HKSAR v. CHEUNG YING TAT AND ANOTHER

DCCC 1131/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 1131 OF 2011

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REASONS FOR VERDICT (D2)

1.  Charge

The second defendant (D2) pleaded not guilty to a charge of conspiracy to defraud. The first defendant, (D1) pleaded guilty at the start of the trial to the alternative charge of fraud contrary to section 16A of the Theft Ordinance.

2.  The fraud on Park N Shop (PNS) by D1

There was no dispute by D2 that a fraud was committed by D1 on PNS with respect to money it paid to a company owned by D2 for “Use By” labels. D1, an employee of PNS, admitted that he defrauded PNS by falsely representing to PNS that there was a need for PNS to purchase “Use By” labels from D2’s company which were in fact of no use to PNS. Payment in the sum of about $9 million was paid by PNS for these useless labels.

3.  The conspiracy charge

The conspiracy alleged that D2 conspired with D1 to commit the fraud against PNS. The charge sets out specific particulars of the dishonesty.

4.  In summary the conspiracy charge alleges that D2 together with D1 conspired or agreed to defraud PNS by causing PNS to purchase “Use By” labels at a grossly inflated price through D2’s company which they knew were of no use to PNS.  The profit made from the sale of these useless labels must have in part been shared with D1 as D1 would not have ventured into this scheme to defraud his employer without some monetary benefit to him.  The receipt of even part of the money from D2 derived from the sale was in fact secret profits made by D1 which was itself a fraud.

5.  Overview & Prosecution Case

D1 as an employee of PNS repeatedly placed orders for ‘Sheet Form’ Use By labels from D2’s company Hang Tat International Trading Company (HT) which he, D1, knew to be useless to PNS. He induced PNS to purchase about 116 million Use By labels and pay a total of about HK$9 million as payment to HT over a period of about three years from 2007 to 2010.

6.  D2 would personally deliver these useless Use By labels to PNS at their fresh food depot in Sheung Shui.  Sometime after receipt of the labels by D1, he would discard them in the rubbish.  D2 was paid by PNS for these useless labels. 

7.  The labels supplied by HT were useless to PNS. Firstly PNS did not use the sheet form Use By label ordered and secondly it already had its long term supplier of Use By labels. 

8.  D1 and D2 were friends.  They were in frequent contact with each other.  They had travelled together on at least 25 occasions.

9.  The prosecution case is that D1 enlisted D2 into the scheme to defraud PNS so that they could mutually benefit from the fraud. It was suggested that D1 and D2 must have reached an agreement whereby they would work together to supply Use By labels to PNS at a grossly inflated price for the purpose of raking in substantial profits from the trade. 

10.  The prosecution basis that D2 was aware of the fraudulent nature of D1’s purchase orders for the useless Use By labels was generally based on the following facts:- 

(a) D2 has all along operated a bar.

(b) D2 had no experience in printing labels nor was he involved in any business of that sort.

(c) D2’s company Hang Tat International Trading Company (HT) a sole proprietorship was set up only a month or so before the orders were placed.

(d) HT’s sole business was the supply of labels to PNS.

(e) HT’s profit margin of sale of these Use By labels to PNS was 750%, thus the sale to PNS was at a grossly inflated price and

(f) that the business transactions with PNS were not genuine business transactions.

11.  The prosecution case was that HT was set up purely to enable D1 and D2 to carry out their fraudulent venture.  Further as a result HT made a colossal profit from the sale of these Use By labels to PNS and the profit from the sale to PNS must have been shared between D1 and D2 as D1 would not have committed a fraud against his employer PNS solely for the purpose of benefitting his friend D2 to the tune of some $9 million. 

12.  On the inference of D2’s sharing of profit with D1, the prosecution allege evidence of this can be inferred from D2’s withdrawal of a substantial amount of cash in the sum of over $6 million from HT’s bank accounts over the years.  It was alleged that the reason for D2 withdrawing the money in cash was that some of this sum must have been shared with D1.  A cash withdrawal was made by D2 as there would be no trace as to the identities of the parties in receipt thereof. 

13.  It was therefore alleged that D1’s secret profit from the sale of the useless Use By labels was a fraud committed on PNS. 

14.  The defendant’s case

The defendant denies there was an agreement between him and D1 to defraud PNS. His case is simply he believed that the sales of Use By labels by his company HT to PNS were for PNS use. He did not know that the labels supplied to PNS were useless. As to much of the internal matters that occurred between D1 and PNS he had no knowledge of them. He did not know nor did he have any notice that D1 was defrauding PNS.

15.  Issues

The main issue was whether there was an agreement between D1 and D2 to defraud PNS. In other words can the prosecution show that D2 was aware of the fraudulent nature of D1’s purchase orders for the Use By labels?

16.  Much of the evidence adduced by the prosecution was not challenged by the D2.  The prosecution case turned on circumstantial evidence of which in turn it sought for the court to draw irresistible inferences against D2 that he was a party to an agreement with D1 to defraud his employers PNS. 

17.  A resolution of the issue was to be inferred from the facts of the case. 

18.  Proof

The prosecution must prove their case beyond all reasonable doubt. No burden whatsoever lies on the defendant. D1’s admission to defrauding PNS is not evidence that D2 knew or was a party to that fraud.

19.  The Evidence

The prosecution and the defence adduced much of the documentary evidence and facts by agreement. In total there were nine prosecution witnesses, seven PNS employees and a representative of each of the companies Fanta and WTC. The defendant elected not to give evidence nor call any defence witnesses.

20.  The prosecution witnesses’ credibility was not seriously challenged by the defendant.

21.  Admitted and Undisputed Facts

D1 was an employee of PNS at the Fresh Food Distribution Centre of PNS located in Sheung Shui, (SSD). PNS needed “Use By” labels to attach to fresh foods processed at the SSD. One of D1’s responsibilities was to purchase labels from suppliers.

22.  D1 suggested to a colleague PW3 Ms So, in about March 2007 that PNS purchase a kind of water proof Use By label from HT to be used at the SSD.  PW3 through her superiors accepted D1’s request and approval was granted for HT to become a supplier to PNS on 1 June 2007. 

23.  In late July 2007 HT began supplying Use By labels to PNS.  The sums paid by PNS to HT for Use By labels from July 2007 to December 2010 amounted to $9,108,900. 

24.  PNS had a long standing supplier for its Use By labels namely William Chan Trading Co (WCT).  Between June 2007 and December 2010 WCT had continued to supply Use By labels to PNS.

25.  The SSD did not use Use By labels printed on sheets (“sheet form labels”).  The SSD had all along been using a roll-up format Use By labels which could be attached to an electronic labelling gun to print dates on the Use By labels.  These were the labels supplied by WCT.

26.  HT ordered its Use By labels from a company called Fanta Offset Printing Co Ltd (Fanta).  The price for each label sold to HT was approximately $0.008. 

27.  HT sold the Use By labels to PNS for $0.068 at a profit of some 750%. 

28.  The defence case

As stated earlier the majority of the prosecution case was not disputed. There was no real challenge to the evidence given by the majority of the prosecution witnesses’ evidence. Mr Souyave leading Ms To for the defendant submitted that the court was unable to draw any irresistible inferences that D2 knew of D1’s fraudulent scheme or was in agreement with D1 to defraud PNS.

29.  Analysis of the evidence

I am very grateful to Mr Choy counsel-on-fiat and Mr Souyave’s very helpful and detailed submissions. I have considered all the submissions with care however I shall not repeat them all.

30.  I say from the outset that I found the prosecution witnesses to be honest and reliable witnesses.  

31.  Have the prosecution proved the specific particulars of dishonesty as set out in the charge. 

32.  In addressing the issue of awareness of the fraudulent nature of D1’s purchase orders can the court draw the inferences from the evidence as presented that D2 was in agreement with D1 to defraud PNS.

33.  In drawing the inferences it is to borne in mind that D2 was not an employee of PNS.  There was no evidence that D2 knew the system at or what D1 was doing in respect of this fraud in PNS. 

34.  The prosecution must prove that D2 must have known or have agreed to D1’s fraud at the material time.  I have reminded myself not to sit look back now with the clear picture of how D1 defrauded his employer and make assumptions that D2 must have known how D1 was himself defrauding his employers PNS.  

35.  Misrepresenting to PW3 and the management of PNS that there was a need to add Hang Tat as a supplier of labels on the pre-text that Hang Tat could supply waterproof labels required by the Sheung Shui Depot

36.  PW3 stated that she agreed to D1’s suggestion to engage new printers to print new waterproof labels.  This conversation between D1 and PW3 took place in or about March 2007. 

37.  The prosecution seek to establish that D2 knew of the misrepresentation as in D2’s Video Recorded Interview (VRI) D2 said the labels were waterproof and would not peel off from wet or frozen surfaces.  D2’s evidence of the labels being waterproof is contrary to PW13 the representative from Fanta who gave evidence that D2 never requested Fanta to produce waterproof labels. 

38.  It was submitted by Mr Choy this falsehood of the labels being waterproof coincides with D1’s excuse to persuade PW3 to accept HT as a supplier and therefore D1 and D2 must have known that the fact the labels were waterproof were false.

39.  Did D2 know of the misrepresentation to PW3?  There was no direct evidence that D2 was a party to or knew anything about his representation. 

40.  Does that fact that D1 and D2 both said the labels was waterproof show that it is a falsehood. 

41.  The fact that D2 said that the labels were waterproof is not evidence that he knew of D1’s misrepresentation to PW3 or that the labels were not waterproof. 

42.  D1 was in contact with PW3 about waterproof labels in March 2007.  There was no evidence that D2 knew of such conversation.  From the evidence of PW3 she did not recall whether the waterproof labels related to the ingredients label or the Use By labels. 

43.  At the trial there was evidence that no labels could be completely waterproof, PW13 gave evidence that the Use By labels it printed for HT were not waterproof.  PW14 (the owner of WTC) said that according to him waterproof meant that the label would not come off easily when it is wet. In Cantonese water resistant and water proof are represented by the same term. 

44.  It is apparent that when D2 said waterproof in his VRI at counter 620 that he meant the Use By labels he provided did not slip off so easily when they were wet. 

45.  I was unable to draw the inference that as both D1 and D2 mentioned waterproof labels that they or more precisely D2 knew the falsehood of their claims.

46.  Moreover D2 said in his VRI that samples were provided to PNS before orders were placed to HT, it would be reasonable to infer that PNS had accepted the labels as ‘waterproof”. 

47.  Causing and procuring PNS to place purchasing orders with Hang Tat for “use by” labels (i) when no order for such “use by” labels had ever been placed by the operating department of the Sheung Shui Depot (ii) when the “use by” labels ordered from Hang Tat were of no use to PNS and/ or did not meet the requirements of PNS

Purchase orders were issued by D1 on behalf of PNS, however there was no evidence that D2 knew or could have known, or that it could be inferred that the “use by” labels were not ordered by the operating departments or that they are of no use to PNS or that it did not meet the requirements of PNS.

48.  According to PW2 and PW3, there are procedures to follow within PNS.  Before any items are provided to PNS, there would be samples and quotations provided by the supplier and it would be cross-checked by the Quality Assurance department.  D2’s VRI said that samples were provided.  It cannot be excluded that D2 believed after provision of samples, and given quotations and signing of agreements with PNS, that PNS accepted the product as supplied by Hang Tat as well as the price he was charging. 

49.  In D2’s VRI (P315, counter 666), D2 made clear that he had no knowledge that the “use by” labels provided to PNS by Hang Tat were not needed by PNS.

50.  The prosecution case is that the “use by” labels were delivered to PNS by Hang Tat.  D2 in his VRI said he delivered the labels personally. 

51.  Can the inference be drawn that D2 knew that the Use By labels were useless.

52.  I was unable to draw an inference that D2 knew no order was place by PNS or that these labels were useless.  PNS had placed orders with HT for these Use By labels continuously over a period of three years.  HT was paid for the labels to be printed.  D2 delivered them in an overt manner to the SSD.  If D2 had known the labels were not ordered or were useless to PNS I found it very hard to accept that D2 would personally deliver the labels or even go so far as to even have these labels made at all.  More so if he had known the labels were useless, in reality the scheme could have been carried out without the provision of labels at all and a fraud could have been committed on PNS on the books alone.

53.  Thereby causing PNS to purchase the “use by” labels at a substantially inflated price

The evidence is that Hang Tat ordered “use by” labels from Fanta in large quantities and paid $0.008 per label and sold on these labels to PNS at approximately $0.068, at a profit of about 8 times more, or at about 750% above the price they purchased from Fanta.

54.  The prosecution submitted that a huge profit margin is implicit that there was a fraud on PNS.  Further the price paid to HT far exceeded the price of Use By labels PNS paid to WTC. 

55.  A huge profit margin by itself is not evidence that there is a fraud.  There are many instances in the commercial world where businesses make huge profit margins.  Goods purchased from a wholesaler are considerably less than from a retailer.  For example a bottle of beer purchased at $10 but resold at a bar for $100.  On the facts before me I am unable to arrive at the assumption that the huge profit margin was a fraud.  

56.  There was no evidence that D2 knew the price that PNS was purchasing Use By labels from WTC.  Moreover, there was no evidence that D2 knew what PNS was paying for any other labels or similar labels at a lower price than what he was charging. 

57.  PNS is a large organisation. It would have been reasonable for D2 to have believed that HT’s price for the label had been acceptable to PNS.  From the facts elicited the price had been approved by D1’s seniors and the accounting department.  It was not D1 who monitored or determined what price was acceptable. 

58.  Concealing the use by labels from the management and/or the receiving department of PNS and disposing of the Use By labels to conceal from PNS that it had purchased the labels

All delivery of goods to PNS made at the SSD was to be to the Receiving Department (RD). The Use By labels was not delivered there. The prosecution case which was accepted by D2 is that the Use By labels was delivered personally by D2 to D1 at the SSD at or near his office and at a later time D1 disposed of them. PW5 had seen the labels kept in the corridor outside the office of D1 in trolleys and thereafter he saw D1 dispose of the labels into a waste bin.

59.  There was no evidence that D2 was directed to the RD or that D2 failed to comply with directions or even that he knew that the labels were to be delivered to the RD.  His delivery to D1 not at the RD where many other employees were working is contrary to any evidence that he was concealing the delivery from the management or the RD.

60.  There was no evidence that D2 knew that D1 was disposing of the labels.  I accept Mr Souyave’s submissions that if D2 had known that D1 was disposing of the labels, would D2 still have had the labels printed, paid for and delivered?  As stated earlier this scheme could have been an electronic or paper fraud.  The printing, paying and delivering of the labels by D2 flies in the face of D2 knowing that there was a fraudulent scheme. 

61.  Was any money paid to D1 by D2 as secret profits

The prosecution submits that the pertinent question is whether D1 would take the trouble to commit such an elaborate fraud against his principal solely to benefit his friend D2 to the tune of $9 million and receive no benefit himself to be inherently improbable.

62.  Mr Choy submitted that D1 would have only carried out this dishonest scheme because he himself would receive a share or cut in the proceeds of the fraud.  Mr Choy referred to these payments as “secret profits” received from D1.  Mr Choy referred to the case of HKSAR v Kwan Tak Kwong & others CACC347/2001 in support of secret profits.  In that case the appellant had made secret profits from his company’s purchase of machines. The seller of the machine had sold the machines to the company at a grossly inflated price and the seller shared the profit made with the appellant by banking the money into the appellant’s bank account.  It was held these were secret profits which constituted a fraud on the company.  However as Mr Choy pointed out the CA also held that not all secret profits constitute a fraud  “a seller can pay a commission to an agent or servant as “sweetener.”

63.  Mr Souyave at paragraph 6 of his further closing submissions distinguishes Kwan Tak Kwong from the present case.  I accept the marked differences in the two cases.  Fundamentally the evidence in Kwan was that money was deposited into the appellant’s bank account from the seller, there was no such evidence in the present case. 

64.  In the present case the further differences are as follows:- 

a) no evidence that D1 knew how much D2 was paying Fanta for the “use by” labels,

b) no evidence that D1 knew what profit D2 was making on the “use by” label,

c) no evidence that D2 knew how much PNS was paying to other suppliers for similar labels and

d) no firm evidence that D1 received any payment of money from D2.

65.  The fact that large sums of cash were withdrawn from HT’s bank account over a period of three years is neither here nor there.  There is no evidence that D1 received any of the ‘cash” at about that time or at any time.  There was no trace of the money to D1’s hands or his account or anyone associated with him. 

66.  Mr Souyave accepts, as do I, that the evidence of the large withdrawals of cash is however highly suspicious.

67.  I accept Mr Choy’s submissions that D1 would only have carried out this scheme to defraud PNS if he himself had a share or benefit in the profit gained by D2.  The ambiguity however in this case is as to how D1 benefited or shared in the profit and the amount.  Mr Souyave submits the many reasons why D1 may have taken elaborate steps to defraud PNS so that D2 could obtain a sizeable profit was that D2 owes D1 money, perhaps D2 had previously saved D1’s life and or D1 is returning a favour which are not inherently improbable. 

68.  From the facts it would not be unreasonable for me to infer that some of the profit was shared with D1 on their numerous occasions they travelled to China together or to Japan.  There is a probability that D2 may have handsomely treated D1 on these travels. 

69.  On all the evidence before me I was unable to draw an irresistible inference that D1 must have obtained a monetary or substantial advantage or secret profit in the terms described by the decision in Kwan Tak Kwong from D2.

70.  Conclusion

The facts before me established a very elaborate fraud by D1. There are facts which point to a very strong suspicion that D2 was in agreement with D1 to defraud PNS. Those suspicions are that, D1 and D2 are close friends, D2 had started a new business only for the supply of labels to PNS just before the commencement of the fraud, all the labels supplied by HT were to PNS, the labels that were sold to PNS at a gross inflation of its original price giving rise to an enormous profit and there were large withdrawals of cash most likely to have been shared with D1.

71.  Vitally, I was unable to draw the irresistible inference that D2 knew these labels were useless to PNS or that D2 knew that D1 was disposing of the labels.  Although I was satisfied that D1 did derive some benefit from D2 from the sale of the Use By labels to PNS I was unable to satisfy myself or find how or in what amount D1 gained from it. I was not satisfied that the prosecution had proved beyond a reasonable doubt that the gain by D1 amounted to a “secret profit” such that the profit was a fraud on PNS.

72.  There was insufficient evidence for me to draw the inference of an agreement between D1 and D2 to defraud PNS.

73.  In the circumstances the prosecution had failed to prove beyond a reasonable doubt that D2 was a party to any agreement with D1 to defraud PNS. 

74.  D2 is acquitted and discharged.