HKSAR v. HO WING CHEONG AND OTHERS

 HCCC10/2006 

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CRIMINAL CASE NO. 10 OF 2006

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R U L I N G

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The applications

1. There are before the court applications by the second, third and fourth defendants to sever the indictment in various ways.

The Indictment

2. The four defendants stand indicted on an indictment that contains four counts. Count 1 alleges that all four of the defendants, together with other persons unknown, conspired between 1 February 2001 and 27 March 2002 to defraud the Stock Exchange of Hong Kong  (“the Stock Exchange"), contrary to common law and punishable under the Crimes Ordinance.  On the latter date the Stock Exchange approved the listing of Fu Cheong International Holdings Ltd. (“Fu Cheong”), on the Stock Exchange.  The Particulars of Offence allege that during the period of the alleged conspiracy the conspirators conspired to defraud the Stock Exchange by dishonestly:  falsifying sales invoices and accounting records to inflate the turnover and profits of Fu Cheong for the financial years 1998-2000 inclusive; misrepresenting the financial position of Fu Cheong and its subsidiary Fortune (Conductive Carbon) PCB Factory Co Ltd.(“Fortune”), in those financial years in the prospectus of Fu Cheong; and by submitting related documents, which included documents containing the inflated turnover and profit figures for those three financial years and the prospectus of Fu Cheong misrepresenting the financial position of Fu Cheong and Fortune for those three years; thereby inducing the Stock Exchange to approve the application of  Fu Cheong for listing on the Stock Exchange.

3. Count 2 alleges that all four defendants, between 1 February 2001 and 22 April 2002, conspired to defraud the shareholders, investors and creditors of Fu Cheong and its subsidiaries and the Stock Exchange of Hong Kong by dishonestly misrepresenting the sales turnover and profits of Fu Cheong in the company's Annual Report for the financial year 2001.

4. Count 3 is laid against only the first defendant.  It alleges that between 10  December  1998 and 14  July 2001, together with other named and unnamed persons, he conspired to defraud various banks by dishonestly: causing Yue Fung Development Company Ltd.(“Yue Fung”), to apply for letters of credit in favour of Fortune and Good News Development Ltd (“Good News”), as beneficiaries;  procuring the recipient banks to issue letters of credit in favour of those beneficiaries;

 submitting false documents to the banks purportedly evidencing genuine underlying commercial transactions; and causing the bank to pay those beneficiaries approximately $88 odd million, when there were no genuine underlying commercial transactions.

5. Count 4 alleges that between 1 July and 4 August 2001 the first and second defendants conspired together, and with a named and other unnamed conspirators, to defraud the Dah Sing bank by dishonesty of a similar nature to that averred in the particulars of Count 3.

Submissions made of behalf of the second defendant

6. It is submitted on behalf of the second defendant by Mr Harris that the second defendant ought to be tried alone or, alternatively, that Count 3 be severed from the trial of the other counts.  The primary application is put on the basis that the trial in prospect is of such length, it having been estimated at listing as requiring 100 sitting days, that the second defendant will be unable to fund his legal representation and that thereby, he would be deprived of a fair trial.  It is said on his behalf that if he was tried by himself the trial would occupy no more than 15 working days.  In support of those submissions, in effect, of the injustice that can be inflicted to an individual defendant caught up in a multi-handed indictment, reference was made by Mr Harris to the ongoing trial before Mr Justice Tong, which was said to be of a similar nature.

7. In support of the alternative application, namely the severance of Count 3 from the trial of the other counts on the indictment, Mr Harris submits that evidence led in support of the count was most likely the most time-consuming, involving as it does a multitude of letters of credit.  Since it only concerns the first defendant, it could be tried separately.

8. Failing success in either of the applications for severance Mr Harris asks for appropriate directions to be given by the court, consistent with a fair trial, with a view to ensuring that the trial is conducted with proper dispatch and a minimum of delay.

Submissions made on behalf on the third defendant

9. On behalf of the third defendant Mr Blanchflower and Mr Eric Cheung draw the attention of the court to the different nature of the offences alleged in counts 1 and 2  in contrast to counts 3 and 4.  In the former, conspiracies to defraud, arising out the steps taken to obtain the public listing on the Stock Exchange of Fu Cheong, are averred.  Those steps involved the alleged preparation of false invoices and accounting records, which were in turn reflected in the false prospectus and annual report of the company for the financial year 2001.  By contrast, it is said counts 3 and 4 relate to the issue and use of letters of credit, it being the purpose of the exercise the subject of Count 3 to generate a cash flow for Yue Fung, whereas count 4 is said to involve the preparation and use of one false letter of credit to settle a debt of about $1 million between Yue Fung and Fu Cheong.  Crucially, Mr Blanchflower asserts in his written submission that the evidence relating to the issue of letters of credit, the subject of counts 3 and 4 are not material to the proof of counts 1 and 2 .  In answer to a question of the court he accepted that he could not characterise that evidence as "wholly irrelevant" to the issues raised in the particulars of counts 1 and 2.

10. Furthermore, Mr Blanchflower invites the court to note that the time periods during which it is alleged the conspiracies subsisted are different, as are the persons affected by the alleged conspiracies.

11. Mr Blanchflower acknowledges that if counts 1 and 2 were severed it could result in a second trial for the first and second defendant.  The second trial would necessitate the recall of some of the witnesses that would have been called in a trial of counts 1 and 2.  However, it is asserted that such inconvenience to the first and second defendants is outweighed by the benefits of having separate trials. The possibility is that if the prosecution secured the convictions of the first and second defendants on counts 1 and 2 they might not wish to proceed on the severed counts 3 there and 4.  The prejudice to the third defendant if severance is not ordered.

12. The prejudice it is said would to be incurred by the third defendant if severance is not ordered is the expense and time consumed in the prospective trial.  Like the second defendant’s counsel, Mr Blanchflower draws this courts attention to what is described as "the incredible overrun from the original estimated length" of the trial currently being tried before Mr Justice Tong.  Mr Ryan is one of the counsel appearing for the prosecution in that case and Mr Blanchflower represents the third defendant, who is also the third defendant in the other trial.  In his written submissions Mr Blanchflower indicates that the length of that trial has had "severe consequences upon his financial resources.”  At the hearing at the end of September 2006, those two counsel agreed in their indication to this court that the trial before Mr Justice Tong was unlikely to finish before the end of the year.  Mr Blanchflower questions the validity and accuracy of the estimated length of this trial.  Apparently, his experiences of estimates of length in the trial before Mr Justice Tong have left him skeptical, to say the least, of the validity of estimates of the length of trials.

The law

13. Mr Blanchflower reminds the court that the provisions of section 23 (3) of the Criminal Procedure Ordinance permit the court to order a separate trial of any count or counts contained on an indictment if of the opinion that:

 “.. a person accused may be prejudiced or embarrassed in his defence by reason of being charged with more than one offence, or that for any other reason it is desirable to direct a person should be tried separately for any one or more offences charged in an indictment.”

The submissions in support of the application for severance by the fourth defendant.

14. Mr McNamara submits that the fourth defendant is in a position similar to the third defendant and he adopts the submissions made by Mr Blanchflower.  Like the third defendant, the fourth defendant is a defendant in the trial currently before Mr Justice Tong.  However, in respect of the issue of the depletion of financial resources available to fund legal representation Mr McNamara points out fairly that the fourth defendant has been granted legal aid for this trial so that argument is not one which he can advance on behalf of the fourth defendant.

The submissions of the prosecution in reply.

15. In reply, Mr Ryan, for the prosecution, resists all the applications for severance.  He reminds the court of the provisions of rule 7 of the Indictment Rules, of the Criminal Procedure Ordinance, Cap 221, which permits joinder of charges that are founded on the same facts, or form or are part of a series of offences of the same or a similar character.  He suggests that the underlying policy is that such charges should be heard together as being in the interests of justice.  Nevertheless, Mr Ryan concedes that in appropriate circumstances it may be appropriate, in particular cases in potentially long and complex fraud to sever the indictment in order to shorten the trial, thereby simplifying the issues. In support of that incontestable proposition he refers to the judgment of the Court of Appeal of England and Wales in R v Kellard [1995] 2 Cr. App. R 134.

Reply: second defendant.

16. Mr Ryan submits that there is insufficient justification for severance of the third count from the other counts on the indictment.  He asserts that if the trial of the third count proceeded after the trial of the other counts it would be necessary to recall most of the prosecution witnesses in the second and severed trial.  He says that would not be fair to the first defendant nor in the interests of justice, causing as it would considerable unnecessary public expense and waste of judicial resources.

17. Of the relevance, to the prosecution in respect of counts 1 and 2, of the evidence in relation to the circumstances of the issue of the letters of credit in favour of Fortune and Good News by banks on the application of Yue Fung, Mr Ryan points to the evidence expected to be led by the prosecution of the indirect treatment of those funds as sales to companies other than Yue Fung recorded in the "accounts receivable" of Fortune.  It is the prosecution case that those inflated sales and related purchases resulted in an overstatement of both turnover and profit in the books of Fu Cheong and constituted a component of the falsity of both the prospectus and the annual report of 2001 of Fu Cheong.  Accordingly, Mr Ryan submits that the evidence to be led in support of count 3 is, in part, the same evidence to be led in respect of counts 1 and 2 and intimately connected with the overall matrix of evidence relevant to those counts.

18. It is the prosecution case, Mr Ryan says, that when the second defendant joined Fu Cheong in April 2001 as its financial controller, an important part of whose duties was to prepare for the prospective listing of the company on the Stock Exchange, he became aware of the earlier and ongoing use of false letters of credit and the related false accounting treatment and, accordingly, was aware of the falsely calculated turnover and profit reflected in the prospectus and annual report of Fu Cheong for 2001.

Reply: third and fourth defendants.

19. Mr Ryan concedes that the fourth count, laid against the first and second defendants, does not concern the third and fourth defendants directly.  However, he submits that the evidence to be led by the prosecution in support of count 3 is relevant to the case against the third and fourth defendants on counts 1 and 2.  It is the prosecution case that after the third and fourth defendants were engaged in February 2001, as financial advisers of Fu Cheong, they became aware of the earlier and ongoing use of false letters of credit and the related accounting treatment, which inflated the sales and purchases of Fortune and were reflected in inflated turnover and profits of Fu Cheong. That evidence is directly relevant to the issue of their part in the use of the resulting falsely stated position of the company in both the prospectus and the annual report for the year 2001 of Fu Cheong.

A consideration of the prospective evidence.

20. It is to be noted that in the Particulars of Offence of count 1 specific reference is made:  at paragraph (a), to the “falsification of sales invoices and accounting records to inflate the turnover and profit figures” of Fu Cheong and Fortune for the financial years 1998-2000;

at paragraph (b), to the misrepresentation of the financial position of those two companies in those financial years in the prospectus of Fu Cheong;

at paragraph (c ), to the submitting of documents, including documents containing the “inflated turnover and profit figures” for those financial years and in the prospectus of Fu Cheong misrepresenting the financial position of Fu Cheong and Fortune for those years.

21. Similarly, in respect of count 2, the Particulars of Offence allege the dishonest misrepresentation of the “sales turnover and profits figures” of Fu Cheong in its Annual report for the financial year ended 2001.

22. The Particulars of Offence in respect of count 3 relate to the dishonest issue of letters of credit on the instructions of Yue Fung in favour of Fortune and Good News respectively to the total sum of over $88 million, it being alleged that there was no genuine underlying commercial transactions.  The majority of those letters of credit were issued in favour of Fortune. 

23. The prospectus issued by Fu Cheong for purposes of its listing on the Stock Exchange stated that (see pages 17373 and 17409) its turnover and ‘ profits before tax’ for the years 1999, 2000 and nine months of 2001 were, in round numbers, respectively:  $167 million: $33 million; $158 million: $34 million; and $150 million: $34 million.

24. Although the Annual Report of Fu Cheong for the financial year 2001 is the document in which it is averred in the Particulars of Offence of count 2 that the sales turnover and profit figures of Fu Cheong were misrepresented dishonestly by the alleged conspirators astonishingly it was not amongst the approximately 20,000 pages of exhibits before the court at the time of the written and oral submissions made by the parties on this application.  Inquiries made of the ICAC officer in charge of the case by the clerk of this court as to the whereabouts of the annual report in the morass of exhibits, in respect of which the list of exhibits encompasses a whole lever-arch file led to the confirmation of the court’s endeavours to locate the document that it had not been served on court.  Later, that omission was remedied by the service of a notice of Additional Evidence dated 24 November 2006 and the annual report, dated 22 April 2002 on the court.  The report of the directors, under the name of the first defendant as chairman, makes specific reference to the groups "pro forma combined profit of the year ended 31 December 2001" as set out in the financial statements.  There, the turnover is described as being in excess of $202 million and the profit after tax more than $40 million.

25. At trial the prosecution intend to call Mr Simon Blade as an expert forensic accounting witness together with a number of customers of Fortune.  The latter group of witnesses is expected to testify that invoices generated by Fortune in respect of purported sales of goods to them do not reflect actual transactions between the parties.  Mr Blade summarises that evidence at table 5 of his report ( page  17040).  As a result, he says that there was an overstatement of sales in the accounts of Fortune and, thereby, in its holding company Fu Cheong in each of the financial years 1999, 2000 and the first nine months of 2001.  The overstatement of sales resulting from those transactions alone were respectively, in round numbers, $33 million in 1999; $21,000,000 in 2000 and $21 million in the first nine months of 2001.  Clearly, the overstated sales for the first nine months of the financial year 2001 were included in the whole year figures included in the financial statements in the annual report of the company.

26. At the outset of his report Mr Blade indicates that he was asked to provide an opinion as to the amount of the profits overstated by Fu Cheong both for the purposes of their listing on the Stock Exchange of Hong Kong and in their subsequent 2001 whole year financial statements.  At 7.1 of his report (page 17042) Mr Blade analysed the movements of the money generated by letters of credit issued on the instructions of Yue Fung in favour of Fortune in respect of purported sales by Fortune to Yue Fung.  He noted that in the financial years 1999, 2000 and the first nine months of 2001 a total of $243 million was received by Fortune in respect of 104 letters of credit, but that $238 million of those monies were transferred out of Fortune's bank account shortly after receipt and “reverted to Yue Fung or related entities”.  Furthermore, he noted that 97 of the 104 Yue Fung letters of credit were supported by a single invoice from Fortune to Yue Fung.  At 8.1 (page 17044) he reached the conclusion that the “ Yue Fung LCs (letters of credit) were supporting apparently bogus transactions”.

27. Next, Mr Blade went on to consider how those transactions were accounted for in the books of account of Fortune.  At table 7 (page 17044) he noted that in the same time period $212 million of those monies were traceable to accounts receivable and at table 8 (page 17045) $135 million traceable to accounts payable.  At table 1 ( page 17029) Mr Blade sets out for each of the financial periods under consideration the overstatement of sales, totalling $212 million. At 10.1 (page 17049) Mr Blade noted:

“I established in section 7 that the vast majority of the Yue Fung LC receipts were almost immediately reverted out of Fortune and back to Yue Fung or its related entities.  Accordingly no inflated margin was left in the company.  This did not make sense as margins remain consistent and I have established that the majority of the Yue Fung LC proceeds had been posted to accounts receivable to settle inflated sales and reversions were posted to accounts payable to settle inflated purchases.  I determined to establish how margins remain consistent despite the transactions identified earlier in this report.”

28. Of the result of his investigation in respect of the financial year 2000, which year he chose because of the greater availability of documentation, Mr Blade states:  (paragraph 1.3,  page 17029)

“ In FY 2000 Fu Cheong has overstated profits by adjusting purchases to create a consistent gross margin by creating a debt due to it by its immediate parent Advance Technology.”

At 10.19 (page 17052) Mr Blade states:

“The financial records for FY 99 and PE 01 are not of the same standard as for FY 00 and I was unable to identify the precise adjustments made to the accounts.  I can however conclude that the adjustments to sales or cost of sales must have been made in these two periods to maintain consistent margins and these would most likely have involved the inflation of assets or reduction of liabilities or manipulation of dividends.”

29. At table 9 (page 17053) Mr Blade sets out in schedule form a table in which a comparison is made between the Yue Fung letters of credit posted to debtors and his estimated overstatement of profit.

Conclusion.

30. In my judgment, having regard to the foregoing analysis of the prospective evidence to be led by the prosecution, there is a clear and obvious nexus between the alleged conduct the subject of count 3, in respect of the issue of letters of credit by Yue Fong in favour of Fortune, and the alleged resulting overstatement of sales in the books of accounts of Fortune and thereby Fu Cheong, as alleged in the Particulars of Offence of count 1, and in the Annual Report for the financial year 2001, is alleged in count 2 on the indictment. Also, on the prosecution case there is an indirect link to the overstatement of profits in Fu Cheong.  In the result, I am satisfied that it is entirely appropriate that count 3 be tried together with counts 1 and 2.

31. am not persuaded that in consequence the complexity and resulting length of the trial will make the trial unmanageable for counsel, judge or jury.  Clearly, the prosecution case is that the alleged conduct in respect of the issue of "bogus" letters of credit was a matter repeated time and time again with resulting consequences, in particular, to inflated turnover and profits of Fu Cheong. The fact that the conduct occurred on multiple occasions does not add to the complexity of the case. The issue for the jury will be whether or not they accept prosecution case of that alleged repeated behaviour and the involvement, if any, of any or all of the defendants.

32. Given that the second defendant is a named co-conspirator together with the other defendant in counts 1 and 2 it would be entirely inappropriate to order that he be tried separately from his alleged co-conspirators.

33. I am satisfied that it is appropriate to proceed to try all the defendants together on the four counts as laid in the indictment and I refuse all of the various applications for severance of the indictment.