HKSAR v. CHENG CHEE TOCK, THEODORE AND ANOTHER

DCCC476/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 476 OF 2011

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Reasons for Sentence

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1.  D1 and D3 were jointly charged with one count of conspiracy to defraud. D2 and D3 were separately charged with various counts of money laundering offences. After trial I convicted D1 and D3 of their respective charges and acquitted D2. On 4 October I called for a background report on D1 and D3 and adjourned the sentence to today, 30 October. Today the prosecution also apply for disqualification order under section 168E of the Companies Ordinance against D1 and D3. I will hear the costs applications by the prosecution after the delivery of these Reasons for Sentence.

Brief facts

2.  D1 was jointly charged with D3 and Kenny Nam with one count of conspiracy to defraud the board of directors and shareholders of C Y Foundations (CYF) by concealing an alleged connected transaction and completed the said transaction without complying with the listing rules of the Stock Exchange.  The monies involved in all the money laundering charges were originated from the sale of the property situated at the 17th floor, 200 Gloucester Road, Wanchai (the 17/F property).

3.  Through its subsidiary, CYF bought this 17/F property in November 2007.  D1 was the chairman of CYF from February 2007 to 8 April 2011.  At the material time D1 was also the chairman, CEO and controlling shareholder of Sino Strategic International (SSI), a company listed in Australia.  D3 acted as a consultant to CYL.  SSI had a subsidiary company, CEH, and CEH set up a company called Sino Joy in Hong Kong.  In May 2006 Sino Joy acquired the 17/F property at HK$42.2 million.  A company register in BVI called Mansion Gains was set up in April 2007, and Mansion Gains was transferred to Nam in the following month, May 2007. 

4.  On 15 June 2007 CEH sold the 17/F property to Mansion Gains at $46.5 million by transferring all the shares in Sino Joy.  Three sums of $4.65 million each were paid to CEH between April and June 2007.  The deal was completed on 29 June 2007.

5.  In September 2007, D2 became the shareholder of Beauford, a BVI company.  On 11 September 2007 Beaufort acquired Mansion Gains from Nam for a consideration of $53.5 million.  Through its subsidiary, CYF acquired the 17/F property with the same consideration of $53.5 million.  An announcement and circular was issued by CYF in accordance with the Listing Rules, stating that the property transaction was not connected with any connected persons of the company and the ultimate beneficial owner of the property was third parties who were independent of CYF.

6.  The sale process of the property in the total sum of $21.5 million-odd were credited into D2’s personal account from the bank account of CYF in October 2007 and December 2007 respectively.  Later D2 transferred various sums of money to the bank account of D3 and that of D1’s wife.  D3 faced two charges of money laundering, Charges 3 and 7, in that he dealt with two large sums of money, namely $10.7 million in October 2007 and $2.06 million-odd in December 2007.  These two sums were transferred to D3’s bank account with the Hang Seng Bank. 

D1’s Mitigations

7.  Mr Duncan SC submitted that D1 was a man of clear record and a person of outstanding achievements and character through his hard work.  D1 shared his success with others.  The mitigation letters speak universally that D1 is an honest and trustworthy person.  The offence was truly isolated departure from D1’s normal behaviour.  The charge also does not reflect fraud of the most serious kind.  The purchase price by CYF was the market price, supported by the valuation report.  It was submitted that had special meeting be convened, the necessary resolution would be passed.

8.  At the end of the day when CYF sold the 17/F property at $70.9 million, the company made a profit of $17.4 million.  Mr Duncan submitted that there was no evidence to suggest that D1 pocketed the profit. 

9.  D1 would not challenge the application for disqualification order, but it was submitted that such an order should be treated as part and parcel of the punishment imposed by the court.  It was submitted that the prosecution’s reliance on paragraph 7 of the case, The Official Receiver v Chan Min Simon, HCMP6570/2000 was misconceived.  Mr Duncan SC referred to the English case R v Jeremy Keith [2010] EWCA 477, at paragraph 118 and 119 of the judgment, and it says:

“Given all the circumstances of the offences were satisfied that the disqualification orders were appropriate in principle for the appellants who, as directors of company, abused their positions and obtained money by unlawful means. However, there are financial consequences for every year they remain disqualified, and the length of the orders must reflect the level of criminality. The disqualification would add significantly to the punishment imposed. We have no doubt that for men of this kind the very fact of their convictions and sentence and the publicity attaching to their trial will amount to a severe punishment for them both.”

10.  Regarding the personal circumstances of D1, Mr Duncan SC submitted that D1 is chronically and seriously ill.  He referred to the case HKSAR v Cheng Ho Chow CACC111/2009, and submitted that by serving D1’s sentence in prison the physical and mental suffering borne by D1, because of his inability to take care of himself, would render his punishment more severe than that visited on an ordinary prisoner whose suffering is only deprivation of freedom.

11.  This court was urged to temper justice with mercy to reflect the situation that D1 is likely to encounter, with regard to his health in prison environment.  D1 is unlikely to re-offend and this conviction is a considerable fall from grace by a sick man who had contributed to the community. 

D3’s Mitigations

12.  Mr Tse SC submitted that D3 was convicted of two categories of offences and urged the court to consider the two money laundering charges as part and parcel of carrying out the 1st charge, and they were a continuation of the initial fraud.  As such, a concurrent sentence for all these charges was called for.  On top of D1’s admissions, Mr Tse SC submitted that given the object of the conspiracy charge, the present offence that D3 faced, was not the usual type of the offence of conspiracy to defraud.  D3 was not trying to make a profit out of the transaction.  It was a kind of sidelining certain procedures which should be complied with.

13.  The shareholders of CYF did not suffer any loss.  Had the procedures been followed, the possibility of having the resolutions rejected was low.  The period of conspiracy was short.  Apart from the said sidelining, it was further submitted that everything was done properly by Nam and CYL, e.g.  the consent of the board was obtained and all relevant company documents were prepared.

14.  D3 played the role of “foot soldier” and was not the instigator of the scheme.  Everything done by D3 was not done in secrecy and he got the implied consent of the senior management of CYL.  No one in CYF raised any objection to the proposal.  D3 did not have any personal gain.  He was holding the money as the custodian for others.  There was no international element in these offences. 

15.  Regarding D3’s personal circumstances, Mr Tse SC submitted that D3 did not have a good childhood and he worked all his way to a successful career.  He is filial to his family, and because of these proceedings, D3’s business has shrunk.  It is the dark age for D3.  He had a clear record and cooperated fully with the authority.  D3 was not at fault in prolonging the present trial.  This was a good lesson to D3.

16.  Mr Tse SC would object to the imposition of the disqualification order as D3 all along was not acting in the capacity of a director of a listed company.  It is inappropriate to invoke the provision against D3. 

Sentence

17.  The offence of conspiracy to defraud would attract a maximum sentence of 14 years, and it’s not disputed that there is no sentencing guideline.  That said, the sentence to be imposed in the present charge against D1 and D3 has to be justifiable in the context of the facts of the case and the culpability of the defendants.  As I said, there is no sentencing guideline or tariff for the offence of conspiracy to defraud.  The offence is fact-specific, and so is the sentence to be imposed. 

18.  Hong Kong has the reputation of being a free city whereby entrepreneurs could set up their companies or entities to pursue their economic goals.  As such company governance, especially for those public listed companies, is of utmost importance to provide confidence to the general public and to protect the interests of the minority shareholders. 

19.  From D1’s background report, it is not difficult to see D1 came from a well educated and prestigious family.  His parents, and so were family members, experienced a very difficult time during the Cultural Revolution in China.  D1 came to Hong Kong in 1975 and studied in the then Hong Kong Polytechnic.  He worked diligently and was successful in pursuing his career.  In recent years, D1 who is 63 years old now is suffering certain diseases and is required to receive follow-up medical treatments.  However, it is also evident that D1 showed no remorsefulness in committing the present offence.  He maintained that he depended very much on professionals to manage his business in various companies and had no personal gain for the business transaction which dragged him to the present offence.

20.  Counsel for D1 tendered a bundle of 21 mitigation letters from D1’s employees, his business associates and social acquaintances, both in Hong Kong and Mainland China, together with a number of medical reports.  There is none from D1’s wife.  Another mitigation letter from one surnamed Lo was sent to this court directly, of which I have brought to the attention of D1’s counsel.  All of them plead to this court for a lenient sentence.

21.  Counsel for D3 also submitted a bundle of mitigation letters from D3’s family members, former colleagues and a friend. D3 was appraised for his participation in a voluntary project.  D3 was described as a filial son and all along looked after his parents both financially and physically.  D3’s sister commended D3 to be a person of good heart and one who donated both money and time to charity.  D3 might well be the “foot solider” in the scheme, but he was instrumental to the whole plot. 

22.  The fact that he instructed others to carry out the scheme in open manner does not necessarily mean he had nothing to hide from outsiders.  I accept that the facts specific to Charge 1 are not the most serious of its kind.  I accept that both D1 and D3 are men of good character and they had clear record for 63 years for D1 and for 42 for D3.  I accept that both of them worked hard and achieved success in their respective career paths.  That said, D1 owed duties to the shareholders, the public and the Hong Kong Stock Exchange.  It is important that fair play is upheld in the commercial community in Hong Kong.

23.  A clear message should be sent to the commercial or business community in order to protect and uphold the hard-won reputation for reliability and integrity of the business community in Hong Kong and that if anyone is caught and found guilty, he or she will face the dire consequences. 

24.  The imposition of the Listing Rules is to ensure better governance of companies in Hong Kong.  The flouting of listing rules, the misuse of funds and/or manipulation of company resources smacks of the attitude for better and fair governance.  This problem could or might well be exacerbated by a lack of tight regulation and a comprehensive mechanism to punish those who manipulate the system. 

25.  It is also clear to see that quite many people in the senior management level of companies failed or were reluctant to distinguish their own funds and the funds of a public listed company.  Quite often the funds or resources were treated as his or her own in order to suit his or her personal needs or the needs of other related or connected companies. 

26.  In these circumstances and with the need to send a clear message and right message to the business community, I take the view that a custodial sentence is inevitable, even though I do have sympathy for both D1 and D3.  Although the scheme did provide a potential economic risk to the company and shareholders, CYF did not suffer any economic loss at the end of the day. 

27.  D1 was convicted of one count of conspiracy to defraud.  I have taken into account of the forceful mitigations put forward and the facts of this particular case.  I will be lenient to him and adopt a starting point of 6 months.  D1 was convicted after trial and does not show any remorse.  That said, I would also take into account of his previous clear record and his health condition.  I would reduce 1 month from the prison term and sentence D1 to 5 months' imprisonment.  Given D1’s health condition, I am sure he will receive sufficient medical attention and treatment during his detention.

28.  D3 was convicted of three charges.  For Charge, I would adopt a starting point of 6 months and sentence him to 6 months.  Like D1, D3 had a clear record and had put forward powerful mitigating factors.  To maintain consistency I will sentence D3 for 5 months on Charge 1.

29.  As regards to offences of money laundering, I consider that D3 was instrumental to every process or step in implementing the scheme.  As I mentioned in the reasons for verdict, the proceeds were from a known source and it could be taken as an ‘explained receipt’ of money.  It is different from the usual money laundering cases. As such, for Charges 3 and 7, I would adopt a starting point of 6 months for these two charges and sentence D3 accordingly.  This set of sentences is to be served concurrently. 

30.  On the other hand, I do not accept that the money laundering charges were part and parcel of the conspiracy charge.  As D3 was further involved in the transferring of the funds, by taking into account of the totality principle, I order that two months of Charges 3 and 7 are to be served consecutively to Charge 1.  That means I sentence D3 to a total of 7 months.  

31.  As regards the application for disqualification order under section 168E of Cap 32, I have considered the special circumstances of this case and the spirit of the provision.  I order that D1 be disqualified for 3 years.  However, I would not make such an order against D3.