HKSAR v. TSANG WAI-LUN, WAYLAND AND OTHERS

 DCCC24/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 24 OF 2008

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Reasons for Sentence

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1.  There are six defendants in this case.  After trial, I found D1 and D2 guilty of Charge 1, Charge 3 and Charge 4, and D4 to D6 guilty of Charge 4.  I found D1 not guilty of Charge 2 and D3 not guilty of Charge 1 which is the only charge against him.

2.  Charge 1 and Charge 3 are charges of conspiracy to defraud, Charge 4 is a charge of conspiracy to deal with property known or believed to represent proceeds of an indictable offence.

3.  In sentencing, I have taken into account the whole circumstances of the case including its nature and facts, background of each defendant and mitigation put forward on their behalf. 

Facts

4.  The facts which I found are set out in my reasons for verdict which may be briefly outlined as follows.

5.  PW1 and D3 cooperated in introducing projects in the mainland to listed companies in Hong Kong to earn a reward.  In early 2002, after several meetings between PW1 and D1, it was agreed that a company was to be incorporated for the purpose of acquiring the interest in a gas joint venture project in Chongqing.  Then Grand Field would acquire 75% of the shares of this company, the consideration was to be paid by issuing 315 million consideration shares to the shareholders of this newly formed company. 

6.  On 3 May 2002 Sino Richest Limited (hereinafter called Sino Richest) was established for the abovesaid purpose.  It has three shareholders, namely PW1 himself, Worldgate Development Limited (BVI) (hereinafter called Worldgate) and Logistic China Enterprise Limited (BVI) (hereinafter called Logistic China).  The latter two companies had association with Grand Field. 

7.  On 25 May Sino Richest signed a joint venture agreement with a mainland enterprise to set up the Chongqing Sino Richest Gas Company Limited (hereinafter called the joint venture company) to operate the abovesaid joint venture.

8.  By reason of the acquisition of an interest in Sino Richest, Grand Field sought the approval of its shareholders and the Hong Kong Stock Exchange (hereinafter called the Stock Exchange) to issue 315 million consideration shares.  Approval was granted and the shares were issued.

9.  I found that there was no genuine intention of Grand Field to acquire the interest in the Chongqing project.  It was just a conspiracy, of which D1 and D2 were parties, to defraud the shareholders and the Stock Exchange to cause the approval and eventual issuing of the consideration shares. 

10.  After the consideration shares had been issued, the Stock Exchange started a series of queries arising from a complaint of lack of capital contribution of Grand Field to the joint venture.  Grand Field provided a reply to each of the queries.  PW5, the company secretary, drafted the replies.  D1 and D2 each signed some of the replies.  They conspired to defraud the Stock Exchange and the shareholders by concealing the fact of lack of genuine acquisition of the Chongqing project.  False or misleading excuses and explanations were put up in the replies.

11.  Eventually, with a view to cause the Stock Exchange not to raise further queries, it was agreed to make a false representation that there would be a disposal of the interest in the Chongqing venture at a price of $32 million.  The arrangement was that Grand Field purported to sell the project back to Logistic China.

12.  To make the transaction look real, arrangement was made so that funds were made available for Logistic China to pay Grand Field the consideration for the buying back.

13.  There were further fund flow arrangements in that after Grand Field received the fund through its subsidiary Ka Fong, it paid D1 the whole sum under the pretext of repaying him a sum owed to him as a director so that D1 could dispose of the fund for its further distribution until the fund returned to its original source, Upbest Finance.

Background of the Defendants, and Mitigation

14.  I found that D1, D2, D4, D5 and D6 had conspired in this circular fund flow arrangement, each with a necessary mens rea of the offence of conspiracy to deal with proceeds of an indictable offence.

15.  Background of each defendant may be outlined as follows.

D1 and D2

16.  D1 is 51 years of age.  He was at the material time the chairman, executive director and shareholder of Grand Field.

17.  D2 is the wife of D1.  She also was at the material time a director and shareholder of Grand Field.  She is 48 years of age.  She has completed secondary education.

18.  D2 is a first-time offender.  D1 only has one minor conviction of fighting in a public place back in 1985 which I will totally ignore for the purpose of sentencing. 

19.  In mitigation learned counsel said the couple represented yet another successful Hong Kong story but they have now fallen from grace.  D1 came to Hong Kong in 1978 when he was 20 years old without even having completed his secondary education.  Owing to his limitation in education and means, he earned his living as a street hawker.  He overcame the harsh condition and started a leather belt business and later garment business. 

20.  Later he married D2 who was working as a part-time accountant for him.

21.  The couple worked hard to build up their business.  They have a successful real estate project in the mainland.  They started a company which later became Ka Fong.  They started Grand Field in Shenzhen and then acquired Chintex.  Eventually they had Grand Field listed in the Hong Kong stock market.  The listing took place not long before the incident in this case.  After the couple were arrested in July 2007, upon the advice of the SFC and Stock Exchange, the couple resigned from the board of directors of Grand Field.

22.  Learned counsel stressed that the offences were committed by both defendants out of character.  Letters from friends and staff were produced.  The general views are that the couple are fair and honest and willing to help others.  Their staff regard them as good, responsible and caring employers. 

23.  Learned counsel pointed out the long lapse of time between the offences to the convictions and the consequential stress the couple have suffered.  Indeed counsel for all defendants made the same submission.

24.  The convictions caused enormous ramification to the family of D1 and D2.  They have two daughters and one son, all receiving tertiary education.  Both daughters wrote to the court.  From letters of the two young ladies and other people, I am impressed that the couple are good parents who have brought up their children to be responsible and contributing members of the community.  The couple are also generous in charitable contribution as said in the letters and evidenced by receipts produced. 

25.  The court was also shown awards which D1 received as an entrepreneur.

26.  Learned counsel said that D2 was a woman standing by her husband and her involvement in the case might have been a result of her misguided loyalty to her husband.

27.  The health of D1 is not good.   He had to be sent to the hospital when he was in custody during investigation.  In support of mitigation, the defence submitted two letters from medical doctors.  Dr Choi said that D1 is suffering from poorly controlled diabetes mellitus complicated by kidney and eye problems (proteinuria and vitreous haemorrhage).  He also has hyperlipidemia and hypertension which were complicated by left ventricular hypertrophy.   His blood glucose and blood pressure need tight control.  He has been receiving medication. 

28.  Dr Hung, an eye specialist, said D1 was suffering from severe proliferative diabetic retinopathy.  There was vitreous haemorrhage in his right eye.  He requires good control of his diabetes, and if without the treatment of intravitreal injection of Avastin and Argon laser retinal photocoagulation which he was receiving, further bleeding in the eye might lead to blindness.   

D4 and D5

29.  D4 and D5 were both executive directors of Upbest Group.  Upbest Finance Company Limited (hereinafter called Upbest Finance) was one of its wholly owned subsidiaries.  I found that Upbest Finance was the source of the $32 million which had been used to create a false picture that there had been a real transaction between Logistic China and Grand Field.

30.  I further found that D4 and D5 had full knowledge of the circumstances, in particular that the fund was used to cover up the real fact that there had never been a genuine intent to pursue the Chongqing project.  With that knowledge, they entered into agreement with D1 and D2 to put the dishonest plan in place so that the Stock Exchange and the shareholders of Grand Field could be defrauded as set out in Charge 3.  For that I mean the final part of the allegation in Charge 3. 

31.  D4 is now 63 years of age.  He is married with a son and a daughter, both adults.  He holds professional qualifications both in accounting and marketing.  He is a full member of the Hong Kong Securities Institute, an investment adviser, a dealer registered under the Securities Ordinance and Commodities Trading Ordinance, and also a responsible officer under the Securities and Futures Ordinance. 

32.  He was the founder of the Upbest Group and is now its executive and managing director overseeing its daily operation.  He is a first-time offender.

33.  Mitigation letters were produced on behalf of D4.  Authors of these letters include people of high standing in the community such as Sir James McGregor, former Deputy Director of Commerce and Industry, elected LEGCO member and appointed EXCO member.  He trusted him as a straightforward and competent businessman of integrity.  Other authors include a Justice of Peace, a pastor, practising lawyers, the non-executive chairman of the board of directors of Upbest, university professor and chairman of a listed company, etc. 

34.  The general remark of D4 is that he is a man of integrity.  He is described as honest and upright, responsible, conscientious, reliable and selfless.

35.  His daughter also wrote and stressed that at home D4 is a filial son as well as a caring and responsible father; at work he is an entrepreneur with great conscience; and to the community he has been devoted and generous.

36.  Staff of his company signed a letter in which they said D4 is a man of integrity who is also a good and kind hearted employer.

37.  D4 had participated widely and actively in charitable and benevolent work.  Just to mention some, he founded the Upbest Charitable Foundation Limited which supports, inter alia, the reconstruction of schools affected by the Sichuan earthquake and the Orbis project.  He made donation to the Hong Kong Accounting Professionals Society for awarding scholarship to accounting students.  He operates a Chinese medicine clinic providing free treatment and herbal medicine to the poor and the elderly.  He gave regular support to the Po Leung Kuk Child Sponsorship Programme.  He made generous donation to the Community Chest and the Hong Kong New Arrivals Services Foundation. 

38.  The court was also informed that D4 had demonstrated himself as a civil minded citizen by bringing to the police station properties he found.

39.  D4 does not enjoy good health.  He has been receiving treatment for his severe chronic rhinitis for years.  He also suffered from diabetic mellitus and conditions had been deteriorating over the years.  He has also benign prostatic hypertrophy and renal stone was found.  He is confirmed to have fatty liver disease. 

40.  Dr Fung said in his report that the overall health status of D4 is very poor.  He has diseases involving multiple organs and requires constant medical supervision.  Dr Stephen Ng, a psychiatrist, said that D4 is suffering from severe depressive episode with psychotic symptoms and is under psychiatric medications.

41.  D5 is now 49 years of age, still single.  He is a chartered certified public accountant.  He had worked in the Stock Exchange and Price Waterhouse Coopers.  He is a dealer registered under the Securities Ordinance and a responsible officer under the Securities and Futures Ordinance.  He held various licences with the SFC.

42.  His father had passed away long ago and since young he has been taking good care of his mother and younger brother.  He is also a first-time offender.

43.  Mitigation letters from different walks of people also of good standing were produced on his behalf.  Like D4, D5 is a Christian.  He served actively in the church and earned praise from the pastors, ministers and other members of the church.  A pastor said D5 is honest, trustworthy and reliable, and the church buys and sells shares through him.  A professor of architecture who grew up with D5 said he had complete trust on him because of his integrity and honesty. 

D6

44.  D6 was an independent non-executive director of Upbest Group.  He was also the managing director of International Taxation Advisory Services Limited (hereinafter called ITASL).   I found that he had made arrangement for various companies to be involved in a circular fund arrangement by which the $32 million routed through Logistic China, Grand Field, by way of its subsidiary Ka Fong, and D1, and eventually back to its original source, Upbest Finance. 

45.  I found that in agreeing to do so, he had reasonable grounds to believe that the fund was to be used to defraud other parties that there was to be a real transaction between Logistic China and Grand Field.  With this belief, he entered into agreement with D1, D2, D4 and D5 to put the circular fund flow arrangement into effect. 

46.  D6 is 52 years of age.  He is a fellow member of Association of Chartered Certified Accountants.  He had worked in the Inland Revenue Department, Ernst & Young and Deloitte Ross Tohmatsu before joining ITASL.  Evidence in the trial and letters from his superiors show that he excels in his work as a tax consultant.  He had also served as an independent non-executive director in six listed companies but had resigned from all after being charged.

47.  He is married.  His wife is an associate professor of the Baptist University.  Their 20 years old son is studying in USA.  Like other defendants, he has a clear record. 

48.  Mitigation letters were also produced on his behalf.  From the letters, some of which are touching, I can see that D6 is a filial son, a caring husband, a responsible father and a respectable member within the family.  He is highly regarded by relatives, friends, business associates and members of the church.

49.  The letters impress me that D6 is a kind hearted and generous man.  He is a man of honesty and integrity.  Like all other defendants, he committed the present offence out of character. 

50.  His wife said that the long trial had posed heavy pressure and financial strains to the family as D6 had been out of employment for 30 months.  However, he has not given up contribution to the community.  He has been providing free service to others including serving for the Oaks Limited which provides voluntary service for small and medium sized enterprises. 

51.  His mother is 81 years of age and has been suffering from hypertension, diabetic mellitus and diabetic nephropathy with deranged renal function.  She has been on regular hemodialysis.  Recently, she fell and fractured her spine.  As a result, she is now chair-bounded and requires constant care from her helper.  

Consideration

Charge 1

52.  The offence in Charge 1 concerned a listed company and its obtaining by dishonest means of permission to issue shares.  Hong Kong has been making very hard effort in establishing itself as a worldwide finance centre.  Regulating the stock market to ensure its proper running and healthy development is very important.  It is an important public interest and must be the general expectation of our community that the integrity of the companies which are to attract capital from the stock market be kept at a high level.

53.  The investors should be able to trust and rely on the information provided by the listed company to assess and decide on the investment.  The dishonest act of the client as practised in the present case would severely damage the image and, more importantly, rock the confidence in the system and regulation of our stock market which in turn will have an adverse impact on our efforts to build Hong Kong as a leading finance centre.  I, therefore, consider the offence in Charge 1 a very serious one.

54.  The whole community has been working very hard to build Hong Kong into an international financial service centre.  The reputation the Stock Exchange and our stock market now enjoy has to be protected by the efforts of all.  The defendants for their own interests disregarded totally the efforts of the whole community.  What they have done was something which would tarnish the hard-earned reputation. 

55.  By this dishonest act, 3.15 million shares were issued.  They were wholly distributed to the three shareholders of Sino Richest.  The prosecution alleged that the two other shareholders of Sino Richest, apart from PW1, were assigned by D1.  I am satisfied on evidence that the two companies had association with Grand Field, but as to what exactly was the relationship, there is insufficient evidence to support any firm finding.  The only inference that can be drawn must be that by employing this defrauding scheme, D1 and D2 were looking at a financial advantage.

56.  As I said before, an increase of number of shares in the market usually creates a pressure on the share price.  On the other hand, if the market found favour in the false news of engaging in the joint venture, there might be a positive impact on the share price and D1 and D2 would make a profit out of it.  However, the fact is that the share price dropped.  That said, this was undoubtedly not a designed result of the dishonest act.  In my judgment, the fact of the fallen price is not a factor which will affect the culpability of the two defendants. 

57.  There is little evidence to show the real impact of this fraudulent scheme.  Grand Field is amongst the less prominent listed companies in the market and, therefore, the potential number of investors who might be affected might be lesser than if the company had been a much more prominent one.  However, in sentencing, the public interest I have just mentioned is a very important consideration. 

58.  I have found that some people involved in introducing the projects to Grand Field have exercised some dishonest conduct over the company.  However, since evidence shows that such dishonest conduct did not have any material impact on the mind of D1 and D2, and notwithstanding the existence of such dishonest conduct, independent of it the two defendants had never had a genuine intent to proceed with the project.  Existence of such dishonest conduct is not material in the consideration of the sentences.

59.  All in all, I am of the view that an immediate custodial sentence is the only appropriate sentence to be considered for the offence in Charge 1. Having considered the whole circumstances, I adopt a starting point of 3½ years for D1.  I find D1 the mastermind in the conspiracy. 

60.  As for D2, bearing in mind the evidence that D1 was the overall boss of the company, that although D2 must have full knowledge by virtue of her role in the company, there is little evidence to prove her exact involvement in the decision-making process and also the submission from learned counsel that D2 might have been labouring under misguided loyalty towards her husband.  I adopt a lower starting point of 3 years.

Charge 3

61.  Charge 3 also involves a serious offence.  It involved a series of dishonest conduct by way of reply to the queries of Stock Exchange which continued to conceal the original dishonest act.  Shareholders would continue to be deceived and suffered prejudice in their investment decision.  The Stock Exchange was prejudiced in their performance of important public duty.  The irresponsible replies dragged on for half a year.  It ended up with a serious false representation that Grand Field was to sell off their interest in the project. 

62.  The defrauding scheme was not designed to make any further gain.  It was deployed to cover up past illegal conduct.  It involved a series of fraudulent replies.  I am of the view that a starting point of 18 months is appropriate to reflect the nature of the offence and degree of culpability.  For the offence in this charge, I see little to distinguish the degree of culpability between D1 and D2.

Charge 4

63.  Charge 4 is related to Charge 3.  The abovesaid final defrauding exercise involved a false buying and selling of the interest in the joint venture project.  To make the false transaction look real, an arrangement of circular fund movement was put in place.  Apart from D6, all the parties concerned knew that the arrangement was designed to make the Stock Exchange and shareholders to believe in the dishonest false representation.

64.  I agree with learned defence counsel that the facts of this charge represent a very unique case for this nature of offence.  This is not a typical case of money laundering.  The money in question was found to be proceeds of an offence, not because it was profit of any offence but on the basis that it was payment to D1 in connection with commission of an offence.  The arrangement was for D1 to receive the money after it had been used as a vehicle to defraud and then it would further deal with it by distributing it. 

65.  Not only that there is no tariff for this offence, I was told that this case is the first of this kind of money laundering. 

66.  The scheme involved a complicated design and accounting professionals obviously for the purpose of avoiding detection.  D1 and D2 are the persons who were to enjoy the benefit of this scheme if it succeeded.  I am of the view that a starting point of 18 months is appropriate for each of them.

67.  What D4 and D5 did was serious.  They joined in an illegal scheme knowing full well that it was to cover up a false representation which was serious in its nature.  They knew that the Stock Exchange as well as the shareholders of Grand Field and other investors had been defrauded.  They knew the plan they were involved in was to cover up the truth and was designed to end further queries so that the truth could be buried.

68.  Although the two of them were not to enjoy the same benefit as D1 and D2 wanted to have, they for their own motive agreed to join in the scheme with full knowledge of the purpose.  Each of them used their professional expertise to facilitate D1 and D2 in getting out of the grave trouble knowing that performance of public duty by the Stock Exchange would be jeopardised.  People with their background must realise the public implication of the covering up exercise.  They did not do it for free.  They charged a fee but I will not find it a fee at a level far exceeding what would have been levied for normal professional service.

69.  Learned counsel for D4 and D5 submitted rigorously that a non-custodial sentence should be considered.  I have given their submission careful consideration.  I am of the view that a fine or a Community Service Order is neither appropriate nor sufficient in view of the seriousness of the offence despite otherwise the personal attributes of both defendants qualify them as a candidate for a Community Service Order.  The offence is so serious that an imprisonment term is called for.  Further, I am of the view that a starting point of 18 months is also appropriate for each of them.

70.  Whilst direct evidence against D4 is limited and evidence shows that it was D5 who explained the arrangement to PW5, in all the circumstances, I am satisfied that D4 must have full knowledge of the plan and agreed to participate in it.  He was the one who signed the cheques involved in the circular fund flow arrangement.  I do not consider there is anything so material which can distinguish the culpability between these two defendants.

71.  As regards D6, his involvement was in a sense less serious in that there is no evidence to sufficiently prove that he had the knowledge that the Stock Exchange, the shareholders and the investors were defrauded and the scheme he was to involve was to cover up a deception of this nature.  In consideration of the sentence to be imposed on him, I do not need to take into account the public interest factor since D6 was not aware that the underlying purpose of the scheme was to defraud the Stock Exchange in its performance of public duty.

72.  He did agree to participate and play an active role in a scheme, of which he must have the belief that someone was to be deceived into wrongly believing that there was a real transaction of a substantial amount.  However, without knowing exactly the nature and purpose of the deception, there should be a substantial difference in culpability between D6 and the other defendants.

73.  Although the transaction involved a substantial amount, it does not necessarily follow that the deception must be of a serious nature.  However, D6 must be aware that it involved a sophisticated plan and had made arrangement for so many of the companies connected with him to participate.

74.  Having considered the whole circumstances, I am of the view that an immediate custodial sentence is warranted and a starting point of 9 months is appropriate, bearing in mind the basis of his conviction.

75.  In view of the lower starting point I adopt, I have given anxious consideration as to whether a non-custodial sentence such as Community Service Order should be considered.  Despite D6’s personal attributes qualify him as a candidate for consideration of the Order, in all the circumstances, I do not consider a Community Service Order appropriate.

76.  The defendant pleaded not guilty and there has been sufficient material before me to make me satisfied that he has a sufficient degree of remorse.  Notwithstanding that, I find difference existed in culpability between D6 and the other defendants, D6 being a professional had been very much instrumental to the circular fund flow arrangement.  In the circumstances, a Community Service Order is neither appropriate nor sufficient, nor is a fine.

Discount

77.  All the defendants are first-time offenders.  Although their background is different, they have all worked very hard and excelled in their own field.  They have now all fallen from grace.  I am satisfied that they all will unlikely offend again.  For a person in the position as the defendants, a conviction is in a way by itself a harsh punishment.

78.  Apart from having a clear record, I am satisfied that each of the defendants has a positive good character which deserves him or her a discount in sentence.  Despite the way as to how each of them strived towards the ideal and contributed to the community was not the same, I am of the view that each of the defendants is entitled to the same degree of discount for the factor of having positive good character.

79.  There has been a considerable lapse of time between the offence and the trial.  There is no evidence that it has been a result of any fault of any party.  It is understandable that it took time to investigate in a case of this nature and complexity, especially bearing in mind the cross-border dimension.  That said, the stress and other consequence of the delay, though a result of no fault of the authority, have to be recognised by a further discount.

80.  For the abovesaid factors and other matters raised in mitigation, not including what I will mention in a moment, I am of the view that each defendant is entitled to a one-third discount. 

81.  In addition, I am particularly impressed by D4’s selflessness and benevolence, his previous consistent and long-term valuable contribution to the community and his generosity to charity.  In my opinion, for this factor and for his age, D4 deserves the exceptional treatment of some extra discount.

82.  D1 and D4 do not enjoy good health.  The nature and degree of their health problem is not that would normally attract a discount.  The Correctional Services Department has sufficient facility and service to take care of them adequately.  It is out of clemency I am prepared to give each of them a small further discount for this factor. 

83.  In my judgment, the above represent the extent of discount each defendant is entitled to in the circumstances of the case.

Sentences

84.  Based on the matters aforesaid, I sentence the defendants as follows.

85.  D1, Charge 1, 26 months; Charge 3, 11 months; Charge 4, 11 months.  Having regard to totality, I order the sentences for Charge 3 and Charge 4 to run concurrently but 6 months of their aggregate to run consecutively to the sentence for Charge 1, making a total of 32 months’ imprisonment.

86.  D2, Charge 1, 2 years; Charge 3, 12 months; Charge 4, also 12 months.  Having regard to totality, I order the sentences for Charge 3 and Charge 4 to run concurrently but 6 months of their aggregate to run consecutively to the sentence for Charge 1, making a total of 30 months’ imprisonment.

87.  And D4 for Charge 4, he is sentenced to 9 months’ imprisonment.

88.  D5 for the same charge, 12 months’ imprisonment.

89.  D6 for the same charge, 6 months’ imprisonment.

90.  I have been urged to consider ordering the sentence for D4 to D6 to be suspended.  Having given careful consideration, I do not consider there exist sufficient special circumstances to justify suspending the sentence of any of the defendants.

91.  All the defendants are to serve their imprisonment terms immediately.