HKSAR v. CHEUNG CHING HO

DCCC1443/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 1443 OF 2009

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Reasons for Sentence

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1.  Defendant, you have pleaded not guilty to four offences of conspiracy to defraud, contrary to Common Law and punishable under section 159C(6) of the Crimes Ordinance, Cap. 200. However, after my refusal of your application for a permanent stay of the proceedings, you thereafter changed your pleas to ones of guilty. You admitted the brief facts, and I convicted you.

2.  The facts were as follows.  A warrant is a derivative for security that gives the holder the right to purchase securities, usually equities, from the issuer at a specific price within a certain timeframe.  Derivative means security whose price is dependent upon or derived from one or more underlying assets.  The derivative itself is merely a contract between two or more parties.  Its value is determined by fluctuations in the underlying asset. 

3.  The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.  Derivative warrants, hereafter referred to as “DWs”, are financial instruments which give investors the right, but not the obligation, to buy or sell an underlying asset at a predetermined price prior to a specified expiry date. 

4.  In Hong Kong DWs are listed and traded by the investing public by brokers on the Stock Exchange of Hong Kong Limited.  Each DW, before its maturity, bears a unique stock code.  At all material times Calyon Financial Products Limited, hereafter known as “CF”, Citigroup Global Markets Holding Incorporated, hereafter known as “CGMHI”, Standard Bank Plc., hereafter known as “SB”, and Dresdner Bank, “DB”, are four of the issuers authorised to issue DWs.

5.  Since 2002, DW issuers are required to appoint a liquidity provider for each DW issued.  The LP does not have to be a member of the DW issuers group.  The respective LPs appointed by CF, CGMHI, SB and DB were CLS Limited, Citigroup Global Markets (Asia) Limited, Standard Securities Asia Limited and Dresdner Kleinwort Securities (Asia) Limited.  An LP has the function of providing liquidity of DWs in the market by being able to continuously quote to the investing public bid and ask prices to ensure that there is a source of DWs that investors can buy from or sell to.

Charge 1

6.  You were a former broker of shares.  About 2003 you came to know one Raymond Ng, who was then a trader of CLSA Limited, and later its associate company Calyon SA. 

7.  In late 2005 you approached Lam Leo Sze-Hang and told him that an ex-employee of CLSA Limited would cooperate with them by arranging favourable prices to trade in DWs to enable profits to be made.  You suggested it could be arranged for some people to pose as genuine investors, placing orders for DWs of CF and cross-trading the DWs among their accounts. 

8.  There would be an insider at CLSA Limited who would sell the DWs to their party, sometimes at a low price such that the party can either cross trade amongst themselves or sell them outright to genuine investors whom they called “fish”.  They could not dispose of their DWs to the fish.  The insider would cause the LP to buy back those DWs from them, if possible at a higher price, or at least equal to their acquired price.  They regarded this way of trading as “pushing”.           

9.  In around the end of 2005 you started to recruit people to take part in the scheme to push DWs issued by CF at a base in China.  You informed them Raymond was the boss, and the insider at Calyon was Eric Chai, who would receive part of the profit of the scheme. 

10.  You recruited various other prosecution witnesses to the scheme.  You held meetings with recruits. Around November 2005 there was a meeting in Shenzhen when progress was discussed and roles handed out.  The mainland premises were to be set up by a Stephen Chan and his girlfriend.  Computers, computer programs and accessories were to be set up.  A further meeting took place in mid-November in Causeway Bay, and all those who attended the meeting went to premises in Sheung Wan and moved computer equipment to the mainland.  Extra computers were bought in Sham Shui Po.  Since early 2006 the group, instructed by you, had been travelling to the base in the mainland from Hong Kong on every trading day to trade in DWs.

11.  Stephen Chan rented premises in Shenzhen, and then further premises.  The premises operated on an interchangeable basis to avoid detection by the mainland authorities.  There were four different units in Shenzhen, each with computers, mobile phones, Internet and ETNet services.  Stephen Chan provided most of the dummy accounts for use in the scheme, while Raymond provided others for you. 

12.  The account holders in the selected brokerage firms were known as the “heads”.  The person who received bid/ask instructions and to put up the offers through the dummy accounts were known as the “hands”.  Some of the hands were employees of the brokerage firm. 

13.  Raymond would supply in advance the relevant broker numbers representing all the dummy accounts to his “insider” at Calyon SA so that their offers could be identified.  He would then give the same to the members of the base in the mainland.

The mechanics of the scheme

14.  The trading floor of the Stock Market was open for trading from 10 am to 4 pm, with a break between 12.30 and 2.30 pm.  The scheme commenced in early 2006, and you and your team targeted DWs issues by CF, namely those associated with Raymond’s ex-employer Calyon SA. 

15.  All members of the mainland base normally lived in Hong Kong, except Stephen Chan and PW6.  They travelled to Shenzhen, returning afterwards.  The girlfriend of Stephen Chan would call up the hands of the dummy accounts in Hong Kong to confirm the transactions of the previous day to calculate the profits.  She would then give the results to you.

16.  You would phone Raymond each morning to get the stock numbers of the DWs that would be the subject of pushing that trading day by the mainland base, as well as the maximum quantities of the particular DWs that could be traded.  When you were not working on any particular day, PW1, that is Lee Wai-ming, would contact Raymond for instructions that certain trading accounts had to make profit, and sometimes a loss.  You had the responsibility of carrying out Raymond’s instructions as you were the person in charge of the mainland base.

17.  You would distribute phones to members of the base in which numbers for giving instruction to trade in DWs through dummy accounts were preset for making speed-dials.  You would assign to each member one or more than one specific DW for pushing on that particular day.  The number would depend on their past pushing experience.  All members would pay close attention to price movements of their specific DWs. This was the price movement of the DWs, and also of all bid/ask offers being put up by others in the market or by the LP of the DW in question. 

18.  These offers would tell the investor the following:

(1) the stock number of the DW in question, for example 1951, stands for CA-HSBC@EC1001, a warrant issued by the CF;

(2) the buy/sell price has was being offered;

(3) the quantity of the DW in terms of units; and

(4) the broker number, which represented the brokerage firm that put up the offer, or the LP. The LP and the mainland base were thus able to see each other and identify their respective offers from the broker numbers.

19.  Whenever a member at the base wished to put up a bid/ask offer in the market or to enter into a transaction with an existing offer put up by others in the market, he had two ways to do that:

(1) That the principal method was to speed dial a hand who could have access to a particular dummy account for the transaction. The hand could be:

(a) the account holder of the dummy account; or

(b) the trader or account executive of the brokerage firm; or

(c) any other individual who could give trading instructions to trade through the dummy account.

(2) The second less used system was for a member to give trading instructions online to certain brokerage firms that provided such a facility.

20.  Around July 2007 you requested all members of the base to have their own trading account with a brokerage firm for pushing of DWs, collecting their remuneration and collection of cash for paying Raymond.  Individual members either opened at least one new account or used one of their own accounts, or additional dummy accounts.  The member became the account holder of these dummy accounts. 

21.  During trading hours the members of the mainland base carried out frequent transactions using dummy accounts to create misleading appearance of active trading.  Each worked independently of the others, being responsible for different DWs using their own dummy accounts.  These were not real transactions.  There was no change in the beneficial ownership of the DWs.  The prosecution expert from the SFC classified them as “wash sales”. 

22.  The syndicate used 54 dummy accounts for pushing DWs.  The insider participated in the pushing by squaring offers put up via the dummy accounts by the mainland base.  The effect of pushing not only created the false appearance of trading activity of the DWs which could lure genuine investors into investing in them and possible financial prejudice.  It could, at the same time, genuinely lead to a rise in the price of the DWs in the market or prevent a sharp fall in the falling market.

23.  The roles of the insiders were:

(1) to cause offers put up by the base to be squared at favourable prices so as to enable a profit to be made against the LP;

(2) before the close of trade to cause offers put up by the base to be squared to prevent them being left outstanding overnight so as to minimise the loss to the base;

(3) to cause the LP to frequently take part in the wash sales to help generate the false appearance of active trading so as to lure genuine investors;

(4) to cause the price of the DWs to be manipulated by causing the LP to participate in the pushing and in the squaring of favourable prices to base. This was particularly important in the falling market when the intervention by the LP could reduce losses to a minimum.

24.  Just before noon each day the base numbers called the hands to confirm the transactions and obtained information on the trading volume so as to calculate the profits and losses.  During the trading break you, or sometimes PW1, called Raymond with the calculations.  Raymond would then give instructions as to the strategy for the afternoon session. 

25.  At about 3.45 pm the members would call their hands to enquire if all their offers had been squared and informed you or PW1 if some had not been so.  Raymond would then be told. Raymond would then tell his insider to cause the LP to take these offers.  This was to ensure that all their offers were squared that same day.  After the close of trading each member phoned the hands to confirm transactions for the whole of the trading day. 

26.  The calculations showed the profit or a loss of each hand for that day, the profit or loss for each DW, and for each DW issuer and the aggregate profit or loss for each hand.  You, PW1, or occasionally PW6, informed Raymond since 2008 reports were made to Anna, Raymond’s secretary.  The majority of the wash sales were with the LP.  It was here the bulk of the profits were made. 

27.  Some of the offers put up by the members and/or the LP during the course of pushing attracted counter bids from genuine investors lured into believing the trading volume was active and the price is real; another class of victim.  You decided the salary would be paid to members.  ICAC’s arrest operation of 28 May 2008 brought this to an end. 

Charge 2

28.  In 2007 you informed the members of an insider working for Citigroup Global Markets (Asia) Limited.  You and the others agreed to take part in the pushing.  DWs issued by CGMHI, in much the same way as had been done with CFs and DWs.  The DW issuer was CGMHI, and the LP Citigroup Global Markets (Asia) Limited, affiliated companies of the US group Citigroup Incorporated. 

29.  The based pushed DWs issued by CGMHI from mid-2007 to May 2008 according to instructions from you, who in turn was directed by Raymond.  Again the arrests of the 28 May 2008 brought this to an end. 

Charge 3

30.  The Standard Bank DWs were issued by SB-PLC and the LP was Standard Securities, an affiliated company of Standard Bank Group of South Africa.  The operation was much the same and lasted from late 2007 for several months, ending before the arrests.

Charge 4

31.  The former Dresdner Kleinwort Securities (Asia) Limited was part of the Allianz Group of Europe.  The Allianz Group DWs were issued by the Dresdner Bank AG, and the LP was Tai Fook Securities Limited.  The scheme was very much like the others.  It began in early 2008 and lasted for about two months.  You were first arrested on 28 May 2008.  When you refused to testify at the trials of others you were re-arrested on 8 December 2009 and prosecuted. 

32.  In your video-recorded interview under caution on 28 May 2008 you made the following admissions.

(a) you were employed by Raymond in the warrant pushing scheme;

(b) you recruited eight others;

(c) the team placed orders in their mainland office;

(d) Raymond provided insiders to provide favourable prices to the team to earn money;

(e) all trades were day trades;

(f) the scheme was able to increase liquidation of the warrants which attracted other investors;

(g) you passed the earnings to Raymond, who gave you cash to pay yours and others salaries;

(h) you estimated in the most profitable trading days in 2007 the largest daily turnover was about a $100 million, earning more than a million dollars a day, and on average 6 to 10 million dollars per month;

(i) your salary was about a $150,000 per month, but sometimes, without Raymond knowing, you took 200,000 to 300,000 more to share with others;

(j) you said you earned about $300,000 a month and bought a flat for 4.75 million from this’

(k) you decided the salaries ranging from $10,000 to several hundred thousand dollars a month;

(l) you estimated that Raymond 10 million a month and over a 100 million in total; and

(n) whilst you did not know the owners of the dummy accounts, 10 odd were from Hong Kong, that is Hong Kong residents, and five or six from the mainland.

33.  You are a man of hitherto clear record.  On your behalf Mr Bruce, in mitigation, quite rightly said the facts  very much speak for themselves and show that you are not the ringleader.  Raymond, who was the prime mover and prime beneficiary of the scheme, was sent to prison for four years, being 3½ years for these offences.  He submitted that my yard stick should be 3½ years when establishing in the correct starting point, and that it should be less than that.  I will refer to that matter later. 

34.  He told me that you acknowledged you had done wrong and hence your pleas of guilty; that you come from a close, supportive and loving family, who have stood by you throughout and were present in court on each occasion, and in court today.  You have provided me with letters from your father, your brother, your wife and sister, which I have perused and taken fully into account. 

35.  You are 38 years of age.  You are married and have a young daughter 3½.  Your family includes two parents, both in poor health, two brothers and a sister.  Understandably your family are anxious about your plight, and you are in turn anxious about your family.  I was told that you are a devout Buddhist who has supported your faith by donations and doing voluntary work at a temple near to your home. 

36.  Mr Bruce submitted these offences occurred more from weakness than from greed, that since your arrest in May 2008 you have been under great strain.  Mr Bruce, quite understandably, referred to your actions in not taking the easy way out and testifying as expected when your status was that of a prosecution witness under immunity.  Had you gone on to give evidence in the manner which was expected of you, you would have suffered no punishment at all.  Instead, given the way you were treated by certain officer in the ICAC, you stuck to your principles and refused to testify.

37.  I turn now to the sentence itself.  I must confess I have not found this to be an easy matter.  These are very serious offences that involve fraudulent acts on a large scale.  They are acts that reaped large amounts of profit, all obtained by illegal means. They are crimes which involve frauds on innocent investors and reflect badly on Hong Kong as a centre of clean, honest brokerage.  I fully accept that you were not the mastermind or the prime mover, nor were you the major beneficiary. Those mantles belong to Raymond Ng. However, it is clear from the facts that you were the second in line, Raymond’s chief lieutenant.  It was you that headed up the mainland base, and in return you received large amounts of remuneration.   

38.  You are a man of hitherto clear record, a man who enjoys the love and support of your family. It has been said that these were crimes inspired by weakness rather than greed.  With respect, I disagree with that.  I cannot see how you could be led into such a scheme by weakness alone.  The scheme was sophisticated, practised over many months, and extremely lucrative.  Whilst I take into account the sentence of Raymond I am not bound by that.  Nor is it right for this court to comment on that sentence.  I do say that the courts of Hong Kong must make it clear that such fraudulent schemes will be met by measured prison sentences. 

39.  Taking into account all the matters I have mentioned, I have decided to adopt a starting point of 3½ years' imprisonment, which is 42 months.  In my opinion, there is absolutely no reason why you shouldn’t receive the full discount that is afforded to a person who pleads guilty.  The application for stay, even though it was unsuccessful, was a proper application, in my opinion, well argued and worthy of consideration.  Therefore I reduce your sentence to one of 28 months.

40.  In this case there is a further unusual feature, and that I accept fully that if you had gone on in the face of worrying impropriety on the part of the three ICAC officers, then you would have escaped punishment altogether.  However, you showed courage and integrity, albeit belatedly, by not doing so.  In my opinion, what you should have done was you should have testified on an open and truthful basis, seeking not to hide what had been said and done to you.  That is not denying the prosecution the benefit of your evidence and leaving the judge to assess the entirety of your testimony.

41.  The course you took was perhaps second-best and provides me with some difficulty.  And, quite rightly, the system of justice encourages people to give evidence to assist the prosecution, and it may be said to be wrong to obtain some reward when you have not done that.  However, I do accept that you acted out of principle.  You did not take the easy way out, and I find that that should be marked by some slight extra reduction.  Therefore I reduce your sentence by a further three months to 25 months on each concurrently. 

42.  You will go to prison for 2 years and 1 month.