HKSAR v. LAI WUN YIN AND ANOTHER

HCCC 66/2018

[2020] HKCFI 668

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CRIMINAL CASE NO 66 OF 2018

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Transcript of the Audio Recording
of the Sentence in the above Case

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COURT: Now, I start to read out the sentence.

The charge

D1 and D2 were both convicted after trial of one joint count of conspiracy to defraud, contrary to common law and punishable under Section 159C(6) of the Crimes Ordinance, Cap 200.

The particulars of the offence state that the two defendants between 2 June 2008 and 22 June 2009 in Hong Kong, conspired together and with Chun Chi-wai (who was D1’s husband) and others to defraud the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) and/or its officers, servants or agents, by dishonestly submitting or causing to be submitted false financial results and information of China Metal Recycling Holdings Limited (“CMR”) and thereby inducing the Stock Exchange to accept the same as true and accurate, and approve the application of the company for listing on the Main Board of the Stock Exchange.

The defendants

Backgrounds reports have been obtained for the defendants at the request of the defence and I have regard to those backgrounds reports.

D1 was born and educated on the Mainland and she received education up to the secondary level. She and her husband, Mr Chun, met and married on the Mainland and they have three daughters. Two of the daughters have already graduated from university in London and the youngest one is still studying there. In the prospectus, it was said that the Chun couple had cofounded a group of companies under the umbrella of Asia Steel Holdings, the shares of which were wholly owned by Mr Chun. Asia Steel (Holdings) which had operations both in Hong Kong and the Mainland was engaged in trading of scrap metal and its trading arm Central Steel (Macao Commercial Offshore) Limited (“CSM”) was situated in Macau.

Subsequently there was a plan for the group to go listed and for that purpose CMR was incorporated in Cayman Island on 18 July 2007. Mr Chun beneficially owned all the shares of CMR through a company called Wellrun and D1 became one of its non‑executive directors.

As regards D2, she was also born on the Mainland. She came from a humble and difficult background. She came to Hong Kong at a young age. She had worked in different companies before eventually landed in Asia Steel. She was very much a self‑made woman and she worked her way up, starting as an account clerk. At the material times, D2 was the Administrative General Manager of Asia Steel and then CMR. The evidence shows that she was a trusted employee of Mr Chun and her role in the company was like that of a “housekeeper”. She is married with a son who is now studying in a local university.

Both of the defendants have a clear record.

The listing applications

The evidence shows that CMR submitted its first application for listing on 2 June 2008. The tax that CMR opted for its listing application was the “profit test” which, among other things, required that during the three-year track record period its profit attributable to shareholders in respect of the most recent year must be not less than 20 million Hong Kong, and in respect of the first two years the profit must be in aggregate not less than 30 million Hong Kong.

However, then came the worldwide financial crisis, and as a result of which additional inquiry was made by the Stock Exchange and the SFC about the impact of the financial crisis on the industry as a whole. Since it was not possible for CMR to deal with all the additional inquiries from the Stock Exchange and their subsidiaries within the six-month validity period, the listing application was allowed to lapse.

Then, on 24 February 2009, CMR submitted its second application for listing. The test opted for was also the “profit test” but the track record period became 2006, 2007 and 2008. A number of documents were submitted to the Stock Exchange in support of the second application and naturally they were similar to those already submitted for the first application. The supporting documents included a draft prospectus (A1 Proof)(P145), a draft accountant’s report on the financial information of CMR and its subsidiaries for the three-year track record period (P146), a list of major customers and suppliers (P147a), a memorandum on profit forecast (P138) and a memorandum on cash flow forecast (P139).

All the directors of CMR, including D1, had signed documents confirming the accuracy of the information submitted and there was no dispute that the Stock Exchange relied on the accuracy of the information submitted for their consideration of CMR’s listing application.

The listing

Upon the approval of the application by the Listing Committee of the Stock Exchange, on 10 June 2009 CMR issued a prospectus entitled “Global Offering” P122, inviting application from members of the public to subscribe for its shares. The response from the investing public was enthusiastic and the shares were oversubscribed so that more shares had to be issued to meet the public demand. On 22 June 2009, the shares of CMR were listed on the Main Board of the Stock Exchange and a total of about 1. billion Hong Kong was yielded from the initial public offering.

However, just about four years and a half later, on 28 January 2013 the trading of CMR’s shares was suspended. Eventually, in March 2015 the company was wounded up by a court order and provisional liquidators were appointed. I was given to understand that as at today, the liquidation process is still ongoing and D1, as a director, is facing a civil claim by the liquidators acting on behalf of the company.

The scale of the conspiracy

Later investigation by the police revealed that CMR was a castle built on sand. The police had seized a total of over 1,400 bills of lading of CSM just for the period between 2007 and 2009 and a shipping expert, PW8, was asked to comment on 647 of those. MFI-8 is a table showing the exhibit numbers and page references of all the bills of lading which PW8 has examined. PW8, using the very stringent criteria which he had adopted, opined that out of those 647 bills of lading 353 were definitely false and only five of them were genuine. His evidence was not subject to any challenge and he was not cross-examined.

The treasury accountant, PW17, was asked to examine the accounting documents and bank accounts of CMR, CSM and their trading partners between 2007 and 2009. It should be noted that that period overlapped with but was not exactly the track record period in question. However, the figures for the year 2009 will still be relevant as far as CMR’s profit and fund flow forecast were concerned.

PW17 examined the transactions of CSM with: two companies which were said to be its suppliers, namely Cheung Fat and Lane Tone International; and two companies which were said to be its customers, namely Guangzhou Qi Le and Guangzhou Metallurgical.

As regards Cheung Fat, I note that it was said to be one of the top five suppliers to CMR for 2006, 2007 and 2008 in P147a. As regards Metallurgical, it bore a similar name to Guangzhou Metallurgical and the latter was said to be part of the Guang Gong Group, a top customer listed in P147a. However, there is evidence that Cheung Fat, Lane Tone International, Qi Le and Metallurgical were companies set up for perpetrating the conspiracy.

PW17 conducted a funds flow analysis of selected bank accounts of the aforesaid companies and summarised her findings at section B10 of her first report, TA1. The same details were put in a flow chart, at appendix 7 of her report. PW17 observed that there was a “Circular Funds Flow” among the selective bank accounts in that: CSM paid a total of 538 million US to the two suppliers; in turn, the two suppliers paid a total of 547.1 million US to the two customers, and finally, the two customers paid a total of 834.1 million US to CSM.

Relying on the opinion of the shipping expert, PW17 said that if one were to take only those transactions relating to the bills of lading which PW8 categorised as “False” as not being genuine, then the overstatement in CMR’s aggregated gross profit between 2007 and 2009 would be at least 32.5 per cent. However, if all of CSM’s transactions with Qi Le and Metallurgical were not genuine, then the overstatement could be as high as 59.9 per cent.

In the present case it would appear that the elaborated checks that are usually put in place to protect the investing public had not been effective so that the purpose of the conspiracy charge, that is, the listing of CMR by fraudulent means, had in fact been achieved. However, one knows not whether the joint sponsors and/or the reporting accountant, all of which are well known and respectable firms in their own fields, had been deceived or misled by anyone in the performance of their due diligence and I would not speculate, as none of them had rendered assistance to the police during the investigation and none of them gave evidence in this trial.

What we do know is that, by their verdict, the jury was sure that there was a conspiracy to defraud the Stock Exchange to cause it to allow CMR to become listed by means of false financial results and information which grossly overstated CMR’s profit. Furthermore, the jury found as a fact that the defendants were knowing parties to that conspiracy. In the event, the object of the conspiracy was to cheat the Stock Exchange was do into permitting the listing of the company on the strength of the financial statements which contained material falsehood. Members of the public were tricked thereby into subscribing for shares in that company.

The impact of the conspiracy

That said, it has not been the prosecution case that but for the overstating, CMR would have never been able to meet the Stock Exchange’s profit requirements for listing. It has been the prosecution case that had the Stock Exchange known that material false financial results and information had been used in support of the listing application, the Stock Exchange or its officers in charge of listing would have bound to raise queries and require answers so that the approval, if any, would at least not have been given at that time.

The reasons for this was that the Stock Exchange has been entrusted with the public duty by law to ensure, among other things, “an orderly informed and fair market” for the listing and trading of stocks in Hong Kong, and in discharging that duty the Stock Exchange must act in the interests of the public.

Although the victim names in the charge is only the Stock Exchange and/or its agents, clearly the false information presented to the public in CMR’s prospectus and documents submitted in support of the listing would be of considerable interest and importance to the shareholders, investors, potential investors and creditors of CMR and would have a bearing on the eventual listing price of its shares. I am of the view that I am entitled to take into account the potential harm to the investing public in sentencing the defendants.

The fraud is a very serious one in terms of the numbers of companies involved, the quantity of false documents created, the complexity of the fund flows as identified by PW17 and the amount raised from the IPO. To borrow the word of the Court of Appeal in HKSAR v Chu Chick Kei and Another [2013] 5 HKC 21, the fraud was an ambitious one committed on a grand scale. The evidence also shows that the conspiracy is meticulously planned and carefully implemented over an extended period.

On the evidence, the mastermind seems to be Mr Chun, who was D1’s husband and D2’s boss. However, a massive fraud like the present one could not have been committed by him alone. The evidence suggests that apart from Mr Chun and the defendants, there were other co-conspirators acting in and outside Hong Kong, including Mr Baixing, Ms Ng and Ah Yuk. There could be some others. Although PW1, Simon Chan, was not presented by the prosecution as an accomplice as such, the evidence shows that his involvement in the matter was a heavy one. The fact that there was a second attempt for listing shortly after the first had lapsed showed a degree of persistence on the part of those involved.

The Hong Kong Stock Exchange is a major component part of the financial system. The economic wellbeing of Hong Kong very much depends on the proper functioning of the Stock Exchange and the other financial institutions, including of course the banks. In turn, the credibility of the Stock Exchange would depend on the honesty of those players who wish to use the platform to invite the public to put their money for investment. The integrity of that system is challenged and threatened by the defendants’ conduct. Furthermore, any use of fraudulent accounting documents and/or information to get listed would potentially bring disaster for the unsuspecting public. By their agreement and by their conduct the defendants have caused damage to the integrity of the Stock Exchange of Hong Kong. Those involved in this scheme cannot expect leniency from the court.

Sentencing considerations and case authorities

For the offence of conspiracy to defraud, Section 159C(6) of the Crimes Ordinance stipulates that any person convicted of this offence shall be liable to a maximum imprisonment term of 14 years.

In Attorney General v Dominic Cheung Kai Man [1987] HKLR 788, it was suggested that within the broad band of fraud of the worst kind would be a case that involved a breach of trust in multimillion dollar range by a person in a senior and responsible position with an element of public impact. In such a case, it would be appropriate for the court to start from a point at or near the statutory maximum.

In HKSAR v Fu Chu Kan and Others, CACC 104/2007, the Court of Appeal further observed that other aggravating features are the period over which the fraud has been perpetrated (see for example, Barrick [1985] 81 Cr App Rep 78) and the numbers of persons, both within the company and outside it, which the prime mover has drawn into dishonest activity.

Recently, in the case of SJ v Lo King Fat and Others [2016] 2 HKC 230, the Court of Appeal was asked to review the sentences passed on the three respondents in respect of the offences of conspiracy to defraud and bribery. After reviewing the case, the court adopted a starting point of 7 years for the conspiracy in respect of the 1st respondent and a starting point of 8 years in respect of the 2nd respondent. In the course of review, cases including AG v Dominic Cheung Kai Man, HKSAR v Fu Chu Kan and Others and HKSAR v Chu Chick Kei and Another were examined and factors said to have made frauds of the worst kind were identified, namely, a breach of trust in multimillion dollar range by a person of senior and responsible position and with an element of public impact in addition to the period of conspiracy and the scale of the scheme were also identified as aggravating factors.

Roles of the defendants

I bear in mind that the sentence imposed by the courts must reflect the seriousness of the offences and to deter those who are thinking of using similar schemes to manipulate the system in order to get listed and to cheat the Stock Exchange and the investors. Of course, on the other hand I cannot ignore the individual roles played by the defendants.

D1

As regards the role of D1 in the offence there is evidence showing that:

(a) her company, Aprima, was involved in the circular funds flow concerning three parcels of money. Parcel A, US$5,000,020 withdrawn on 4 December 2007, parcel B, US$2,500,020 withdrawn on 7 December 2007, and parcel C, 26 million Hong Kong withdrawn on 11 December 2007;

(b) she had, between 2007 and 2009, signed 22 remittance applications of CSM involving multimillion dollars of money, which according to PW17, accounted for about 10 per cent of the total movement of funds from CSM to Cheung Fat and Lane Tone Hong Kong and those funds were involved in or formed part of the “Circular Funds Flow” as identified by PW17;

(c) she had signed a company cheque of Worldwide, another company of hers, in the amount of 47,900 Hong Kong, on 20 September 2007, to pay for Simon Chan & Co for the setting up of Cheung Fat;

(d) she was present at the long board meeting of CSM held at the office of Messrs Sidley Austin on 22 May 2009. There was also evidence that D1 had signed various documents, which directors of CMR had to sign for the listing.

The above matters show that D1 was a party to the conspiracy at a relatively early stage and not as a latecomer. The above matters also show that D1’s role in the conspiracy was a relatively limited one, mainly if not solely about signing of cheques or remittance applications in furtherance of the conspiracy. This is because of the evidence that although she had a room in the offices of CMR she was not seem to have been involved in the daily management of CMR or its subsidiaries. She had been granted an option to purchase about 2.18 million shares in CMR’s IPO but she did not exercise any of those. She was paid 150,000 Hong Kong per annum for her role as a non‑executive director. On the other hand, I do not lose sight of the fact that her husband, Mr Chun, did make a huge profit from the fraud.

There were immigration movement records showing that Mr Chun was out of Hong Kong from time to time. In all the circumstances, although D1 did not give evidence, I am prepared to accept the mitigation advanced by Mr Leung that it may be the case that she was acting under the influence of her husband. Nevertheless, D1’s participation, I should say knowing participation in the conspiracy carried with it an element of breach of trust because of her position as a director of CMR, albeit a non-executive one.

D2

There is direct evidence of the accountant Simon Chan, PW1, who had set up companies and provided accounting and secretarial companies which featured in this offence. PW1 gave evidence against D2 that:

● she was the contact point between Mr Chun and him;

● she engaged PW1 to set up companies which feature in this case;

● she arranged for the signing of documents for incorporation of those companies and asked PW1 to prepare for the ledgers and financial statements of companies which contained material falsehood;

● she once received through PW1 about 600,000 Hong Kong in cash which was the proceeds of a cheque from Cheung Fat; and

● she once came with Mr Chun to PW1’s office to deal with the ledgers of Cheung Fat.

Over the period between 2007 and 2009, D2 received basic salary of about 2.2 million Hong Kong. She had been granted Pre-IPO options to purchase 1,746,725 shares of CMR. I am told by Mr Wong, for the prosecution, that she exercised those options and made a profit of about 3.07 million Hong Kong. I note that she was not the only employee who was granted Pre-IPO share options. However, not counting those who were said in the prospectus to be in the “Senior Management”, hers was the largest among those 36 employees who had been granted share options. But for the fraud, D2 would not be able to make any profit out of her share options.

Similar to the situation of D1, however, I am prepared to accept that she was acting under the influence of Mr Chun. In view of all the evidence, it is apparent that she was recruited by Mr Chun into the conspiracy because she was a trusted employee. However, in my assessment, her role in the conspiracy remains extensive, significant and indispensable.

Starting point

In my assessment, the fraud revealed in the present case comes very close to the worst of its type. Therefore, in view of the case authorities cited above and on the basis that Mr Chun was the mastermind and he orchestrated this massive fraud, had he not absconded in October 2015 whilst on police bail and had he been convicted after trial, in my view his sentence would not be less than 12 years’ imprisonment.

Regarding D1, in view of the relatively limited role played by her as revealed by the evidence, I am of the view that the appropriate starting point for her is one of 7½ years’ imprisonment.

Regarding D2, despite the fact that she was an employee, I am of the view that she was more involved, both in terms of scope and depth, than D1 in the implementation of the conspiracy. I consider that the appropriate starting point for D2 is one of 8½ years’ imprisonment.

Regarding mitigation, both Mr Leung, for D1, and Ms Tsang, for D2, raised undue delay as a factor for seeking reduction in sentence. Mr Wong has, at my request, prepared a chronology of events. As to this, I have regard to sentencing in Hong Kong by Cross and Cheung, 8th Edition, paragraph 30-82 to 30‑94, and in particular the legal principles set out in Scook v R [2008] 185 Australian Cr Rep 164, applied in HKSAR v Chiu Chi Wing, CACC 243/2012, unreported.

I note that the case was first investigated by the Securities & Futures Commission which led to the winding-up proceedings in 2005, Re China Metal Recycling Holdings No 3 [2015] 2 HKLRD 415. Neither of the defendants appear, as such, in that civil proceedings. It was only on 1 April 2015, that the SFC released materials from the winding-up proceedings to the police. However, it would not be the case that the police could use or could rely solely and directly on the materials they got from the SFC and dispense with their own investigation, as the purpose and subject matter of the SFC’s investigations was very different.

There were also very different issues, procedures, rules of evidence and standard of proof in the winding-up proceedings and, as I said, neither of the defendants appear as such in those civil proceedings.

Whilst D1 was arrested on 26 July 2012, D2 was only arrested on 7 July 2015. As I have said, the police encountered difficulties owing to the lack of cooperation from the joint sponsors, reporting accountant and the employees of CMR in its Hong Kong office. Despite all the difficulties, the defendants were charged on 8 March 2016 and the case was eventually committed for trial on 26 February 2018.

Having considered the chronology and submissions from all parties, I am satisfied that there had been no undue delay in the police investigation as a whole, bearing in mind the complexity of the transactions and the quantities of documents involved. I am also satisfied that there had been no undue delay in the advising process and the compiling of the committal bundle, bearing in mind that formal evidence has to be obtained in admissible form.

In this regard I note that the committal bundle alone consists of 200 box files containing 55,189 pages of documents. This is not to count the additional 7,697 pages of documents produced during the trial from the prosecution and the defence. Therefore, the quantity of “raw materials” which the police must have come across during investigation would be more.

Both of the defendants did not make any admissions to the offence under caution. This is their right and they should not be prejudiced for the exercise of that right. However, the lack of admissions from the defendants helps to explain why the investigation took so long.

After the committal, between 18 April 2018 and 21 August 2019, there had been a total of 11 case management hearings, most of them before me, and the progress of the case had been closely monitored. I do not agree that translation of documents was a major cause to the late trial dates. At the first CMH no trial dates had yet been fixed nor was the language of the trial determined.

Given the large quantities of documents involved, some in Chinese and some in English, it would not be reasonable to expect the prosecution to start the translation process before the language of the trial was decided. I note that initially the defence has asked for a Chinese trial. That, however, was later found to be not practicable and therefore at the second CMH, on 28 March 2018, it was decided that the trial should be conducted in English.

On the other hand, I agree that the trial might have commenced a few months earlier, had the prosecution applied before committal for a letter of request to Macau in respect of the evidence of PW10 and PW11, the employees of CSM in Macau. At the third CMH, on 12 July 2018, the prosecution informed the court that they were considering obtaining commissioned evidence from Macau. However, according to the chronology, the prosecution should have anticipated the problem of the availability of the two ladies as early as mid-December 2017.

Whilst I appreciate that the prosecution was facing a difficult decision to make and it was natural to adopt a “wait‑and‑see” attitude to see whether PW10 and PW11 would finally agree to come to Hong Kong, the blunt fact is that in the event the letter of request still had to be applied for and that was done in mid-February 2019, by which time a few months has been lost and this is not the fault of the defendants.

At the fifth CMH, on 21 December 2018, the prosecution informed the court that their Macanese counterpart had reverted to them about the draft letter of request. On the same occasion, the trial date was fixed to commence on 16 December 2019 with 60 days reserved.

After several further CMHs and with much urging from this court to the prosecution to expedite the commissioned evidence the Macanese proceedings eventually took place on 6 September 2019. At the 10th CMH before A Pang J, the parties indicated that they desired to keep the trial date as fixed without waiting for the return of the formal evidence from Macau.

On 16 September 2019, the trial commenced as scheduled. The first few days was spent on several preliminary matters, then the empanelment of the jury started on 23 September 2019. The closing speeches began on 11 December 2019 and the summing-up on 16 December 2019. The jury retired on 18 December and returned their verdict on the following day, which was day 62 of the trial.

Judging from the above, although the prosecution could have applied for the letters of request earlier, say, in the first quarter of 2018, it would be uncertain at that stage as to when the commissioned evidence would be eventually available. On the other hand, I believe that the fixing of trial dates have helped to impart a sense of urgency and to expedite the Macanese proceedings. In the end of the day the trial dates were kept. In my assessment, the actual time lost caused by the delay in applying for the letter of request would be in terms of a few months only.

During the mitigation, my attention was drawn to the fact that D2 is now said to have been suffering from depression arising from post-traumatic disorder arising from the legal proceedings. On the other hand, I note that it said in the background report that D2 started consulting a psychiatrist in 2012 due to great stress at work and has sleeping problem. However, it is not uncommon for a defendant pending trial to be under stress owing to the uncertainty of his or her predicament. Unlike the recent case of SJ v Cheng Tsz Hin, CAAR 2/2019, there is no evidence before me to suggest that her depression stands out from a deep sense of remorse. Therefore, I do not consider D2’s psychiatric condition is a matter to which much weight could be attached.

Apart from the issue of delay, Mr Leung and Ms Tsang also seek a reduction of sentence on the basis of the way in which the defence was conducted. I note that there were extensive Admitted Facts, but for the Admitted Facts the prosecution might have difficulties adducing evidence from one or two shipping companies which had since ceased operation. On the other hand, the trial has used up all the 60 days reserved for it and overrun a little bit.

On the basis of the above two aforesaid factors, namely, delay and cooperation from the defence in the conduct of the trial, I deduct 4 months from the starting point of each of the two defendants respectively.

I have read the mitigating fact letters filed on behalf of each of the defendants. I note that both of them had a good character and have the benefit of strong support from relatives and long-term friends. On this basis I am prepared to temper justice with mercy and deduct an additional 2 months from the defendants’ respective starting points.

Having carefully considered the mitigation, both written and oral made on behalf of D1 and D2, I do not see any further ground for reduction.

Conclusion

Based on all of the above, D2 is sentenced to an imprisonment term of (7 years 6 months minus 4 months minus 2 months) equals 7 years. The prosecution seeks a disqualification order against her as a director. Mr Leung does not oppose that application. Having considered Ray Millard [1994] 15 CrApp R(s)445 and the criminality of her conduct, I order that D1 be disqualified for a period of 10 years.

As regards D2, she is sentenced to an imprisonment term of (8 years 6 months minus 4 months minus 2 months) equals 8 years.