, the bank as a large and responsible institution should act in accordance with even the bare primary orders sought. On behalf of the bank it was conceded that the real issues between the parties were not merely limited to whether the New York orders had any effect in Hong Kong. If the issues were so limited, it would hypothetically be possible for the plaintiffs to obtain a declaration that the New York orders were of no effect in Hong Kong, yet the bank might under such a bare declaration be under no legal obligation to make payment in accordance with the plaintiffs' instructions. Both parties agreed that it was not intended that the present proceedings should reach that arid conclusion.

However, the bank submitted that the originating summonses were misconceived. In the bank's view, its defence could only properly be put after discovery and that the court was unable to make important findings of fact, including determinations on foreign New York law, without witnesses including experts on New York law, being called. The bank submitted that the present proceedings were in the nature of a preliminary skirmish and that the real issues could only be determined in an action. The plaintiffs criticised the bank for not raising the question of procedure before the parties embarked on a lengthy hearing dealing with the substantial issues between the parties. The plaintiffs pointed out that the originating summonses were not of an interlocutory nature and raised substantial issues for final determination. So far as questions of fact were concerned, the plaintiffs from the outset had made it clear that they were content to proceed on the basis that the court assume that all allegations of fact, adverse to the plaintiffs, were true.

I am satisfied that the originating summonses are properly brought in accordance with O 5 r 4 Rules of the Supreme Court. I am further satisfied that the orders sought will enable substantial issues to be finally determined. If there were likely to be a substantial dispute of fact, it would have been more appropriate to have begun the proceedings by writ but in view of the plaintiffs' factual concessions already referred to, that should prevent any dispute of fact arising. The plaintiffs' earlier actions have, of course, already been stayed. If factual or other difficulties were to arise, the court may always give further directions under O 28 r 4 and these could extend to ordering that the proceedings continue as if commenced by writ. I reject the bank's criticism of the procedure adopted by the plaintiffs and propose to determine both summonses on the merits.

The normal relationship between banker and customer is one of contract. In the present case, the contract between the parties was created when the bank accepted the plaintiffs' applications to open accounts with the bank. The contract between the parties is subject to a bank document signed by the plaintiffs entitled 'Private Banking Terms and Conditions'. During the relevant period there were a number of instructions given by the plaintiffs to the bank which were not carried out. As to these various instructions, I find that the plaintiffs' instructions dated 1 August 1988 superseded any prior instructions. I further find that those instructions were duly executed by an authorized signatory of the plaintiffs.

The plaintiffs submitted that none of the rules contained in the 'Private Banking Terms and Conditions' entitled the bank to reject those instructions. I was reminded that once a customer pays money into a bank the property in the money passes to the bank and is replaced by a debtor and creditor relationship. The plaintiffs, it was submitted, were unconcerned whether the bank transferred that money elsewhere or held it in a nostro account. A nostro account is an account the bank maintains for its own purposes in a foreign country, usually in the currency of that country but occasionally in another currency. The bank's Hong Kong branch maintained a United States dollar nostro account with its New York branch.

Where international banks, such as the present bank, have branches in different countries, the law is well settled that each branch is treated in the country in which it is situated as a separate entity independent of its parent body — Power Curber International Ltd v. National Bank of Kuwait SAK [1981] 1 WLR 1233. Here the plaintiff submits that the local branch of the bank is situated in Hong Kong; the account was opened in Hong Kong; the account is kept in Hong Kong; and the account is operated in Hong Kong. Accordingly, it is subject to Hong Kong law.

The existence of the nostro account, although raised in preliminary correspondence between solicitors, never loomed large at the trial. In fact, the plaintiffs' submissions that the account was solely connected with Hong Kong, were very much the same submissions advanced by the bank to the New York court. The debtor-creditor relationship between the parties in Hong Kong in relation to funds deposited in the Hong Kong accounts, makes it irrelevant whether subsequently the bank transferred those funds into a nostro account maintained in the United States or elsewhere.

I was referred to Libyan Arab Foreign Bank v. Bankers Trust Co (1988) 1 Lloyd's Rep 259 as authority for the proposition that as a general rule the contract between the bank and its customer is governed by the law of the place where the account is kept in the absence of any agreement to the contrary. There was no contrary agreement and I hold that the contract between the plaintiffs and the bank is governed by Hong Kong law.

The bank would not concede that it was contractually obliged to honour the plaintiffs' instructions but I reject its attempt to find any rule in the 'Private Banking Terms and Conditions' which would support any contractual refusal to make payment. The bank also advanced, if tentatively, the submission that the contract was subject to an implied term which in the present circumstances excused payment. This submission was reserved rather than developed and in its embryonic form is also rejected. The relevant evidence simply falls far short of satisfying the well established criteria, set forth in a long line of cases from The Moorcock (1889) 14 PD 64 onwards, which must exist before a term may be implied.

The plaintiffs submitted that the New York court orders were not enforceable in Hong Kong and it was entirely lawful for the bank to make payment in accordance with its customer's contractual instructions. I was reminded that even if SEC had proceeded to final judgment in New York, such judgment would not be enforceable in Hong Kong under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319). I note that the Ordinance applies, in addition to certain Commonwealth countries, to Belgium, France, West Germany, Italy, Austria, Israel and the Netherlands but not to the United States of America. In any event, this court is concerned with a factual position where no final judgment has yet been obtained in the United States.

In contract the bank therefore had an obligation to honour the plaintiffs' instructions. It is now necessary to go on and consider whether that primary contractual obligation was displaced by the New York court orders or on any equitable or other ground.

In view of the clear contractual obligation of the bank to make payment, if it declined to do so because of the New York court orders, the plaintiffs submitted that such refusal, would be contrary to r 3 set out in Dicey and Morris on The Conflict of Laws Vol 1 p 100. I confirm that rule is an expression of the common law principle that Hong Kong courts have no jurisdiction to entertain an action for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state. There is no direct attempt in the present proceedings, by the United States or its federal agency the SEC, to enforce a penal or public law of the United States. However, in a number of cases it has been held that unacceptable indirect enforcement of a foreign law occurs, where a private party attempts to raise a defence based on foreign law, to vindicate or assert the right of a foreign state.

In the plaintiffs' submissions, the New York court orders were penal and public laws of a foreign state and could not be enforced directly or indirectly in Hong Kong. The bank submitted that it was necessary to give separate consideration to the nature of the two different New York court orders. So far as the civil treble penalty provision was concerned the bank conceded that was a penal law and could not be enforced in Hong Kong even indirectly. This was a sensible concession for the Privy Council in Huntington v. Attrill [1893] AC 150 held that penal laws included not only crimes in the narrow sense but all breaches of public law subject to monetary punishment at the instance of the government. Lord Davey cited with approval the following words of Marshall CJ in the United States Supreme Court judgment of Wisconsin v. Pelican Insurance Co 127 US (20 Davis) 265: The rule that the courts of no country execute the law of another applies not only to prosecutions and sentences for crimes and misdemeanours but to all suits in favour of the State for the recovery of pecuniary penalties for any violation of statutes for the protection of its revenue or other municipal laws and to all judgments for such penalties.

However, the bank submitted that the disgorgement provisions were not penal. I was referred to the fact that while the treble payment provisions were described as a penalty payable into the United States Treasury, the disgorged funds were paid into a private bank and held in the name of a receiver on behalf of defrauded investors.

In the plaintiffs' submission, the bank could rely on neither order as a ground to refuse payment, for to do so would require a Hong Kong court indirectly to enforce a foreign penal or public law. I was referred to Rossano v. Manufacturers' Life Insurance Co [1963] 2 QB 352 where a policy holder in England sued an insurance company for the proceeds of matured endowment policies. One defence was that the Egyptian government had served Egyptian garnishee orders on the insurance company's branch in Egypt for unpaid tax alleged to be due by the insured. The Egyptian government was not a party to the action, so the English court was concerned with the question of indirect enforcement. McNair J rejected the defence observing at p 376:

"Many of the points raised in these submissions raise difficult questions of private international law upon which English authority is scanty. But as I have reached the conclusion that the fundamental objection to the recognition of these orders is that their recognition would offend against the well-settled principle that the English court will not recognise or enforce directly or indirectly a foreign revenue law or claim, it is not necessary for me to deal with many of the other points raised ... in the High Court of Eire in Peter Buchanan Ltd & Macharg v. McVey ... Kingsmill Moore J says this: 'If I am right in attributing such importance to the principle, then it is clear that its enforcement must not depend merely on the form in which the claim is made. It is not a question whether the plaintiff is a foreign state or the representative of a foreign state or its revenue authority. In every case the substance of the claim must be scrutinised and if it then appears that it is really a suit brought for the purpose of collecting the debts of a foreign revenue it must be rejected.' In my judgment for this court to allow the defendants to set up in diminution or extinction of the plaintiff's claim a foreign garnishee order or attachment served upon them by the Egyptian tax authorities would clearly be contrary to the principles above stated."

I was also referred to the recent decision of the English Court of Appeal in the United States of America v. Inkley [1988] 3 All ER 144. The United States obtained judgment in civil proceedings in that country for a sum payable in terms of a bond given in United States criminal proceedings under which the defendant had defaulted. A civil action was then commenced in England to enforce the American civil judgment. In England, the High Court gave judgment in favour of the United States but this was reversed on appeal. The Court of Appeal held that notwithstanding the civil form of the enforcement proceedings, in substance the purpose of the civil action was the execution of the United States own penal laws. English courts therefore had no jurisdiction to hear the claim.

In support of the bank's submission that the disgorgement order is severable from the penalty order and may therefore properly form part of the bank's defence to payment, I was referred to Raulin v. Fischer [1911] 2 KB 93. The defendant had been convicted by a French court of recklessly galloping her horse in Paris. Under France's Code d'Instruction Criminelle, a person injured by the criminal act of another, may intervene in the prosecution — the action publique — and claim damages whereupon his claim — the action civile — is tried at the same time and one judgment is pronounced. The plaintiff having intervened in the Paris proceedings, obtained judgment and in enforcement of the judgment sued the defendant in England for payment of the damages awarded in France. The defence in the English proceedings was that under private international law, a penal judgment of a court in one country cannot be enforced in another country. Hamilton J held that the foreign judgment was severable and the portion awarding damages to the injured person was not within the rule of private international law which prohibits courts from executing, directly or indirectly, the penal judgments of a foreign court.

On this issue I have also considered the case of Re Cable (Lord) (Deceased); Garratt v. Waters [1977] 1 WLR 7 in which certain beneficiaries applied to restrain trustees from remitting to India funds domiciled in England. The Indian Government, through its Reserve Bank, had ordered the trustees, one of whom was resident in India, to remit the funds to India where duty was still payable. Failure to do so would have involved a breach of India's exchange controls and rendered the trustees liable to Indian penal consequences. Slade J accepted that an English court would not entertain an action for the direct or indirect enforcement of the revenue laws of a foreign state. However, after making the following distinction he declined to restrain the trustees from remitting funds to India, observing: "... it would not be correct to say that the failure of the English court to intervene in regard to the redemption moneys amounted to an enforcement of the exchange laws of India. It is one thing for the court to intervene by requiring trustees to comply with foreign fiscal legislation; it is quite another thing for it to decline to prevent trustees of a foreign trust from complying with fiscal legislation of the country of the proper law, which under such foreign law they are entitled indeed obliged to obey."

In the present case, SEC, a United States federal agency is the sole plaintiff in the New York court proceedings. The order for disgorgement and the order for penalty are solely sought by SEC. No investor or private party has intervened in the SEC's statutory enforcement proceedings. The terms on which the Receiver will hold the disgorged funds are those to be proposed by SEC and approved by the court.

The scheme of the 1984 United States triple penalty legislation was to provide an additional deterrent to disgorgement. So far as the offender was concerned, he became liable to a triple penalty in addition to his pre-existing punishment to disgorge profits. There is no provision in the United States securities legislation which permits an investor to initiate the statutory machinery himself or to intervene. This is a very different position from that which arose in Raulin v. Fischer. I also consider it a very different position to in Re Cable (Lord) (Deceased); Garratt v. Waters where in the peculiar circumstances of that case, the court was understandably not prepared to stop trustees of a foreign trust from complying with the penal laws of the country of the proper law. The more difficult question which arises in this case is whether the disgorgement provisions are truly penal or public in nature or whether they are of the kind considered in Huntington v. Attrill. In that case, the relevant companies legislation included penalties for non-compliance under which directors and officers were liable to monetary penalties recoverable by the State which were then applied to the support of the poor of the county in which they were recovered. In addition, the legislation created a statutory cause of action under which a creditor of a company could, in certain circumstances, sue officers of the company in their personal capacity. The Privy Council held that the statutory right of a creditor to sue was not penal and did not infringe the rule that the courts of one country will not enforce the penal laws of another.

In Huntington v. Attrill, as in Raulin v. Fischer, the provisions which were held not to infringe the rule, shared the common element that the private party either commenced proceedings or could intervene, before liability on the part of the defendant was determined, to recover moneys in his own name. In the present case, there is no such private right of commencement or intervention. SEC is the sole plaintiff and it is only after the moneys have reached the Receiver and a plan for distribution is approved by the court, that defrauded investors can apply for payment. Under the statutory scheme, investors or other private persons do not commence parallel proceedings against Lee or participate in SEC's proceedings. The SEC has the sole right to enforce disgorgement from Lee. It is only after SEC has successfully discharged that public responsibility that the subsequent private, if statutorily founded, right of the investors to make their own private claims to the Receiver arise. The SEC's powers and the investors' powers are neither co-extensive nor co-exist. The investors' rights only arise after the SEC's disgorgement powers have been exercised. This factual position does not correspond with the position which existed in any of the cases cited to this court.

In some respects, the United States statutory machinery has elements common to those cases where it has been held that the foreign law relied upon was penal or other public law. On the other hand, if the position of the ultimate possible recipients of the disgorged funds is considered in isolation, the machinery includes elements which are analogous to the position which arose in Huntington v. Attrill. Quite clearly the triple penalty is penal in nature and represents the imposition by the United States of a monetary penalty upon persons found to be guilty of illegal insider trading.

The disgorged offender's funds, it is true, are not paid into the United States Treasury. However, the disgorged funds are a monetary sum recovered by SEC in its capacity as a federal agency, in exercise of its statutory powers forming part of the enforcement provisions of the Securities Exchange Act. I am satisfied that the disgorgement proceedings, adopting the words of Purchas LJ in United States of America v. Inkley at p 150, amount to 'the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity'. If the disgorgement proceedings are not in the narrow sense the enforcement of a sanction, they are certainly the enforcement of a public power or right at the instance of the United States in its sovereign capacity.

After considering this closely balanced issue, I hold that the United States statutory provisions relating to disgorgement form part of that State's public law. I have already held that the triple penalty provisions form part of the penal laws of the United States. I further hold that neither of the New York court orders, which may be made under those twofold provisions, can be invoked by the bank in Hong Kong, by way of defence to the plaintiffs' originating summonses.

Although the bank disputed the plaintiffs' contractual claim and strongly submitted that the disgorgement provisions formed no part of United States penal or public law, its principal defence was founded on the proposition that the funds in the plaintiffs' accounts were subject to a constructive trust. The bank submitted that as a result of the investigations, culminating in the New York court proceedings, it had actual knowledge of the allegations made in those proceedings. Further, in addition to that actual knowledge, it was entitled to assume, for the purpose of the present originating summonses, that those allegations were true.

As a consequence, the bank submitted that it had good reason to believe that:

(a) Lee had made profits from the use of confidential information which was wrongly imparted to him by a fiduciary in breach of that fiduciary's duty of trust.

(b) Some of those profits may have found their way into the plaintiffs' accounts at the Hong Kong branch of the bank.

(c) The plaintiffs are holders of those accounts as the nominees or bare trustees of Lee.

If with such knowledge, the bank knowingly assisted Lee in dealing with those funds, the bank itself would be liable to the beneficiaries of the constructive trust. In those circumstances, it was submitted the bank, in accordance with Hong Kong law, would become the constructive trustee of those funds.

I was referred to Snell's Principles of Equity (28th Ed) p 192 on the principles relating to constructive trusts where it is pointed out that the liability of strangers to a trust, which would be the position of the bank if held to be a constructive trustee, does not arise merely because they are agents for the trust but only if: "... they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. The requisite knowledge has been described as knowledge of circumstances which would indicate to an honest, reasonable man that such a design was being committed or would put him on inquiry, which the stranger failed to make, whether it was being committed."

On the position of a bank as a constructive trustee, I was referred to Cresswell Encyclopaedia of Banking Law C76-C89 which on general principle, largely adopts the statements set out in Snell. Reference is made to well-known cases such as Selangor United Rubber Estates Ltd v. Cradock (a bankrupt) (No 3) [1968] 2 All ER 1073, where it was held that it was the act of parting with the trust property, that caused liability to arise. In particular, I was referred to Cresswell C89.9 as a correct statement of the bank's position:

"The circumstances in which a bank having come under a duty of inquiry and hence a duty not to comply with the customer's instructions, ceases to be under the latter duty : The refusal by a bank to comply with its customer's instructions in relation to moneys in the customer's account can have serious adverse consequences both for the customer and the bank. That is a practical consideration that militates strongly against the court extending the duty on the bank not to comply with the customer's instructions beyond what is the minimum reasonably necessary to ensure that the bank does not knowingly allow a misapplication of moneys in a customer's account with the bank. The duty not to comply with the customer's instructions would appear to be coextensive with the subsistence of the duty of inquiry. The bank has a primary obligation to pay a cheque on demand. In more general terms that is a primary obligation to comply with the customer's instructions in relation to moneys in the account. In exceptional circumstances that obligation must yield to the obligation to make inquiries. If an inquiry is made and answered, the only relevant question that arises is whether or not that answer would put the honest and reasonable banker on further inquiry. If it does then the bank must continue to refuse to obey its customer's instructions. When put on inquiry a bank remains under a duty not to comply with its customer's instructions either if it acquires knowledge of the intended misapplication of moneys which it holds or whilst it is pursuing its inquiries."

Where a constructive trust exists, the legal title to property vests in one person and the equitable title in another. This division of ownership, importantly in fraud and other cases is one factor giving rise to the equitable doctrine of tracing, which permits the equitable owner to pursue the trust funds into the hands of the ultimate recipient — Re Diplock's Estate [1948] Ch 465 where the law was exhaustively considered by the Court of Appeal. As part of its concern not to be placed in double jeopardy, the bank, citing Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd [1981] Ch 105, submitted that the law in relation to constructive trusts and tracing, were substantially the same in Hong Kong and New York. If the plaintiffs' accounts were subject to a constructive trust, beneficiaries could pursue tracing remedies and the bank could be liable under Hong Kong law. In Chase Manhattan Bank NA v. Israel-British Bank (London) Ltd, the plaintiff had paid US$ 2m into the defendant bank under a mistake of fact. The defendant later went into liquidation and Goulding J held that the plaintiff was entitled in equity to trace the mistaken payment and recover what later represented the original mistaken payment.

I am satisfied that Wang in disclosing the confidential insider information was in breach of trust. That breach of trust certainly existed in relation to his duty to Morgan Stanley and through his employer to its customers. The relationship between Wang and Lee can be categorised as that of tipper and tippee. The bank submitted that Lee, on receiving from Wang insider trading information, assumed the same duty of confidentiality imposed on Wang. It was further submitted that if in breach of that duty, Lee traded and made profits, then those profits were subject to a constructive trust arising from that breach of duty. I was referred to Baden v. Societe-Generale du Commerce SA [1983] BCLC 325 and it was submitted that, in accordance with the four requirements set out in that judgment, Lee was liable in respect of the insider profits, as a constructive trustee.

I am satisfied that Lee, as a tippee of Wang, assumed a duty of confidentiality and was under an obligation to abstain from trading with insider information obtained from his tipper. If he elected to trade while in possession of that confidential information, I am further satisfied that he held the resulting profits as constructive trustee.

The law is well settled that a bank is liable to the innocent beneficial owners of funds, if in relation to those funds, it gives knowing assistance to a fraudulent scheme. If the bank gives knowing assistance, the law holds that the bank is a constructive trustee of such funds. The beneficiaries thereupon have a claim in equity against the bank. The wide extent of a bank's duty was emphasised in Lipkin Gorman (a firm) v. Karpnale Ltd [1987] 1 WLR 987. In that case, a firm of solicitors held a partnership account at a London branch of an English bank. Each partner had authority severally to sign cheques drawn on the account. One of the partners, unknown to the others, was a compulsive gambler. The bank was aware he was a compulsive gambler. The gambling partner, unknown to his partners, made a number of fraudulent withdrawals from the partnership account. The court found that the bank, knowing the partner because of his gambling was in financial difficulty, had reasonable grounds for believing that he was fraudulently withdrawing sums from the partnership account. Quite independently of contract, the bank was held in breach of duty to the other partners, in honouring cheques drawn by the gambling partner. The court held the bank liable as constructive trustee for rendering knowing assistance to the gambling partner.

The plaintiffs' main attack on this particular defence was that if any constructive trust existed it was founded on United States public law. It was pointed out that on the evidence, Wang's duty was owed to Morgan Stanley and its customers. This was the duty Lee assumed. But the only notice of potential claims received by the bank was in relation to the statutorily disgorged funds which the Receiver would hold for a different class of persons. The latter class were defrauded investors, defined in the affidavit of Mr JW Dickey, the bank's expert on United States law, at para 9, in these terms: "If successful in its case against Lee, the SEC will seek to require Lee to compensate the investing public, from whom he bought and to whom he sold securities in violation of the US securities laws, by disgorging all of his illegal profits on the theory that he holds them as constructive trustee for the benefit of the defrauded investors."

I accept that the class of persons to whom Wang owed a duty, which Lee inherited, is different to the class of beneficiaries entitled to make claims against the Receiver.

In the plaintiffs' submission, the only constructive trust which could arise, would result from SEC's power to obtain a New York court order, forcing Lee to disgorge funds to be held ultimately by the Receiver. The plaintiffs argued that a constructive trust arising in that situation, founded on United States public law, would not be recognised by Hong Kong law.

To emphasise that no parallel common law or equitable private rights could in those circumstances arise independently of statute, I was referred to and have considered the House of Lords judgment in Lonrho Ltd v. Shell Petroleum Co Ltd [1981] 2 All ER 456. In 1965, because of Southern Rhodesia's unilateral declaration of independence, the United Kingdom made it a criminal offence to supply oil to Southern Rhodesia. Lonrho had earlier lawfully participated in the construction of a pipeline to enable oil to be shipped to Mozambique and thence by pipeline to Shell's refinery in Southern Rhodesia. Shell never used the pipeline and in concert with the Southern Rhodesian Government exported oil illegally to Southern Rhodesia by other means. Those illegal exports, Lonrho claimed, assisted in extending the period of unilateral independence during which the pipeline was unused. The House of Lords held that any criminal breaches by Shell of the United Kingdom order, did not give rise to a cause of action in tort for conspiracy in favour of Lonrho, under which it could recover damages for losses caused by Shell's contraventions.

The plaintiffs also disputed that the New York court orders were capable of being severed in accordance with Raulin v. Fischer. Chase Manhattan v. Israel-British Bank (London) Ltd, in the plaintiffs' submission, was a very different type of case, where the constructive trust arose only because of payment under a clear mistake of fact. The present case, it was submitted, did not fall within the well-settled equitable principles which apply to payments by mistake but was concerned with the novel question whether because of insider trading, a constructive trust in relation to profits, could arise independently of statute. So far as Lipkin Gorman v. Karpnale Ltd was concerned, I was reminded that the bank's duty existed because the other partners were unaware of their partner's gambling. If the other partners had been aware the duty would not have arisen. In the present case, while SEC was the first party to have knowledge, it passed that knowledge on to the bank and also elected not to appear before a Hong Kong court.

After considering these submissions, it seems to me that the plaintiffs' approach faces at least two difficulties. First, the bank has knowledge of Wang's breach of duty to Morgan Stanley and its corporate customers. I have already held that when Lee knowingly traded with the advantage of that confidential information, he assumed that same duty and was similarly in breach of trust. The liability of third parties who receive confidential information with knowledge of the breach and act on that information is the same in Hong Kong as in English law. In addition to the general statements in Snell and Cresswell, these particular equitable principles are also correctly set out in Gurry Breach of Confidence p 271. The duty and liability for breach, arise in equity and exist quite independently of any United States statutory provisions whether penal, public or otherwise.

Secondly, so far as the funds held by the Receiver are concerned, it is important to recognise that the principle that Hong Kong courts will not enforce, directly or indirectly, the penal or other public law of a foreign state, does not extend to all foreign law. The principle is limited to penal or other public laws. Non-penal or non-public laws, whether statutory or otherwise, are not caught by the prohibition. I therefore accept the bank's submission that it is not enough for the plaintiffs to point to the fact that the disgorged funds held by the Receiver are distributed by him under powers founded in statute.

The crucial question is whether the funds are distributed under a penal or other public law. In my view, the public statutory duty of SEC in respect of disgorgement is executed when it recovers the funds and discharged when those funds are lodged with the Receiver. The Receiver holds the funds subject to the private claims of those individual defrauded investors falling within the class defined in Mr Dickey's affidavit. Those investors' private rights to present claims to the Receiver do not arise unless and until the SEC has recovered the disgorged funds and transferred them to the Receiver. The investors' rights to the funds held by the Receiver are therefore clearly susceptible of being severed, in accordance with Raulin v. Fischer, from the SEC's prior exercise of its public statutory powers to secure disgorgement. Against this background and applying the principles enunciated by the Privy Council in Huntington v. Attrill, I hold that the investors' claims, even if statutory, are not made in the direct or indirect exercise of any United States penal or other public law rights.

I find that the bank had knowledge of the fact that a constructive trust could arise in respect of the profits made by Lee, in breach of the duty he assumed from Wang which was owed to Morgan Stanley and its corporate customers. The bank further had knowledge of the fact that the profits were subject to a constructive trust in favour of the defrauded investors entitled to claim against the Receiver. In my view, knowledge of the existence of either constructive trust, created the exceptional situation where the bank ceased to be under its contractual duty to comply with its plaintiff customers' instructions. In fact, the bank had knowledge of both.

The bank's knowledge resulted from its own access to the particulars of and the nature of the transactions recorded in the accounts; the particulars of the SEC investigation including the sworn investigatory testimony; the verbatim record of the evidence adduced and submissions made during the New York court hearings; and the procedural steps taken by SEC culminating in the New York court orders. The bank's actual knowledge is the cumulative effect on its corporate mind of information from those various sources. Once the bank has such knowledge, it is under the equitable duty not to act adversely to the beneficiaries of those trusts by giving knowing assistance to Lee or the plaintiffs. Quite apart from any possibility of being placed in the financial double jeopardy of having to pay twice, if with such knowledge the bank gives knowing assistance, it would at least at that stage, itself become a constructive trustee of the funds in the plaintiffs' accounts.

I am satisfied that this court's recognition of the constructive trusts does not amount to a direct or indirect enforcement of United States penal or other public laws. Indeed, an important characteristic of this defence is that if the bank's knowledge were otherwise sufficient, a constructive trust arises even if the SEC investigations had not culminated in the New York court orders and even if the funds paid into the New York court had still remained in Hong Kong to the credit of the plaintiffs' accounts.

I accordingly hold that because of the constructive trusts which have arisen of which the bank has actual knowledge, it is not lawfully obliged to comply with the plaintiffs' instructions. I appreciate that not all the funds in the accounts paid into the New York court may represent profits from insider trading. It may be that they are mixed funds and some part originated from other sources. However, that does not compel the bank to make any payment out to the plaintiffs until proper inquiry and the due exercise of the beneficiaries' tracing rights. If necessary, the parties may have to come back to court at some time in the future, to have any dispute over the final ownership of the trust funds determined under Hong Kong law.

The bank also advanced a number of other defences. These included subrogation on which Orakpo v. Manson Investments Ltd [1978] AC 95 was cited and I was generally referred to Goff and Jones The Law of Restitution (3rd Ed) p 527. Issue estoppel was also raised and I was referred to Carl Zeiss Stiftung v. Rayner & Keeler (No 2) [1967] 1 AC 853 and to Dicey and Morris on The Conflict of Laws at p 432. On the bank's risk of double jeopardy, the House of Lords' examination of the risk of payment by a debtor twice over, but arising in garnishee proceedings, in Deutsche Schachtbau-und Tiefbohrgesellschaft mbH v. The R'As al-Khaimah National Oil Co [1988] 2 All ER 833 was cited. I was also referred to courts' attempts to keep pace with recent spectacular advances in electronic and transnational financial transactions, by developing the concept of hot pursuit, illustrated by cases such as London and Counties v. Caplan (Ch D, 26 May 1978, unreported) which MacKinnon v. Donaldson Lufkin Corp [1986] l All ER 653 was prepared to recognise if exceptional circumstances existed.

On the increasing extent to which courts are willing to make extra-territorial and other orders, to provide remedies in relation to contemporary commercial, multinational and similar financial dealings, I was referred to British Airways Board v. Laker Airways [1985] AC 58, Midland Bank v. Laker Airways Ltd [1986] 1 QB 689, Babanaft International Co SA v. Bassatne [1990] Ch 13 and Derby & Co Ltd v. Weldon (The Times, 2 August 1988). To the extent that granting a declaration is within the inherent discretion of the court, it was submitted for the bank, that in accordance with the trend illustrated by these latter cases and to facilitate speedy and effective steps being taken by courts internationally against insider traders, this court should exercise its discretion to aid rather than frustrate the New York court.

I am content to record that this court will always take whatever effective steps are legally available to it under Hong Kong law, to deal with illegal or morally reprehensible commercial conduct. The only limits on the court's power are those imposed by Hong Kong law and at times by the sufficiency of the evidence adduced. Where a conflict of laws situation does arise, in this area as in others, the dispute should be approached in a spirit of judicial comity rather than judicial competitiveness. Whatever the approach of other courts, this is the sympathetic approach followed by this court in the present proceedings.

The plaintiffs' counsel met each of these other defences with positive, detailed and reasoned argument. It was properly pointed out that nearly all of the bank's further defences would strictly only arise if final judgment in the United States had first been obtained against Lee. In view of my favourable findings on the bank's constructive trust defence, it is unnecessary for me to consider the others in any further detail except to comment that most of them were potential rather than present defences.

The plaintiffs are therefore not entitled to the declarations, including the order for payment, sought in the originating summonses. The two summonses are accordingly dismissed. There will be an order nisi pursuant to O 42 r 5B(6) of the Rules of the Supreme Court that the plaintiffs pay the bank's costs to be taxed if not agreed; the order to become absolute if an application to the contrary is not made within 14 days. Liberty to apply is reserved on any other consequential matters.