SECRETARY FOR JUSTICE v. SCHMITT CHARLES LEE

CAAR 12/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

APPLICATION FOR REVIEW NO. 12 OF 2006

(ON APPEAL FROM HCCC NO. 71 of 2006)

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J U D G M E N T

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Stuart-Moore, VP (giving the judgment of the Court):

Background

1.  On 8 November 2006, leave was granted by Ma CJHC to the Secretary for Justice (the applicant) for an application to be made to this court pursuant to section 81A of the Criminal Procedure Ordinance, Cap. 221, for a review of a sentence totalling 4½ years’ imprisonment which was imposed on Schmitt Charles Lee (the respondent) by Deputy High Court Judge E Toh on 25 October 2006.  The respondent was additionally disqualified from acting as a director of any company for a period of 10 years as to which no complaint is made in these proceedings.  The respondent pleaded guilty at the outset of his trial on 21 September 2006 to a count of false accounting, contrary to section 19(1)(b) of the Theft Ordinance, Cap. 210 (the 1^st count) and eighteen further counts of false accounting, contrary to section 19(1)(a) of the same ordinance (counts 2-19).  All of these offences carried a statutory maximum of 10 years’ imprisonment.

2.  The judge imposed concurrent sentences of 2 years’ imprisonment on counts 1 to 3, concurrent terms of 2 years and 8 months’ imprisonment on counts 4 to 11 and concurrent terms of 2 years and 8 months’ imprisonment on counts 12 to 19.  The judge ordered that 15 months of the sentences on counts 4 to 11 and a further 15 months on counts 12 to 19 were to run consecutively to the 2-year sentence on counts 1 to 3, making 4½ years in all.

3.  The basis of this application is that the sentence in its totality was manifestly inadequate.  The losses covered by the respondent’s false accounting amounted to not less than US$29.8 million (approximately HK$231.8 million).

The facts

4.  The essential nature of the respondent’s fraudulent conduct, as revealed by a most thorough investigation carried out by the Commercial Crime Bureau, was straightforward.  Mr Turnbull’s synopsis on behalf of the applicant, taken from the Summary of Facts he prepared for the trial, helpfully sets this out and we propose, therefore, to adopt parts of it.

5.  In 1992, the respondent established Charles Schmitt & Associates Limited (the company).  He, his wife and two other persons were directors of the company which was engaged in the business of managing investment funds. 

6.  In October 2001, the company started a fund known as CSA Absolute Return Fund Limited (CSAARF). That fund was supposed to invest the monies it received in other investment funds, a “fund of funds” as it was known, situated in an offshore jurisdiction. The respondent and one other person were the directors of CSAARF.

7.  Although in 2002, the investment manager was shown as the company itself and, in 2003 and 2004, it was shown as CSA Management Limited, in reality the respondent made all the investment decisions for CSAARF.

8.  Bermuda Trust (Far East) Limited, a subsidiary of the Bank of Bermuda, was appointed as the custodian of the CSAARF funds.  After an investor placed his monies with CSAARF, those funds were remitted to the custodian.  After this, the respondent gave written instructions to the custodian nominating an amount and a particular sub-fund leaving the custodian to remit the nominated amount to the sub-fund’s bank account.

9.  In the period between May 2002 and June 2004, CSAARF purportedly invested in ten sub-funds.  These sub-funds were: (i) Amici Partners Limited, (ii) Argent Convertible Arbitrage Fund Limited, (iii) Beacon Plus Limited, (iv) DKI Fund Limited, (v) GLG Feeder Fund Limited, (vi) King Street Fund Limited, (vii) Soundshore Fund Limited, (viii) Vega Absolute Return Fund Limited, (ix) Veritas High Yield Fund (Cayman) Limited and (x) West Side International Limited.

10.  Each of these sub-funds had a company administrator.  There were a total of four administrator companies for the ten sub-funds which were run by corporate secretarial companies in Hong Kong and which acted on the respondent’s instructions.  These companies, and the sub-funds for which they had responsibility, were as follows:

(a)    Offshore Investment Advisors Limited administered Amici Partners Limited, Argent Convertible Arbitrage Fund Limited and Vega Absolute Return Fund Limited;

(b)    Concepts Industries Limited administered Beacon Plus Limited, GLG Feeder Fund Limited and King Street Fund Limited;

(c)    AMS Group Limited administered DKI Fund Limited and West Side International Limited; and

(d)    Advantage Investment Services Limited administered Soundshore Fund Limited and Veritas High Yield Fund (Cayman) Limited.

11.  The ten sub-funds into which CSAARF monies were purportedly invested had been created by the respondent.  He had purchased a number of shelf companies in Hong Kong and given those companies names which resembled those of the genuine master funds which operated in offshore jurisdictions.  Hence: (a) Amici Partners Limited would invest in Amici Associates; (b) Argent Convertible Arbitrage Fund Limited would invest in Argent Lowlev Convertible Arbitrage Fund Limited; (c) Beacon Plus Limited would invest in Beacon Rock International Limited; (d) DKI Fund Limited would invest in Davidson Kempner International Limited; (e) GLG Feeder Fund Limited would invest in GLG Europe Long-Short Fund; (f) King Street Fund Limited would invest in King Street Capital Limited; (g) Soundshore Fund Limited would invest in Basso Investors Limited; (h) Vega Absolute Return Fund Limited would invest in Vega Relative Value Fund Limited; (i) Veritas High Yield Fund (Cayman) Limited would invest in Veritas High Yield Arbitrage Fund (Bermuda) Limited; and (j) West Side International Limited would invest in West Side Offshore Partners.

12.  Each month, the administrators of the sub-funds would send to the custodian the net asset value (NAV) for the shares in the sub-funds in which CSAARF had purportedly invested.  The custodian used this information to compile a monthly valuation of the CSAARF fund.  Each quarter, the custodian would compile a statement which was sent to the investors and CSAARF setting out the value of the individual investments in these funds.  The auditors of CSAARF were Ernst & Young.

13.  On or about 6 April 2004, the respondent supplied the auditors, for the purpose of the 2003 audit, with ten valuation reports of the sub-funds into which investments, purportedly, had been made by CSAARF.  This act on the respondent’s part was reflected in the 1^st count of the indictment, the particulars of which were as follows:

  “Schmitt Charles Lee, on an unknown date between the 1^st day of April and the 6^th day of April 2004, in Hong Kong, dishonestly, with a view to gain for himself or another or with intent to cause loss to another, in furnishing information for the purpose of the annual audit of CSA Absolute Return Fund Limited [CSAARF], for the year ended the 31^st day of December 2003, produced to Ernst & Young accounts, records or documents made or required for an accounting purpose, namely valuation reports of Offshore Investment Advisors Limited, Advantage Investment Services Limited, Concepts Industries Limited, AMS Group Limited, by making or concurring in the making of entries therein, which to his knowledge were or may have been misleading, false or deceptive in material particulars, namely the net asset value [NAV] of each unit of Amici Partners Limited, Argent Convertible Arbitrage Fund Limited, Vega Absolute Return Fund Limited, Soundshore Fund Limited, Veritas High Yield Fund (Cayman) Limited, King Street Fund Limited, Beacon Plus Limited, GLG Feeder Fund Limited, DKI Fund Limited and West Side International Limited was respectively US$175,815.00, US$286,234.00, US$244.97, US$1,315,718.00, US$122,726.00, US$1,626.09, US$152,792.00, US$132,145.00, US$196,237.00 and US$188,161.00.”

14.  On 8 April 2004, the respondent furnished a letter of representation to the auditors of CSAARF which was false to the extent described in the particulars of the 2^nd count, as follows:

  “Schmitt Charles Lee, on the 8^th day of April 2004, in Hong Kong, dishonestly, with a view to gain for himself or another or with intent to cause loss to another, falsified an account record or document made or required for an accounting purpose, namely a letter of representation of CSA Absolute Return Fund Limited dated the 8^th day of April 2004 addressed to Ernst & Young, by making or concurring in the making an entry therein which to his knowledge was or may have been misleading, false or deceptive in a material particular, namely (i) the company had satisfactory title to owned assets appearing in the statement of assets and liabilities of CSA Absolute Return Fund Limited for the year ended the 31^st day of December 2003; (ii) he had no knowledge of any fraud or suspected fraud affecting the Company involving: management; employees who have significant roles in internal control; or others where the fraud could have a material effect on the financial statements.”

15.  On the same day, the respondent signed a financial statement of CSAARF for the year ending 31 December 2003.  The statement falsified the purported value of the sub-funds into which investments were said to have been made.  This allegation was contained in the particulars of the 3^rd count, as follows:

  “Schmitt Charles Lee, on the 8^th day of April 2004, in Hong Kong, dishonestly, with a view to gain for himself or another or with intent to cause loss to another, falsified an account, record or document, made or required for an accounting purpose, namely the financial statement of representation of CSA Absolute Return Fund Limited for the year ended the 31^st day of December 2003, by making or concurring in the making of an entry therein which was or may have been misleading, false or deceptive in a material particular, namely that the value of the investees funds was US$65,588,225.00.”

16.  From the time of CSAARF’s inception until 15 June 2004, when the authorities were first alerted to the respondent’s fraudulent conduct, a total of sixteen quarterly statements were sent by the custodian of the fund to its investors (represented by counts 4 to 19).  Each count followed a similar format and, for present purposes, it suffices to set out the particulars of the 4^th count as a sample, as follows:

  “Schmitt Charles Lee, on or around the 28^th day of June 2002, in Hong Kong, dishonestly, with a view to gain for himself or another or with intent to cause loss to another, falsified account records or documents made or required for an accounting purpose, namely the Bank of Bermuda, Bermuda Trust (Far East) Limited statement for the period ending the 28^th day of June 2002 of CSA Absolute Return Fund Limited, by making or concurring in the making of an entry therein which was or may have been misleading, false or deceptive in a material particular, namely that the value of a one unit of CSA Absolute Return Fund Limited shares of Class A being US$1,037.25.”

17.  In June 2004, an employee of the company discovered the fraud and notified the Securities and Futures Commission.  The respondent was interviewed and he admitted that there had been transfers of funds from the sub-funds’ bank accounts to an account under his control with a bank in Switzerland.

18.  On 15 June 2004, the respondent was arrested by officers attached to the Commercial Crime Bureau.  He was interviewed but he declined to answer any questions.

19.  On 21 June 2004, CSAARF was placed in the hands of provisional liquidators.  Subsequent enquiries by investigators revealed that no investment had been made by CSAARF into the master funds, via the sub-funds, as the respondent had represented to the investors, the custodian of the funds and the auditors.

20.  In the period from June 2002 to 15 June 2004, 1,062 persons had invested a total of US$194.5 million in the fund.  However, the liquidators were able to realise assets amounting to US$164.7 million approximately HK$1.281 billion.  Of those who invested, 213 have now been fully repaid but 849 have received nothing.  We were informed that it is anticipated they may in due course receive between 60 and 70% of their investment.

21.  Although the shortfall is US$29.8 million (approximately HK$231.8 million), to be added to this figure, there are a number of additional losses, notably: (1) initial charges and commission paid by investors amounting to US$3.1 million (approximately HK$24.1 million); and (2) liquidation costs and expenses including legal costs paid and expected to be incurred (net interest received will be claimed but is subject to taxation) amounting to US$11 million (approximately HK$85.5 million).

22.  The total estimated loss which accrued (subject to the costs claim being taxed) to the investors of CSAARF was US$43.9 million (approximately HK$341.5 million).  Of this figure, approximately US$20.4 million (approximately HK$158.7 million) consisted of losses on loans made to companies associated with Charles Schmitt and expenses incurred by those companies.  Significantly, this included the sum of US$3.1 million (approximately HK$24.1 million) which was the cost involved in the acquisition of a property purchased by the respondent and his wife in Hawaii.

Mitigation

23.  It was submitted in mitigation in the court below that the respondent had been rendered penniless at the age of 61, having lost everything.  The judge was told that the respondent was a university graduate when he joined the United States Army in 1968.  He left the army in 1972 and obtained a Masters degree in international economics in 1977.  Thereafter, he worked at the New York Stock Exchange.  He married in 1989 and came to Hong Kong in 1990.  The respondent had a clear record.

24.  Emphasis was placed on the service the respondent had given to his church and letters of reference were read to the court from leading figures at his church.  The respondent’s wife had stood by him and had supported their three children on the income she derived from work as a marketing consultant.

25.  The essence of the fraudulent conduct was described by Mr Whitehead SC, who mitigated in the court below, as an inability to own up to the “large losses suffered in other funds of his business, not CSAARF.  Instead of owning up to these losses and reporting them, he tried to cover them up and keep the business from going under”.  The respondent chose to set up offshore companies with a view to making up the losses, it was said, by “increasingly aggressive investment strategies” although, as the judge noted, these funds included the US$3.1 million investment in a property in Hawaii.

26.  A further point made by Mr Whitehead was that as the charges were in respect of false accounting, the sentence should be lower than for theft, obtaining property by deception or conspiracy to defraud.  It was submitted, also, that as there were civil claims against Ernst and Young for negligence in the management of the accounts, the loss to the investors might yet be reduced and it was pointed out that the liquidation costs, as claimed, had not been tested.

27.  Finally, it was submitted that the respondent’s trial had suffered from a delay of 2 years and 4 months from arrest to sentencing which was a factor that ought to be reflected in a reduction of sentence.

Discussion

28.  Mr Whitehead’s submissions in the court below have largely been adopted in these proceedings by Mr Macrae SC who argued that the sentence imposed on the respondent fell within an acceptable range for the offences he had committed.  Mr Macrae accepted that false accounting was not different from theft in terms of its gravity but, in addition to the factors raised by Mr Whitehead in mitigation, he argued that as two days’ advance notice of Mr Whitehead’s mitigation had been provided to the judge and to the prosecution in the court below, it was hardly appropriate for Mr Turnbull, in the present proceedings, to criticise some of the mitigating factors apparently relied on by the judge to the benefit of the respondent when no objection had been taken to them in the earlier proceedings.  In saying this, Mr Macrae was referring to the delay before sentence, the discount for the age of the respondent and the cooperation of the respondent with the liquidators as topics which merited a discount, all of which went without comment from the prosecution in the proceedings in the court below.

29.  Mr Macrae realistically accepted that the amounts of money involved in this case were huge and that the breach of trust was considerable.  Nevertheless, he submitted that, having regard to the factors urged in mitigation, this court should not make any upward adjustment to the sentence.  In saying this, we were invited to consider four further letters of reference which have been produced as fresh evidence under cover of a Notice of Motion dated 11 June 2008 and this we have done. 

30.  The judge in the court below was addressed in regard to the sentencing guidelines in R v Barrick [1985] 81 Cr App R 78 at 82.  The effects of inflation on the loss figures set out in that case were also brought to the judge’s attention by reference to R v Trevor Clark [1998] 2 Cr App R 137 which was adopted in Hong Kong in HKSAR v Cheung Mee-kiu [2006] 4 HKLRD 776 where, at 779, this court converted the Trevor Clark bands relating to theft by a person occupying a position of trust (at a conversion rate of HK$12.5 to £1) as follows:

“Band 1 –   over £1 million (HK$12.5 million): 10 years’ imprisonment or more.

Band 2   –   between £250,000 (HK$3.125 million) and £1 million (HK$12.5 million): 5 – 9 years’ imprisonment.  Count 1 comes within this band.  An application of R v Clark (1998) 2 Cr App R 137 would therefore have resulted in a starting point of 5½ years.  In fact, 4½ years was adopted.

Band 3   –   between £100,000 (HK$1.25 million) and £250,000 (HK$3.125 million): 3 – 4 years’ imprisonment.  Charges 2 and 5 came within this band.  On a strict application of R v Clark starting points of 3½ years and four years respectively would have been applied; which are precisely the sentences in fact adopted.

Band 4   –   between £17,500 (HK$220,000) and £100,000 (HK$1.25 million): 2 – 3 years’ imprisonment.

Band 5   –   less than £17,500 (HK$220,000): up to 21 months’ imprisonment.  Charges 3 and 4 fall within this band.”

31.  This court in Attorney-General v Dominic Cheung Kai-man [1987] HKLR 788 at 793 stated that the matters set out in Barrick to which regard should be paid in determining the proper level of sentence were to be taken “as applying to all kinds of fraud”.

32.  Here, the respondent’s breach of trust led to losses of at least US$29.8 million (approximately HK$231.8 million) and US$43.9 million (about HK$341.5 million) when the liquidation costs and commission charges are included in the losses.  Mr Turnbull informed us that the liquidation costs have been approved by a Committee of Inspection and that the provisional liquidation costs of CSAARF were taxed by the court and paid.

33.  In Trevor Clark (above) it was recognised (at page 142) by the English Court of Appeal that:

“… the scale of so-called white collar dishonesty in the form of theft and fraud has, in the experience of the members of this Court, increased, both in complexity of execution and in the rewards which can be dishonestly achieved. It follows that, as recent authorities have shown, there are cases which properly attract longer sentences than were specifically contemplated in Barrick itself.”

This was obviously such a case.  The losses covered by the respondent’s fraudulent conduct, whether treated as false accounting or fraud, went far beyond anything contemplated in the Barrick and Trevor Clark guidelines, as adopted in Dominic Cheung Kai-man’s case.

34.  In passing sentence, the judge described the respondent as the “instigator and mastermind” who was the “sole beneficiary” of a “well-planned” and “sophisticated scheme to lure investments of an incredibly large amount of money”.  The judge also spoke of the effect of such conduct on public confidence in investment fund schemes.  Mr Turnbull argued that, whilst the judge’s comments were apt, the overall sentence imposed singularly failed to mark the gravity of the respondent’s conduct or to provide a sufficient deterrent to fraudulent conduct on this scale.

35.  When dealing with the pre-trial delay, the judge referred to her recognition of the strain on the respondent who had had to wait for 2 years and 4 months before learning his fate.  However, it is apparent, with respect, that this comment rather missed the point at issue.  There was, of course, a delay as there is with every case before trial.  The real question is whether there has been an unreasonable delay, through no fault of a defendant, which has contributed to his punishment.  Only then does it become mitigation worth recognition and here, as Mr Turnbull argued, there was none at all.  The respondent, having been arrested on 15 June 2004 and having declined to answer any questions, was charged on 17 June 2004 with a single offence of theft.  On 2 March 2006, the theft charge was withdrawn but nineteen charges of false accounting were preferred in its place.  The committal papers were served on 19 April 2006 and, on 28 April 2006, the respondent indicated pleas of not guilty to the charges.  On 12 June 2006, trial dates were fixed, allowing six weeks for the hearing, between 9 October and 20 November 2006.  However, on 6 September 2006, the respondent’s solicitors notified the prosecution for the first time that guilty pleas would be entered to all counts on the indictment.  The case was listed on 21 September 2006 when the respondent pleaded guilty and sentence was adjourned to 25 October 2006 at the request of the respondent’s legal representatives.

36.  It goes without saying that the respondent could have indicated that he would plead guilty on 28 April 2006, about twenty-two months after his arrest.  In a case of this magnitude, such a delay was perfectly understandable and not unreasonable and the judge appeared to have recognised this when describing it as having been: “commendably well-investigated” and deserving of full credit “to all involved in this difficult exercise”.

37.  Mr Turnbull also submitted that the judge, who stated that she had taken the respondent’s age and previous good character into account in his favour, ought not to have given credit on this account.  It seems to us that, if credit was given, it was likely to have made little difference.  However, we should add that this was not a case where it was appropriate to have regarded age or clear record as mitigating factors.

38.  In regard to the respondent’s previously clear record, any relevance that this might have had if this had been a one-off instance of dishonesty by a man of his age was lost having regard to the ongoing nature of the respondent’s conduct.  Aside from this, the offences were unusually serious.  The judge had described the respondent as an “extremely experienced man with an engaging personality”.  It seems apparent that he had worked his personality, and his experience of the fund investment world in which he lived, to great effect on his victim-clients by inspiring in them confidence in his abilities.  He was, in short, what amounts to a skilled ‘conman’ who lived by fraud for the period of nearly twenty-two months covered by the nineteen counts on the indictment between 28 June 2002 and 8 April 2004.

39.  The one ingredient in the respondent’s mitigation, apart from his pleas of guilty, which properly carried some weight was the respondent’s cooperation with the liquidators who were, as a result, able to reclaim much of the loss.  However, Mr Turnbull was right to bring to our attention one aspect of the attitude taken by the respondent which was not, perhaps, indicative of an entirely cooperative frame of mind albeit it may be said that it was the respondent’s wife who placed a hurdle in the way of the liquidators rather than the respondent himself.  This was that the accountant, appointed by the High Court to act as the administrator of the respondent’s assets, agreed to pay US$150,000 to the respondent’s wife if she relinquished all claims to the Hawaiian property which had been purchased by the respondent and his wife using investor funds to which they had no entitlement.  The accountant made the offer, which was duly accepted (as evidenced by a Deed of Compromise dated 13 July 2006) in order, we were told, to avoid a costly Hawaiian court action which would only have delayed matters at a time when a weakening property market loomed.  Finally, we should add that it was accepted by Mr Macrae that the unusual delay in this matter being listed for hearing before this court was no fault on the part of the applicant or the court.

Conclusion

40.  We have no doubt, having regard to all the circumstances of the case, that the sentences imposed on the respondent, totalling 4½ years’ imprisonment, were manifestly inadequate.  In our opinion, an appropriate overall sentence would have been 12 years’ imprisonment after trial on the nineteen counts before the court.  Having regard to the losses which appear to have been recovered due to some extent to the respondent’s cooperation, we feel that the overall starting point, in its totality, could properly be reduced to 10 years’ imprisonment.  The guilty pleas will further reduce the sentence, globally and individually, by a third.

41.  Pursuant to section 81B of the Criminal Procedure Ordinance, Cap. 221, we shall allow this application on the ground that the sentence imposed on the applicant was manifestly inadequate.  The present sentences are quashed and, in substitution, we impose concurrent terms of 5 years and 4 months’ imprisonment on counts 1 to 3 and, on all the remaining counts, there will be sentences of 2 years’ imprisonment to run concurrently with each other but consecutively to the extent of 1 year and 4 months to the sentences on counts 1 to 3.  These sentences reflect starting points of 8 years on counts 1 to 3 and 3 years’ imprisonment on the remaining counts before the discount for the pleas of guilty.

42.  The overall sentence, therefore, is increased from 4½ years to 6 years and 8 months’ imprisonment.  The order for the 10-year disqualification of the respondent as a director of any company remains unaltered.  We do not, having read the submissions on the topic, consider that any downward adjustment of the terms of imprisonment, to take into account that this is a review of sentence, is merited.