HKSAR v. HO CHIN HOU

 DCCC195/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 195 OF 2008

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Reasons for Sentence

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1.  Defendant, you pleaded guilty to a single offence of fraud, contrary to Section 16A of the Theft Ordinance, Cap.210. 

2.  You admitted the brief facts and I convicted you.

3.  Charges 2 to 5 were subject to not guilty pleas and were to be left on file. 

4.  The brief facts were as follows.  Extrawell Pharmaceutical Holdings Limited became a listed company on 10 March 1999.  Its principal business was the manufacture and sale of pharmaceutical products on the mainland.  Between the listing and 22 April 2002, you were the chairman and executive director.

5.  On 13 December 2000, you sold all your shares in the company and they were acquired by a Dr Mao Yu-min.  On 22 April 2002, Mr Mao replaced you as chairman but you remained as an executive director.

6.  Extrawell has a number of wholly-owned subsidiary companies, including Extrawell Enterprises Limited (“EEL”), Extrawell (BVI) Limited and South Asia Pharmaceutical (China) Limited (“South Asia”). 

7.  Extrawell Holdings Limited (“EHL”) was a local private company, partly owned and controlled by yourself.  It had no connection with Extrawell.

8.  Fosse Bio Development Limited (“FBE”) is a company incorporated in Hong Kong in 1998.  It is engaged in the research and development of oral insulin enteric-coated soft capsules in conjunction with Tsinhua University in Beijing. 

9.  At the time of its incorporation, Fordnew Industrial Limited was controlled by Mr Siu Yeung-ping and he was the majority shareholder of FBE.

10.  Viderex International Limited was a company owned and controlled by Mr Siu Yeung-ping and his brother Siu Yeung-ching.

11.  In late 2000, Extrawell became interested in FBE’s produces.  They negotiated the acquisition of 51 per cent of FBE’s shares for HK$39.78 million.  D1, that is yourself, was not involved in those negotiations.  Later, Extrawell pulled out. 

12.  In early 2000, you negotiated the acquisition of FBE on behalf of Smart Ascent Limited (“SAL”).

13.  Subsequently, a Letter of Intent dated 11 January 2001 was entered into between SAL and Fordnew for the same consideration, that is, $39.78 million, for the acquisition of 51 per cent of FBE.  You signed the Letter of Intent on behalf of SAL.

14.  Fordnew later transferred 51 per cent of its shares to SAL.  Shortly before the negotiations, Madam Chuah Meng-meng and Madam Tang Po-ling, respectively the financial controller and senior accountant of Extrawell, acquired SAL on your instructions and that was from Four Seas Limited, an accounting firm.  This was a shell company.  The fees for its purchase were paid by EHL, the company chop of SAL was obtained from Four Seas on 11 January 2001.

15.  Between 11 January 2001 and 12 March 2001, you, by 3 personal cheques, paid 3.5 million to FBE as deposit.  By December 2003, SAL, using money from various accounts, including EHL, Ng Lai-chan and Liang Qi-suan, paid additional sums of around 4 million to FBE through the accounts of FBE and Viderex. 

16.  Ng, a Malaysian national, is your ex-wife and Liang, your secretary in Guangzhou.

17.  On 23 March, on your instructions, Chuah and Tang transferred their shares in SAL to Mr Ong Cheng-heang and Madam Wu Kiet-ming.  Ong, a Malaysian, was married to your daughter and was an independent non-executive director of Extrawell until he resigned on 2 August 2001.  Wu, a Malaysian, was married to Mr Ho Yeong-fan, your son, and an executive director of Extrawell until 2 August 2001.  After the transfer, Ong and Wu became each 50 per cent shareholders of SAL.

18.  On 25 July 2003, the Mainland Food and Drug Administration issued a clinical trials permit to FBE and Tsinhua approving trials on humans.

19.  On 3 April 2004, Extrawell (BVI), a subsidiary of Extrawell entered into a sale and purchase agreement with SAL to acquire 51 per cent of its shares for HK$73 million. 

20.  On 1 March 2004, Extrawell received a report from Castores Magi Asia Limited, a valuer which opined that as at 31 January 2004, the fair market value of 100 per cent equity interest in FBE was HK$279.8 million. 

21.  According to the sale and purchase agreement, a total of $71,568,628 would be paid to Wu for her 50 per cent shares and $1,431,372 to Ong for 1 per cent of his 50 per cent of shares.  All payments were fully made to Ong and Wu by 9 September 2004 by South Asia, a subsidiary of Extrawell.  As a result, SAL became a subsidiary of Extrawell.

22.  After the signing of this agreement between Extrawell (BVI) and SAL, as SAL held 50 per cent of the shares of FBE, there was a requirement to obtain an audit report on SAL and FBE.  On instructions, Tang altered the company account records of SAL and FBE and made false cheque records to remove all traces of direct connections between EHL, yourself and your associates and SAL and FBE. 

23.  At all material times, the management of Extrawell were not told by you and were unaware of the interests of yourself in SAL and the relationship between you, Ong and Wu.  You also concealed or failed to disclose that SAL was controlled by them.

24.  On 25 March 2004, Extrawell issued a circular but failed to make the true position clear.

25.  The $73 million paid by Extrawell to Wu and Ong was remitted to their accounts in Singapore and subsequently transferred to a bank account of Ng in Singapore, your ex-wife.  About half of the money was then transferred by Ng to the Hong Kong account and then to other accounts including that of Liang.

26.  On 24 August 2007, the Hong Kong Stock Exchange received a complaint by the Securities and Futures Commission concerning the relationship between you and Ong.

27.  You were arrested by ICAC on 20 September 2007.  You admitted the facts. 

28.  You are a man of hitherto clear record. 

29.  The charge itself is one of fraud.  The victim in that fraud is expressed to be Extrawell Pharmaceutical Holdings Limited and related to the $73 million paid for the 51 per cent of the shares of Smart Ascent Limited (“SAL”).

30.  The deceit is expressed as three different acts, all of which or some of which operated:

(a)  Falsely representing that Wu Kiet-ming and Ong Cheng-heang were not connected persons; and/or

(b)  Concealing or failing to disclose that those two persons were respectively the daughter-in-law and the son-in-law of yourself; and/or

(c)  Concealing or failing to disclose that Smart Ascent Limited was a company controlled by you with an intent to defraud.

31.  Mr Plowman on your behalf has provided lengthy and persuasive mitigation.  I have taken some time to consider that mitigation and the actual facts of this case. 

32.  It is a matter of record that the prosecution has shown understanding and compassion towards you, based primarily on your accepted and undisputed grave ill health and your advanced years.

33.  On top of all this, we have reports indicating that your mental health is extremely poor, showing strong evidence of early onset dementia.  The evidence is supported by tests, opinions and a demonstrable diminution of your IQ.  I shall deal with these matters in more detail at a later stage.

34.  On the face of it, this appears to be a very serious charge indeed.  SAL was undoubtedly your creature, acquired by you, and the evidence overwhelmingly shows that it was controlled by you, by your daughter-in-law and your son-in-law.

35.  SAL acquired 51 per cent of the shares in FBE for just under $40 million in early 2001 and then, in early 2004, Extrawell purchased 51 per cent of the shares in SAL for $73 million. 

36.  However, this is far from telling the whole and true story.  If one looks closely at the facts, the level of criminality on your part is put in its proper perspective.  For sure, there is a demonstrable and operational fraud, but I find this is a unique and wholly exceptional case, for reasons I shall explain.

37.  The first and perhaps major point of mitigation that sets this case apart is that it is not a situation of Company A being fraudulently induced into acquiring or investing into Company B which is a worthless empty vessel.  Extrawell’s purchase of 51 per cent of SAL is the acquisition of a genuine and valuable asset for a price that at the very worst possible view, is at the very least a fair market price.

38.  We know from what occurred thereafter that the value of the asset was to grow and improve dramatically.  Thus, the victim has profited.

39.   Further, we know that you acquired the shares in FBE via SAL at the same price Extrawell initially agreed to pay, but then withdrew being unwilling to accept the risk.  You then took up the challenge, bought the shares using SAL and accepted the risk.  Your decision in that sense proves to be sound financially.

40.  Further, it is clear that from late 2000 you had no financial interests in Extrawell having disposed of your shares.  You remained as an executive director of Extrawell only because you were invited to do so.

41.  Indeed, evidence of various prosecution witnesses in the trial of D2 and the Immigration records show that you were rarely in Hong Kong between 2001 and 2006.  You only spent 218 days here.  Therefore, it can be said that in fact you took little part in the running of Extrawell. 

42.  It is also clear from the evidence of various prosecution witnesses, such as Dr Mao, the chairman of Extrawell, that you did not attempt to use your position as an executive director to push Extrawell into acquiring the shares of SAL either by exercising influence on Dr Mao or on the board of Extrawell.  The impetus came from the chairman himself.  You took no part in the negotiations, you were not present at the board meetings which approved the 2004 acquisition and you took no part in the appointment of Castores Magi as the independent valuer.  That valuer deemed the acquisition to be a sound investment. 

43.  However, what you did is to remain silent when you bore a duty to speak out.  What can be said and I accept this to be correct, is that you showed a measure of honesty and decency by distancing yourself from the negotiations when a more dishonest person would have used his position to his own advantage in a more positive way.  It is however not clear if this was by design or by force of circumstances. 

44.  It is also a fact that on all sides and at all stages independent professionals were heavily involved in the acquisition. 

45.  Interestingly, and lending strong and meaningful mitigation to your case, is the fact that the chairman and two directors of Extrawell all confirmed that they would not attach any significance to the relationship between you and SAL.  They were more concerned with the feasibility of the oral insulin product and the reasonableness of the price.

46.  It is worthy of note that even after your non-disclosure came to light, you were not removed from the board of Extrawell and remained as a director until your voluntary resignation in March 2009.  This took place just prior to the commencement of the trial.

47.  You are to this day still a consultant in Extrawell.  To continue in the same vein, on 21 May 2009, Extrawell issued a circular to convene an EGM to ratify and approve the 2004 transaction. 

48.  An updated valuation report from Castores Magi to the effect that as at 28 February 2009, 100 per cent valuation of shares of SAL was placed at 1.5 billon, putting 51 per cent at over three-quarters of a billion, which were bought in 2004.  In 2004, Extrawell had paid only $73 million.  Therefore, one view might be that you were the actual loser.

49.  The meeting was held on 8 June 2009 and unanimously approved, thereby ratifying the 2004 transaction.  Thus, it seems that your non-disclosure, whilst amounting to a fraud in law, was pointless and ineffective in that the so-called victim was and is a very content victim, who would have proceeded in that direction in any event.

50.  Your given reasons for the non-disclosure were that so you were not pressed by your colleagues to accept a lower rate.

51.  From later valuations, it seemed that you made a mistake in selling to Extrawell when you did and for a mere $73 million. 

52.  Thus, I do find this to be demonstrably a wholly usual case of its type worthy of an exceptional sentence.

53.  I now turn to further factors which affect  you personally.  I shall deal first all with your health situation.

54.  As a general proposition, the ill-health of an accused, be it mental and/or physical, is not a matter which entitles the defendant to a non-custodial sentence when an immediate custodial sentence is appropriate.  This is especially so when dealing with serious criminal offences.

55.  Having said that, it does appear that there is some discretion left in the court.  In the case of R v Chow Kui Chun(?) [1996] 3 HKC 278, Yang CJ adopted four principles.  The third principle was this,

“A serious medical condition, even if it was difficult to treat in prison, will not automatically entitle an accused to a lesser sentence than otherwise would be appropriate.” 

This seems to suggest that the court does have a discretion in these circumstances, the important and operative word being “automatically”.

56.  The rationale behind the general principle that medical grounds seldom operate to reduce a sentence is based on the duty imposed on the Correctional Services Department to ensure appropriate treatment of those placed in their care and the power of the Chief Executive to commute sentences where appropriate.

57.  In the present case, and I note this to be accepted by the prosecution and supported by proper and comprehensive medical reports from doctors of experience and eminence, you are suffering from an extremely serious heart condition.  This was first diagnosed in February 2008 by Dr Subach Bahari(?), whose report is to be found at tab 30 in the defence bundle.  The angiogram indicated a severe blockage of the main artery and moderate blockage of another.

58.  By April 2009, Dr Chris Wong, whose report is at tab 31, concluded from the fresh angiogram that the position had deteriorated with two main arteries showing over 70 per cent narrowing.  His opinion was that you were medically unfit to stand trial.

59.  After your plea of guilty on 22 April 2009, I granted bail to you to allow you to seek urgent medical treatment.  Whilst the question of bail or custody after conviction is not a matter on which the prosecution is entitled to make representations, the prosecution did volunteer their support for continuing your bail.

60.  On 30 April, you saw Dr Devin Pelay(?), a cardiologist in Malaysia.  Another angiogram showed a significant further deterioration of your health, both main arteries showing up to and over 90 per cent stenosis.  Dr Pelay is of the opinion that because of the location of the blockages, angioplasty is not suitable and open heart surgery involving a double heart by-pass is advised.  This would involve several days in intensive care and 3 months to recover, the avoidance of stress being advised.

61.  Further, you are suffering from mental problems.  The psychological report of Dr Peter W H Lee dated 15 April 2009, tab 28, concludes the following:-

(1)  That you are estimated to have impaired cognitive function of 23 to 30 IQ points, that is in paragraphs 34 and 56.

(2)  That you are suffering from signs of an early dementive process (paragraphs 40, 43, 56, 58).

62.  Also, the psychiatric report of Dr Benjamin Lai of 8 April comes to a similar conclusion, which is at tab 29.

63.  The conclusion I draw is that you are physically in poor condition and in need of urgent and serious medical intervention.  Also, your mental condition is fragile and likely to deteriorate. 

64.  I turn now to the question of positive good character, which is a factor to be borne in mind but not a decisive factor. 

65.  You were born in the mainland in a poor rural village.  Your mother took you to Malaysia at the end of the Second World War to join your father.  You had a variety of jobs until you started your company, John Masters Limited in the 1980s.  Eventually, you built up the company and achieved wealth through business.  Upon achieving success, I am told by Mr Plowman and this is supported by various documents in the defence bundle, that you have given freely and massively to charities in both Malaysia and Mainland China. 

66.  In Malaysia, you assisted with an orphanage, a childcare centre and other healthcare services, that is tab 16, and donated over HK$12 million to various charitable causes through the Maha Karuna Buddhist Society.  This includes provisions of homes for the elderly, healthcare and education for the poor.

67.  In the mainland, you have assisted your home county in Guangdong, that is called Dabu.  Over the years, you have donated I am told in excess of RMB41 million towards schools, roads, bridges, hospitals, homes for the elderly and healthcare.  You have contributed additional sums to alleviate the consequences of natural disasters and improve the life of the poor.  Tab 21 applies.

68.  You have been accorded many civic honours for your contributions, and I refer to tabs 22 to 27.  The road you built has been named after you, the Chin Hou Road.  Therefore, it seems that having attained wealth, you attempted to share that wealth with others.

69.  I turn now to my conclusion. 

70.  You are a man of 72.  You have a clear record, in poor physical and mental health.  You are a divorcee with three grown-up children.  You are a self-made man who came from the most humble of beginnings to achieve a position of authority and wealth.  You have a magnificent record of charitable works whereby huge sums as well as time have been given to help those less fortunate.  You are of clear record.

71.  The crime of which you are convicted should not be trivialised, but on the other hand, it should be kept in its true perspective.  The victim company still retains you in the capacity of consultant and presumably would still have you as a director, but for your voluntary resignation at the beginning of this trial.  Extrawell has benefited massively from your fraud and ratified now with full knowledge the 2004 acquisition.

72.  From evidence presented and the facts as they have now emerged, the fraud was pointless and stupid.  If you had played with a straight bat, Extrawell would undoubtedly have proceeded on the same path that it took.

73.  On the other hand, it could even be said that given the most recent valuation of SAL, that had you not proceeded as you did, then you would have retained an immense asset worth far above what you actually received for it.

74.  In my opinion, there was fraud, and fraud is to be discouraged at any level.  Indeed, you have pleaded guilty to that fraud.  The probity of the market is called into question when fraud prevails, but this, as I have said, is a wholly exceptional set of circumstances and having brought together all the threads, I now come to the conclusion that a custodial sentence is called for.  I take a starting point 3 years’ imprisonment, reduced to 2, but allowing for all the points in mitigation I have mentioned, that sentence will be suspended for a period of 2 years.  You are therefore sentence to 2 years’ imprisonment, suspended for 2 years. 

75.  I am sure Mr Plowman will explain this to you fully, this means that if you commit no further offence in Hong Kong which carries imprisonment within the next 2 years, you will not be required to serve that sentence.  Should you commit any offence at all which carries imprisonment, then you will serve that sentence in addition to any sentence imposed.  Do you understand?

DEFENDANT:  Yes.