Two Hong Kong-based traders sentenced to three years in jail for allegedly false trading of Macquarie Bank derivatives, have been ruled innocent.

Patrick Fu Kor Kuen and Francis Lee Shu Yuen were convicted for 20 counts of manipulating derivatives warrants issued by Macquarie Bank, and sentenced to 33 and 36 months imprisonment respectively in May 2010.

They later appealed against both conviction and sentence to the Court of Appeal which dismissed their appeals, but reduced their sentences to 20 months and 21 months jail time respectively.

However the Court of Final Appeal said last week that although the defendants’ conduct gave rise to a false and misleading appearance of active trading, there was evidence that their purpose was not or did not include the purpose of creating a false or misleading appearance of active trading. Accordingly, the earlier findings by the trial judge and the Court of Appeal were in error.

The decision is a landmark for practitioners because of its observations about the proper function of expert witnesses in market misconduct cases, and the burden of proof in these cases.

The Court of Final Appeal agreed with the prosecution that defendants bore a persuasive burden of proof in establishing they had an innocent purpose, when their trading created such a false appearance of active trading.

Having allowed the appeals, the Court of Final Appeal quashed the convictions of Fu and Lee and set aside their sentences.