The Eastern Magistracy of Hong Kong recently found former Hong Kong civil aviation chief, Albert Lam Kwong-yu, guilty of insider dealing.

On June 4, 2010, Lam, who at the time was an independent non-executive director (“INED”) of Hong Kong Aircraft Engineering Company (“HAECO”), received a call at 3:13 p.m. from HAECO’s Chief Executive Officer about a coming deal in which Cathay Pacific Airways Limited, a substantial shareholder, would sell all its HAECO shares to Swire Pacific Limited (“Swire”), which would then, in accordance with Hong Kong listing rules, trigger a general offer by Swire for all shares in HAECO.

Shortly thereafter, Lam, who was lunching at the Hong Kong Club, Hong Kong’s oldest exclusive members’ only social club, walked to a friend’s office nearby, logged into an internet account, and purchased 4,000 shares of HAECO. Lam did not have enough cash in his securities account and paid for the shares by electronically drawing down and transferring HK$340,000 (about US$44,000) from an overdraft account. These actions were completed within the 47 minutes of his call with the CEO, ensuring that Lam’s trade was completed before Hong Kong market close at 4:00 p.m.

Upon announcement of the deal on June 7, 2010, HAECO shares were valued at about 25% higher than the then market price. Lam sold the shares shortly after, netting a profit of around US$10,000.

At trial, Lam pleaded not guilty, claiming that he had “forgotten” he was an INED of HAECO at the time due to intoxication. In his defense, Lam brought fact witnesses to testify exactly what he drank at this luncheon – specifically, a gin and tonic, two glasses of white wine, and two glasses of red wine. The director of the Hong Kong Poison Information Centre also appeared to provide expert testimony on the impact of alcohol on Lam’s judgment.

Additionally, Lam claimed that he did not intend to make a profit on his trade, a statutory defense in Hong Kong. Lam testified that he self-reported the act to the CEO the next day, and pledged to donate his profit to charity. He also resigned as INED on June 6, 2010, before the deal was announced.

Lam was sentenced to five months’ imprisonment (suspended for two years), fined HK$50,000 (~US$6,450), and ordered to pay the Securities and Futures Commission’s costs – a pretty hefty fine for a few drinks too many.