HKSAR v. TSUI CHI KIN AND ANOTHER

CACC 102/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 102 OF 2007

(ON APPEAL FROM DCCC NO. 1052 OF 2005)

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REASONS FOR JUDGMENT

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Saunders J (giving the reasons for judgment of the Court):

1.  The Applicants sought leave to appeal against their conviction, on 23 March 2007, by District Judge A Chan, on one count of conspiracy to defraud, contrary to common law and s 159C Crimes Ordinance Cap 200.  In addition, the 1st Applicant sought leave to appeal against the sentence imposed upon that conviction.  On 29 August 2008, we dismissed the applications and said we would provide reasons later.  This we now do.

2.  The circumstances of the charge related to the Applicants’ involvement in schemes promoted by a company called Vantage International Development Ltd, (Vantage).  The scheme in which the Applicants were involved was described in the trial as a “money planting scheme”.  The judge found that the operation of Vantage was fraudulent, and that both Applicants knew that it was dishonest.  He convicted both.

1st Applicant’s grounds:

3.  Three grounds were advanced on the 1st Applicant’s behalf.

4.  The first was that instead of applying the test of dishonesty as the appropriate mental element in the charge, the judge applied a test of imprudence.  The second was that the judge was wrong to find that Vantage would inevitably collapse.  The third was that the judge was wrong to find that Vantage was not engaged in any other business.

The failure of Vantage was inevitable:

5.  It is convenient to deal first with the judge’s finding that the failure of Vantage was inevitable.

6.  The judge examined the evidence with care and was quite entitled to come to the view that Vantage would inevitably collapse.

7.  He was so entitled upon the basis of his plainly correct findings that the company had no business or income, other than the plans, and that the massive returns promised to investors, between 226% and 5,858%, on an annualised basis, required considerable future income, any source for which was absent. 

8.  The argument made by Ms Tsang that it was not until and unless Vantage could recruit sufficient new members to get the necessary funds for payouts at the next stage of the plan, that it would advance to the next stage, fails to recognise the obligation to make payouts to existing members.  In order to obtain funds to meet the obligation to existing members, new members must always be recruited and the scheme advanced further.  Collapse was consequently inevitable. 

9.  The scheme was identical to that in HKSAR v Shek Fu Wing CACC 51 of 2004, described in that case in the following way:

“….scheme required participants to make cash investments in various plans in return for which they were promised handsome rewards as the plans grew. …..The growth of the plans depended on the number of participants which the existing participants could recruit.  These plans, however, were bound to fail as the promised rewards far exceeded the income received from them as there was no investment of income from the plans and there was no other income received by the companies which had been set up solely for the purpose of operating the fraud.”

Those words apply equally in the present case.

10.  The assertion that Vantage could delay advancement and payment to members indefinitely until there were adequate funds, (based on the issuance of invoices), thereby avoiding collapse, was quite unjustified on the evidence.

11.  This ground therefore failed.

Whether Vantage was engaged in any other business:

12.  The evidence that Vantage was not engaged in any other business was overwhelming.  A police search of the company premises showed that there were no documentary records at Vantage that indicated that the company had been engaged in any other business.  In evidence the 1st Applicant did not produce any documents demonstrating any other business.

13.  The 1st Applicant was obliged to accept the evidence that Vantage did not own a pig farm or slaughterhouse in the Mainland, as he had asserted to prospective customers of the scheme.  That it might at some stage in the future be given a preferential placement in a company, involved in pig farms or slaughterhouses in the Mainland, to be listed on the Australian stock market, did not, in any sense, constitute a business operated by Vantage.

14.  The true relationship of Vantage with the suppliers and manufacturers of products allegedly sold by Vantage was demonstrated by the evidence which established that the claim of ownership and manufacture of those products by Vantage was false.  The businesses manufacturing goods were not owned by Vantage.  Vantage was merely a minor purchaser of goods.

15.  The assertion that a business was constituted by the sale of green products, air pure refiners, aromatic essential oils, pillows, health food, drinks and supplements did not assist.  The products allegedly “sold” were nothing more than rewards to people who joined, and did not, by themselves, constitute an independent business by Vantage.  The sums allegedly “paid” for those items so exceeded any realistic view of their market price that it cannot be argued that the distribution of those items consequent upon persons joining the scheme, constituted a “business” on the part of Vantage.

The test applied:

16.  The submission that the wrong test was applied was dependent upon the fact that the judge accepted the evidence of an expert witness, a Treasury Accountant in the Commercial Crime Bureau of the Hong Kong Police Force, who in the course of giving evidence as to the viability of the scheme, gave evidence that it was not prudent for Vantage to run its plans.  The expert evidence of the Treasury Accountant established that within a relatively short space of time impossibly substantial sums of money were required to keep the scheme running.

17.  It is plain as a proposition of law, that to support a charge of conspiracy to defraud, dishonesty is an essential mental element, and that nothing short of dishonesty will suffice.  Mere imprudence is not sufficient.

18.  It is however, quite plain from the Reasons for Verdict that the judge did not base his conclusion that the plans on offer by Vantage were dishonest solely upon the view of the expert that it was not prudent to run the plans.  He clearly went on to consider the whole of the circumstances of the plans, coming to the inevitable conclusion, on the facts, that the plans were doomed to fail.  In particular he had regard to the fact that a cash inflow from sources other than the mere sale of the plan invoices would be required in order to fund the plan and to meet the high rates of return offered to members.

19.  He reached this conclusion in the light of unassailable evidence that Vantage had no other business at all, other than the schemes promoted, and that consequently there would be insufficient income to meet the obligations to those who joined the schemes.

20.  In the light of these matters, and the judge’s findings of fact that assertions made to prospective participants, by the 1st Applicant, of ownership by Vantage of a mainland pig farm, slaughterhouse, and breeding technology, were false, the judge was perfectly entitled to come to the conclusion that the 1st Applicant knew that the schemes were dishonest.

21.  The judge did not apply a test of lack of prudence, but the correct test of dishonesty, in terms of R v Ghosh [1982] 3 WLR 110.

22.  For these reasons the application by the 1st Applicant for leave to appeal against conviction was dismissed

2nd Applicant’s grounds:

23.  Mr Lam relied upon two grounds in the appeal.  First, he submitted that a tape-recorded conversation with the 2nd Applicant, made by an undercover police officer, was adduced to prove the truth of what was said by the 2nd Applicant in the conversation, and was accordingly inadmissible as hearsay.  He submitted that it was wrongly relied upon by the judge in assessing whether 2nd Applicant was dishonest.  Second, he contended that without the evidence from the tape recording there was insufficient evidence upon which the inference of dishonesty on the part of 2nd Applicant could be drawn.

The tape recording:

24.  This ground of appeal was fundamentally misconceived.  The application of the hearsay rules depends upon how a statement is being used to prove a fact in issue: see Archbold Hong Kong 2009, para 11-3.  The prosecution may seek to adduce an out-of-court statement made by a defendant for the purpose of using that statement to incriminate a defendant or to undermine credit.  The jury, or a judge in a trial by judge alone, as the tribunal of fact, is entitled to decide what parts of the evidence are accepted or rejected and what weight is attached to those parts that are accepted.

25.  An essential part of the case for the prosecution was to establish that the 2nd Applicant was a part of the scheme operated by Vantage.  In order to establish that the 2nd Applicant was part of the scheme, the prosecution sought to adduce in evidence the tape-recorded conversation between the 2nd Applicant and the undercover police officer.  In the conversation the 2nd Applicant explained the system operated by Vantage, plainly with a view to recruiting the undercover police officer to the scheme, thereby demonstrating her involvement in the scheme.  Mr Lam correctly described the conversation between the police officer and the 2nd Applicant as the performance of a sales pitch.

26.  In so far as the statements made on the audio tape were representations in order to induce investment, the evidence was not adduced to prove the truth of what was said, but to establish the very representations that formed the basis of the charge. The audio tape was plainly admissible as part of the res gestae.

27.  In so far as the statements on the audiotape contained assertions by the 2nd Applicant which raised inferences that she knew the scheme was dishonest, those statements constituted admissions against interest, and were admissible for that reason, as an exception to the hearsay rule.

28.  No complaint can be made by the 2nd Applicant as to the use of the tape recording by the judge to find admissions of knowledge on her part.  No objection was taken to the admissibility of the audio tape at trial.  None could properly have been taken.  The evidence was properly admitted, and the judge was entitled to rely upon it, to find both that the 2nd Applicant was a participant in the scheme, and that she knew it was dishonest.

29.  This ground failed.

Was the evidence sufficient to draw the inference of dishonesty on the part of 2nd Applicant?

30.  The judge correctly recognised that in order to convict the 2nd Applicant the burden lay upon the prosecution to establish that she had been dishonest in terms of the test in R v Ghosh.  Having reviewed the evidence, including in particular the conversations recorded on the tape recording, the judge was satisfied as to the 2nd Applicant’s dishonesty, and convicted her on the charge.

31.  Mr Lam submitted that the evidence did not go further than showing that the 2nd Applicant was anything other than an enthusiastic team head under the 1st Applicant and that the inference was equally open that, as a team head, making sales pitches, while she knew how the system worked, she did not know of its dishonesty.  Mr Lam pointed out that the three remaining accused, also team heads like 2nd Applicant, but in respect of whom there were no tape-recorded conversations, were acquitted.

32.  The argument was entirely unsupported by appropriate reference to the relevant passages in the transcript.  It was necessary therefore to adjourn the appeal to enable counsel to put before us proper information as to the matters relied upon.  This having been done we heard counsel further.

33.  In reaching his conclusion, the judge referred to three particular assertions made by 2nd Applicant in the course of the tape-recorded conversation to substantiate his finding that 2nd Applicant knew that the representations she was making were in fact false.  They were that:

(a)  the 2nd Applicant had been working along with the 1st Applicant since the inception of Vantage;

(b)  on a number of occasions she asserted that she was at the core of the company; and

(c)  she exaggerated Vantage’s turnover, capital, and financial support.

34.  The judge referred also to the 2nd Applicant’s enthusiasm in promoting the plans on offer, and that as an insurance agent she was familiar with charts, tables, figures and concepts such as a return on investment.  He noted too an occasion when the 2nd Applicant was extremely reluctant to show the terms and conditions of the plans to PW19, Wong Wai Fong, the undercover police officer, saying that that could only be done after joining the scheme.

35.  With that background, the inference that the 2nd Applicant knew the scheme was fraudulent is compelling.  That is particularly so when the fact that she gave no evidence meant that there was nothing to undermine, contradict or explain the evidence put before the judge in the prosecution case: see Li Defan v HKSAR (2002) 5 HKCFAR 320.

36.  The 2nd Applicant’s application for leave to appeal failed.

The sentence application:

37.  The judge sentenced the 1st Applicant to 4 years imprisonment.  The judge referred to the decision in HKSAR v Shek Fu Wing, DCCC440/2003 in which, for an identical scheme, a term of 4 years imprisonment was imposed.

38.  The 1st Applicant, in the written submissions prepared for him, conceded that a starting point of 4 years imprisonment was proper for a London Gold fraud.  The argument made for the 1st Applicant was that the scheme in which he was involved constituted a pyramid selling scheme for which there is a maximum sentence of 3 years imprisonment.  We rejected that contention.  This was not a pyramid selling scheme, but a money planting or “ponzi” scheme, identical to that in Shek Fu Wing.

39.  The factors to which the court should have regard in considering the sentence in fraud cases such as these are set out in HKSAR v Tsoi Shu & Ors [2005] 1 HKC 51.  It is not necessary to repeat them here. 

40.  It is sufficient to note that the 1st Applicant was the mastermind of the scheme, which lasted for some eight months.  It was described correctly by the judge as being a “well-planned and carefully executed operation”.  More than $3 million went into the bank accounts of Vantage.  These accounts were controlled by the 1st Applicant.  There was a lack of proper business records and ledgers and consequently neither the full amount received as a result of the fraud, nor the exact number of members who suffered losses could be determined.

41.  The judge correctly noted that the victims who testified were mostly housewives in their forties and fifties, and were of limited education.  This is a type of fraud which preys particularly on the inexperienced and gullible with limited education.

42.  The sentence of 4 years imprisonment, for a fraud of this nature was appropriate.

43.  For these reasons, the applications of the 1st and 2^nd Applicants were dismissed.