HKSAR v. GONG BEIYING AND ANOTHER

DCCC 1234/2004 (Part A)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 1234 OF 2004 (Part A)

--------------------

--------------------

________________

VERDICT

________________

Charges

1. As a result of Angel Field Ltd (“Angel Field”) taking over D2’s company Ying Wing Holdings Ltd (“Ying Wing”), the two Defendants were charged as follows:

 1st Charge (D1 and D2):  Between the 1st October 2001 and 31st May 2003, with Conspiring with Mr CHAU Ching-ngai (“Chau”), Ms MO Yuk-ping (“Mo”, Chau’s wife) and Mr CHEUNG Chun-ying Jango (PW1) to defraud Ying Wing’s minority shareholders, officers of the Hong Kong Stock Exchange (“SEHK”), officers of the Securities and Futures Commission (“SFC”), and members of Ying Wing’s Independent Board Committee (“IBC”), contrary to common law and s.159C(6) of the Crimes Ordinance Cap.200,

2nd Charge (D1): Theft, for which I have previously found no case to answer, and,

3rd Charge (D1):  On the 4th April 2003, with False accounting, by falsifying an application by Shanghai Land Holdings Ltd for payment by making a false entry showing that $53M was to be paid to Great Center Ltd for materials used for a project on Wu Zhong Road in mainland China, contrary to s.19(1)(a) of the Theft Ordinance Cap.210.

Introduction

2. I will provide a short summary of the allegations in the 1st Charge by using the following 4 paragraphs:

(1)   As to who were behind which companies: Chau, Mo and D1 were behind imGO, Angel Field, Shanghai Land, Shanghai Merchants, Park Well (a subsidiary of D2’s Ying Wing before the takeover by Angel Field), Great Hero, Great Center, Eastar, Win Victory, Wisevest Profits, Shun Loong Finance, Modern Shine, Smartway, and Shanghai Finance.

D2, assisted by PW1, was behind Ying Wing & its subsidiary Park Well (before Angel Field took over), Feng Lin, and Show Good. 

(2)   D1 et al and D2 et al, against stock market rules, made an illegal agreement (the “secret agreement”) whereby D1 et al, in form and appearing to outsiders, were buying D2’s Ying Wing for $61.8M in toto including its subsidiary Park Well which was operating a fabric business, but in substance D1 et al were only buying Ying Wing’s listed status (or “shell”) while leaving behind its fabric business for D2 to continue to operate under Park Well, and one year later, for D1 et al to “sell back” the business to D2 so that eventually all would look regular to the outside world.

(3)   Ying Wing was worth much more than $61.8M if the fabric business had been included.  But D1, D2 and their co-conspirators including PW1only informed Ying Wing’s minority shareholders of the understated value of $61.8M, putting the minority shareholders and the market regulators in the dark.  The minority shareholders blindly sold their shares to D1 et al at only $0.418 per share pursuant to a Mandatory General Offer issued by D1 et al.  The minority shareholders sold up, and Angel Field took over Ying Wing completely.  D1 et al then turned Ying Wing into Shanghai Merchants, and D1 became one of its directors.

(4)   One year after the takeover, pursuant to the secret agreement, D1 et al needed to officially “sell” the fabric business to D2, and this must be done in a way which appeared legitimate.  Therefore, via the use of veil company names (the British Virgin Islands companies, or “BVI companies”) and veiled bank transfers, the following was done:

(a)   In order to avoid declaration and detection, D1 et al artificiallymade the sale price to be below the  disclosable 15% of Shanghai Merchants total net asset value (“NAV”).  To enable this to be done, Angel Field injected $50M into Shanghai Merchants by the latter’s artificial issue of shares, in order to boost its assets to $106.7M, and at the same time Shanghai Merchants artificially devalued the fabric business from $45M to RMB 15M (HKD 14.5M).  Hence the percentage was now only 13.25% of Shanghai Merchant’s NAV.

(b)   D1 et al provided money ($14.13M) to D2’s veil company Show Good for the “buy back” of the business, appearing to an outsider that D2’s Show Good had paid money and “bought back” the business from D1’s subsidiary Park Well.  But the money eventually went back to D1 et al themselves.

(c)   After the above had been done, D1 et al now owned Shanghai Merchants (the successor of D2’s Ying Wing) officially free of D2’s business, and D2 officially “bought” a business which he had never lost.  In the meantime, following the acquisition of the whole of Ying Wing, D1 et al had successfully defrauded Ying Wing’s minority shareholders and the regulators by hiding the value of the fabric business, i.e. successfully grossly underpaying the minority shareholders a total of between $30M and $49M, depending on which expert’s view one adopts (PW35 and PW34).

3. As to the 3rd Charge, a summary of allegations is as follows:

(1)   On the 10th February 2003 (one year after the takeover) D1 et al  bought Eastar, hence owned land on Wu Zhong Road in Shanghai.

(2)   On the 4th April 2003 Great Center (Mo’s puppet PW25) via an “Indent Contract” purported to buy decoration materials from suppliers for Eastar to furnish the Wu Zhong Road project, but the contract was a sham, because the materials were neither ordered nor bought, while the money ($53.1M) was part of the veiled bank transfers in the overall scheme to further the conspiracy.

Prosecution’s evidence

4. The parties admitted formal and official matters such as the corporate status and structure of the relevant companies, who their directors were at the material time, for example listed company imGO had Chau as Chairman, Mo as General Manager, and D1 as Executive Director, and the three remained in those positions when imGO became Shanghai Land, that Angel Field had Chau and Mo as directors, Great Hero and Eastar were Shanghai Land’s wholly owned subsidiaries with D1 and Mo as directors, Shun Loong Finance also had D1 and Mo as directors, while Great Center and Wisevest had a Ms Tao (PW25) and Ms Li (PW28) as sole directors respectively (evidence later showed Ms Tao and Ms Li to be Mo’s friends), Shanghai Finance had Chau and Mo as directors, that Ying Wing was controlled by Feng Lin and D2 was its chairman, and that Ying Wing was engaged in snack food and fabric processing businesses.  Also not in dispute were Angel Field’s acquisition of 74% of Ying Wing’s shares at the material time, the bank transactions including the movement of funds such as illustrated in the two diagrams being Annex A and Annex B to this Verdict which show exactly the same fund flows as the diagrams produced by PW33 at Exh P196 (see Bundle 8 at pages 3322 and 3331), but I will annex to this Verdict Annexes A and B rather than P196 because the former are larger and easier to read.  Further admitted facts proved, inter alia, that both defendants had clear criminal records, and that D1 was in possession of a personal notebook of which one page was tendered as Exh P463(A), the content of which included inter alia figures, witnesses and personalities mentioned in this trial  e.g. TAO Yi-li (PW25), LI Yung (PW28), and Shun Loong Finance (a company on D1’s side).

PW1 was Mr CHEUNG who was D2’s financial controller and accountant of Ying Wing.  He testified under immunity as he was one of the conspirators.  He said that D2 had held 74% of Ying Wing’s shares, and Ying Wing was holding subsidiaries including Park Well which controlled the fabrics factory in Chaoyang in the mainland.  PW1 spoke about the sequence of events beginning from the end of 2000, about D2 wishing to sell Ying Wing’s listed status but not its business, how D2 and he were looking for buyers, how D1 et al held meetings involving PW1 himself and D2, PW1 advising D1 and D2 that a sale of name and not business was “not possible” and had to be done “with great care” because selling a listed company without any business “did not comply with the relevant rules”.  Eventually an agreement was reached whereby: (1) D2 would sell his shareholding in Ying Wing (being 74%) including Park Well and other subsidiaries, (2) but the sale price of $61.8M did not include Ying Wing’s fabric business which D2 would retain, (3) D2 would bear the losses and profits of the fabric business, (4) after one year, D1 et al would “fund D2 to buy back” his own business, i.e. D2 needed not pay for a business which he has never in fact sold off.  Ying Wing when sold had only the fabric business as company business, because the snack food business had already been sold off. 

PW1 continued to testify that D2 remained in control of Park Well and its subsidiaries after Angel Field’s takeover.  Exh P68, P69, P73 and P74 supported this testimony.  As to Show Good, PW1 said its sole director was D2’s clansman Mr Tsoi Chun-to (Exh P85).  From the time Show Good was acquired by Mr Tsoi to its “buying back” Park Well  i.e. the fabric business one year later, it had never carried out any business. The only reason for Show Good’s existence was to “buy back” Park Well.

In order to reassure D2 regarding points (3) and (4) mentioned two paragraphs above, D1 and D2 prepared “secret documents” at D2’s request and “for his protection”. The documents were placed in two separate envelopes.  The first envelope contained a management contract. The eventual “sale and buy back” involved in substance only D2 himself, but D2 could not appear in the document as vendor and buyer at the same time.  Hence while D2 was the signatory for Park Well as vendor, he needed to obtain a clansman Mr CHEN (also see under PW5) as buyer: see Exh P239 Bundle 8 page 3625.  As things turned out one year later, because as we now know D2’s Ying Wing became D1’s Shanghai Merchants which now owned Park Well, PW1 said he knew the wording subsequently became changed from “Park Well selling its subsidiaries to Show Good”, to “Shanghai Merchants selling Park Well and its subsidiaries to Show Good”.  As to the second secret envelope, PW1 said this contained 5 documents facilitating D2’s “buy back” the fabric business one year after the sale of Ying Wing.  Show Good the buyer was set up with PW1’s help at D2’s direction, the sole director of which was Mr Tsoi Chun-to, another of D2’s clansmen.  The 2 sets of secret documents were stored in the offices of solicitors C.K.Mok & Co.  The management contract was retrieved a month after Angel Field had bought Ying Wing.  The second set  of 5 documents was retrieved in May 2003 by PW1, D2’s son Mr Tsoi Chun-hung, Mr Siu Yim-wah (PW26) and Ms Carrie Ng (Shanghai Merchants’ financial controller, PW37).  PW1 and Ms Carrie Ng amended the vendor from “Park Well” to “Shanghai Merchants”, and the company being sold was amended from “Park Well’s subsidiary” to “Park Well” itself, while the buyer remained as Show Good: Exh P253-255, Bundle 9 at pages 3974, 4030, and 4032.  The documents bore the signatures of Mr Tsoi Chun-to and D1, and the sale price was RMB 15M: Bundle 9 page 4030. (Two of the other 3 documents, the Bought & Sold Note and the Instrument of Transfer, were identified by PW24: see below).  As to the last document in the second envelope, the Promissory Note, it purported to show that a Ms Chang Yin would pay RMB 15M to garment company JieNuo in Chaoyang City, but Chang had never owed D2 any money, yet D2 during negotiations with D1 et al insisted to have this document drafted so that D2 could use as proof, in due course, of his “buying back” the fabric business.  (As to more about Ms Chang, please see under PW6, PW21 and PW28).

On the 12th March 2002 Angel Field bought D2’s Feng Lin which held 74% of Ying Wing for $61.8M, after which, pursuant to the takeover rules, Angel Field made a Mandatory General Offer (“MGO”: Exh 430) to Ying Wing’s minority shareholders who were members of the public, offering $0.418 per share.  In the MGO, D2 had approved a “Letter from the Board” (Bundle 26 at page 11577) where it was said that the Offeror (Angel Field) intended that the Ying Wing Group would continue to be engaged in the processing and trading of fabric in the Chinese market upon completion of the Disposal Agreement i.e. after the total acquisition of Ying Wing. But by the time the MGO was published (14th March 2002) Angel Field had already controlled the Ying Wing Group, and so all parties including D1, Chau, Mo, PW1 and D2 had already known and already decided that Ying Wing would not continue with the fabric business, but that it was D2 himself (soon to be out of Ying Wing) would continue the same. 

As to the offer price of shares in the MGO, PW1 explained that this was obtained from dividing Ying Wing’s net asset value (“NAV”) of $61.8M by the number of shares, which yielded $0.331.  The arithmetic formula shows that if the NAV had been higher then the offer price would have been higher. (see also under PW23).  PW1 said he had supplied Ying Wing’s financial data to the two independent financial advisors Hantec and AMS for them to recommend to the minority shareholders as to whether the MGO should be accepted.  As to Ying Wing’s NAV, he had used a valuation certificate Exh 418 (Bundle 25 page 10972, particularly page 10977).

After Shanghai Merchants had “sold” Park Well to Show Good, PW1 was shown Shanghai Merchants’ Minutes of Meeting (Exh P258, Bundle 9 page 4048) recording ratification of the sale, bearing D1’s signature.  Bundle 9 page 4049 shows Shanghai Merchants knew that the sale needed not be declared to the regulators because the price was below 15% of the company’s NAV. 

Finally, PW1 said the secret agreement of selling Ying Wing’s “shell” but not its business, and “buying the business back a year later”, was never disclosed to the regulators SFC and the SEHK, or to Ying Wing’s IBC, or to Ying Wing’s minority shareholders, or to any independent financial or legal advisors. 

PW2 was Mr LO, a partner of Stevenson Wong & Co solicitors, legal advisors to D2 and PW1.  He took instructions from PW1. His firm was responsible for preparing documents relevant to this matter, e.g. sale and purchase agreements, including the internal sale of Ying Wing’s snack food business, and documents such as the MGO which was prepared jointly with lawyers of D1’s side Messrs Preston Gate Ellis.  In court PW2 confirmed many such documents, for example P24 to P43, P429 to P431, which supported PW1’s testimony.  Angel Field’s side came to his offices only 2 or 3 times, but each time it was represented by D1.  He was not aware that the sale of Ying Wing to Angel Field was only the former’s listing status excluding its fabric business.

PW3 was Mr MAK, legal executive of C.K.Mok & Co solicitors who provided custody for the “secret documents”.  PW3 said he had received direct instructions from D1.

PW4 was Ms NGAI who in 2002 and 2003 was Manager at Secretarial Services Ltd which set up Show Good for Mr Tsoi Chun-to.  Her evidence supported PW1’s testimony.  She explained the official company documents Exh P57 to P94.  The effect of her undisputed testimony was: (1) in 1998 D2 was director when Ying Wing was incorporated, (2) Ying Wing subsequently became Shanghai Merchants, (3) at least to late June 2003 (long after Ying Wing had been sold to D1’s side) D2 was still involved in Park Well (see Exh 69, Bundle 6 page 2447), (4) Tsoi Chun-to became Show Good’s sole director on incorporation at about the same time as the “secret documents” were prepared, i.e. 16th January 2002 (Exh P78).

PW5 was Ms CHAM who in 2002 and 2003 was Accounting Manager at Deloittes who audited Shanghai Merchants’ books before  production of its Annual Report 2002.  She explained official documents including the relevant Annual Reports of Ying Wing and Shanghai Merchants, the books of which Deloittes had audited before the Reports were published, data coming from Ms Carrie Ng who was the financial controller for Shanghai Merchants.  However PW5 said nobody had shown her Exh P239 namely the agreement that Park Well’s profits and losses were to be borne by a Mr Chen Zhou-hai and not by Shanghai Merchants, whereas under normal situations this would have been shown to her so she could accurately audit the books.

PW6 was Ms TSE, company secretary of Shanghai Land and Shanghai Merchants.  She said that regarding company transactions and the calling up of various company directors to come to the office to sign documents, she had taken intructions mostly from D1, although sometimes also from Mo’s secretary Shirley Chung. PW6 spoke to a list of BVI companies whose files were kept in the filing room.  Champion Hope (director Siu Yim-wah), China Expert (director Chang Yin), Great Center (director Tao Li-yi), Modern Shine (director also Siu Yim-wah), Smartway Trading (director Yu Ling), and Wisevest Profits (director Li Yung), were all connected to Mo. 

PW6 said that non-executive director Mr Gordon Ng (PW14) had queried why the sudden and massive devaluation by Shanghai Merchants of the fabric business from RMB 45M to RMB 1M during an Audit Committee Meeting on 7th April 2003 where D1 was present  (P249: Bundle 9 page 3942).  But more importantly, Mr Gordon Ng had refused to sign the Resolution (P257) ratifying the sale by Shanghai Merchants of Park Well to Show Good for a mere RMB 15M, as a result of which D1 asked PW6 “what other method could be used to record this transaction”, and this had led to PW6 fabricating a telephone conference whose minutes recording ratification was then signed by Mo and D1 (P258: Bundle 9 page 4048) therefore by-passing Mr Ng.  The minutes of the fabricated tele-conference were backdated to 12th April 2003 in order to match the “sale date” as shown in what PW1 refers to as the “secret documents” i.e. P253, P254 and P255 which had been created as long as one year before.

PW6 continued to testify that from working with D1, she knew D1 understood Cantonese and English, and had even replied emails in English.  As to D1’s role in Shanghai Merchants, this included decision-making regarding the company’s transactions, its direction, and its operations.  D1 gave instructions to PW6 directly.  The company’s hierarchy was that both financial controller Carrie Ng and PW6 were under D1.

PW7 was Shanghai Merchant’s company secretarial officer Ms LAW, a subordinate of PW6.  The significance of her testimony was in relation to Exh P257 and P258 (see under PW6).  The chronology and what happened about these documents were as stated by PW6.

PW8 Mr YEUNG was Shanghai Land’s Manager in capital marketing since August 2000.  From September 2003 onwards he took instructions directly from D1.  He said D1’s Cantonese was fluent.  Exh P307 (Bundle 10 page 4427) was about Shanghai Land’s “Wu Zhong Road project” but the work was in the mainland and he and Shanghai Land had nothing to do with it.  Regarding the sale of the fabric business by Shanghai Merchants to Show Good, he advised financial controller Ms Carrie Ng that to avoid having to issue an announcement and a circular to the SEHK and having to obtain approval from shareholders, the transaction must be less than 15% of Shanghai Merchants’ NAV.  D1 then instructed him to issue new shares in order to boost Shanghai Merchants’ NAV.  Exh D4 shows PW8’s suggestion that Shanghai Merchants would issue 125M new shares to Angel Field, which would then pay $50M to the former, boosting the former’s NAV to $101M, so that the sale price of RMB 15M would now be under 15% of Shanghai Merchants’ NAV.

PW9 was Mr LAI, director of Hantec Ltd which was one of the two financial advisors to Ying Wing’s IBC regarding Angel Field’s MGO.  The IBC consisted of two members, Mr Clint Wong and Mr Eric Wong, both independent non-executive board directors of Ying Wing.  Together with another independent financial advisor called AMS, Hantec had given advice to Ying Wing, although the work done by Hantec as compared to AMS was only one-tenth as reflected by their respective remunerations. Hantec had considered Ying Wing’s financial information before recommending to the minority shareholders that the offer of $0.418 per share was reasonable and should be accepted.  However Hantec could only assume that what PW1 had said about Ying Wing’s financial details was true.  Hantec had done no independent investigation, although there were interactions with other sources like Reuters.  Nobody had told Hantec about the sale of Ying Wing being only for its “shell” and not its business, or that after the takeover Ying Wing would not bear the losses of Park Well’s fabric business, or that one year after the takeover the business would be transferred back to Ying Wing’s proprietor.  If he had been told the above, he would have told Ying Wing to inform the SFC, the SEHK, the IBC, and other investors about this arrangement, and he would have made inquiries himself before making a recommendation for the IBC to accept the MGO, because the unrevealed “selling back” of the fabric business might affect the company’s NAV. 

PW10 was one of the two independent non-executive directors and a member of Ying Wing’s IBC Mr WONG.  He had only attended one board meeting, and nothing was discussed about the sale of Ying Wing’s shares during that meeting.  He had not heard about Ying Wing having been taken over until after the event when he needed to resign from directorship.  Although he had signed documents in P430, he did not pay much attention to their content when he signed.  Nobody had told him anything about Ying Wing’s shares being sold to Angel Field, or about Angel Field’s MGO.

PW11 was Ms MOK of AMS, joint advisor with Hantec for Ying Wing’s IBC on the reasonableness of the MGO.  Her evidence was consistent with PW9.  Similar to PW9, PW11 took Ying Wing’s financial details from PW1.  And similar to PW9, AMS had never been told about the “secret agreement” or its terms.  PW11 said disclosure of the relevant agreement  was required.  She said that if such matters had been disclosed, her advice to Ying Wing’s  IBC would have been affected.

PW12 was the other member of Ying Wing’s IBC Mr WONG.  He served in that capacity together with PW10.  Following advice from AMS and Hantec, he recommended the minority shareholders to accept the MGO at $0.418 per share.  Nobody had told him about the “secret agreement”.  As to whether his opinion would have been affected if the secret agreement had been revealed to him, his testimony after a lunch adjournment was the opposite to his pre-lunch testimony.  I find that he had not considered his answers adequately before giving evidence, and I cannot rely on him. 

PW13 was Mr Jamieson of the SEHK.  In summary his testimony was: (1) the Listing Rules were only for civil compliance, (2) although the SEHK had approved the takeover documents, the secret agreement in our case had never been disclosed to the SEHK beforehand, (3) the SEHK could only depend on the honesty of company directors for information, (4) the sale of a company “shell” without selling its business was “backdoor listing” which was not permitted under pain of suspension of the listed company on being discovered, and might even lead to de-listing, and (5) the sale of Park Well and the fabric business to D2 or his nominee needed not be disclosed if the consideration was under 15% of the parent company’s NAV, as seen in Rule 14.12(1). 

PW14 Mr Gordon NG was an independent non-executive director of Shanghai Merchants.  His testimony about what happened in the Audit Committee Meeting on the 7th April 2003 and why he refused to sign the Minutes, was consistent with PW6 and PW7.  He told the directors that the disposal of the fabric business should have been disclosed before Ying Wing was taken over.  He could not recall having attended any “telephone conference” after Park Well was sold, or seen the subsequent minutes as signed by D1 (and Mo).  He said that Mo had never attended any audit committee meeting. 

PW15 was Ms CHUNG, accountant at imGO which became Shanghai Land.  Her testimony was about fund transfers as related to the 2nd and 3rd Charges, as represented by the Admitted Facts and Annex A to this Verdict.  PW15 said that the day-to-day affairs of Shanghai Land was run by D1 who could approve fund transfers up to a limit.  For example, the transfer of USD 13M (HKD 101M) from imGO to Great Hero which was Shanghai Land’s subsidiary, was authorised by D1 (Exh P286 to P290).  The nexus of D1 in the 3rd Charge (regarding fund transfers and the purported Wu Zhong Road project) is shown in Exh P294 to P299 involving transfer of USD 405,000 namely HKD 3.157M from Shanghai Land to Eastar. 

PW16 to PW22 testified on matters about the 3rd Charge.

PW16 was Ms Noelle TO, personal secretary to D1.  Regarding Exh P300 which was an internal application for transfer of $53M+ from Eastar to Great Center “for the Wu Zhong Road project”, she had passed it to D1 for signature and received it back after D1 had signed.  D1 had always used Cantonese when speaking with her, and D1’s Cantonese was “no problems”.  D1’s English was “OK”, even sending emails in English without help. 

PW17 was Shanghai Land’s assistant company secretary Ms Maggie CHAN.  D1 was the person who was able to authorise payments of company annual fees.  PW17 also spoke about the three BVI companies Great Center (director Ms Tao Li-yi), Smartway Trading (director Mr Yu Ling), and Wisevest Profits (director Ms Li Yung).

PW18 was Head of Shanghai Land’s accounting department Mr RAHMAN.  He took day-to-day instructions directly from D1 who spoke Cantonese with him with no difficulty, even though sometimes they had used putonghua.  The internal application to transfer $53M+ from Eastar to Great Center (Exh P300) was prepared on D1’s instructions and signed by D1 and Mo.  Exh P301, being to instruct the bank to transfer funds referred to in P300,  was signed only by Mo because D1 did not have permission to sign for such a large amount.  For transfers of funds such as in P300, he needed to see supporting documents, in this case the Indent Contract (Exh P304) showing the funds to be for the Wu Zhong Road project.  Feasibility Study Reports for the project, Exhibits P304 and D15, bore a difference in cost, but these were alternative proposals, one with a plot ratio of 1.1, the other 1.8.

PW19 was PW18’s subordinate, Ms Tracey LEE.  Her testimony was consistent with PW18.  She prepared documents on PW18’s instructions, and effected the relevant transfers in relation to Great Hero and Eastar: see Annex B to this Verdict.  She said P300 was an “accounting document”, but this as a matter of law was not in dispute.

PW20 was Mr Johnson CHUNG, accounting manager of Shun Loong Holdings.  His testimony proved the transfer of moneys from Wisevest to Shun Loong, then from Shun Loong to Shanghai Finance: see Annex B transactions 6 and 7.  The transfer of funds on the 4th April 2003 appeared as Wisevest repaying Shun Loong for a loan advanced 2.5 months earlier (on 21st January 2003), for which there was a loan agreement (Exh P311), but PW20 knew nothing about Wisevest, or anything about the loan itself, or whether there was any document to show that the loan was genuine (Exh P199-202, P311-313).  The transfer of funds on the 7th April 2003 appeared as Shun Loong lending money to Shanghai Finance (Exh P308, P310, P203-205).

PW21 was Ms Ruby KWOK, accounts clerk of Shanghai Merchants.  She proved all the fund transfers represented in Annex A relating to Angel Field (Exh P316), Shanghai Merchants (P316, P229-231), Modern Shine (Exh P229-231, P238), Smartway Trading (banker’s affirmation annexes JSB 9 and JSB 11, LCH 71), Win Victory (LCH 71), Ms CHANG Yin (JSB 9 and JSB 11), and the Cashier Order to Shanghai Merchants (P234 and P235).  PW21 also proved Annex B transactions 8 and 9  i.e. Shanghai Finance $51M to Angel Field (P314), and Angel Field $51M to Shanghai Merchants (P316), both transactions occurring on the same day and only 1 minute apart. 

PW22 was Mdm YU Ge who was working for Chau at Shanghai Merchants’ offices, being involved in handling accounting documents including those for BVI companies Great Center where Ms Tao Li-yi was director (PW25), Modern Shine where Mr Siu Yim-wah was director (PW26), and Smartway where Mr Yu Ling was director.  PW22 met PW26 and Mr YU at a dinner hosted by Mo at the latter’s residence.  All the above 3 directors came to the offices only to sign blank forms to enable fund transfers between these companies when required subsequently.  PW22 had kept the signed blank forms, and when instructed by Shanghai Merchants’ financial controller Ms Carrie NG, she would complete the payees’ details, and effect the transfers.  An example of this was the transfer of $51.2+M from Great Center to Wisevest (Exh P282: also see Annex B). 

PW23 was Ms Pinky TSE, Director of Corporate Finance in the SFC.  She tendered the Takeover Code (as applicable in 2002 and 2003) which was gazetted but which did not have the force of law.  She explained the relevant rules, and spoke about Exh P380 to P412 which were submitted to the SFC by Angel Field (D1’s side) and Ying Wing (D2’s side) such as the MGO and draft and final public announcements, including declarations of truth, to be vetted by the SFC, as required by the Code.  In summary, PW23 said that only the disposal of Ying Wing’s snack food business had been disclosed, but the SFC had never been informed about what is now called “the secret agreement”.  If the secret agreement had already been reached at the time of the MGO, there was a breach of the Code (Rule 25), and the SFC would look into the terms of the agreement before it would approve the MGO because it might affect the offered price per share, and the minority shareholders must be protected.  The secret agreement involved what she referred to as an “under the table consideration”, and unless the fabric business had no value, there was consideration passing from offeror to offeree which was hidden from the minority shareholders, and whatever value this consideration was, it “should have been shared to the minority shareholders”.  The health of a company or its business was not the SFC’s concern, but the value of an asset was.  Unless the value was zero or negative, it should have been disclosed and shared to the minority shareholders.

PW24 was Ms LAU, Shanghai Merchants’ assistant accounting manager.  Her testimony was consistent with PW21 and PW22.  She spoke about the secret documents, including the Bought and Sold Note, and the Instrument of Transfer mentioned by PW1, evidencing Shanghai Merchants selling Park Well (signed by D1) to Show Good (signed for by Mr TSOI Chun-to): see Bundle 8 at pages 3572 and 3573. 

PW25 was Ms TAO Yi-li as referred to by PW22.  Her testimony was consistent with PW22.  There was no dispute she was the sole director of Great Center.  On Mo’s invitation she went to Shanghai Merchants’ offices to sign documents “relating to the setting up of a company”, but she had also signed some 10 to 20 blank forms given to her by PW22, of which P282 was an example.  In fact she had nothing to do with Great Center, and had already gone back to Shanghai when the transfer of funds to and from Great Center were effected (see Annex B).

 PW26 was Mr SIU Yim-wah as referred to by PW22.  The effect of his testimony was the same as PW25.  He had signed blank forms in Mo’s home on the instruction of Mo’s secretary and D1 (mostly the former), and the companies with which he was connected on paper were Eastar, Champion Hope, and Modern Shine, funds to and from which he had no knowledge of (see Annex A), for example P231 and P238 had his signature but he had only signed blank forms.  As to the two “secret envelopes”, D1 had taken him to solicitors C.K.Mok where he had signed on a piece of paper, but he did not know its purpose (P134).  As to the instructions to solicitors C.K.Mok for the release of the two secret envelopes apparently to himself, whose receipt he appeared to have signed, he had no knowledge of such a release.  

PW27 was Ms Helen YEUNG, accounting manager at Shanghai Land.  She spoke about the fund transfers of $51M from Shun Loong to Shanghai Land, and the same from Shanghai Land to Angel Field, on the 7th April 2003: see Exh P305-307, P327 (Annex B transactions 7 and 8), which was consistent with PW20’s testimony.

PW28 was Ms LI Yung, sole director of BVI company Wisevest.  The effect of her testimony was the same as PW25 and PW26, namely, having known Mo and had stayed in Mo’s house, she had signed blank forms and blank cheques, these having been given by “either Shirley or D1” for her to sign, but she knew no English, and she had no knowledge about having become Wisevest's director.  Chau had told her something about setting up a BVI company for his use in Shanghai, and Mo had put money and made withdrawals from her (PW28’s) Po Sang Bank account.  The fund transfers in and out of Wisevest she knew nothing about (Annex B transactions 5 and 6).  As to Ms CHANG Yin, PW28 said she was Mo’s friend.

PW29 Mr LI was General Manager of Offshore Incorporations Ltd which set up BVI companies including Wisevest for PW28, as the documents showed.  He spoke about Exh P217 to P220 regarding Wisevest.  However, the cheques in payment for Wisevest’s annual fees (for example P220) appeared to bear not director PW28’s signature but Mo’s signature.

Witness statements of PW30 to PW32 were read under s.65B of Cap.221.  These tended to show that the Indent Contract for the Wu Zhong Road project was fake.

PW30 was Mr von der Groeben, Chief of International Sales in Duravit AG.  He said his company had never sold any building materials to Great Center. 

PW31 Mr YAPwas General Manager of Grohe Water Technology AG in China and Hong Kong.  His company had never received any order for products for the Wu Zhong Road project, nor had he heard of Great Center or Shanghai Hongxin Real Estate Development Co Ltd.

PW32 Mr Wangwas Chief Representative of Scavolini.  He said Scavolini had never received any order for products for the Wu Zhong Road project, nor had he heard of Great Center or Shanghai Hongxin Real Estate Development Co Ltd.

PW33 Mr Morrison was a partner of Moores Rowland and Mazars, for many years a chartered accountant and auditor.  He has examined many cases of commercial fraud and has testified in court as an expert.  His expert status was not disputed.  He was briefed about this case and a related matter, and has prepared a report as Exh P196 (Bundle 8 at pages 3295-3345).  He had examined the related documents and the relevant inter-bank transfer of funds which he represented by diagrams in Bundle 8 at page 3322, which is in effect the same as Annex A to this Verdict, and page 3331, which is in effect the same as Annex B to this Verdict.  His conclusions, which were well-supported by convincing observations such as “exact matching of banking figures” and the “lack of genuine trade transactions”, were that all the fund transfers represented in the two diagrams were sham.  He said that the $22M were in fact used to finance Show Good to buy back Park Well, while the $53.1M did not match the stage of development of the Wu Zhong Road project but to finance Angel Field to buy Shanghai Merchants’ 150M shares (page 3326 §26, and page 3336 §31).

PW34 was Mr Gidwani, an in-house accountant at the ICAC for the past 19 years.  His expert status was disputed by the Defence, but after conducting a voir dire I was satisfied he was an expert in his field: see a separate written Ruling in this regard.  PW34 has examined the financial statements of Ying Wing Holdings Ltd for 2001 (Exh P246), and that of Shanghai Merchants for 2002 (Exh P245), and the MGO (Exh P430), including the aspects of “segment assets and liabilities” and calculations of mandatorily offered prices of shares based on different net company asset values.  He explained how his comments were arrived at.  He said for Ying Wing’s total NAV, if the fabric business had been included in the takeover, it would have been HK$110.788M (being $61.8M + $66.2M x 74%), and when divided by the number of shares, the price would have been $0.749 per share which was what should have been offered by Angel Field to Ying Wing’s minority shareholders, not the cheaper $0.418 per share.  He agreed that his views were based on the assumption that the published financial statements contained correct figures, and that the market realisable value (“RV”) of a company depended on a prospective buyer’s own requirements including what money the buyer might wish to spend on it afterwards.  However PW34 also added: (1) although the fabric processing and trading were losing money, the land and fixtures would still be worth something, which “could not be just a giveaway”, (2) the fabric business had only tangible assets, no borrowings having been made, so that the stated NAV must be close to the RV, i.e. the stated positive value in the financial statement represented a truly positive NAV, (3) his view derived support from the sale of Ying Wing’s snack food business which was in similar “health”, yet it yielded a positive value and money to Ying Wing, (4) regarding what a businessman might need to spend on refurbishing and the like, PW34 said this would only be “the second aspect”, whereas here we were only concerned with “the first aspect” i.e. how much  it would cost the buyer to buy, not how much the buyer would spend afterwards, and what the buyer (Angel Field) would spend on a property had nothing to do with the vendor (Ying Wing), and (5) the aspect of a business losing money had nothing to do with the value of the land, buildings and tangible assets, because losing money would only mean zero goodwill, not zero value for the tangibles.  These comments were entirely consistent with what PW23 (and PW1) had said, and I find them logical, convincing, and compelling.  I will return to this important aspect of the evidence later.

PW35 was Mr LAU, a chartered property surveyor whose expert status was not in dispute.  His work involved all types of property i.e. residential, industrial, commercial.  He provided a valuation report (Exh P420: Bundle 25 page 10982) regarding Ying Wing’s land and fabric factory at Chaoyang.  He described his methodology, and provided valuations dated 31st December 2002 and 12th April 2003, the land value being unchanged at RMB 4M, while the building depreciated from RMB 27M on the first date to RMB 25M on the second date.  At the relevant times, therefore, the total value for land and factory building was (around) RMB 30M.

PW36 was Mr Stephen LAI, a chartered quantity surveyor.  His expert status was not in dispute, and he spoke about the Indent Contract for the supply of decoration materials (Exh P324) and the Feasibility Study (P307) for the Wu Zhong Road project.  His report is Exh P198.  The effect of his evidence is that the Wu Zhong Road project was “unlikely to be genuine” for the following reasons: (1) a deposit of 30% payable on signing the contract was unusual because payment was usually on delivery to site, and in any event the percentage far exceeded the usual 10-15%, (2) detailed specifications for the materials were missing, for example what grade of the stated brands being ordered, (3) the timing of delivery would normally be at least after building had actually started, but here it was 6 months beforehand, (4) on a total construction cost of $223M, the cost of decoration materials here was 84% which was far, far higher than usual, the normal percentage being only about 5%, and if he used the originally stated construction cost of $171M, the cost of decoration materials of $187M even exceeded the total cost of the whole construction, which was an impossibility, (5) a stated “bonus” refund of 20% to Party B if Party B could find cheaper materials, is not normally found in indent contracts, (6) a stated completion date of within 90 days of signing the contract was too short to have been reasonable, especially when the concrete frames of the buildings would not even have started, and (7) there were significant discrepancies between the Indent Contract and the Feasibility Study.  Defence asked PW36 about Exh D15 which was the Feasibility Study based on a plot ratio of not 1.1 but 1.8, and PW36 agreed the materials required would have been more, but using a calculator in court PW36 then said that even if enlarging the total building cost to this extent, the percentage of decoration materials would shrink only to 43.69% (from 84%), but still far too high when compared to the normal 5%, so that the percentage was still far from being realistic.

PW37 was Ms Carrie NG, Shanghai Merchant’s financial controller, testifying under immunity.  Her immediate superior was D1. D1 gave her instructions, and discussed with her on matters of finance such as the company’s internal fund transfers, and the tabling of liabilities and profits.  PW37 spoke about Shanghai Merchants’ documents such as P241, P470 and P263.  The effect of her testimony was:  (1) D1 played an active part in Shanghai Merchants’ financial affairs,  (2) Park Well was not a functional part of Shanghai Merchants, details of Park Well having only been obtained from PW1,  (3) preparation of financial statements e.g. the one dated 19th July 2002, was made after discussion with D1 who provided her with details, (4) the “planned selling price” of the fabric business as being $15M had not been provided after any valuation by a surveyor “because D1 said there was nothing special and it was expensive to engage a surveyor” (P470 and P263), (5) on D1’s instructions she had gone to the solicitors with PW1 and two other men to retrieve the secret documents as PW1 had testified, i.e. sale and purchase agreement, instrument of transfer, bought and sold note, and the promissory note.  After perusing these documents and discussing with D1, “it was decided” that the wording should be altered from Park Well being the vendor to Park Well itself being sold (which is consistent with PW1’s testimony),  (6) as to the ratification of sale of Park Well to Show Good (Exh P258), D1 had discussed the matter with her, especially on the timing of the sale,  (7) D1 instructed PW37 to write to and direct the bank to transfer $51M from Shun Loong to Shanghai Finance (see Annex B transaction 7): Exh 205,  (8) PW37 proved the documents relating to transferring HKD 14,133,610 (the equivalent of RMB 15M) involving the apparent buyer Ms Chang Yin (Annex A transactions 6 and 7), and (9) on the Audit Committee Meeting in April 2003, PW37 testified consistently with PW14.  

PW38 was ICAC investigator Ms LAU who arrested and video- interviewed D1 twice under caution: VRI₁ and VRI₂.  From D1’s handbag were found 2 blank A4 sheets with Mo’s signature already there, and in her suitcase (in the hotel room) were another 40 such blank but signed sheets, the use of which was explained by D1 in her VRI₁ (see below).  Also found inside D1’s suitcase was P324 the original of the Indent Contract regarding the Wu Zhong Road project, and P457 which was a Cancellation of the Contract.

PW39 ICAC Assistant Investigator Ms CHUNG, and PW40 Principal ICAC Investigator Ms LI, were only called to testify in the Special Issue regarding the VRIs’ admissibility.

D1’s two Video Records of Interview: 

Actually there was a third VRI, but this was very short and not challenged, and the content was only regarding whether D1 was willing to give a non-prejudicial statement, to which D1 replied in the affirmative.  As to VRIs of substance, there were two, and D1 challenged both.  I will discuss her grounds of objection below.  I adopted the Alternative Procedure, in which D1 and her close friend Ms ZHANG testified.  I will discuss D1’s testimony below, but I will analyse Ms Zhang’s evidence first.  As a “close friend since school days and keeping close contact with D1”, she did not surprise me when she said the same things as D1, e.g. there was a conversation between PW38 and D1 en route to the ICAC.  However Ms Zhang did not take a note of what was said until at least one year afterwards, and furthermore, if PW38 had wanted to question D1 in the car, I find it illogical that PW38 would have chosen to sit not beside D1 in the back seat (which was not disputed) but in the front next to the driver.  In any event, Ms Zhang was separated from D1 and PW38, so that she did not hear what PW38 had said to D1, and so she could not refute PW38’s testimony that at the scene she had arrested and cautioned D1. 

As to D1’s grounds of objection, they were, to say the least, most mild.  The grounds were essentially four:

(1) The 1st ground was unfairness because D1 alleged she was not competent in Cantonese to provide answers. After viewing both videotapes in court, and listening to what and how D1 spoke, I had no doubt whatsoever that D1 was entirely competent in Cantonese, that she also commanded an adequate level of English consistent with what her colleagues had said to this Court, that she was free to correct the interviewer for errors (as she did), was given ample caution, and was given ample opportunity to add to anything she had already said.  I could see no merit on this ground of objection.

(2) In the 2nd ground of objection D1 said she was denied of and/or misled regarding access to a lawyer.  But access to lawyers was clearly written in two Notices to Persons in Custody, as well as posted on the walls of the interview rooms and in the detention cell.  To allege that D1 would be “dictated by PW38” to write certain entries into the detention logbook would have meant PW38 telling D1 to write down the names of two solicitors of D1’s choice, when PW38 was trying to dissuade D1 from seeking help from any lawyer.  I find this allegation illogical.

(3) The 3rd allegation was pre-interview coaching.  But the evidence showed simply not sufficient time to do any “rehearsal”, not to mention the grossly disproportionate number of questions of a rehearsal to the actual number of questions asked during the VRI, i.e. 7 as against over 600.  Furthermore, D1 corrected PW38 whenever necessary during the interview, which ran contrary to the thesis of pre-interview coaching.

(4) As to the 4th allegation, i.e. inducement into becoming a prosecution witness, if that had been true, PW38 would not have said to D1 that she (D1) needed not say anything unless she wanted to do so, but whatever she said might be used as evidence against her in court.

At the risk of being too detailed in this interim issue of admissibility, I wish to explain why I did not accept D1’s allegations against the prosecution’s witnesses, and why I rejected D1’s testimony. 

(1) Counsel criticised PW38 that if D1 had been arrested at the scene, PW38 had breached ICAC Standing Orders by not taking D1 to the detention area immediately on arrival at 12:05 hours, but left it until after the completion of VRI₁ at 14:29 hours, which could have rendered PW38 disciplinable.  In answer to this, PW38 explained that because en route to the ICAC in the car D1 was already keen to explain matters, she decided to interview D1 on videotape as soon as possible, therefore she had delayed taking D1 to the detention area.  In any event, I find that even if PW38 had breached Standing Orders, I should not lose sight of the fact that the issue here was D1’s voluntariness, not whether PW38 should be disciplined.  As Barnett J said in CHAN Ching-man HCMA 112/1995, “It is easy to criticise the conduct of a police constable from a distance, but unless the circumstances were wholly unreasonable, an admission should not generally be rendered inadmissible.”  Counsel for D1 relied on the “delay” point to say that D1 was not arrested until after VRI₁ had been completed, i.e. after 14:19 hours, and not before noon as PW38 testified. But we can see D1 had signed on the Notice to Persons in Custody (Exh P452) as early as 12:25 hours which was before VRI₁ had even started.  But worse for D1 was, when asked in the VRI whether she agreed that she had been arrested and cautioned at the scene, she said she agreed (see VRI₁ at Entry 13).  When cross-examined about this in court, D1 became evasive, and when pressed she said “I did not understand the meaning of arrest”, which I found incredible coming from a university graduate: please refer to audio recording District Court No.34 on 18th November 2005 from 16:06 to 16:09 hours.

(2) D1 alleged that PW40 had said certain words of oppression and/or inducement after the search of the hotel room, relying on the fact that departure from the hotel room was at 18:40 while arrival back at the detention area was 19:15, a time interval longer than the journey from the ICAC to the hotel earlier.  However the written entry was “departure from hotel room”, and departure from the room was followed by debriefing the deputy hotel manager, calling for the ICAC car, and waiting for the car to arrive at the hotel, which all took time before the actual return journey started.  D1 could not tell us the time of departure from the hotel front door. The written entry did not say “departure from the hotel front door”, and so I could not see how Counsel could say that the return journey had taken longer than the earlier journey to the hotel, or that therefore PW38 or PW40 was unbelievable.

(3) D1 said she had “only glanced” the Notice to Persons in Custody, and “did not fully understand the contents” before she signed.  For a university graduate having worked in corporate finance full-time now for 6 years, and for her to have signed on this document which was written in Chinese, and further, in VRI₁ she said she had understood the allegations and the content of the Notice to Persons in Custody, but in court for her now to say “I mean I did not understand the legal aspect because the Notice was just a format”, and “I did not know the significance of putting my signature on a document”, I find totally incredible. 

(4) For D1 to say she knew what “immunity” meant, yet did not know what “arrest” meant, what “caution” meant, what “a witness” meant, or what “a suspect” meant,  I found her a dishonest and incredible witness.

There were numerous other examples, but I see no necessity to enumerate all of them here.  I found D1 to be dishonest, incredible, and unreliable.  I had no doubt all the VRIs were provided voluntarily, and I could find no basis to exercise my discretion to exclude any.  

I now come to a summary of the contents of the interviews.

VRI₁ was produced by the Prosecution at the request of D1’s Counsel as he wished to show, inter alia, D1’s competence or otherwise in the Cantonese dialect, and to compare her demeanour during VRI₁ and at the beginning of VRI₂.  In VRI₁, D1 herself said she had no problems with Cantonese (Entries 17-22), she and the interviewing officer spoke about allegations regarding the Bank of China matter, about Shanghai Land and related companies, about some people not related to our case today such as Theresa Ko and Vivian Fan, their lawyers and accountants (29-173), she had participated in “the deal” (174-180), her own background and about Chau (181-244), her renumeration was not salary but “director’s fee” (222, 224), her negotiations in buying and selling company “shells” (190), the bridging loan from the Bank of China and her own involvement (249-442), the use of shares as security and repayment of loan (350-614), she helped Chau negotiate matters of corporate finance (430, 434, 442), about financial administration and procedural aspects of Shanghai Land, Shanghai Merchants and Shun Loong and the personalities involved (617-959), the trading of shares (960-1047), D1 did not trade in shares herself (977-979, 1029, 1031), her accommodation was provided by Chau and Mo at their residence at Jardines Lookout (1048-1220), how Mo and Chau had signed on blank A4 paper found on D1 for D1’s use as necessary namely when Chau and Mo were absent from Hong Kong (1098-1167), about CHANG Yin (1185-1191) and LI Yung as being associated with Mo (1199-1210).

In VRI₂, D1 spoke about the Wu Zhong Road project (Entries 16, 120-196, 245-252), she knew personalities like YU Ling, SIU Yim-wah the director of Champion Hope and Modern Shine, YU Ge etc who became directors of BVI companies, that they were friends and relatives of and fetched by Mo and Chau (324-444), BVI companies were used to buy projects like Wu Zhong Road because the Bank of China would not allow Shanghai Land to make huge purchases, about personalities and their BVI companies (40, 333-448), what the BVI companies were for, that these companies had no business of their own but served only as vehicles for Chau and Mo (450) to avoid transactions being classified as “connected” (286), that BVI company directors came to pre-sign documents on Chau Mo or Catherine TSE’s instructions (80-86, 455-478), that if Chau said to use which company to do what D1 would take part in handling the matter (480, 532-540), about directors like YU Ge, TAO Li-yi, and YU Ling and their BVI companies, and that they were Mo’s friends and relatives (687-792), about the circuitous way where funds were transferred ending up at Win Victory which was Chau and Mo’s company, the purpose being to avoid “connected transactions” for which public announcement was required (648, 833-842, 862, 878), about the 40 pieces of blank A4 paper with Mo’s signatures already there, which had been seized from herself (1159-1196) and their purpose (1211-1216), Shanghai HongXin was the project company for Wu Zhong Road, the project was cancelled but the $50M had gone to Shanghai in about March or April 2003 (1272-1294), she was responsible for the transfer of that sum of money on Chau’s instructions, the money not having been used on the project but had gone via BVI company Great Center to Shanghai Land (1302-1400), about the Wu Zhong Road Indent Contract which was seized from her possession, about  herself having helped Chau transfer the money (1384), she agreed that the transfer “would be a problem” and she was “very scared that those matters would be exposed” (1353-1402), she was very scared because she was a director (1478), only because she had trusted Chau (1513, 1521), but she knew something wrong had been done (1523, 1527, 1533, 1535).

Defence evidence

5. D1 testified in the general issues and adopted her testimony given in the Special Issue.  She spoke about the meetings and negotiations leading to Angel Field’s acquisition of Ying Wing, and the personalities involved.  She said she was sent by Chau and Mo to Hong Kong only to learn, that she had no power to make financial decisions, she knew nothing about finance and legal matters here, her understanding of the term “shells” in the context of buying and selling companies meant “listed companies”, and that her duty was only to “follow up” on company acquisitions with the necessary paperwork.  She said she had seen and signed numerous documents involved in this case, including the secret documents (P253-256), Minutes of meeting and telephone conference (P257, P258), the Escrow Agreement with C.K.Mok solicitors, Shanghai Land and imGO’s “Put Option” as a result of which $13M was to be paid to the former, Minutes of meetings where Shanghai Merchants was to issue 150M shares to Angel Field as a result of which $50M was paid to the former, and numerous other documents, where she had signed as a director, sometimes as the only person present at a meeting.  However, D1 said, all these documents were prepared by secretary Ms Catherine Tse (PW6) and financial controller Ms Carrie Ng (PW37) for her (D1) to sign, and she signed without any knowledge of the contents, any knowledge of their background, or of transactions or the reasons behind them, as she was only “told to sign” by staff junior in rank to herself.  The documents in her possession at the time she was intercepted, including the Indent Contract and its Cancellation, and many blank forms with Mo’s signatures, use of which she had explained in her VRI₂ , were in her possession only because they were Mo’s things which she had tidied up at Mo’s residence, and she was just taking them from there to the office.

In summary, D1’s testimony was that although agreeing she was a university graduate in commerce and international finance, with five years post-graduate experience at the time in the investment field, was Shanghai Land’s Executive Director sent to work in Hong Kong on renumerations of $20,000 per month plus RMB 6000 per month to her parents in Shanghai, plus an extra month’s pay per year, plus bonuses ($50,000 in one year), however, D1 says, in reality she was only an ignorant and uninformed puppet, knew nothing, and was here only to learn.  She agreed that she had indeed signed official company documents and authorised the transfer of large amounts of company funds, had spoken about the use of BVI companies, but she had never read or understood what she was signing.  Even though inside her personal notebook was a circular fund-flow diagram matching PW33’s diagrams, associated with relevant dummies like Ms Tao (PW25) and their BVI companies involved in the veiled fund transfers, and even though the diagram, the names and the dates were in her own handwriting and the notebook was found in her possession, she said all those were only what a staff member had told her, but she knew nothing about the diagram itself or the details of the transactions, or their background or any nexus between them.  She said she had done nothing dishonest in this whole affair.

D2 elected not to testify, but called three witnesses. 

DW2 was Mr TSE, an expert surveyor.  He compiled a report (Exh D31).  His conclusion was that the total value of the property of the fabric business, i.e. buildings and land, was RMB 15M (which we know was precisely the value adopted by Shanghai Merchants when selling the business to Show Good).  However, at the end of the day Mr TSE’s opinion did not weaken the Prosecution’s case because: (a) his report was two years post facto and not one relied upon by Shanghai Merchants at the relevant time,  (b) there were significant variations in calculation factors, for example the cost per square metre he said was between RMB 500 and 700 which meant the grossly variable nature of the intermediate columns inside his calculations in §11.1,  (c) the valuation figure of RMB 15M could well have been much higher if the upper end of the variable factors had been chosen, (d) at §2.2 he evaluated using “Open Market Value”, yet at §7.1 he contradicted his opinion because he also said there was “no readily available market” for this property, and (e) most important of all, he agreed that he had not included plant and machinery in his valuation, which he agreed could have been worth RMB 16M which, when added to his valuation of RMB 15M, would have come to (about) RMB 30M, which was the valuation given by PW35.  In any event, Mr Tse’s report does not remove the problem the Defence faces, because even if the value had been RMB 15M as Shanghai Merchants had stated, D1 et al were not relying on Mr TSE at the time Shanghai Merchants rated the value as RMB 15M.  Furthermore, even if the factory and land value was only RMB 15M, this had in any case been hidden from the minority shareholders a the time of the MGO. 

DW3 was Mr ZHENG, an assistant accountant from Shantou.  He was not licensed to sign reports but his duties included helping his principals (here also a Mr ZHENG) in inspecting properties and preparing valuation reports.  D2 had approached his firm for valuation of the factory premises in March 2000 and his firm had used the “forced sale method” to come up with a report Exh D32.  However even by December 2000 the factory was still unsold, and so D2 returned with a request to use the “depreciated cost method” for valuation, and DW3’s firm came up with the report Exh D33, which gave a value of RMB 27M inclusive of land and machinery (see fax header at page 11 for page location).  I realise these reports were possibly hearsay, but assuming they are admissible, DW3 does not help the Defence case, because:  (a) he contradicted DW2’s valuation of a mere RMB 15M, making DW2’s precise figure of D1’s “RMB 15M” even more unlikely to be accurate, and (b) if D2 and those on Angel Field’s side had hidden a value of RMB 27M (HKD $25.5M) from Ying Wing’s minority shareholders and the stock market regulators, whether the value was RMB 45M, 27M, 30M or even only 15M, this does not help D2 or D1 under the 1st Charge.

DW4 was Mr Blade whose expert status as an accountant was not disputed.  He compiled a report Exh D34 which, despite having made assumptions (see report at §7.9 and the usage of the term “would have”), despite having viewed matters from an ordinary investor and businessman from the general public and not in the context of a mandatory general offer, and despite his opinions having been based on “reconstituted facts” which he assumed to have been correctly supplied to Deloittes, I found him to be a reliable witness.  He concluded that Park Well’s fabric business was losing money and so was a liability to Ying Wing.  However he also said that while a liability to Park Well (a subsidiary to Ying Wing) was real to Park Well, its own liability to Ying Wing (the parent holding company) or to another subsidiary, would make no difference to the Ying Wing Group as a whole.  Furthermore, a parent can write off a debt owed to it by a subsidiary without affecting the parent’s overall financial liability to the parent’s outsiders.  Finally, DW4 agreed that at the Ying Wing group level, if Park Well’s NAV was positive (as per PW23, PW34, especially PW35, and even DW2 and DW3), then Ying Wing’s NAV would be higher than if the value of the fabric business had not been included.  I find that although DW4 was called by D2, when the basis of his conclusions was clarified, his evidence was in fact consistent with the Prosecution’s case.

Assessment of evidence and analysis

6. I bear in mind the burden of proof to be on the Prosecution and the requisite standard.  I also viewed the witnesses under immunity with circumspection.  However all the prosecution witnesses testified in a straightforward manner and without exaggeration.  Defence attacked PW1’s credibility, for example on the question of commission and cheques he received, but he gave a credible explanation, and the criticisms were nowhere near able to erode into his credibility even in this peripheral issue.  Furthermore, he and other prosecution witnesses were well supported by documentary evidence.  For example, even minute details like the date of Show Good’s incorporation and the lodging of the secret documents at solicitors C.K.Mok & Co, and how Exh P133 was written by PW1 to show the solicitors how to write Mr Tsoi Chun-to’s Chinese name, entirely supported PW1 in what he said.  PW1 was not speaking about impalpable matters, because the things PW1 has said have eventuated in physical documents which we can now see with our eyes.  Another example is PW6 (D1’s secretary) who had a degree in law, who spoke clearly, slowly, consistently, and with great care, and whose testimony entirely supported all the other prosecution witnesses where their and her testimonies covered similar areas.  In fact all the prosecution witnesses supported the evidence of all the others.  I find PW1 and all the other prosecution witnesses honest, reliable, consistent with each other, and to have told the truth. 

I am told that both defendants have clear records and so bear in mind the relevant legal implications as applicable to them.

7.Regarding the 1st Charge, I bear in mind the law on Conspiracy as stated for example in R  v  Anderson [1986] AC 27, and Archbold Hong Kong 2005 at especially § 36-34 to 36-42, and 36-48 to 36-69.  Because alleged co-conspirators Chau and Mo have not been charged, or in court to act as witnesses, I remind myself of the warnings under R  v Jones and Others [1997] 2 Cr App R 119, although no witness had actually testified that Chau or Mo had said what words. 

D1’s case was “Yes, I was one of the top executives, I was present at discussions and meetings, and I have signed important documents, but I was only an ignorant observer and a mere puppet”.  She says that negotiations from her side were carried out only by Ms Cathy Lam who spoke with PW1 in Cantonese, a dialect in which she herself did not speak or understand, and so she herself had provided no input. 

I have already stated why I find D1 incredible.  For the following further reasons, I do not accept D1’s thesis that she was merely a passive puppet with no informed participation, or that during conferences to buy Ying Wing, only Ms Lam did all the negotiating:

(a) If D1 was an ignorant learner who had no part to play, it is illogical and unconvincing to suggest that Chau would send her, a director on a salary and bonus, to Hong Kong.  D1 says sometimes she would need to relate matters from the meetings (with PW1) back to Chau.  However, on D1’s own version Chau and Ms Lam had “direct contact” with each other, and so I fail to see why D1 would be needed to relate matters instead of Ms Lam doing so herself.  Although D1 says she was “only there to learn”, she also said she could not understand Cantonese and had no idea what was going on, in which case I fail to see how and what she could learn.  Hence when asked about this self-contradiction, D1 became evasive, could not answer, and could only repeat what she had already said previously.  Actually in VRI­₁  D1 had clearly told the ICAC that she had previously participated in negotiations for the acquisition of listed companies in Hong Kong, i.e. she had not been present merely as a dummy who could speak no Cantonese and “was here only to learn”.

(b) If Ms Lam and/or other professional advisors could assist Chau in every way as D1 would have us believe, and D1 was present merely as a puppet with no power or knowledge to negotiate or make any decision, it is curious why D1 would have given her official namecard to PW1.

(c) If D1 was a mere puppet, there would be no need for her to be present when Shanghai Merchants’ Annual Report 2002 was being prepared, or to have contributed, or to have discussed with anybody, or signed any report, because as her Counsel says “all the professional people were there”.

(d) D1 dealt with PW3 direct, telephoning PW3 direct, instructing him direct, including obtaining a draft of the escrow agreement from Stevenson Wong & Co to hand to PW3, and telling PW3 before the documents were deposited that Champion Hope would be paying C.K.Mok’s fees.  D1 did not require Ms Lam to speak for her when instructing PW3.  And then there was the evidence from PW6, supported by that of PW7, that when non-executive director Mr Ng refused to sign the ratification P257, it was D1 who had asked PW6 for “an alternative method” leading to the fabrication of P258 which was subsequently signed by Mo and D1 herself.  In other words we can see D1 was active, not passive and ignorant.

(e) PW15 said Shanghai Land’s day-to-day operations were directed by D1.  PW15 said Chau was not there in the office at all, and Mo was “not often in the office”.  As third in line, D1’s role in the corporate affairs of Shanghai Land and Shanghai Merchants can clearly be seen.

(f) PW16 said he took direct instructions from D1 about day-to-day matters on finance and administration, using Cantonese most of the time.  She said Chau was not in Hong Kong, while Mo had only been coming to the office 2 to 3 times each week, and each time only for 2 to 3 hours.  PW16 completely supports PW15’s testimony.

(g) Minutes of an Audit Committee Meeting (Exh P249) recorded D1 as making a contribution, not being an ignorant dummy as she asserts: see bottom of page 2.  Chau or Mo was not present at the meeting, and D1 was the most senior officer there.

(h) D1 graduated with a Bachelor of Commerce degree in Shanghai in 1997.  As early as 2000 she was already Deputy Manager in the Shanghai Nongkai Group of companies working in their investment department, and in Hong Kong she had a personal secretary working for her.  I do not accept she knew nothing about corporate financial affairs or the workings and implications of major commercial dealings.

(i) Shanghai Merchants’ 2002 Financial Report (Exh P245) on page 2 shows D1’s profile as “appointed as an executive director of the Company in April 2002 and is responsible for the overall financial planning of the Group. Ms Gong graduated from East China Normal University, majoring in international finance. Ms Gong has over five years’ experience in direct investment and investment in listed securities”.  In court D1 agreed with all the above descriptions except the most unfavourable part, which was that she was responsible for the overall financial planning of the Group.  However, she admitted she had read her own profile description, she admitted it was a public document, and a wrong entry would have misled shareholders, but she still said that despite the error she had decided not to take it up with anyone.  I do not accept her profile in P245 contained any errors.  Similarly Exh P397 (a document having originated from D1’s side) stated D1’s qualifications, ability and role. 

(j) For Shanghai Land, D1 was authorised to operate fund transfers, on her own, up to HKD $10M, and with no upper limit if signing with one other executive.  But D1’s ability to transfer company funds was in fact not restricted to her “authorised upper limit” as first appears, because “another executive” such as Mo (and Chau) had already signed numerous blank forms in D1’s possession for D1 to use as and when required. I do not accept that an untrusted dummy learner would have been permitted to sign cheques or authorise fund transfers in this way.

(k) Consistent with PW15 and PW16, PW37’s evidence clearly, unequivocally, and convincingly contradicted D1’s thesis that she was merely an ignorant puppet who was in Hong Kong only as a learner: see Prosecution’s evidence under “PW37” above. 

(l) Even though the video interviews were provided 15 months after Angel Field had taken over Ying Wing, during the interviews D1 not only spoke fluent Cantonese, but also mixed in with English words.  Except with three Cantonese words (where native Shanghai speakers tend not to close their lips when pronouncing words ending in “m”), she spoke virtually indistinguishably from any person whose mother dialect is Cantonese.  I find it incredible to suggest that merely by “picking up” Cantonese from work and television, D1 could have gone from a stage of total incapacity in  Cantonese at the beginning of 2002 to total fluency, even using local colloquialism, by the time she was interviewed in June 2003.  She was clearly well versed in corporate finance, and had participated in the buying and selling of company “shells”: see her VRI₁ especially at entries 144, 146, 190, 366, 455, and 472.  Furthermore, D1 was speaking about events occurring back in 2001-2002, but she has never explained to the ICAC that “back then her Cantonese was in fact non-existent or inadequate”. 

(m) Even on D1’s own testimony she had clearly assumed active roles, for example regarding the Indent Contract and its Cancellation found in her possession, she said she had queried a Mr MO of staff why these two self-contradictory documents should co-exist, and she had then obtained an explanation from him.  Furthermore, on her own testimony she said it was herself who had asked Mr Rahman (PW18) to arrange for funds to be transferred upon her receiving the Indent Contract by fax from Shanghai.  If D1 had been a mere puppet she would not have made enquiries or have initiated fund transfers.  Another example is, it was on her own iniative that she had asked PW6 to create P258 in order to by-pass non-executive director Mr Ng’s objections.  Yet another example is, she was concerned enough about financial matters told to her by the “funds department” in Shanghai, so that she felt the need to write things down (see Exh P463A) and the need to raise queries with Chau.

(n) If D1 had been an ignorant puppet who was present at negotiation meetings “only to learn”, there would have been no reason, on her own thesis, that “Ms Lam related things to her where needed so that she (D1) could relate them to Chau” because: (1) With telephones, emails and faxes in the 21st century, there was no reason why Ms Lam should not have done so directly, and (2) clearly with important negotiation matters like these, communicating to Chau via a person who could not speak or understand Cantonese, whose English was even worse, would be illogical and at the very least risky.  In this context I can also use the fabricated minutes of the Audit Committee Meeting as another example: if D1’s thesis was correct, she would not have been able to understand what was going on during that meeting, let alone feeling concerned that Mr NG would not sign, and less still would she ask Ms TSE for a method to by-pass Mr NG, or would have asked Mr NG not to complain to the Board about this problem.  The evidence is completely against the “ignorant learner” thesis.

(o) D1 picked and chose things as they suited her.  For example, she said she had signed all the documents without knowing their content or the background leading to their existence, because she was “only told to sign”. However, regarding P300 which was the subject matter of the 3rd Charge, she said this time she knew what the content was and she “believed it was a genuine document”, which is the opposite of ignorance.  Another example is P297 where although Mr Rahman (PW18) asked her to sign, she “had queried him” because she thought she had insufficient authority to authorise such a large amount.  D1 was clearly not a “dumb puppet” signing documents blindly whenever she was told to sign.

(p) D1 adopted her testimony in the Special Issue, where she asserted she knew nothing about the laws of Hong Kong, or the rules of the SEHK or SFC.  If that testimony was true, she would not have worried about making the “sale back” to Show Good to be less than 15% of Shanghai Merchants’ NAV, nor would she have directed how to boost the NAV by issuing shares to Angel Field so that the NAV would be over $100M.  Further, I found D1 evasive when cross-examined, for example in VRI₁  she said she had understood the allegations, but in court she now repeatedly said she did not really understand them: examples are found in VRI₁ at Entries 62 and 74, and her evasive testimony can be heard via court recording in District Court No.34 on the 18th November 2005 at time 15:14 to 15:22 hours.  I find D1 a dishonest witness.

(q) D1 said she was “just a junior member in the company”, but she was entrusted with pre-signed blank sheets with Mo’s signatures (in her VRI she said Chau had done the same), which shows the trust Mo and Chau have placed on D1. 

For all the above numerous reasons I do not accept the thesis that D1 was a mere “naïve country girl” as her Counsel put her forward, a mere puppet with no knowledge of what was happening, or had no dishonesy when performing the relevant acts involved in this trial, or was paid by Chau to come to Hong Kong “only to learn” and not to perform any important corporate duty.  D1 was in possession of the fund-flow diagram (P463) even before she went to Shanghai on the date she asserted to have been asked about these things for the first time.  I have no doubt that D1 knew exactly what was going on, and that she was heavily involved in this affair as the witnesses stated and as the various documents showed, including those drawn and signed in her own hand.

Defence suggested that because lawyers were consulted by both sides, there could have been nothing clandestine or illegal.  However consulting a lawyer does not mean a client will end up choosing to follow legal advice.  As solicitor PW2 testified, he was not even aware that Ying Wing was to be sold only as a name without its business going with it, and the testimony of PW1 was that the secret documents were in any event not drafted by lawyers. 

D1 suggested that the “middlemen” PW1, David Wan and Ms Lam had a vested financial interest who were eager to push matters through.  However this does not mean that the principals namely D1, Chau, Mo, and D2 had no interest.  It is obvious that the principals’ financial interest was many times greater than that of the middlemen, as is usually the situation in financial dealings.  It is not in dispute that David Wan was paid $250,000, but even if Angel Field and Ying Wing had only saved $15M and not $45M, this was many many times more than what David Wan and PW1 had received by way of commission.

8. As to D2, his case was “absence of a dishonest state of mind”.  He pushed responsibility onto PW1 as it was PW1 who had engaged auditors and advisors.  But D2 was a director of his company.  The main witness against D2 was PW1, and I have already stated why I find PW1 a reliable witness.  The fact that D2 was not present at every meeting with D1’s side is immaterial, because he had instructed PW1 who was his representative, and this his Counsel does not dispute.  It was D2 who was director who signed for example Ying Wing’s annual report (Exh P246).  D2 was anxious about the creation of the secret Promissory Note. Counsel said the secret documents contained a variety of names and their substance was unenforceable, so that they were nothing more than “comfort documents” for D2.  However it was precisely “comfort” which D2 was after.  The fact that the secret documents were not drafted by lawyers, and that they were unenforceable in law, in the circumstances this was hardly surprising. 

As to Ying Wing’s assets as they related to D2’s mens rea, PW1 made it clear that whichever accounting method one had used, the variation would be insignificant.  As to the suggestion of “only selling the shell”, D2’s case is that it had originated from D1’s side, not D2.  PW1 strongly maintained D2 had instructed him about selling the “shell only” from the very beginning.  As to having auditors, the same applies to consulting lawyers. Deloittes had audited the books, but this was meaningless because information had been withheld from them.  For example PW2 told us he had never heard of Ying Wing selling only its name and not its business, and PW5 never knew that after the takeover, Park Well’s business would be out of Shanghai Merchants’ hands.   Furthermore, as director and “the boss” of the fabric business, D2 must know he was selling Ying Wing without selling the business, and he must know the business had at least a positive value in land, buildings and machinery, and as director of Ying Wing he must know the value of the business had been hidden from the minority shareholders, and this is so even without mentioning about the inferences from his demand for, and the creation of, the secret documents.  I have no difficulty finding D2 had mens rea in the secret agreement.  As to what value D2 had in his mind regarding the fabric business, I will turn to this aspect in the next paragraph.

The value of the “fabric business”

9. D2’s case regarding value of the fabric business was that it was at most RMB 15M, but if trading was included in the consideration, then it was worth either zero or negative because the trading of fabric was losing D2 money.  D2 criticised valuer PW35 because PW35 used Shenzhen statistics instead of Shantou’s.  However, PW35 explained that: (a) the latter statistics were non-existent, and the former was the next best thing, (b) he had already made downward adjustments of 20-30% from Shenzhen costs, and (c) he had taken into account the original building cost for the factory premises itself when using the Depreciation Replacement Cost method of valuation.  PW35’s expertise was not in dispute.  But more importantly, PW35’s testimony completely supports PW23 and PW34 when referring to the existence of a positive net asset value in respect of tangibles in the fabric business, and in fact even defence witness DW2’s view amounted to the same (see under “DW2” above).  PW35’s valuation of RMB 30M clearly shows PW34 to be correct when the latter said the land “could not have been a giveaway”, and that the fabric business, consisting only of tangibles with no mortgage, must be worth something. 

For the above reasons I do not accept that tangible assets are the same as trading activity.  I find there is a distinct and severable difference between building land and machinery on the one hand, and what trading may be conducted in the building on the other, because one can buy the land but stop carrying on the hitherto trade.  The significance regarding an activity which loses the owner money is the latter’s inability to charge the buyer for goodwill, and I find PW34 Mr Gidwani’s testimony in this regard to make perfect sense.

Actually, academically, whether the NAV of the fabric business was worth RMB 45M, or 30M, or 15M, as PW23 said “as long as it was worth something”, whatever the actual value was, this does not in law help the defendants in the 1st Charge.  PW34 gave the exampleof a restaurant whose building was worth $100M, but the restaurant business itself was losing $1M per year.  After 3 years the building may be worth only $95M (assuming no capital gain).  However if the owner sells “the business” including the building, the net asset value of “the business” is nevertheless a positive value of $95M even though its trading segment was losing $1M a year.  I find this logical, because the buyer does not need to use the building as a restaurant, not to mention the value of the land itself, which must be worth something.   PW35 evaluated the land and factory to have been worth a total of RMB 30M.  PW35 was an independent expert surveyor and valuer.  I accept his testimony to represent the true position, and it supports PW34’s testimony. 

I find however, as a matter of fact, that what was in the two Defendants’ minds at the relevant time was $45M because (whether in truth it was worth $45M or less) that was what they believed and accepted, and which was what they declared to outsiders.

The Mandatory General Offer price per share

10. Regarding the MGO’s offer price of $0.418 per share, D2 places great emphasis on the difference between Ying Wing’s NAV which in turn depended on the value of its fabric business, and the realisable value (“RV”) of same.  D2 says that given the poor health of the fabric business, the minority shareholders could not have obtained a better price than $0.418 per share, because the fabric business was worth zero or even a negative value.  To this argument I re-visit the testimonies of PW23 and PW34, which to me make perfect sense.  But D2’s argument also needs to be considered in the context of the following matters:  (1) As PW11 said, what AMS and Hantec were advising on was a mandatory general offer, not a voluntary general offer, (2) In any event, as there was no evidence of any other offer from the market, the fact that there might have been a better or worse “outside” offer was purely hypothetical, and the law does not permit me to speculate, (3) The fabric business’ positive NAV of $45M was published by none other than Ying Wing and Angel Field themselves, and not given on the spur of the moment.  And so the Defendants can hardly now turn around and say “Oh, the value we gave in the MGO was wrong; since the time this matter blew up we have had further thoughts, and the correct value should have been zero or even negative”.  Furthermore, if the stated value had been substantially lower than the truth, one would expect Angel Field to have been only too keen to state what it considered to be the true value, for example $30M, or $15M, or zero, because Angel Field would then have needed to pay the minority shareholders even less,  (4) As to the value of the fabric business, I find that in the circumstances of this case PW34’s testimony that “Nobody would give me land and building for nothing” logical and entirely convincing,  (5) As to the consequence of a business losing money, PW34’s evidence was that this would only mean “zero goodwill” but did not mean “zero value for the land buildings and other tangibles”, and I find this logical and convincing, and (6) PW37 had been to inspect the factory, and although the situation was not in mint condition, at least “some workers were still weaving cloth”;  obsolete machinery had nothing to do with the value of the building and land in any event.  For all these reasons I do not accept D2’s abovestated argument.

D2 also criticised independent financial advisors AMS and Hantec for not having been “independent enough”.  But AMS and Hantec were not Ying Wing.  If D2 and PW1 chose to hide information, AMS, Hantec, SFC, SEHK and all the others would not know.  Of course, it is precisely the hiding of information which had misled AMS and Hantec into recommending the price of $0.418 per share to the IBC and hence indirectly to the minority shareholders.

Translated into price per share in the Mandatory General Offer, commonsense tells us that the testimonies from PW1, PW23 and PW36 must be correct, because the share price in a mandatory offer (not to be confused with the market share price) equals net asset value divided by the number of shares, and so the larger the net asset value, the higher must be the offered share price. 

Show Good as a sham company

11. D2 did not make the following points as major arguments, but he first suggested that Show Good was not a sham company, as PW1 on paper had stated its director Mr Tsoi Chun-to had “wished to acquire” a BVI company and not at D2’s instigation.  I do not accept D2’s thesis because: (a) Even leaving PW1’s testimony aside, there is no dispute that Mr Tsoi was a mainland resident, and we have heard no evidence to indicate he had any interest to conduct business in Hong Kong, (b) Show Good had not carried out any business for the whole 16 months from beginning to end, (c) on the other hand, D2 had ample reasons to nominate his clansman Mr Tsoi to be a front, (d) Exh P92 shows that it was D2, not Mr Tsoi Chun-to, who had paid Secretarial Services for Show Good’s incorporation, (e) Exh P93 shows that D2 and/or his son Tsoi Chun-bun were involved in Park Well and Show Good, not Mr Tsoi Chun-to, and (f) the date of Mr Tsoi’s acquisition, being 15th January 2002, was consistent with the prosecution’s case on the creation of the secret documents.  I find, therefore, that the mere fact that PW1 had told Secretarial Services “Mr Tsoi Chun-to wished to have a BVI company” in no way detracts from D2 forming and using Show Good as a veil, to be used to hide the secret agreement to “buy back” the fabric business.  Secondly, D2 suggested that seeing the fabric business was more a loss than a profit, there was little motive to retain the same.  However there was evidence (including what PW37 had said and P270 at page 4177) to suggest that at least fabric trading was making profits.  In any event this issue is only collateral. 

Mens rea

12. I have already discussed mens rea to a large extent above.  However it is useful to state positive pieces of evidence supporting the ultimate finding, which I will enumerate under paragraph 13 below.  

Defence says that because the draft MGO and supporting financial statements had been shown to the stockmarket regulators, and the final MGO itself had been “passed” by these bodies, everything must have been in order.  But this argument does not help, because an asset (whether it was actually $45M or otherwise) had been hidden from the company’s total NAV, so that the statement inside the MGO (Bundle 26 page 11588) that $0.418 per share was a good offer, being better than $0.331 each, was published as a result of information hidden from the vetting authorities. D2 says the MGO and related documents indicated a management plan which was subject to change after the takeover, but the situation here was not a “change of plan” but a pre-determined “fixed plan”, and this fixed plan had been hidden from those who should know about the same.  As PW23 of the SFC said, “It was not a case of indefinite future plans, but the consistent message given to the SFC was that the company taking over would be engaged in the same business as the offeree company before the takeover, namely that it would continue with the offeree’s fabric business”.

13. Defence says that while PW1 had advised D1 and D2 that the sale of a “shell” without its business was “not possible and needed to be done with great care” but not that it was “illegal”, and so Defence says it is possible that the Defts did not have mens rea.  I will address this shortly.  In the absence of a direct confession, mens rea can only be inferred from the circumstances.   I bear in mind the test in  R  v  Ghosh [1982] 3 WLR 110. 

For reasons already stated I accept PW1’s testimony to represent the truth, and this alone provides evidence of mens rea in the 1st Charge.  Chau, Mo, D1 and D2 were mature persons in commercial business, they were directors of listed companies, D1 has told the ICAC she was into the trading of company “shells”, and both D1 and D2 were involved in this particular illegal plan for months.  Furthermore, there are many pieces of  evidence external to PW1’s testimony which clearly support PW1 as well as supporting each other.  I cite these as follows:

(1) Even D1 agrees with PW1 that Angel Field of her side had negotiated with PW1 on the takeover of Ying Wing.

(2) D1 et al held discussions with PW1 representing D2, D2 via PW1 saying to D1 et al that D2 was only interested in selling Ying Wing’s listing status but not its fabric business, and D1 et al saying to PW1 that Angel Field was also interested in buying only the listing status.

(3) D1, Chau and Mo agreed with D2 and PW1 that Angel Field’s takeover of Ying Wing would appear to outsiders as if the fabric business was also being taken over, but they also agreed that the fabric business would one year later be “sold” to D2 so that all would appear legitimate.

(4) The secret agreement is evidenced inter alia by the secret documents deposited with solicitors C.K.Mok & Co.  A Sale and Purchase Agreement of the business (Exh P253) had been prepared before the takeover, where it was written that Park Well would later sell its subsidiaries to Show Good.  This alone proves that the secret plan had been formed at least two months before the complete takeover of Ying Wing.  D1 signed this document.  And D1 instructed PW37 on the 11th April 2003 (around the time of the “sell back”) to retrieve the secret documents.  But there is more proof that the “sell back” had been well agreed and settled long before April 2003, because when they were first prepared, Ying Wing had not been turned into Shanghai Merchants, so that the conspirators had thought Park Well would be selling its fabric business to Show Good.  But after the takeover Ying Wing became Shanghai Merchants, so that Park Well became a subsidiary of Shanghai Merchants, hence it now became necessary that the vendor’s name be amended to Shanghai Merchants, and the subject-matter of the sale be amended to Park Well itself.  And so one year later the names in this Agreement needed to be amended to read Shanghai Merchants selling Park Well to Show Good.  This is entirely consistent with the prosecution’s case, and indeed made perfect sense, because: (a) the timing the “selling back” was agreed upon is consistent with the secret agreement having been made before the takeover, and (b) it made sense because before the takeover, Shanghai Merchants had not even come into existence and so its name could not have appeared in the original document; the original document had enabled D2 to sign for Park Well as seller, and his clansman Mr Tsoi to sign for Show Good as buyer, i.e. D2 could control the whole “re-sale” himself; but after Shanghai Merchants had come into existence, D2 could not sign on behalf of Park Well, so that the document must be altered to Shanghai Merchants selling Park Well to Show Good.  And PW1 testified that it was D2 who had instructed him to acquire Show Good for the “buy”.

(5) D2 had insisted on creating the Promissory Note (P256), one of the secret documents, to protect his interest.  This shows his involvement in the conspiracy.  At the same time D2’s clansman became the sole director of Show Good in order to facilitate the “buy back”.  The secret documents were prepared and stored away before Angel Field’s takeover. However the nexus between D2 and D1 is further shown by the secret documents, because:  (a) PW26 was involved in signing some of these documents, yet PW26 was connected to Mo (i.e. D1’s side) and not with D2’s side, (b) PW26’s involvement in Champion Hope was a veil and a sham (see the effect of his testimony), but PW26 had signed on the same document as somebody else who had signed on behalf of Show Good, and (c) D1 was directly involved in the deposit and retrieval of these secret documents to and from Messrs C.K.Mok & Co. 

(6) D1’s side prepared the MGO, with financial information about Ying Wing having been supplied by PW1 with D2’s knowledge and approval, but the secret agreement was not told to Ying Wing’s financial advisors (see under PW9 and PW11). The hiding of information shows mens rea.

(7) When Angel Field had acquired control of Ying Wing, in the MGO to Ying Wing’s minority shareholders D2 by “Letter from the Board” falsely stated that Angel Field intended theYing Wing Group would continue with the fabric business, when in truth he knew the business was to remain with himself.  This further and independently proves D2’s mens rea.  This was followed by Shanghai Merchants’ Annual Report 2002 (P245) on page 4 where D1’s company stated that the fabric business had achieved a favourable result, which was obviously untrue.

(8) The management agreement (Exh P239 Bundle 8 page 3625), one of the secret documents, coming into existence as early as January 2002, stated that any losses incurred by Park Well in the fabric business was to be borne by a Mr Chen Zhou-hai who PW1 testified was D2’s nominee.  This is further evidence that D1 et al had never intended to buy Ying Wing’s fabric business.  In addition, this document was never shown to auditors Deloittes, pointing to its clandestine nature.

(9) The secret documents on the “buying back” show such names as Tao Li-yi of Great Center, Siu Yim-wah of Champion Hope and Modern Shine, Yu Ling of Smartway, and Chang Yin, and particularly Chang Yin who appeared in the promissory note insisted upon by D2 at the time the secret agreement was made.  One would have expected that these people should be linked to D2’s side, but in fact they were all Mo’s friends linked to D1’s side: see testimonies of PW6, PW22, PW25, PW26, and PW28.  This shows D1 et al to be linked to the sham “buy back” arrangement.  But there is more about D1’s involvement in the sham sale, because when PW14 refused to sign the ratification of sale, D1 asked for a new set of minutes to be written which she then signed in order to by-pass PW14’s objections.

(10) The stated value of the fabric business being $45M (Exh P418), whether representing an accurate valuation or not, was adopted by both D1 et al and D2.  This should officially have been included as part of Ying Wing’s NAV and disclosed to all concerned, but it was not disclosed to any outsiders before the MGO was put forward by Angel Field and published.

(11) At the time of the MGO, not only had Angel Field and Ying Wing hidden the secret agreement from all outsiders, but they had made false declarations in the relevant official documents (see for example P397 at its pages 8, 17 and 18 at paragraphs d and e, P401 at its pages 8, 70 and 75 at paragraphs d, e, and f.  See also under PW23).

(12) Mo and D1 asked friends to sign blank forms intended for the veiled transfer of funds, and both subsequently caused the relevant fund transfers, furthering the conspiracy.

(13) The Listing Rules specified a threshold of 15% above which the “sale” of the fabric business was notifiable and disclosable, but D1 made sure this was avoided.

(14) D1 and Mo jointly and without a valuation basis, executed the devaluation of the fabric business from $45M to $15M.  Counsel for D1 suggested (especially to PW37) that the impairment was justified because a letter from Shanghai Merchants to Deloittes (Exh P242 at §20) mentioned depreciation of $26.5M and $3M, i.e. $45M less $26.5M less $3M became $15.5M.  I do not accept this thesis because: (a) there is no primary source of evidence, and this letter was merely a self-serving communication originating from Shanghai Merchants itself, (b) the rapid and unexplained devaluation was queried by independent non-executive director Mr Ng (PW14), but on D1’s direction, backdated minutes of a fabricated tele-conference were then prepared which was signed by D1 and Mo only, bypassing PW14, and (c) the long paragraph on page 2 in P250 was amended by the immunised PW37.  The purpose of the sham devaluation is clear, and this was to make the “sell back” value under 15% of Shanghai Merchants’ total NAV so that no disclosure to the regulators was required, and D1 stated so herself (see also under PW8).

(15) Chau & Mo used Angel Field to inject into their own Shanghai Merchants a sum of $50M, making the latter’s assets $106.7M.  The directors meetings resolving to this were all attended by D1, one of which by D1 herself alone, and all minutes were signed by D1.  Therefore D1 must have knowledge.  Her active role in the engineering towards making the fabric business value below 15% is shown in the testimonies of PW6, PW7, PW14 and Exh P257 (in Bundle 9 at page 4040).  In addition to D1 being a director, physically D1 had also signed for the approval for injection of USD 13M from imGO into Shanghai Land (Annex B transaction 1) as a first step in the veiled chain of fund transfers to achieve the purpose, she had directed PW18 to transfer funds in Annex B transaction 2, and she had also authorised the transfer of funds in Annex B transaction 3.  As to the use of BVI companies as veils, D1 clearly knew their purpose: see under VRI₂  above.

(16) To make the fabric business worth only 13.25% of Shanghai Merchants’ total NAV, D1 was involved in 5 out of 9 of the fund transfers in Annex B, in addition to having the fund-flow diagram in her personal notebook.

(17) Within the next 5 days PW1 and Shanghai Merchants’ Ms Carrie Ng amended the secret documents referred to in subparagraph 5 above to make inter alia the sale price to be only RMB 15M: see Exh P254.

(18) At the same time D1 signed the new document showing Shanghai Merchants’ Park Well as selling the business to D2’s veil company.

(19) The “sale price” of RMB 15M (HKD $14.2M) was fake, because Show Good’s purchase money paid to Shanghai Merchants’ Park Well had originated from Shanghai Merchants where D1 was a director, and D1 in Exh P258 page 2 revealed that she knew the 15% requirement, but because of the veiled fund injection into Shanghai Merchants, disclosure was not now required.

(20) In the following month (May 2003), despite the protest of director and solicitor Mr Ng over the devaluation of the business, D1 asked PW6 for “another method to record the sale”, by-passing Mr Ng.

(21) The secret documents had already been prepared before the takeover. Participants in acquisition negotiations including D1 and D2 must know that the “payment” per Exh P256 was a sham.

(22) Show Good, whose sole proprietor was D2’s clansman Mr Tsoi Chun-to, carried out no business from the time of its incorporation to its “buying” Park Well’s business.

(23) The transactions in Annex A show the completely circular nature of fund transfers in quick succession after 5 veiled transactions originating from Angel Field and Shanghai Merchants, both being companies of Chau Mo and D1 (and $7M went to Win Victory which was also Chau and Mo’s company), ending back in Shanghai Merchants.  PW33 provided his expert opinion which was well supported by evidence, which was not seriously challenged by the Defence, which I accept as the truth, and which unequivocally stated the fund transfers were sham, because the real use was to make Show Good appear to have “bought back” Park Well.  The purpose of the fund flows in Annex A was to provide for an ostensibly legitimate sale of the business to Show Good. The “sale” needed documentary support to make it appear genuine, hence the Indent Contract, but this was a fake.

(24) As to the transactions in Annex B, the timing of the bank transfers, the amounts of transfer, and the account balances before and after the transfers, prove beyond reasonable doubt that they were the same moneys.  Although there were alleged reasons for fund transfers, such as the “Wu Zhong Road project” and “Repayment of loan”, there is no credible evidence to support these assertions.  Again, PW33 gave his opinion and stated that the $53.1M had nothing to do with the Project but that the transactions were sham, having been designed for Angel Field to enable Shanghai Merchants to boost its assets to $106.7M in order to make the “sale” of Park Well under 15% of Shanghai Merchants’ NAV.  Furthermore, the Indent Contract and application for funds for the Wu Zhong Road project, put forward by D1 and those working with herto support fund transfers, were unrealistic fabrications: see PW36’s testimony, see the fact that the moneys had gone to Chau and not on the Project, and see the co-existence of the Cancellation with the Indent Contract itself.

(25) The transactions in Annex B also show that Chau, Mo and D1’s imGO and their Shanghai Land had, via 7 veiled transfers of funds, all in and out of their own companies, boosted Shanghai Merchants’ NAV by $50M to $106.7M.  I accept PW33’s testimony, because imGO and Shanghai Land could easily have transferred funds, in one step, straight into Shanghai Merchants, but this was done using 7 other companies which were all controlled by D1 et al.  Furthermore, the fund transfers involving Great Center, Modern Shine and Smartway were effected via blank pre-signed forms, signed by directors associated with Mo (see PW22’s evidence), with Mo and D1 having asked puppets to sign the same to facilitate transfers, then completing these blank pre-signed forms for the banks to transfer moneys.  Therefore the only reasonable inference I can draw from such circuitous routes of fund transfers is, that the movement of funds were there for a clandestine purpose, namely not to make it obvious to an outsider that the real purpose was to increase Shanghai Merchants’ NAV so as to reduce the ratio of the “sale” of the fabric business back to D2 to below 15% of Shanghai Merchants’ NAV, and so that it was not disclosable hence no outsider would know.  And D1’s personal notebook contained a diagram of fund flows which matched these veiled fund transfers (P463).

(26) Shanghai Land and Shanghai Merchants’ company secretary PW6 had never seen any records regarding Park Well.  And D1 had not seen any.  If Angel Field and Shanghai Merchants had genuinely taken up Park Well’s business, PW6 and D1 must have seen at least some business records of Park Well in their office premises.

(27) D1’s role in Shanghai Merchants included decision-making regarding the company’s transactions, its direction, and its operations. D1 gave direct instructions to many, including PW3, PW6 and PW18. 

(28) In addition to signing numerous documents for Shanghai Merchants, D1 had also taken part in procedures connected with the “secret agreement”, for example instructing puppet PW26 to sign on blank forms when PW26 was at Mo’s house, and taking PW26 to solicitors C.K.Mok to sign on documents connected with veil BVI companies, transactions of which puppets like PW26 had no knowledge. 

(29) In addition to friends being used as puppets who signed blank forms for Mo, many of which were subsequently used for veiled fund transfers, D1 on arrest was in possession of 40 sheets of blank A4 paper with Mo’s signatures on them “to be used when needed and when Mo was absent from Hong Kong”: see D1’s VRI₁.

(30) If there had not been a secret agreement, there can be no reasonable explanation why personalities from D1’s side (Mo’s side) should appear in veiled transactions and in the secret documents, for example Chang Yin in the promissory note, when the secretive “buy back” should only involve D2’s side.

(31) There is no doubt that D1 knew the purpose of setting up the BVI companies to have been for clandestine purposes, especially regarding Eastar and Great Center, and their use within the context of the fake Indent Contract (see VRI₂ Entries 44, 56, 80, 103-108, 112, 450). The Indent Contract existed simultaneously with its own Cancellation which was undated and also in D1’s possession simultaneously, the sole proprietor of Great Center was Ms Tao (PW25) who had only signed blank forms and Great Center had no business of its own, and D1 signed Exh P300 to authorise the transfer of $50M from Eastar to Great Center on the strength of this Indent Contract which itself was a sham, and subsequently D1 authorised the transfer of $51M from Shun Loong to Angel Field within a mere half an hour of the same amount having been transferred from Wisevest (another BVI company), and within one minute the same amount was transferred from Angel Field into D1’s own Shanghai Merchants.  D1 said “Yes, I knew about these transfers but it was only because PW37 had told me about them”.  For reasons already stated I do not accept that D1 under these circumstances, with the roles she played, and the office she was holding, did not know the truth and background of these events.

(32) Furthermore, in the internal document “Shanghai Merchants’ financial status as at 30th June 2002” jointly submitted by D1 and PW37 (Exh P270), the planned sale price of “an asset” was 15M, in the Promissory Note which PW1 said D2 insisted on creating to guarantee D2’s interest in the fabric business (P256) the sale price was again 15M, in another internal financial document of Shanghai Merchants jointly submitted by D1 and PW37 (P263) the planned sale price of an asset was again 15M, and in the end the fabric business was indeed “sold” to Show Good for RMB 15M (HKD 14.5M), yet D1 asserted that “these were only coincidences”.  We can see that because the fabric business had always been contemplated to be “sold off” by Shanghai Merchants, as far back as the time the conspiracy was formed, these were really no surprise and could not be coincidences.

(33) The intended result by the conspirators was successfully achieved by the middle of 2003 when all the steps were completed, namely Chau, Mo and D1 had underpaid Ying Wing’s minority shareholders by millions of dollars, had taken over Ying Wing completely, Shanghai Merchants had now become a listed company in Hong Kong, D2 was able to continue  the fabric business, having successfully “bought back” from Shanghai Merchants, and Shanghai Merchants had successfully avoided notifying the regulators because the fabric business had been “officially devalued” (with no proper or credible basis) by Mo and D1 to under 15% of Shanghai Merchants’ total NAV.  The conspiracy achieved its results perfectly.

As jury I do not accept that all the above matters had come together as sheer coincidences.  The testimony of “insider” PW1 was not only credible in itself, but also supported by external evidence such as bank records and documentary exhibits.  When viewed together, every piece of evidence and all the financial transactions make perfect sense, which can only be the result of prior agreement and careful planning between the parties.  Prosecution witnesses working with D1 testified consistently to D1’s involvement in this affair.  Although Shanghai Merchants came into existence only after Ying Wing had been completely taken over by Angel Field, D1’s involvements were consistent with evidence showing her university degree in commerce and international finance, her high position in Shanghai Land and Shanghai Merchants, and her duties within these companies.  Although the prosecution has no duty to prove motive, the evidence shows that D2 had reason to sell, and D1 et al had reason to buy, Ying Wing’s “shell” and not its business.  I will say more on motives later. 

With D1 and D2 being both directors of their relevant companies, involving themselves as principals as well as making use of their agents in the negotiations and acquisition of listed company Ying Wing, and in the making, retrieval and amendments in the secret documents, the only reasonable and irresistable inference I can draw is that both D1 and D2 possessed the requisite mens rea as related to the 1st Charge, and further they have jointly and in conjunction with Chau, Mo and PW1 carried out their plan in furtherance of the illegal agreement.  Because D1 knew the agreement was fraudulent and dishonest, it is no help for her to say that she was acting for Chau and Mo: see Michael CHUA and Anor CACC 64/1991 at page 4 to page 5.

The core of the fraud is found in the testimonies of PW23, PW34 and PW35, which I accept to be the truth.  I find that the fabric business, even if consisting only of the land buildings and machinery, must be worth something, even if not $45M which D1’s side had accepted at the time of issuing the MGO, even if I accept that the business was worth only $15M which D1’s side subsequently asserted to be worth, even if I accept D2’s expert valuing merely the land to be worth $15M, the value should have been disclosed at the time of the MGO.  Hiding this value points to intention to defraud.  Even leaving aside PW35’s valuation, D1’s side and D2 have jointly adopted the same valuation report stating the value to be $45M, and they can hardly now go back and say the report has no evidential value.  Hiding an asset value from the financial advisors hence the Independent Board Committee and hence the minority shareholders, the Securities and Futures Commission and the Stock Exchange of Hong Kong, of a significant consideration, proves dishonesty. 

I am aware that mere knowledge of something illegal does not make one a participant in a conspiracy.  However as can be seen above, there is ample evidence of acts done by both defendants to make me feel sure that there had been active parts performed by both of them.

The Prosecution needed not show motive, but motive is quite obvious in this case.  For D1 and her co-directors, they succeeded in:  (1) “backdoor listing” Shanghai Merchants so that they had a ready-made public listed company through which they could raise money from the Hong Kong public, and (2) acquiring the listed company while underpaying millions of dollars to the minority shareholders.  The conspiracy enabled D1 et al to secretly achieve the above while satisfying D2’s requirements in cash as well as both parties being able to avoid disclosure of the “sell back” via the relevant two fund-flows represented by Annexes A and B.

As for D2, he was able to raise immediate cash of $61.8M by selling only the listed status of Ying Wing, while retaining the fabric business which still had land buildings and machinery, in addition to at least the possibility of a “turn around” with the business.  D2 had nothing to lose but had everything to gain, because via the conspiracy he needed never pay anything to D1 et al any time, as the fabric business including its tangibles was something which he had never sold to anyone.

Conclusions

14. Regarding the 1st Charge, for the above reasons I find D1 and D2 guilty as charged.

15. Regarding the 3rd Charge, that D1 had prepared the relevant application for moneys in Exh P300, and the flow of moneys from one company to another, are not in dispute.  Testimonies including those from PW30, PW31, PW32 and PW36, including D1’s VRI₂ (see analysis above, especially under §13 subparagraphs 32 and 33), prove beyond reasonable doubt that the $53.1M had never been intended for use, and was never used, for the falsely stated purpose of buying decoration materials for the Wu Zhong Road Project. D1 by her status and role played within Shanghai Land and Shanghai Merchants, and from what she had said in VRI₂, must have known the real purpose of the application in P300 had in reality nothing to do with the Wu Zhong Road Project.  She had signed P300 and had directly instructed PW18 to prepare the moneys for transfer.  D1 says Exh D15 shows the projected cost was different from P307, and so the Indent Contract was genuine, but analysis on the Indent Contract in light of the whole of the evidence, and the effect of PW36’s testimony, contradicted her thesis beyond reasonable doubt.  D1 on the one hand said she knew nothing about the background of any document she had signed, but on the other hand she insisted that the Indent Contract for the Wu Zhong Road Project was genuine:  in other words she wanted to have it both ways.  I have no doubt that D1 knew P300 was a false document, and that when she initiated its preparation and her subsequent signing of the same, she was dishonest.

D1 says if the Indent Contract was a fraud, there would have been no need for a Cancellation document.  However there is an easy explanation, even though I do not, nor is it necessary for me to, make this a finding.  The explanation is, if someone was to ask D1 et al at a later date why the $15M had not gone to the Wu Zhong Road project, the Cancellation document would be a perfect shield for them to use.

Actually, even if the Wu Zhong Road Project had been in existence, or had been contemplated, it had nothing to do with the $15M having been used for a different and dishonest purpose, namely to “finance” Show Good in its sham “buy back” of Park Well.  Furthermore, D1 told the ICAC that the money had actually gone to Shanghai for Chau’s use. 

16. I find that the false application Exh P300 was a document within the meaning of “false accounting” under the Theft Ordinance: see LAM Choi-lan CACC 91/1999 at especially paragraphs 16 to 20.  In any event the Defence do not dispute this to be an “accounting document”.

For the above reasons I find the 3rd Charge against D1 to have been proved reasonable doubt, and she is convicted of this Charge.

* Annexes A and B are attached after this page.

Annex A

Annex B