KWAN WING KIM v. CHEUNG KA KIM CURTIS

HCMP4639/98

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H E A D N O T E

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Securities and Futures Commission Ordinance, Cap.24 - inquiry by court under section 33(13) - non-appearance of Defendant at hearing - onus on Applicant to establish a prima facie case

Remedies under section 33(13) - discretion - how exercised

Non-appearance of Defendant - whether indemnity costs appropriate

HCMP 4639/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANCEOUS PROCEEDINGS NO.4639 OF 1998

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REASONS FOR JUDGMENT

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1. This is an originating notice of motion for an inquiry into whether Cheung Ka Kim Curtis ("the Defendant") without reasonable excuse failed to comply with a notice dated 4 August 1998 ("the Notice") issued under section 33(4) of the Securities and Futures Commission Ordinance, Cap.24 ("the Ordinance") and for relief pursuant to section 33(13) of Cap.24.

Background

2. In February 1998, solicitors acting in the estate of the late Ip Sing Chak ("the Deceased") reported possible irregularities in relation to an investment fund by the name of Kwong Fai 88 Investment Program ("the KF88 Program") in which Mr Ip had invested. The Program had been promoted and investments solicited in Hong Kong, the relevant persons being the Defendant and one Dexter Yeh. A number of documents were sent to the SFC in connection with the complaint. The brochure of the KF88 Program revealed that it is an investment Program through which clients' funds are invested in various currencies, precious metals, commodities and indices including those that can only be traded as commodity futures contracts on a commodity exchange. A company known as Cornucopia International Trading Inc. ("CITI") was the investment consultant of the Program. Funds to be invested had to be remitted in US dollars to Barclays Bank New York Branch, ABA No.026002574, the receiving bank for the account of Kwong Fai Limited ("KFL"), Account No.1656176 at Barclays Bank plc. in Nassau, Bahamas, the beneficiary account.

3. KFL was the investment manager and CITI as investment consultant levied a charge equal to 5% of the invested capital as well as an incentive bonus equal to 50% of the new gross profit. The Defendant appeared to have signed documents on behalf of KFL whilst Mr Yeh had signed on behalf of CITI. CITI had a correspondence address in Chatham Road and inquiries conducted by the SFC revealed neither CITI, nor KFL, nor the KF88 Program, nor Mr Yeh, nor the Defendant was registered in any capacity with the SFC under any of the relevant ordinances as defined in section 2 of the Ordinance. The investigation undertaken by the SFC relates to possible offences under :

(i) section 4 of the Protection of Investors Ordinance, Cap.335; and/or

(ii) section 49 of the Securities Ordinance, Cap.333 ("the SO"); and/or

(iii) section 143 of the SO; and/or

(iv) section 27 of the Commodities Trading Ordinance, Cap.250.

The Notice

4. The Notice was issued by the Plaintiff, an employee of the Securities and Futures Commission ("the SFC') and an investigator under section 33(1) of the Ordinance. It required the Defendant to produce to the Plaintiff on or before 6 August 1998 the following records and/or documents in the possession of the Defendant or under his control :

(a) records of all remittances received from [CITI], Dexter Yeh, Sze Chit Hay and/or persons referred to [the Defendant] via or by [CITI], Dexter Yeh and/or Sze Chit Hay, by either [the Defendant] or [KFL] directly or indirectly, since 1 April 1996;

(b) records of all payments made to [CITI], Dexter Yeh, Sze Chit Hay and/or persons referred to [the Defendant] via [CITI], Dexter Yeh and/or Sze Chit Hay, by either [the Defendant] or [KFL], since 1 April 1996;

(c) details of all bank accounts used for the purpose of receiving funds from and remitting funds to [CITI], Dexter Yeh, Sze Chit Hay and/or persons referred to [the Defendant] via [CITI], Dexter Yeh and/or Sze Chit Hay, by either [the Defendant] or [KFL], since 1 April 1996;

(d) records and documents evidencing the use to which the remittances at (a) were put;

(e) in the event that funds mentioned at (a) were invested via or with any Funds, brokers or investment advisers, details of those trades including both individual contract notes and statements of account;

(f) records and details of all parties on whose behalf [the Defendant] or [KFL] have received funds;

(g) all records and documents recording and monitoring any investments made for or on behalf of third parties by either [the Defendant] or [KFL];

(h) a list of brokerage house(s) through which any such investments were executed since 1 April 1996;

(i) records of all transactions conducted via the brokerage houses listed at (h) by [the Defendant], either personally or for and on behalf of [KFL], on behalf of any persons, corporations or Funds.

5. Broadly speaking, the documents sought fall into two categories : the first (comprising items (a) to (e)) relate to the movement of funds between CITI and the Defendant and KFL. The second category (comprising items (f) to (i)) relate to the kinds of investment made by the Defendant or KFL. At the date of the Notice, the Defendant was legally represented and the Notice was served upon his then solicitors. The Defendant has not produced any documents in response to the Notice. All he has done is to provide limited information at an interview relating to two bank accounts.

6. After the originating notice of motion was issued, the Defendant took out a summons for the release of copies of certain of the documents that had been seized under a search warrant on premises occupied by the Defendant. Directions were given on 15 October for the further conduct of both the originating notice of motion and the Defendant's summons and the filing of evidence by both parties. The Defendant's summons came on for hearing on 29 October. He was represented by solicitors. The court did not have to proceed to a determination of the Defendant's summons as the SFC decided, on a voluntary basis, to provide copies of the documents sought. Further directions were then given in respect of the hearing of the originating notice of motion. The deponents were ordered to attend for cross-examination. The Defendant was directed to file his affidavit in opposition on or before 9 November 1998.

7. No affidavit was filed by the Defendant on 9 November. The application of the Defendant's solicitors to cease to act came on for hearing on 10 November. In fact, at the hearing of the Defendant's summons on 29 October, some intimation that this might happen had been given to the court. Since the hearing on 29 October, the Defendant's former solicitors did eventually speak to the Defendant who was told that he had to attend for cross-examination at this hearing. The Defendant's former solicitors have not been able to obtain instructions from the Defendant who told them that he no longer wanted them to represent him. An order was accordingly made to the effect that the Defendant's former solicitors cease to act for him.

8. The Defendant did not appear at the hearing. He has made no attempt to seek an adjournment or otherwise explain why he could not be present. I see no reason why the recalcitrance of the Defendant should be allowed to frustrate the Plaintiff's application. No purpose would be served in adjourning these proceedings when the Defendant has had ample notice of the hearing and his reasons for not attending are not known. The necessary inquiry must proceed in the Defendant's absence and without his assistance.

9. As the Defendant is not present, he is obviously not able to proffer any excuse for not complying with the Notice. Nevertheless, it is not sufficient for the Plaintiff simply to point to the Notice and the Defendant's failure to provide documents sought in the Notice. The burden is upon the Plaintiff to establish to the satisfaction of the court that the documents and/or records sought in the Notice are documents that, on a balance of probabilities, exist and are in the Defendant's possession or under his control.

The evidence

10. The Defendant's relationship with KFL

11. There is a letter dated 23 July 1998 from Oceanic Bank & Trust Limited addressed to the Defendant. It reads as follows :

"Mr Curtis Cheung
1009 Wing On House
71 Des Voeux Road,
Central Hong Kong

Dear Mr Cheung:

Re : Kwong Fai Ltd.

Attached is Oceanic's standard client package with résumés and our current fee schedule for your information.

...........

Loran Sturrup, who was the employee in charge of your account, has resigned from the company effective July 31st, 1998. Anita Bain, our department head in charge of Trusts and Corporate Services will oversee your company.

The current status of your company is as follows:

Directors:	Falkirk S.A. and Pantiles S.A.
Shareholder:	Rawson Nominees Limited (in trust for Curtis Cheung)
Incorporated:	July 15, 1992; Registration #10,133B (copy of Certificate of Incorporation attached)
Bank Account:	Barclays Bank, Bay Street #1656176
Brokerage Account:	Prudential Securities, Coral Gables, Florida #0ZG 965896-91

......

Please contact me personally with respect to your company and its accounts until I have briefed Mrs Anita Bain on your files.

......

Yours sincerely,

OCEANIC BANK AND TRUST LIMITED" (emphasis added)

This letter was obtained from the Defendant's accountant. It acknowledges in no uncertain terms the relationship between KFL and the Defendant. The Defendant, via Rawson Nominees Ltd., was the only shareholder and thus the only beneficial owner of KFL. For practical purposes therefore the Defendant must be treated as having control over KFL.

12. Movement of funds

13. It would appear that an investor in the KF88 Program was required to enter into an Investment Trust Agreement ("ITA"). Under the terms of the ITA, the investor was required to remit the amount to be invested to the bank account of KFL in Bahamas to be used exclusively "for participation into the [KF88 Program]". The funds were to be remitted to KFL as follows :

"Receiving Bank :	BARCLAYS BANK NY BRANCH ABA NO.026002574 75 WALL STREET NY, U.S.A.        (for further credit to)
Beneficiary Account :	KWONG FAI LTD. A/C NO.1656176 BARCLAYS BANK PLC BAY STREET BRANCH NASSAU, BAHAMAS."

It is to be noted that the Beneficiary Account specified in the ITA is indeed KFL's account identified in Oceanic's letter. The ITA contained references to KFL being "the investment manager". Each of the three ITAs in evidence concerning individual investors (i.e. the Deceased, Ng Chi Kuen, Anthony, and Kong Tseung Him) were signed by the Defendant on behalf of KFL. There is also an ITA in which CITI was itself the investor, the investment manager being KFL without there being any investment consultant. This ITA with CITI was signed by the Defendant on behalf of the investment manager.

14. It would appear from letters sent from KFL to CITI which were signed by the Defendant that upon receiving funds from CITI for and on behalf of a particular investor, CITI would receive daily reports on the progress of that investment program from KFL. There are two such letters in evidence : one relating to Kong Tseung Him dated 4 August 1997 and another relating to Madam Tai Yip Sau Ying dated 3 July 1997. Information relating to the investment of the relevant investor was provided by CITI to that investor, initially on weekly basis and subsequently, from February 1997 onwards, on a monthly basis. A number of such reports relating to the Deceased are in evidence.

15. In relation to the claim made by the Deceased's estate which brought about the present investigation, a Stakeholder's Agreement was entered into on 6 March 1998 between D.M. Chan & Co., the Defendant's accountant as stakeholder and KFL. This document was signed by the Defendant for and on behalf of KFL which was described in the stakeholder's agreement as the "investment manager". The first recital is revealing : after referring to the ITA between CITI and KFL, it recited that KFL obtained the investment fund from CITI or CITI's clients for participation in the KF88 Program.

16. The last category of relevant documents consist of copies of cheques signed by the Defendant on behalf of Sociedade de Consultadoria Financeira Kwong Fai Limitada in favour of individual investors and receipts issued by the recipients.

17. Interviews

18. Apart from the documentary evidence referred to above, there are transcripts of four interviews that the Defendant attended at the SFC. These interviews were inconclusive on a number of issues largely because the Defendant's answers were either unclear or contradicted answers given at one or other of those interviews. For the purposes of the present inquiry, it is not necessary to rely upon the answers given by the Defendant at any of these interviews.

19. Conclusion

20. In my judgment, the documents establish that :

(i) the Defendant or KFL has received remittances from CITI or investors referred by CITI which were to be used for participation in the KF88 Program;

(ii) KFL was the investment manager of that Program;

(iii) reports on the progress of investments were made by the Defendant or KFL on a periodic basis and prima facie this suggests that funds received were invested;

(iv) the Defendant or KFL has made payments (by way of cheques) to investors in the KF88 Program;

(v) the Defendant is the beneficial owner of KFL and is therefore in a position to exercise control over KFL.

The Plaintiff has established a strong prima facie case. I am satisfied that the documents sought in the Notice are categories of documents that should exist and that they are in the Defendant's possession or under his control.

The remedy

21. Section 33(13) of the Ordinance provides that :

" If any person, without reasonable excuse, fails to do anything which he is required to do under subsection (4), the investigator may certify the failure to the High Court and the High Court may thereupon inquire into the case and-

(a) order such person to comply with the requirement within such period as may be fixed by the High Court; or

(b) if the High Court is satisfied that such person has failed without reasonable excuse to comply with such requirement, punish him in the same manner as if he had been guilty of contempt of court."

22. It is open to the court to proceed under paragraph (b) of section 33(13) if it is satisfied that the Defendant has failed without reasonable excuse to comply with the Notice. Suffice to say that no such excuse is discernible either from the documents before the court or the transcripts of the interviews and the Defendant has chosen not to file any evidence to explain his non-compliance. Nevertheless to punish a person as if he had been guilty of contempt of court is a serious matter and the court would normally be reluctant to make any such order against a defendant in his absence when the reason for his absence is not known.

23. A question arises as to whether the remedies in paragraphs (a) and (b) of section 33(13) are cumulative or alternative. As it is not strictly necessary to resolve this question now, I will reserve it and for present purposes proceed on the assumption that they are alternative remedies. In this event, a relevant (if not the relevant) consideration in exercising the court's discretion is the remedy which would more effectively advance the public interest. Since the discharge of the SFC's statutory function is best advanced by putting it in a position of furthering its investigations, I have little hesitation in concluding that from the public interest perspective, punishment of the Defendant must be second best. That being the case, I will order that the Defendant do comply with the Notice within 14 days of the service of the order on him.

24. Contempt proceedings may of course still arise under the Rules of the High Court rather than under para.(b) of section 33(13) of the Ordinance if after having been served with the Notice the Defendant still fails to comply with the court's order.

25. There is to be liberty to apply in case difficulties are encountered in effecting personal service of the order on the Defendant.

Costs

26. Mr Mok sought costs on an indemnity basis. Such an order was made in Jessie Wong Wing Yee v. Real Grant Limited, 1996, MP No.1814. Although the facts are different, the following passage from the judgment of Rogers J. (at 5T-6F) is particularly pertinent :

"... the requirement to comply with notices of the SFC under section 33 is a very important requirement. Those upon whom such notices are served must be in no doubt that they must be complied with. If those upon whom notices are served were to get the impression that they may be ignored with impunity, or expect merely a slight rap over the knuckles when eventually they were forced to comply there would considerable mischief. They must be disabused of that. It is my view that this court in appropriate cases must and should always impose a severe penalty which will bring home to those the importance with which the court regards this."

27. The Defendant has known since 15 October of the hearing. He has been advised by a very experienced firm which only ceased to act for him a few days prior to the hearing. The Defendant was informed by his former solicitors of the order made on 29 October that he attend for cross-examination. Not only has he not appeared, he has not attempted to communicate with either the court or the SFC prior to the hearing as to why he is not able to be present. A person who is made a party to proceedings under section 33(13) who has had adequate notice of the hearing may not ignore such proceedings with impunity. If the rule of law is to be upheld, such seemingly defiant conduct must be discouraged. For that reason, an award of indemnity costs is plainly appropriate. Accordingly, I will award indemnity costs against the Defendant, such costs to extend to the costs of the call-over hearing held on 15 October 1998.