HKSAR v. FONG WAI-LAP, ADRIAN AND ANOTHER

DCCC1074/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 1074 OF 2011

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Reasons for Verdict

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1.  Defendants, you have both pleaded not guilty to an offence of conspiracy to defraud, contrary to common law and punishable under section 159C(6) of the Crimes Ordinance, Cap. 200.

2.  The prosecution case was as follows.  You, D1, were an assistant vice-president of ICBC International Holdings Limited, working as a sales trader at its subsidiary ICBC International Securities Limited.  D2, you were a senior sales marketing manager at Phillip Securities (Hong Kong) Limited (“PSHK”), working as a dealer’s representative.  Both of you were licensed persons registered with the Securities and Futures Commission.

3.  Both ICBCS and PSHK require their traders or dealer representatives to comply with their compliance manuals. This includes the duty to act in the best interests of their clients’ investors and to conduct themselves with honesty, integrity and fairness, and also to be familiar with the Prevention of Bribery Ordinance.  The ICBC manual prohibits staff from receiving any benefit which is likely to conflict with their duties to any client.  Staff must also be satisfied that persons placing orders on behalf of a client’s account have been duly authorised to do so.

4.  Under PSHK’s manual, licensed persons are expressly prohibited from using fraudulent or deceptive schemes in security transactions and from “rat-trading” in which the interests of the client are harmed intentionally.  As part of their licensing conditions, both companies undertook not to conduct proprietary trading, that is they could not make a profit for themselves by trading shares in addition to or instead of earning commission from processing trades.

5.  In September 2009, Metallurgical Cooperation of China Limited (“MCC”) launched an initial public offering intending to have their stock listed on the Stock Exchange of Hong Kong on 24 September 2009.  On 18 September 2009 MCC announced its initial public offer price as $6.35 per share.  On or about 18 September you, D2, requested D1 to procure shares of MCC for your customers before the date of listing of MCC and the grey market through ICBCS.  Grey market trading refers to the trading of securities prior to the time when they are traded publicly on the Stock Exchange. 

6.  On 21 September 2009 you together had at least two phone conversations in which you agreed that after you, D1, had procured the shares of MCC from the grey market, that you would mark up the share price by about 5 cents per share before selling them to your customers, D2.  They would then share the profits between them.

7.  On 21 and 22 September, D1, you procured 10 million shares of MCC, 3 million at $6.70, 2 million at $6.45 per share, and 5 million at $6.50 per share.  That is a total price of 65.5 million, and an average price of $6.55 per share.  After each parcel of shares had been procured, you, D1, e-mailed you, D2, with the details of the amount and price. You, D2, replied in the same manner. 

8.  At this time you, D2, approached three customers of PSHK, Mo Ku-mo, Tang Wai-kin and Leung Kwok-hung, Nelson, offering to sell them the 10 million shares.  Mo agreed to take 3 million shares on the understanding that the purchase price would be higher than the IPO price, Tang 2 million at $6.67 per share and Leung 5 million at $6.75 per share.  When offering to sell the shares to them, you, D2, never mentioned that you had privately marked up the purchase price, nor had you, D2, sought prior approval from the management of PSHK to this agreement with D1 to purchase 10 million shares in MCC from ICBCS.  

9.  Around 23 September of 2009, you, D2, informed Mr Lam Ho-chu, director of international sales of PSHK, of the purchase of the 10 million shares of MCC from ICBCS.  You submitted three dealing tickets to Lam.  Lam refused to approve the transactions as he noticed the selling price of the shares offered to the clients was higher than the actual price offered by ICBCS.  These transactions had breached the dealing policy to act in the best interests of the client.

10.  On that afternoon you called Mr Ma Tor-fuk, head of sales, trader of ICBCS.  You, D2, claimed that ICBCS refused to open a new securities account for BSHK.  Ma refused as the deals had already been confirmed by both sides.  As a result of the dispute between ICBCS and PSHK about the sale and purchase of those 10 million shares of MCC, PSHK had not allocated shares of MCC to Mo, Tang or Leung.  You, D1, never reported to Ma that customers of PSSHK, that is Mo, Tang and Leung, would purchase the shares at a marked-up price.

11.  On 24 September 2009, the first day of trading, the share price of MCC shares fell below the IPO price.  The stock closed at $5.52 per share.  ICBCS, pursuant to your confirmation, D2, transferred 10 million shares of MCC to PSHK, but they refuse to accept the deal, claiming that you, D2, were not allowed to confirm deals on behalf of PSHK.  The matter was referred then to the SFC. 

12.  The management of ICBCS and PSHK confirmed that you, D1, and you, D2, were not allowed to mark-up the share price before selling to customers for your private gain.  Mo and Tang confirmed they would not agree that the share prices of MCC be marked-up, Leung that he was unaware of the mark-up.  On 17 February 2011 you were both arrested by ICAC.

13.  The prosecution comprised three totally live witnesses and four prosecution witnesses, each of whom their witness statements were read out in court under section 65B of the Criminal Procedure Ordinance, Cap. 221.  There were admitted facts, each being in respect of each of you, being P31 for you, D1, and P32 for you, D2.  Also produced in the case were 43 prosecution exhibits, including three video-recorded interviews for each of you.

14.  P31, the admitted facts for you, D1, entered into evidence in accordance with the provisions of section 65C of the Criminal Procedure Ordinance, Cap. 221, established the following:

(1) D1, your identity was admitted.

(2) You were employed by ICBC International Holdings Limited as a senior associate, institutional sales, under subsidiary ICBC Securities Limited, that is ICBCS. A copy of your employment contract dated 15 April 2009 is produced as P1. D1, you were the assistant vice president of ICBCH.

(3) A compliance manual for ICBCH and employees is produced as P2.

(4) The acknowledgement of P2 signed by you, D1, is produced as P3.

(5) You, D1, were licensed and registered with the SFC.

(6) Your e-mail account was awlfong@icbci.com.hk.

(7) Each member of ICBCH, at his or her own e-mail account, a unique password.

(8) E-mails from and to your account, D1, between 1 and 24 September were burned onto a DVD, which is P8.

(9) Eight such e-mails are produced as P9, A-H.

(10) They have not been interfered with.

(11) Your phone line was 2683 3185.

(12) Audio recording in respect of D2’s phone line at Phillip Securities (Hong Kong), 2287 4935, were recorded. The conversations were burned onto a DVD, which is P10. They have been properly recorded and not tampered with.

(13) A transcript of 73 phone conversations, being P11 and P11A, contained the voice of you, D1, talking with D2.

(14) The transcripts are unaltered.

(15) ICBCS opened an account with PSHK on 19 August 2009, being P15 and P15A.

(16) September 2009, Metallurgical Corporation of China Limited (“MCC”) launched an initial public offering, and IPO, intending to have the stock code 1618 listed on the Stock Exchange of Hong Kong on 24 September of that year.

(17) On 18 September 2009 MCC announced an IPO price as $6.35.

(18) On 21 and 22 September 2009 you, D1, procured 10 million MCC shares on the grey market, sourced as follows: (a) 3 million at $6.70 per share from CITIC Securities on the morning of 21 September 2009; (b) 2 million at $6.45 per share from CITIC on the morning of 22 September 2009; and (c) 5 million at $6.50 per share from ICBC International Strategic Investments Limited on the morning of 22 September 2009.

(19) On 24 September, the first day of trading, the share price of MCC fell below the IPO price, closing at $5.52.

(20) You, D1, are of hitherto clear record.

15.  The admitted facts for you, D2, P32, were entered into evidence in accordance with the provisions of section 65C under Criminal Procedure Ordinance, Cap. 221.  They provide as follows:

(1) Your identity, D2, is admitted.

(2) You were the dealers representative of Phillip Securities (Hong Kong) Limited (“PSHK”). Your agreement dated 11 March 2009 is produced as P4.

(3) The staff dealing policy for PSHK and employees is produced as P5.

(4) PSHK’s compliance manual is P6, with English translation as P6A.

(5) P7 is your receipt for P5 and P6.

(6) You were licensed and registered by the SFC.

(7) Your e-mail account at PSHK was pacong@phillip.com.hk.

(8) E-mails from D1’s account between 1 and 24 September 2009 were retrieved and burned onto a DVD, P8. They were not tampered with.

(9) Eight e-mails from P8 are produced as P9, A to H.

(10) They have not been tampered with.

(11) Your phone number at PSHK was 2287 4935.

(12) Audio recordings of your phone conversations were burned onto a DVD, which is P10. They have not been tampered with.

(13) The transcript of 73 conversations extracted from P10 are produced as P11, and the English translation is P11A.

(14) D2, you are one of the participants in the 73 conversations on P10. They have not been tampered with.

(15) Mr Nelson Leung opened an account with PSHK on 21 February 2008, produced as P12.

(16) Mr Mo Ku-mo opened an account with PSHK on 20 February 2008, produced as P14.

(17) Mr Tan Wai-kin opened an account with PSHK also on 20 February 2008, which is P40.

(18) ICBCS opened an account of PSHK on 19 August 2009. That is P15. And the P15A is the translation.

(19) In September 2009 MCC Limited launched an IPO intending to have its stock code no. 1618 listed on the Hong Kong Stock Exchange on 24 September 2009.

(20) On 18 September 2009 MCC announced the IPO price as $6.35 per share.

(21) On 21 and 22 September 2009 D1 procured a total of 10 million MCC shares on the grey market, sourced as per P31.

(22) On 24 September 2009, which is the first day of trading, the share price in MCC fell below the IPO price, closing at $5.52 cents.

16.  The first live witness was Leung Kwok-hung, Nelson, PW10 on the list.  He had been introduced to Phillip Securities by you, D2, and opened an account with them.  You, D2, invested for him in the stocks and shares.  His account with Phillip was opened on 28 February 2008 with a credit limit of $1.5 million.  He only invested a few times prior to September 2009 and was only advised by you, D2. 

17.  On your advice he said in September 2009 he was interested to purchase stock in MCC, stock code no. 1618.  He had read about it in the newspaper and heard from friends.  He said one of his group of friends was Mo Ku-mo, and also Tang Wai-kin.  He thought they invested too.  He thought you, D2, rang him on 22 September 2009.  He was to purchase 3 million shares at $6.81 each.  He said that Ah Mo was to purchase 3 million shares and Kenny Tang 2 million.  They were to purchase at $6.81 as well.  However, PW10 said he never confirmed the price with them.

18.  At page 346 there is a telephone conversation with you, D2, where PW10 asked for 5 million shares.  At page 369 further discussion where agreed 5 million at $6.70 per share.  Then there were four conversations on the same day, and PW10 was to get them at a price cheaper than Mo or Tang.  He said he put money into Phillip’s account but did not know how much to pay.  You said to pay in 1.5 million on 23 September.  He just put money in.  He said it was a big purchase, 33.5 million approximately if completed.  He prepared the money but never paid.  He was only asked to put in 1 to 2 million. 

19.  That day or next day you phoned and asked him to put in 30 per cent of the purchase price to secure the deal.  The next day he went to your office and had prepared a cheque to secure the deal, but you told him there was no stock available so the deal could not be completed.  He said he had gone to Phillip’s office with his friend Kenny Tang who also bought stock.  This is about 2 to 3 pm on 23 September.  He intended to pay his deposit of one-third of the price by cheque.  You said the deal was cancelled and there was no stock, and maybe they could buy on the market later.

20.  You had already confirmed 5 million shares at $6.70 on the phone and PW10 said he had paid $1.5 million into his account. You gave no explanation, D2, and Mr Lam did not ask for one.  The next day PW10 said he purchased 300,000 shares at $6 to $6.08 or so.  He said he had no idea of what the difference was between the grey market and the open market, just bought shares.  The next day they had fallen in price.

21.  Page 599, 24 September, between 8 am and 9 am, you called to say the deal fell through because you did not have 30 per cent of the price in the account.  PW10 felt that this was not a proper reason.  As far as PW10 could recall, you never told him you had marked up the shares.  He was then cross-examined first by Mr Fong.  He confirmed he did not know D1.  He accepted it was at 1007 hours on 22 September that you, D2, invited him to purchase MCC shares.  He agreed he did not care where you, D2, had got the shares from.  He believed the price quoted was reasonable.  He understood Phillip traded MCC shares themselves.

22.  The next day it was 1036 hours when he increased his order from 3 million to 5 million shares.  At this stage no price was agreed.  However, 3 million at $6.81 per share he believed would be the price. The next call was at 11 am when the average price was now $6.70 per share, and this is for 5 million.  At counter 13 you agreed that you, D2, asked him to give you some allowance and pay $6.75 per share.  This was because he had not seen the bill.  PW10 said he would pay $6.70, $6.75 or $6.80 and did not care about the price.  He wanted to buy the stocks.  He did not really consider the IPO price but agreed that you did tell him that it was $6.36.  He did not care it was higher.  He also agreed he automatically bought 300 shares.  It seems Kenny Tang also bought some. 

23.  Mr Davies then cross-examined.  He agreed that in his witness statement to ICAC he said he had no objection if you, D2, made a profit.  He did not know what was meant by marking up the price.  You, D2, represented Phillip, and he did not know that what they paid for them.  He did not care.  He agreed he did not care if Phillip made a profit by marking-up the price. 

24.  The witness statement of Lam Ho-chu, PW2, was then read into the record in accordance with the provisions of section 65B under Criminal Procedure Ordinance, Cap. 221, as P34 and P34A.  PW2 said he was the director of international sales at Phillip Securities (Hong Kong) Limited. He managed the sales team of about 460 account executives who worked as if self-employed.  They earned commission.  The company has a computer system stock automatic trade system (“SATS”).  A client contacts, an AE puts information into SATS to check the accounts, etc.  Stock transactions of over $500,000 have to be approved by PW2 and one of the other three responsible officers.  These are known as ROs. 

25.  Phillip Securities acts as agent to facilitate the purchase of shares.  The company does not directly sell shares.  The shares are sold at the actual market price.  The AEs have no basic salary, just commission.  The company does not allow an AE to sell shares with a different price from the market price, nor is the AE permitted to collect extra commission from the seller or the buyer of shares without the company’s approval.  PW2 confirmed you, D2, are an AE under his supervision and someone who required to comply with the company principles. 

26.  On 24 September 2009 MCC was to be listed.  SATS could not process unlisted shares, and you, D2, could not handle such a large transaction.  You had to get approval from PW2 a RO.  You contacted PW2 twice in relation to this transaction.  The first time was around 22 September 2009. PW2 received a message that clients wished to purchase 10 million shares.  PW2 said he was not clear if it was 10 million shares or 10 million dollars worth of shares. 

27.  You, D2, never mentioned where the MCC shares came from, nor the share price.  In conversation he told you the clients had to have accounts with Phillip and had to have, in those accounts, money equivalent to 30 per cent of the share price.  You provided a transcript to ICAC of the telephone conversations between them at 12:44:39 on 22 September 2009.  One per cent and 0.2 per cent referred to commission receivable from the clients.

28.  One or two days before 24 September you came to his room with three tickets, three clients, covering 10 million shares. Tickets are not used for normal purchase through SATS, only when approval of an RL was needed.  You said you got some shares from ICBC.  The clients offered to buy them at different prices.  Whilst you could not recall exactly, the average price was about $6.70.  He could not remember ICBC’s selling price of the MCC’s shares which you had mentioned to him, but it was below $6.70.  As you learned from SATS, the three clients did not have sufficient funds in their Phillip’s account, that is 30 per cent.  You refused to approve the transactions.  Also the transaction price was different from ICBC’s selling price, and this was contrary to Phillip’s principles.

29.  Phillip Securities was an agent, so it was illegal.  And he explained this to you, D2.  PW2 said that on the day of the listing, that is 24 September, his boss phoned to say ICBC had released 10 million MCC shares to Phillip Securities.  Later it was found that you, D2, had promised the shares to three clients and the deal with ICBCI.  You had never told PW2 that the three clients and ICBI had confirmed these transactions. 

30.  Phillip Securities had opened account with ICBI in August of 2009, but only PW2 and four others could operate it.  You, D2, were not one of those persons.  As an AE you had to have approval from an authorised member of staff.  It was PW2’s belief that you marked up the price of the shares bought from ICBC and then sold them to clients to get a profit. Phillip did not permit you, D2, to collect commission from ICBCI or clients privately.

31.  PW2 then dealt with the seizing of the exhibit from Phillip by ICAC, the employment history of you, D2, until your resignation on 1 December 2009.  The seized e-mails confirmed that between 21 and 22 September 2009 you, D2, and D1, confirmed the purchase by Phillip of 10 million MCC shares from ICBCI, 3 million at $6.70, 2 million at $6.45 and 5 million at $6.50.  On 23 September you, D2, sent D1 an email saying the transaction was illegal and instructing D1 to cancel it.  PW2 then reiterated he never proved this transaction. 

32.  At this point Mr Chau then put some supplemental questions to PW2.  Phillip Securities deals with stock trading, buying and selling of shares.  D2 was a sales representative with no basic salary.  Your income comes from commission on sales.  You got 50 per cent of the commission Phillip Securities made, but it varied.  You could apply to the company to get more.  Other than commission there was no other way an AE could get money from the company.  IPOs are where a company wants to list on the Stock Exchange offers a price declared at a specific date.  Then a few days later it is listed.  MCC, on 18 September, the IPO price was $6.35.  You can purchase shares on the grey market prior to the first day of trading.

33.  He said you, D2, contacted him on a couple of occasions prior to listing of MCC, according to telephone records the first occasion being 22 September 2009.  PW2 had asked you if it was to be 10 million in investment shares or 10 million shares.  To trade in the grey market you had to have 50 per cent of the price in the account.  D2, you asked for a special arrangement to collect extra commission.  PW2 reminded you, you had to use the same ratio for buying and selling.  He asked you to raise the commission on the seller.  At that stage you did not give the account numbers, but later you gave some. 

34.  You came to see him on the second occasion about the sale of MCC shares.  This was before the listing date.  You came with three dealers tickets filled in with stock number, account number, stock quantity and the prices.  Three clients wanted to buy at around $6.70, 10 million shares in total.  If successful, Phillip’s commission would be 0.25 per cent of that total, that is a 167,500.  Of that, you, D2, would get half.  That is $83,750 approximately.

35.  You had told him the price on the ticket was higher than the price asked for by the seller.  You said the clients were willing to offer a higher price.  You wanted to earn the difference, but this was not possible.  It was forbidden by the rules of the company.  Also the SFC stipulated they should protect the interests of the client and let the client know what the stock was selling at.

36.  PW2 said he would not approve if the prices were different.  Also the accounts did not have 30 per cent of the price in them. “Therefore I did not approve the transaction.”  You, D2, never told him you had already approved the purchase of 10 million shares from ICBC. 

37.  PW2 was then cross-examined by Mr Fong.  PW2 described how deals were confirmed.  Your duties, D2, as an AE were to buy and sell shares for clients.  You could deal in the grey market but you needed the RO’s consent for the transactions.  An AE should not transfer shares to another broker before sale to a client.  PW2 knew nothing of any involvement of Sun Hung Kai in the deal.  You, however, had said that your client had used Sun Hung Kai previously.  PW2 said he has asked nothing about this and only cared about Phillip’s role, commission and deposit.

38.  PW2 agreed he had heard of proprietary trading, which was practised by some firms who bought shares, then sold them at a higher price.  However, he said the proprietary traders he had heard of did not sell to clients but to other firms.  This was not common.  A special licence was needed.  He did not know if Sun Hung Kai did proprietary trading. 

39.  Mr Davies then cross-examined on your behalf, D2.  PW2 confirmed that the new staff were given a dealing manual and a group compliance manual.  They had to be read together.  They say trading and the grey market is permitted unless specifically disallowed by management.  He believed SFC rules did apply to the grey market, but not stipulated.  If you, D2, wished to be granted dispensation from compliance, you had to come to PW2 or another RO.  In MCC’s case PW agreed you did this, you followed company procedure.  PW agreed he could not recall the exact conversation he had with you.  Whilst he could not remember the details, it was a big order so he could remember important matters.

40.  Angel Ma he believed had told him that you, D2, wanted to speak to him  about 10 million transaction in MCC shares, so you called him.  He basically told you to check they had the money.  There was mention of Sun Hung Kai by you, D2.  PW2 understood you spoke of a transaction with that company of grey market shares.  He had no idea what it was.  PW said that the first time you had approached him with regard to a special arrangement you never mentioned anything between Sun Hung Kai and Phillip.  He disagreed he was speaking of other members of Phillip’s staff opening accounts with Sun Hung Kai.  He said the deal was illegal.  He was talking about the difference in price and told you this.  This was not allowed by the SFC, not acting in the interest of the client. 

41.  He told you, D2, to come to him again if 30 per cent deposit was put down and no profit.  He said by this time he believed the actual price appeared in newspapers.  PW2 agreed he told you it was alright if you used another method and Phillip did not make a profit, as Phillip was the agent.  PW2 was not aware of any arrangement between ICBCI whereby ICBCI opened an account with Phillip and dealt directly with the three clients.  Phillip had an account with ICBCH.  Prior to this the credit limit was 20 million.  If the credit limit was to be raised one of the five ROs at Phillip had to be approached, had to approach ICBCH.  If ICBCH unilaterally raised Phillip’s credit limit.  Phillip would be aware it was raised to 80 million.  However, PW2 said he was not aware of this. 

42.  Ma Tor-fuk, Dick gave evidence as PW1 on the list.  He was head of sales and institutional sales at ICBCH.  His witness statement was admitted into evidence as P39 and P39A for the translation, section 65B of the Criminal Procedure Ordinance, Cap. 221.  He said he was an RO of ICBCH, John Lo was his supervisor at the time of the incident, and you, D1, were a salesman of institutional sales.  You liaised with clients and opened accounts for individual companies and brokers.  He, too, was supervised by John Lo.

43.  On 21 September 2009 you told him that your client Phillip Securities wanted to purchase shares of MCC on the grey market. You did not mention who the contact person was.  On that day PW1 was covering for John Lo.  PW1 phoned Lo, who agreed to ICBCH acting as agent to look for sellers of MCC shares.  He made it clear to you that the company acted as an agent, drawing commission from transaction, and that they would not carry out proprietary trading.  In fact all in the company knew it was a condition of their licence from the SFC that they would not do so.

44.  You, D1, consulted other salesmen and, as a result, agreed to purchase 3 million shares from CITIC at $6.70 per share.  You confirmed with Phillip Securities by e-mail, P9 and P9B.  From this e-mail PW1 found the person at Phillip to be D2, who he did not know.  Their dealing department confirmed the purchase with CITIC’s dealing room and Phillip Securities dealing room.  D1, told you that Phillip wanted to purchase more. 

45.  On 22 September of 2009 Lo returned and approved a rise in Phillip Securities Limit to $80 million.  You then, D1, then got another 2 million MCC shares at $6.45, and D2 accepted them.  E-mails were exchanged to confirm.  That is P9C and D.  CITIC confirmed the sale and Phillip the purchase.  D1, you then sourced 5 million MCC shares from ICBC International Strategic Investment Limited at $6.50 per share, each confirmed by e-mail, those being P9E and P9F. 

46.  It was not until the first day of trading, that is 24 September 2009, that the shares could be input and assigned to Phillip at the relevant price.  Phillip was required to pay ICBCH 65.5 million and .1 per cent handling fee, commonly referred to as “ten drops”, plus a levy for the transaction.  You, D2, contacted PW1 for the first time on 23 September 2009 to say that Phillip Securities had a problem and you were unable to collect the shares.  After this you, D2, had phoned several times to say the deal was cancelled, but PW1 did not consent as it had been confirmed already.

47.  On 24 September 2009 ICBCH dealing room input the 10 million shares to Phillip, but Phillip did not accept them and did not pay ICBCI.  ICBCI then sold them at a loss.  ICBCI does not do proprietary trading and does not allow scalping or “rat-trading” in the grey market. However, trading in the grey market is allowed.  Each new recruit gets a staff code of practice and a compliance manual.  PW1 would not allow any member of staff, including you, D1, to accept an advantage for privately providing convenience and assistance to any client. 

48.  Mr Chau then asked some supplementary questions by way of an examination-in-chief.  PW1 said another division of ICBCI did have a few people authorised to do proprietary trading, but not your section, D1. When the shares were purchased they acted as agent for Phillip Securities.  PW1 reminded you to be careful in dealing with D2 and make sure he was the right person.  You, D1, applied to John Lo to increase Phillip’s credit limit to $80 million.  You were not entitled to any money from these shares.  You received a monthly salary, also a discretionary bonus at the end of the year.  PW1 then listened to and commented on some phone conversations. 

49.  PW1 was then cross-examined by Mr Fong.  He confirmed the proprietary trading was a company acquiring shares and some of them were at a different price to earn a profit.  PW1 said as he understood it a firm could approve itself.  He knew some securities firms did it, but not sure if Sun Hung Kai was one of them.  Another department or firm of ICBC did do proprietary trading.  He said prior to this incident his company had never done grey market trading, but John Lo could approve it. 

50.  He said Kay Lau was a member of staff.  She opened the account for Phillip Securities with ICBCH.  She asked PW1 for help to do this.  This is one to two days before the first sourcing.  He said he did not know if CITIC did proprietary trading.  He believed CITIC would have acquired the shares at list price, that is $6.35.  He said Phillip was their client.  ICBC has paid no commission to CITIC, but Phillip had to pay commission of .01 per cent plus the levy. 

51.  Third batch of shares came from ICBC International Investment for 5 million at $6.50.  He agreed it was possible it did proprietary trading.  The price as agent must match the price that it paid to CITIC, could not get approval to do proprietary trading because it acted as agent.  When a deal was complete the shares would belong to Phillip.  No duty on his company to know what Phillip did with those shares or inform Phillip’s clients the price that they had sold it to Phillip for.

52.  Mr Davies then cross-examined.  He confirmed that ICBCH had a compliance manual and he believed every member of staff was bound by it.  He agreed that it unequivocally forbade trading in the grey market.  That was why he sought John Lo’s approval.  That permission was sought and given by telephone.  PW1 believed that even if the manual forbade it he could get permission from seniors.  He said that you, D1, were employed on a fixed salary and the only additional money would be the annual bonus.  If ICBCH had made an illegal profit from proprietary trading, he did not know of that, if that profit would go to you, D1, nor did he know if there was any mechanism for such a payment.  He believed there was none.  PW1 said he was the same level as you, D1, but he was more senior.

53.  Mo Ku-mo then gave evidence as PW8.  He said that he had known you D2 since about 2007 and socialised with you.  Nelson Leung and Kenny Tang.  They all discussed stocks arrangements amongst themselves, invested in the stock market opening an account on your advice, D2.  That is P13.  This was opened in February 2008 with a credit limit of 3 million.

54.  In September 2009 he was advised by you, D2, to purchase MCC shares.  The four of them were having a drink when you, D2, raised it.  PW8 agreed the price on the grey market was $6.35 per share before listing, and PW1 agreed to 3 million.  He agreed to source 3 million at $6.35 two to three days before listing.  One day prior to listing PW8 contacted you, D2, to ask how the purchase was going.  You said you were working on it and not yet done.  PW8 said he was in the mainland, and you, D2, contacted him to say that perhaps he could not buy any shares.  He gave no reason.  He thought there were one or two other calls.  He said the purchase could not be done.  You said the deposit was not enough.  You never asked him to deposit money.  At first meeting you said it was $6.35 per share.  He said that he would not allow you, D2, to raise the price of the shares and pocket the difference. 

55.  PW8 was then cross-examined by Mr Fong.  He agreed in the Tibet Pub on 21 September 2009 he had purchased 3 million shares at $6.35 per share.  Mr Davies then cross-examined PW8.  PW8 agreed his only interest was in making a profit and he did not care where you, D2, got the shares from.  He agreed he never said that you, D2, must not make a profit. 

56.  Tang Wai-kin, Kenny, then gave evidence as PW9 on the list.  He said he had known you D2 since 2004 to 2005 and was a friend with whom he sometimes socialised.  He also knew Mo and Nelson Leung.  He said he had an account with Phillip Securities, which he used to trade in stocks and shares.  Sometimes he relied on the advice of you, D2.  On 21 September 2009 he thought you, D2, had called him to discuss MCC shares.  They should be priced between $6.91 and $6.98.  After the conversation he saw you, D2, in the Tibet Bar at between 5 and 6 pm.  Nelson and Mo were there as well, with others present. 

57.  On 22 September 2009 they had further telephone conversations.  You agreed to purchase 2 million at $6.70.  On 23 September 2009 he went to your office with Nelson Leung.  After a wait you said the documentation could not be done so the deal was cancelled.  You did not say why.  When you confirmed 2 million at $6.70 you never said you had purchased at lower price, nor that you had marked them up. 

58.  PW9 was then cross-examined by Mr Fong.  He was aware on 21 September that the MCC shares were not yet listed on the Stock Exchange.  At first he did not know the IPO price was $6.35.  He did not know the price or where you, D2, were getting the shares from, nor that you were marking them up.  He accepted in his witness statement of 17 February 2011, you had told him the price was subject to change until settlement. 

59.  He accepted that you, D2, in a telephone conversation of 22 September 2009, at 1103 hours, confirmed that 2 million shares at $6.70.  PW9 said he believed the transaction would go through at that price.  He confirmed he did not know you, D1.  Mr Davies then cross-examined. He agreed his only interest was to sell the shares at a profit and did not care where they came from.

60.  Wong Chung-fai, Angus, then gave evidence as PW11 on the list.  He was the ICAC officer who arrested and interviewed you, D1.  His statement at P42 was read into evidence in accordance with provision of section 65B of the Criminal Procedure Ordinance, Cap. 221.  He produced your three recorded interviews as P16 to P22B, with Notices to Persons in Custody, the discs, the transcripts and the translation. 

61.  The final witness was P13, Chow Wai-lung, Jeff, whose statement was read into evidence in accordance with the provisions of section 65B of the Criminal Procedure Ordinance, Cap. 220, as P43.  He was the officer who arrested and interviewed you, D2.  He produced P23 to P30B, being the Notices to Persons in Custody, the discs, transcripts and translation of the video recorded interviews. 

62.  Prosecution then closed its case.  In the absence of any contrary submission I did rule that each of you had a case to answer on the charge.  Each of you, having had your rights explained by counsel, elected neither to give evidence nor to call any defence witnesses. Defence then closed their case. 

63.  On behalf of prosecution and defence, all counsel made final submissions.  In respect of Mr Chau, with agreement he made final submissions even though neither defendant gave evidence, and the court approved that arrangement.

64.  I turn now to the verdict.  The allegation against both of you is that you dishonestly conspired together to defraud the three named victims by: (1) inviting them to buy shares in MCC at a price higher than the initial public offering price of $6.35; (2) sourcing the shares in MCC at a price lower than the three agreed to pay; and (3) not disclosing to them that they had sourced the shares in MCC at a price lower than they had agreed and attempting to appropriate the difference between the selling and buying price of the shares of MCC. 

65.  The most striking aspect of this case appears to me to be the openness or transparency of the alleged conspiracy.  We have heard evidence that the IPO was a matter freely reported in the press and presumably easily able to be checked by the alleged victims.  Further, you, D2, went to your supervisor PW2, told him frankly what you intended to do and sought his permission.  The basis of the charge is the agreement to mark-up shares.  It is also odd that the shares purchased by you, D1, had already been marked-up.  The IPO price, as we know, was $6.35, yet 3 million was sourced at $6.70, 3 million at $6.45 and 5 million at $6.50. 

66.  What is also clear from the evidence is that the witness Wilson Lam, PW2, was clearly in my opinion far more concerned that 30 per cent deposit had not been deposited than with the marked-up price of the shares.  The latter point he referred to in his evidence was almost, in my opinion, an afterthought.  The theme of openness is echoed in the easily accessible telephone calls and e-mails, all of which were recorded and produced in evidence.  The contents are eloquent as to the lack of guile on the part of each of you.  There is nothing to indicate that you would have been unaware that there were facilities to access and record them, yet you proceeded with your schemes openly. 

67.  The facts are clear enough and there is no doubt in my mind that you, D1, and you, D2, were acting outside the scope of your conditions of employment.  The question is whether you acted dishonestly and therefore illegally.  Put bluntly, was this a dismissible matter with perhaps a civil remedy available to the victims should they suffer loss or a criminal conspiracy?  The onus is squarely on the prosecution to prove the latter beyond all reasonable doubt if a conviction is to be achieved.  That you, D1, and you, D2, did agree to the scheme to procure shares in MCC and sell them via Phillip Securities at a higher price than cost, dividing or sharing the profit it is clear to me beyond all reasonable doubt. 

68.  As I have said, this just does not feel like a conspiracy.  At first sight, one might take the view that it is simply the normal workings of a capitalist economy with traders sourcing shares or commodities to sell at a profit to others.  But of course I cannot and do not decide this case on mere feelings for the evidence.

69.  Let me address now the particulars of the charge.  Perhaps another factor worthy of mention is that none of the three alleged victims asked you, D2, what the shares were bought for so there is no evidence of you lying or covering up the sourced price of the shares.  You, D2, were honest as to the IPO price.  Taking a step further, I cannot be sure that you, D2, would have been anything but honest in giving them the information, if asked.

70.  The allegation is that you D1 and D2 conspired together to defraud the three alleged victims by these defined dishonest acts. So let us examine them. 

71.  One, inviting the three to purchase MCC shares at a price higher than the initial public offering price of $6.35.  This is somewhat strange, as I have said, as you D1, D2 had acquired the shares at a price higher than the IPO price, and there is no evidence before me that there is anything dishonest about you doing so.  There is no evidence that the source price bears any resemblance to the IPO price.  Also there is no evidence of you D1 agreeing with D2 to invite the specific named persons to buy MCC shares. From the evidence, D1, you have no connection with the three persons.  At best you are agreeing to source shares for D2 to sell to unknown parties or indeed brokers, as D2 you said in one conversation. 

72.  The second set of particulars is that of sourcing the shares of MCC at a price lower than that agreed to be paid by the three alleged victims.  The particulars are well covered in the final submission on behalf of D1 by Mr Fong.  D1, you had sourced 3 million shares at $6.70 per share, 2 million shares at $6.45 and 5 million at $6.50.  D2, you approached Mr Tang, who is PW9, first by phone, on 21 September 2009 and mentioned a transaction price of $6.91 to $6.98.  That same day you met Mo, who is PW8, and it was agreed he would purchase 3 million at $6.35.  This is very odd as it would be selling at a loss. 

73.  The next day D2, you rang PW9 and they agreed 2 million at $6.70.  It was not clear that they were part of the 3 million sourced from CITIC at that price.  Here the prosecution has further difficulty in establishing the particulars.  PW10 called D2 to ask you, D2, to ask him to get 5 to 7 million shares.  No price was mentioned at that stage on 22 September 2009 at 10.36.  At 10.51 you, D2, called D1 and agreed to take 5 million shares at $6.50 per share.  You, D2, then called D1 and said you would pay the $6.70 per share, and PW10 agreed to $6.75 per share.  Clearly this shows to me that Leung was not against you, D2, taking a profit.  The other consideration that no price had been agreed before the shares were sourced. Therefore this ground has not been made out.

74.  Particular three alleges that you did not disclose to the three alleged victims that you had sourced the MCC shares at a price lower than that they are each to pay.  This seems, on the face of it, to be the very epitome of the dishonest act.  It is clear there is no direct relationship between you D1 of ICBCI Securities and the three customers who were clients of you, D2, or Phillip. 

75.  In that respect, D1, it cannot be said that you have any duty, legal or moral, specifically to act in the interests of those persons listed.  D1, you have quoted to D2, Phillip, the actual price that you were paying, and that accords with your duty.  So I agree that D2 only owed a duty of care to the three if such a duty existed.  The whole evidence is that the three so-called victims did not care where the shares came from, were little concerned as to who or what was paid for them, and concluded that what you, D2, offered them was a reasonable price.  They were only concerned to make a profit. 

76.  There is no evidence at all that you, D1, have agreed with D2 that he should not disclose the price paid to them, or anyone, that is that they were paying more than the sourced price.  Again the prosecution case has not been proved beyond all reasonable doubt in respect of this particular. 

77.  Mr Fong did submit on the aspect of whether Phillip did take part in proprietary trading, but in my opinion that is mere speculation lacking in evidence or substance, and does not advance the defence case one jot.  It is unnecessary to speculate in this regard.

78.  The fourth particular refers to an attempt by both of you to appropriate the difference between the selling and buying price of the MCC shares.  Any attempt to appropriate the price difference is of no importance or probative value unless the prosecution can prove beyond all reasonable doubt that the victim or victims had been defrauded.  Indeed, it would have sufficed if any of the victims can be shown to be defrauded. 

79.  Mo agreed to 3 million at $6.35 per share.  This is not and cannot be fraud.  It is the IPO price.  Tang at 2 million from D2 at $6.70 per share, there is a total lack of positive(?) evidence to show that they were not part of the 3 million shares sourced for $6.70 per share, so no fraud in this case having agreed to 5 million and agreed to increase the asking price from $6.70 to $6.75 he found the price reasonable and clearly did not care if you, D2, did make a profit.  Therefore again there is no evidence of the third victim being defrauded.

80.  In the round, it is clearly the case where you D1 and D2 made a broad agreement to do something that was not in accordance with your conditions of employment, but was it criminal?  In view of what I have found, it was not and it was not shown to be so beyond all reasonable doubt.  There is, in my opinion, insufficient evidence of dishonesty.  To put it simply, it is a case of trying to make a little bit extra money that I am not satisfied can be shown on the evidence to involve defrauding or dishonesty. 

81.  Therefore the case is dismissed.