HKSAR v. MAK KWUN YIU AND ANOTHER

 DCCC771/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 771 OF 2008

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Reasons for Sentence

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1.  D1 pleaded guilty to one count of conspiracy to defraud, Charge 1, and one of conspiracy to falsify accounts, Charge 3.  D2 is convicted after trial of two counts of conspiracy to defraud, Charge 1 and 2, and one of conspiracy to falsify accounts, Charge 3.

2.  D1 is sentenced on the basis of the facts as admitted by him.  D2 is sentenced on the basis of the facts as found by this court.  I shall not recite the facts in details.  The facts for D1 are set out in the document titled “Summary of Facts for Plea of D1 only” dated 20 April 2009.  The facts for D2 are set out in the verdict delivered on 31 July 2009. 

3.  LCT was incorporated in 1982 and was engaged in the construction business.  D1 became a director in 1992.  D2 became a director of LCT in May 1999. 

4.  LCTIHL was the parent company of LCT.  LCTIHL was incorporated in the Cayman Islands in July 1998 and it was listed in the Hong Kong Stock Exchange in 1998.  D1, Chan and Vong were three of the executive directors of LCTIHL at the time of its incorporation.  D2 became a director of LCTIHL in December 1999.  LCTIHL owned a number of subsidiaries including LCT, FMS and Mictech.  D1 and D2 were minority shareholders of LCTIHL.  Chan and Vong were majority shareholders in LCTIHL and most of the subsidiary companies.

5.  Chan and Vong were the prime movers of all the conspiracies.  They remain at large.  The only personnel of LCT and LCTIHL on trial are D1 and D2.

6.  PW1 and PW2 who were the co-conspirators of Charge 1 and 2 gave evidence under immunity.  PW7 who was a party to the conspiracy to falsify accounts became an immunized witness in this case. 

7.  Before their convictions in the present matter, both  D1 and D2 are men without criminal convictions.  Both D1 and D2 were arrested in May 2005.  They were charged in 2007.  They appeared in court in 2009. 

Charge 1 and 2 

8.  Charge 1 and 2 concerned conspiracies amongst the named persons to defraud the financial institute in question.  Under each conspiracy, those involved would cause and permit applications to be made by LCT to the financial institute concerned for granting of Invoice Financing Loan in respect of stooges controlled by the co-conspirators.  Those involved would cause and permit the falsification of documentation required for the said applications.  They would cause and permit payments to be made to the stooges who were stated to be beneficiaries pursuant to the said applications.  In fact, there were no underlying commercial transactions relating to the said invoice finance loans.

9.  BII was the victim financial institute under Charge 1.  Charge 1 took place during 1 February 2000 to 5 February 2001.  Jian Sing Bank was the victim under Charge 2.  The offence took place during 5 June 2000 to 28 February 2001.  Cheung Shing, Chung Fai and Barex were used as the invoice issuers and beneficiaries in the conspiracy to defraud BII.

10.  During the currency of the conspiracy, between 9 September 2000 and 5 February 2001, Barex invoiced LCT on three occasions for sums of approximately half a million dollars each.  Between 16 October 2000 and 5 February 2001, Cheung Shing and Chung Fai issued 6 invoices to LCT for sums ranging from $600,000 to over $1 million.

11.  Any two of the four directors of LCT were required to sign on the invoices submitted to BII.  D1 and D2 as directors of LCT, each signed 6 of the 9 invoices.  Of the 9 trust receipts D1 signed 7 and D2 signed 8.  Of the 9 drawdown requests, D1 signed 7 and D2 signed 8.

12.  The total amount obtained from BII through false documentation was $6,138,662 of which over $2 million remained owing in relation to these loans by 30 May 2001.

13.  Cheung Shing and Chung Fai were used in the conspiracy to defraud Jian Sing.  During the currency of this conspiracy, Cheung Shing invoiced LCT on two occasions for sums of approximately $694,000 and $775,000 respectively.  Chung Fai issued 4 invoices to LCT for sums ranging from approximately $572,000 to $905,000. 

14.  Any two of the four directors of LCT were required to sign on the invoices submitted to Jian Sing.  In that regard, D2 signed 4 of the 6 invoices, 4 out of the 8 drawdown requests and 3 of the 6 trust receipts.  The total amount obtained from Jian Sing through false documentation was $4,402,199. 

15.  On 15 July 2002, the account was closed.  At the time some $4.8 million odd was still owed by LCT to Jian Sing.  The nominal owners of the bogus businesses, namely Barex, Cheung Shing and Chung Fai, were employees of LCT, all of modest background with little education.  They had no control in the operation and affairs of the bogus businesses.  They opened bank accounts for the bogus businesses, but the accounts were controlled by the conspirators.  They would sign cheque books of the bogus businesses blank for use by the conspirators.

16.  Under each conspiracy, as soon as application for drawdowns had been made on the basis of the false documents and approved by the financial institute in question, the money drawn down would be paid to the bank accounts of the beneficiaries.  Very soon afterwards, cheques for similar amounts were paid from these bank accounts into the account of LCT.

Charge 3

17.  Charge 3 concerned the acquisition by LCTIHL through its subsidiary Mictech of two bogus website businesses in April 2001.  These took the acquisitions of two BVI companies, namely Hardmeadow which owned the website www.woodmarket.com and Gonhaven which owned www.nicefuel.com respectively.  Neither company, indeed neither website, appears to have had any genuine business.  Certainly nothing was paid for them.

18.  PW7 was the person who helped to prepare the valuations of the websites.  With the information provided by PW7 in March 2001, LCH (Asia-Pacific) prepared a valuation for Hardmeadow of $38 million and for Gonhaven of $20 million.  In order to effect the sales of the BVI companies to Mictech in 2001, Chan Sai-lo (PW9) and Chau Pak-kuen (PW10) were recruited to appear as the real men behind the two BVI companies.  Though PW9 and PW10 were stated on the papers as the owner of the BVI companies, in fact they had nothing to do with the BVI companies.

19.  PW9 and PW10 were asked to go to a law firm to sign documents.  PW9 was approached by Chan whereas PW10 was approached by D1.

20.  In the case of D1, he asked PW10 for help in selling  a website to LCT.  He said PW10 would not have to put up any money, that he would create the company for PW10 and all PW10 had to do was to sign on sale and purchase documents.  D1 said his company would create some debtors that owed his company money and transfer those debts to PW10 as a consideration for the purchase of the website.  He was not to receive any moneys from the debtors.  D1 told PW10 that one of the debtors would be Multiways which was owned by PW10 but had been winded up.  PW10 promised to help.

21.  PW9 and PW10 attended a law firm and signed the respective sale and purchase agreements, the deeds of indemnity and the deeds of assignment.  When PW9 attended the law firm, he was accompanied by D2.

22.  For the purchase of Hardmeadow and Gonhaven, a substantial part of the consideration was to be the assignment of debts owed to LCT and FMS.  In fact a great majority of the debts to LCT and FMS did not exist.  The debts used as a consideration in the purchase of Gonhaven amounted to $21 million odd.  For Hardmeadow, the total debts which were to be assigned to the vendor were put at some $38 million odd.

23.  RSM Nelson Wheeler was the auditors for LCTIHL for the financial year ending 31 May 2001.  Having ascertained the acquisition of Hardmeadow and Gonhaven by Mictech as well as the assignment of debtors by LCT and FMS, PW18, the partner assigned to the audit noted that apart from the valuation by LCT, the intangible assets of each website was little more than $1 million odd.  The debts said to be owed to these subsidiaries were in effect replaced by the websites acquired by the assignment of those debts.

24.  At the time the audit team was preparing the audit plan for April 2002, Chan, Vong and Albert Hung advised the audit team that they intended to write down the values of those website operations to $1.  Such a write-down would, in accordance with the generally accepted accounting principles, have to be reflected in the financial statements as at 31 May 2001.  The auditors issued a qualified opinion in the annual report for 2001.  Notwithstanding that, on 12 June 2002, the same day as the auditors’ report, Chan and  Vong signed a letter confirming the accounts represented a fair and proper picture.  As a result of the sham transaction involving the website companies, $59.7 million worth of apparent business had been written off from the books of LCTIHL.

25.  D1 and D2 signed minutes of board meetings approving the acquisitions of the websites.  D1 played a part in the arrangements for the sale of Hardmeadow.  D2 accompanied PW9 to the law firm in Central for the signing of the documents.  D1 and D2 both signed a number of relevant documents in relation to both transactions.  D1 resigned his directorship of all related companies between September and November 2001.

26.  Ms Draycott for D1 made a moving speech for D1 in mitigation.  Mr Oderberg for D2 made a realistic mitigation for D2 who obviously cannot claim the benefit of guilty pleas.  I would not repeat the matters urged by counsel.  The force of the mitigation so eloquently made would be better reflected in the transcript of the hearing.  The matters raised are still fresh in my minds, I shall try to deal with these matters in the later part of the discussion.

27.  Briefly stated, Ms Draycott reminds me the number of chargers that D1 stands convicted of on his own pleas, the effect of the commission of the crimes had on D1, how D1 is loved by his family members, the four years’ delay in prosecution, how D1 excelled in his studies, his success in LCT, the rise and fall of the company, the influence of Chan and Vong had on D1, the medical condition suffered and the depression that developed after the offences were committed, that D1 did not gain personally but was only to salvage the company where he saw his career was, that the false accountings had no effect on the share price of LCTIHL and that D1 is unable to work because of the depression he suffered.

28.  Mr Oderberg took me through the life of D2, his rise in LCT, his attachment to and dedication to the company, that D2 left the company as he detected there was something wrong though short of criminal happening in LCT, that D2 all along believed the website businesses were genuine, how D2 struggled to live a normal life in the past few years with his daughter in Hong Kong pending the trial.

29.  The fraud on invoice loan financing which took place in the present case was akin to cases of LC frauds that frequently came before the criminal courts.  What the CA said in HKSAR v Chan Kar Leung and others CACC287/2004 and HKSAR v Lee Kwok Yun and others CACC117/2004 are applicable to the present case.

30.  In Chan Kar Leung, the Court of Appeal stated at paragraph 89 of the judgement:

“But in any event, it was clear beyond peradventure that the bank was deliberately deceived into thinking that there were goods available in Hong Kong as security and that, but for these misrepresentations, the letters of credit would not have been issued.  The gravamen of culpability, when it comes to letters of credit fraud, is the fundamental damage that is done to this system of trade; a point that has been made time and again by appellate courts.”

31.  In Lee Kwok Yun, the Court of Appeal said at paragraph 28 of the judgment:

“It has been said too often to require any detailed explanation that the gravamen of offences of this kind lies in the substantial risk that they impose upon banks and the damage that is done to the lifeblood of commerce by letters of credit fraud. The fact that there was in the event no loss to the banks is a factor to be taken into account and it is a fact that the judge took into account; but,  nonetheless, the risk was always there, and the period over which the conspiracy was effected,  and in which the second applicant played a central role, was substantial.”

32.  In my view, Hong Kong’s reputation as a financial and banking centre would suffer greatly if invoice loan frauds like the present ones were to be allowed to grow.  The abuse of invoice loan financing, if became prevalent, the banks had to put in more manpower and resources in checking the contents of the documents submitted or even became more reluctant in lending money to their clients.  And ultimately, both the banking industry and bona fide traders would suffer.  It is therefore, in my view, that there ought be a deterrent factor in the sentence imposed in order to deter the like-minded from doing the same.

33.  For Charge 1, I have considered the facts as admitted by D1 and the facts as found by me in the case of D2.  I have borne in mind the roles of D1 and D2 while Chan and Vong were the prime movers.  As between D1 and D2, both had played an active part in the scheme and as between D1 and D2, I find them equally culpable.

34.  For Charge 1, I have considered the total amount of the loan granted through false invoices was over $6 million and $2 million remained unpaid.  The conspiracy covered the period during 1 February 2000 to 5 February 2001.  I appreciate that D1 and D2 were not acting out of greed but they were acting out of misguided loyalty to Chan and Vong and they were trying to save the business of LCT which they saw as their career.  I think a starting point of 3½ years is appropriate. 

35.  D1 pleaded guilty to the offence, he is entitled to one-third reduction for his guilty plea and clear record.  There are materials before me showing that D1 has made offerings to a church.  It is admirable but I cannot accept these acts amount to acts of charity entitling D1 to further discount over and above the one-third reduction.

36.  I accept that there was delay in the prosecution.  Given the physical and mental conditions of D1, the delay adds to his sufferings.  I am told by the ex-wife of D1 in her letter that the divorce was related to the stress suffered by D1 after his arrest.  I should have mentioned that I have gone through each and every letters written for D1.  They are truly moving and they show that D1 is living in love and care by many.  The delay in prosecution together with the adverse effects that it had on D1, in my view, cannot change the form of sentence but they do affect the quantum.  I think a further discount of 8 months is appropriate for D1.

37.  In the case of D2, he had a clear record.  He is entitled to a reduction of 4 months for his clear record.  I accept the delay in prosecution did affect D2 in some ways but the effects are not as serious as in the case of D1. In my judgment, a reduction of 5 months is appropriate.

38.  For the reasons given, on Charge 1, I sentence D1 to 20 months’ imprisonment; I sentence D2 to 33 months’ imprisonment.

39.  For Charge 2, the total amount obtained through false documentation was $4 million.  Jian Sing suffered a loss of $4.8 million.   The offence took place during 5 June 2000 to 28 February 2001.  I think a starting point of 3½ years is appropriate.  The same consideration applies as in the case of Charge 1.  I allow D2 4 months’ reduction for his clear record and 5 months’ reduction for the delay in prosecution.  For the reasons given, I sentence D2 to 33 months’ imprisonment for Charge 2.

40.  Charge 3 concerned a conspiracy to falsify accounts of a public company.  The conspiracy involved elaborate planning and extensive use of false documents and bogus transactions of two websites.  Almost $60 million of apparent assets had been written off from the books of a listed company, i.e. LCTIHL.  Conduct of this nature and scale is unacceptable and it would tarnish the reputation of Hong Kong as a financial centre.  I find D1 and D2 equally culpable in the scheme to falsify accounts.  I accept D1 and D2 were not the prime movers, but still the offence calls for a deterrent sentence.

41.  On the facts before me and bearing in mind the active albeit minor role played by D1 and D2, a starting point of 3 years’ imprisonment is appropriate.  D1 is entitled to one-third reduction for his guilty plea and clear record.  For the delay and consequences of the delay on D1, I would allow D1 a further reduction of 6 months.  I would allow D2 4 months’ reduction for his clear record and 4 months’ reduction for the delay. 

42.  For the reasons given on Charge 3, I sentence D1 to 18 months’ imprisonment; I sentence D2 to 28 months’ imprisonment.

43.  Charge 1, D1, 20 months; D2, 33 months.  Charge 2, D2, 33 months.  Charge 3, D1, 18 months; D2, 28 months.  I have considered the totality principle, the offences were distinct and separate offences.  They call for partially consecutive sentences.

44.  In the case of D1, I think an overall sentence of 28 months should meet the end of justice, and I order 8 months of the sentence for Charge 3 to run consecutively to the sentence for Charge 1, making a total of 28 months.

45.  In the case of D2, a term of 3½ years should meet the end of justice.  I order that the terms of imprisonment for Charge 1 and 2 shall run concurrently with each other, 9 months of the sentence for Charge 3 shall run consecutively to the sentence for Charge 1 and 2, making a total of 3½ years.