HKSAR v. GONG BEIYING AND ANOTHER

CACC 29/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL 

criminal APPEAL NO. 29 OF 2006 

(ON APPEAL FROM DCCC NO. 1234 of 2004 )

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Reasons For Judgment

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Hon Yeung JA (giving reasons for judgment of the Court):

Introduction

1.  Gong Beiying (A1) and Tsoi Hon-chung (A2) appeared before Deputy Judge W Lam (“the judge”) in the District Court on an indictment consisting of three charges.

2.  The 1^st charge alleged that A1 and A2 conspired with others to defraud the minority shareholders of Ying Wing Holding Ltd (“Ying Wing”), its Independent Board Committee, and officers of the Stock Exchange of Hong Kong (“SEHK”) and the Securities and Futures Commission (“SFC”) in the takeover transaction of Ying Wing by Angel Field Ltd (“Angel Field”) in early 2002.

3.  The 2^nd charge alleged that A1 stole a chose in action of about $53 million owed by Liu Chong Hing Bank to Eastar Development Ltd (“Eastar”), and the 3^rd charge of false accounting alleged that A1 falsified a document to show that $53 million was paid to Great Center Ltd (“Great Center”) for the supply of building materials under a fictitious contract (“the Indent Contract”).

4.  The applicants pleaded not guilty to the charges.

5.  The judge ruled that A1 had no case to answer on the 2^nd charge, but convicted her of both the 1^st and 3^rd charges.  The judge also convicted A2 of the 1^st charge.

6.  Both applicants were sentenced to a total term of two years’ imprisonment.  They seek leave to appeal against conviction only.

Background Facts

7.  A1 was the assistant to Chau Ching Ngai (“Chau”) and his wife, Mo Yuk Ping (“Mo”), who together set up Angel Field and many other subsidiaries in Hong Kong.

8.  A2, through Feng Lin Holding Ltd, held 148 million out of the 200 million issued shares (i.e. 74%) of Ying Wing, a company listed in the SEHK, and was its Chairman.  Ying Wing’s business was mainly fabrics processing carried out under its wholly owned subsidiary – Park Well International Group Ltd (“the Business” or “Park Well”) in Chaoyang, PRC.

9.  In April 2002, A2 sold his 74% shares of Ying Wing to Angel Field for $61.8 million and the transaction, approved by SEHK and SFC, triggered off a Mandatory General Offer (“MGO”) to Ying Wing’s minority shareholders at $0.418 per share.  The offer was ostensibly based on the $61.8 million paid by Angel Field for A2’s 148 million shares in Ying Wing.

10.  Ying Wing’s minority shareholders, having been advised by an Independent Board Committee, accepted the offer on the basis that the $61.8 million was a true price for 74% of Ying Wing’s shares.

11.  After the takeover, Ying Wing was renamed Shanghai Merchants Holdings Ltd (“Shanghai Merchants”).

12.  In April 2003, Shanghai Merchants transferred Park Well to Show Good Ltd (“Show Good”), a company controlled by Tsoi Chun-to (“Tsoi”), A2’s clansman, a Mainland resident with no business experience in Hong Kong.

Prosecution Case

On the 1st charge

13.  In late 2001 and early 2002, there were discussions of acquiring A2’s 74% Ying Wing shares between A1, Chau and Mo, and A2 and Jango Cheung Chun-ying (“Jango”).  Jango was Ying Wing’s financial controller.

14.  An agreement was reached for Angel Field to acquire only Ying Wing’s “shell”, i.e. its listing status, by paying $61.8 million to A2 for his 74% shareholdings in Ying Wing.

15.  In order to get around the SEHK’s prohibition against “backdoor listing” by one company acquiring only the listing status of a listed company, the Business was, ostensibly, included in the sale.

16.  The parties agreed that A2 would retain the Business and be responsible for its profits or losses.  The Business would be transferred back to A2 one year after the takeover for no consideration.

17.  The price of $61.8 million paid by Angel Field for A2’s 74% share in Ying Wing under the agreement, therefore, did not include the value of the Business.

18.  A2 then set up Show Good in the name of his clansman – Tsoi as the buyer to take back the Business.

19.  In order to reassure A2, two sets of documents (“the secret documents”) were prepared and placed with a firm of solicitors.  The 1^st set was a management contract allowing A2 to continue running the Business.  The 2^nd set contained five documents relating to the transfer of the Business to Show Good to take place in one year’s time.

20.  In March 2002, Angel Field officially acquired A2’s 74% in Ying Wing for $61.8 million and made a MGO to the remaining 26% minority shareholders.  The offer documents stated that it was the intention of Angel Field that Ying Wing would continue the Business after the takeover.

21.  It was also represented to the minority shareholders, the SEHK, the SFC and the Independent Board Committee who advised the minority shareholders on the MGO that the Business of Ying Wing was valued at about $45 million.

22.  As the agreed price for A2’s 74% share of Ying Wing reached between the applicants and their co-conspirators, excluding the Business, was already $61.8 million.  Ying Wing’s value was understated by at least $45 million.

23.  Based on the $61.8 million paid by Angel Filed for Ying Wing’s 74% shares, ostensibly including the Business, the Independent Board Committee advised Ying Wing’s minority shareholders to accept Angel Field’s MGO offer of $0.418 per share.  The SEHK and SFC also approved the deal.

24.  After the takeover, Ying Wing was renamed Shanghai Merchants and A1 was appointed an executive director.  A2 continued to operate the Business although Shanghai Merchants officially owed it.

25.  In April 2003, there was a re-structure of Shanghai Merchants’ share capital.  Angel Field purportedly injected about $50 million into Shanghai Merchants to increase its net asset value (“NAV”) to over $106 million and was allotted 125 million new shares.  The Business was devalued, on paper, from $45 million to $15 million.

26.  The upshot was that as the value of the Business fell below 15% of Shanghai Merchants’ NAV, any future disposal of the Business did not have to be disclosed under the listing rules.  This was part of the conspiracy as if the transfer of the Business back to A2 had to be disclosed, it might attract attention and lead to possible enquiries.

27.  Subsequently and because of the changes of company names, the applicants and Jango had to retrieve and destroy the secret documents, and prepared a new set of documents purportedly to show the sale of the Business to Show Good for RMB 15 million.  A1 executed those documents on behalf of Shanghai Merchants on 12 April 2003.

28.  The purported payment of RMB 15 million by Show Good to Shanghai Merchants for the Business was a sham.  In fact the money did not come from Show Good or A2 at all.

29.  In May 2003, A1 asked Shanghai Merchants’ directors to ratify the sale of the Business to Show Good by backdating a document – the Minutes of a Directors Meeting.  Mr Gordon Ng, an independent non-executive director refused.  There was a subsequent resolution signed by Mo and A1 ratifying the sale.  The resolution was supposed to have been passed in a telephone conference.

On the 3^rd charge

30.  The 3^rd charge arose out of the purported injection of about $50 million as further capital of Shanghai Merchants by Angel Field in April 2003.

31.  One of the other companies acquired by Chau and Mo was imGO Ltd, which was renamed Shanghai Land Holding Ltd (“Shanghai Land”).  A1 was its Executive Director.

32.  In February 2003, Shanghai Land became the owner of a plot of land in Wu Zhong Road in Shanghai by acquiring the shares of its holding company – Eastar.

33.  There was then a series of account manoeuvres.  Firstly, Shanghai Land paid $53 million into the account of its subsidiary – Eastar.  The Indent Contract was purportedly executed between Eastar and Great Center Ltd – a company set up by Mo in the name of a friend, for the supply of bathroom and kitchen equipments to the Wu Zhong Road construction site.

34.  A1 and Mo authorised the transfer of $53 million from Eastar to Great Center purportedly as down payment under the Indent Contract.

35.  However, the money was immediately transferred from Great Center’s account to that of Wisevest Profits Ltd – another company set up by Mo in another personal friend’s name, and then to the account of Shun Loong Finance Ltd, which was wholly owned by Chau, with A1 as an executive director.

36.  On 7 April 2003, A1 authorised the transfer of $50 million from Shun Loong’s account to that of Shanghai Finance Holding Ltd, which was again one of Chau’s wholly owned companies.  On the same day, $50 million was transferred from Shanghai Finance to Angel Field and then immediately transferred to Shanghai Merchants as payment for the 125 million shares.

37.  The prosecution case was that the series of account manoeuvres were designed to mislead, as the $53 million paid into Great Center was not a payment for the supply of bathroom and kitchen equipments under the Indent Contract at all, but intended as payment for the 125 million new shares in order to increase Shanghai Merchants’ NAV, which was a necessary step to avoid disclosure when the Business was transferred to Good Show in 2003 in pursuant to the conspiracy.

The Prosecution Evidence

38.  There were substantial admitted facts relating to the corporate structures of the various companies, the applicants’ status, the movements of funds and the transactions as revealed by the relevant documents.

39.  In particular, it was agreed that the $53 million purportedly paid to Great Center in fact ended up, through many intermediate companies, in the account of Shanghai Merchants and was then used as payment for the 125 million additional shares allotted to Angel Field.  According to Ms Tse (“PW6”), those intermediate companies were all connected to Mo or Chau.

40.  There was the undisputed evidence that A2 was still involved in Park Well long after Angel Field had acquired Ying Wing and that the transfer of the Business from Park Well to Show Good, purportedly at the consideration of RMB 15 million, was not supported by any surveyor’s valuation.

41.  Jango gave evidence under immunity and described how it was agreed that Angel Field would acquire Ying Wing’s listing status but not the Business.  As the selling of only the listing status offended the listing rules, it was agreed that A2 would ostensibly sell his 74% shares in Ying Wing for $61.8 million whilst secretly retaining the Business.  It was further agreed that A2 would get back the Business after one year and that the money for A2 to get back the Business would be provided for.

42.  Jango described how A2 retained control of the Business after Angel Field’s takeover of Ying Wing until the Business was transferred to Show Good, a company controlled by A2 through Tsoi.

43.  Jango also described how the secret documents were prepared to assure A2 that he would get back the Business after one year.  However, as there were subsequent corporate re-structures, it was necessary to change the names of some of the companies involved in the transactions.

44.  Jango was adamant that after the takeover by Angel Field, Ying Wing did not continue with the Business, and it was A2 and his son who ran the Business.

45.  Jango described how the MGO price for the minority 26% shares was an undervalued price, as the $61.8 million for A2’s 74% shares in Ying Wing did not in fact include the value of the Business, which would be transferred back to A2 after one year without any consideration.

46.  Jango was adamant that the agreement reached related to the sale of Yiu Wing’s listing status only and that the transfer back of the Business a year later was not disclosed to the minority shareholders, the SEHK, the SFC, or the Independent Board Committee.

47.  Mr Gordon Ng (“PW14”) was an independent non-executive director of Shanghai Merchants. He confirmed his refusal to sign the minutes of an Audit Committee Meeting because of the massive devaluation of the Business from $45 million to RMB 15 million and the fact that the disposal of the Business was not disclosed.

48.  According to PW6, Mr Gordon Ng’s refusal to sign the minutes resulted in the fabrication of a telephone conference and the minutes ratifying the resolution, which were signed by Mo and A1.

49.  PW8 – Mr Yeung also confirmed that to avoid the need to publish an announcement relating to the disposal of the Business, its value must be less than 15% of the NAV of Shanghai Merchants and as a result A1 instructed him to issue new shares in order to boost Shanghai Merchants’ NAV.

50.  There was then the purported payment of about $50 million to Shanghai Merchants as Angel Field’s injection of capital for the issue of the 125 million new shares.

51.  The advisers of the Independent Board Committee confirmed that they had no knowledge that the sale of Ying Wing was confined to its listing status, otherwise they would have made further enquiries before recommending the acceptance of the MGO.

52.  An officer from the SEHK confirmed that “backdoor listing” by acquiring just the listing status of a listed company was not permitted and that the disposal of assets not exceeding 15% of the NAV of a pubic listed company need not be disclosed under the relevant listing rules.

53.  A number of witnesses confirmed that A1 was instrumental to the transfer of $53 million from Eastar to Great Center purportedly under the Indent Contract.  In fact the money did not stay in Great Center’s account and instead, having gone through a number of other companies’ accounts, became Angel Field’s payment to Shanghai Merchants for the 125 million new shares.

54.  It was not disputed that the Indent Contract was subsequently cancelled and there was evidence that Great Center in fact never had the materials to supply to Eastar under the Indent Contract.

55.  There was evidence from experts to the effect that the RMB 15 million for Show Good to get back the Business and the $50 million for Angel Field to acquire the 125 million shares came from other companies under the control of Chau and Mo and that there was in fact no “genuine trade transaction” supporting those payments.

56.  Mr Gidwani, an in-house ICAC accountant, concluded that Ying Wing’s total NAV, including the Business, would have been $110 to 120 million and therefore the MGO price for its minority shares should be higher than $0.418.

57.  Mr Gidwani confirmed that the Business, although losing money, had tangible assets, in the form of land and fixtures and there was no debt.

58.  A chartered property surveyor confirmed that the value of the land and factory building of the Business alone was around RMB 30 million.

59.  A chartered quantity surveyor took the view that the Wu Zhong Road project was unlikely to be genuine.

60.  A1 gave three video interviews and the records of the first two were challenged.  The judge rejected A1’s allegations of unfairness, pre-interview coaching, denial of lawyers and inducement to become a prosecution witness.  The judge admitted those records as evidence.

61.  In the records of interview, A1 admitted to be involved heavily in the business dealings of Chau and Mo, in particular the takeover of Ying Wing by Angel Field.  A1 also admitted to be responsible for the transfer of the $53 million, purportedly in favour of Great Center, but which in fact ultimately ended up in Shanghai Merchants’ account as payment by Angel Field for the 125 million new shares. She admitted that the transfer of the Business was a problem and that she was “very scared that those matters would be exposed”.

Defence Case

62.  A1’s case was that she was naïve and was only acting on the instructions of Chau and Mo.  She claimed to be unaware of the true nature of the transactions in question and therefore she was not acting dishonestly.  A1 insisted that payment of the $53 million to Great Center was a genuine payment for the supply of materials and there was no false accounting.

63.  A2’s case was that the Business was included in the deal and that the $61.8 million paid by Angel Field for his 74% in Ying Wing was a fair and reasonable price.

64.  A2 suggested that the Business was running at a loss and therefore did not worth anything.  A2 suggested that as the Business had a negative asset value, there was no need to disclose the transfer of the Business to Show Good in 2003.

65.  The suggestion was that A2 was not acting dishonestly.

66.  A1 gave evidence at trial, but A2 did not.  A1 also called one witness to support her allegations against the ICAC officers and A2 called three witnesses to give evidence on the value of the Business.

A1’s Evidence

67.  A1 raised little challenge to the prosecution evidence.  However, she claimed to be acting under the instructions and directions of Chau, and Mo and was not familiar with the true nature and effect of the various transactions in question.

68.  A1 claimed to be ignorant of the nature of the documents that she had signed.  She was questioned about certain personal notes that she made, including a diagram showing various companies involved in the circuitous fund movements consistent with the prosecution allegation.  A1 simply said she only produced them on what others had told her and she knew nothing about the transactions.  She said she was not acting dishonestly.

69.  A1 alleged that she had been misled as she was told that the ICAC only wanted her as a witness and that the ICAC was interested in others.  She said she did not know Cantonese well enough to enable her to properly take part in the interviews and that she was persuaded not to seek lawyers’ advise when attending the interviews.

70.  A1 called her friend, Ms Zhang to give evidence to support the allegation as to how she was misled by the ICAC officers.

71.  A1, on the other hand, claimed that the Indent Contract was a genuine contract although it was subsequently cancelled.  She emphasized that if it was not genuine, there was no need for it to be cancelled by a formal cancellation document.

A2’s Defence Witnesses

72.  A2 called two surveyors on the value of the Business.  Mr Tse (“DW2”) said in 2005 the value of the Business, i.e. its land and building, was RMB 15 million based on land cost of between RMB 500 and 700 per square meter and that the value of the plant and machinery was another RMB 16 million.

73.  Mr Zheng (“DW3”) valued the Business, including land and machinery at RMB 27 million.

74.  Mr Blade (“DW4”), an accountant, said the Business was losing money and was therefore a liability.  Mr Blade confirmed that the tangible assets value of the Business was about $30 million.  However there was also a book debt of over $40 million due to Ying Wing (Shanghai Merchants) and if such book debt was taken into consideration, the Business’s NAV would be negative.

75.  Mr Blade agreed that as the book debt was owed by a subsidiary to the holding company, it did not affect the value of the group as a whole.

76.  He also agreed that a book debt due from a subsidiary could be written off with the consent of the board.  He agreed that the records showed that on the same day when the Business was transferred to Show Good, the book debt owed to Ying Wing (Shanghai Merchants) was written off.

The Judge’s Findings

77.  The judge aptly put A1’s case as follows: “Yes, I was one of the top executives, I was present at the discussions and meetings, and I have signed important documents, but I was only an ignorant observer and a mere puppet”.

78.  The judge rejected A1’s case.  The judge did not accept A1’s assertion that she did not speak or understand Cantonese, which according to her, was the dialect used at those meetings.

79.  The judge gave detailed reasons for his decisions; in particular the judge pointed out A1’s background and her senior position as well as the active and important role she played in significant business dealings of the many companies that she was involved in.

80.  The judge rejected the suggestion that A1 was just a “naïve country girl” and had no knowledge of what was happening, and concluded that she was heavily involved in the dishonest transactions as she was very much trusted by Chau and Mo.

81.  The judge also rejected A1’s allegations against the ICAC officers as to the circumstances leading to the first two interviews and concluded that the records of interviews were provided by A1 freely and voluntarily.

82.  The judge accepted the evidence of Jango that A1 was present and took part in the discussions when it was mentioned that A2 would only be willing to relinquish Ying Wing’s listing status and would retain the Business.

83.  The judge pointed out that there was no need for A2 to be present in all the meetings concerning Angel Field’s takeover of Ying Wing, as Jango was his representative.  However, A2 was throughout aware of the true nature of the agreement reached with Chau and Mo on the sale of his 74% shares of Ying Wing.

84.  The judge pointed out that A2 was careful enough to make sure that he continued to run the Business after the takeover and that the Business would be reverted back to him in a year’s time.

85.  The judge emphasized that A2 had instructed Jango to sell only the listing status of Ying Wing and that he was concerned about the preparation of the secret documents as he had asked for the secret documents to be placed with a firm of solicitors.

86.  The judge rejected A2’s case that the Business had a negative NAV because of the alleged book debt or because it was suffering a loss.  The judge accepted the prosecution experts’ evidence that in 2003, the value of the land and factory building of the Business alone was around RMB 30 million.

87.  The judge pointed out that both A1 and A2 believed and accepted that the value of the Business was $45 million in 2002 when Angel Filed took over Ying Wing, as demonstrated in the MGO documents.

88.  The judge concluded that the book debt was simply written off when the Business was transferred to Show Good in 2003.

89.  The judge also rejected A2’s case that the $0.418 per share in the MGO was a reasonable price.

90.  The judge concluded that Tsoi, a mainland resident with no business experience, was just a front nominated by A2.  The judge pointed out that it was A2 who paid the incorporation fees of Show Good and together with his son, were involved in the running of Park Well and Show Good.

91.  The judge found both applicants to be acting dishonestly and they were involved in the conspiracy for months.  The judge identified over 30 “pieces” of evidence that supported Jango’s evidence against the applicants. The judge said:

“…I do not accept that all the above matters had come together as sheer coincidences.  The testimony of (the) insider – PW1 (Jango) was not only credible in itself, but also supported by external evidence such as bank records and documentary exhibits. When viewed together, every piece of evidence and all the financial transactions make perfect sense, which can only be the result of prior agreement and careful planning between the parties.”

92.  In describing the applicants’ acts in pursuance to the conspiracy, the judge very often used the term (“D1 et”) and occasionally (“D2 et”).

93.  The judge pointed out that A1, on the one hand, claimed to be ignorant of the documents that she had signed, but on the other hand, insisted that the Indent Contract was genuine when the evidence all pointed to the contrary.

94.  The judge further pointed out that A1 had admitted to be aware that Chau used the money purportedly paid under the Indent Contract.

95.  The judge rejected A1’s explanation and concluded that the document, executed by A1 for the transfer of the$53 million, purportedly in favour of Great Center as materials supplied under the Indent Contract, was a falsified document for accounting purpose.

96.  The judge concluded that both A1 and A2 were acting dishonestly and he therefore convicted A1, on both the 1st and 3rd charges, and A2 on the 1^st charge.

Grounds of Appeal

Of A1

97.  Mr Kevin Egan, A1’s counsel, takes great objection to the judge’s use of the term “D1 et al”.

98.  Mr Egan suggests that such use indicates that the judge, in his deliberation on whether the charge of conspiracy was established, had failed to focus on A1’s act and declaration, and her state of mind, and had therefore failed to identify A1’s criminal conduct sufficiently to justify the conviction on the charges. 

99.  Mr Egan submits that the judge had failed to deal with the evidence in a fair and balanced way by contrasting the judge’s reference, to the prosecution case in 29 pages of his reasons for verdict, and to A1’s case in less than two pages.

100.  Mr Egan further submits that the judge had failed to properly evaluate the evidence, and in so doing had deprived A1 of a fair trial.

101.  Mr Egan argues that the judge was wrong to have admitted A1’s records of interview as evidence.  He suggested that the interviewing officer had failed to follow the proper procedures and had clearly lied when she denied having spoken to A1 prior to the interviews.

102.  Mr Egan says there are indicia in the interviews that show that there had been earlier informal conversations denied by the interviewing officer, one indicator by a comment by A1 herself and several by the officer.

103.  It is suggested that in all the circumstances, the convictions on the two charges against A1 “are against the evidence and the weight of evidence and are unsafe and unsatisfactory”.

Of A2

104.  A2 puts forwards very lengthy and complicated perfected grounds of appeal.

105.  He suggests that the Business was included in the deal when Angel Field took over Ying Wing as disclosed in the MGO documents.

106.  He further suggests that the takeover arrangement was based on the valuation certificates and the advices of financial advisers; therefore A2 was not acting dishonestly as he could have genuinely believed that the price offered by Angel Field was fair and reasonable.

107.  In particular, it is pointed out that A2 had expressed the wish for the parties to achieve the transfer within the limits of the law.

108.  A2 complains that the judge had failed to properly evaluate the evidence of both the prosecution and defence witness, and therefore erred to conclude that the $61.8 million paid by Angel Field for his 74% in Ying Wing was an undervalued price.

109.  A2 emphasizes that the Business’s NAV was in fact negative due to its liability and the judge was wrong to conclude that it had a positive NAV.

110.  A2 suggests that the judge was wrong to conclude that the $40 million book debt owed to Ying Wing (Shanghai Merchants) had been written off and even if it had, the written off only took place in April 2003.

111.  A2 suggests that he had not defrauded Ying Wing’s minority, or the SEHK, or the SFC or the Independent Board Committee.

112.  Mr Cheng Huan SC, in his written submissions, makes the following comment:

“Much was made by the prosecution and the learned judge of the so-called ‘secret agreement’ that Park Well would later be sold by Shanghai Merchants to Show Good.  It is submitted that in a modern commercial world, businessmen may have various perfectly legitimate reasons for keeping commercial agreements confidential.  It is further submitted that the Court should not speculate why businessmen keep transaction confidential but should instead focus on the actual transaction itself to determine whether it requires disclosure.  As explained in the paragraphs above, the 2^nd Applicant had no duty of disclosure in relation to the sale of Park Well because of its negative NAV.”

Discussion

A1’s application

113.  We are surprised by Mr Egan’s complaint of the judge’s use of “D1 et al”.

114.  The conspiracy in question involved more than just the applicants.  In the particulars of the 1^st charge, reference was made to three more co-conspirators, Chau, Mo and Jango.

115.  The conspiracy arose out of the sale of A2’s 74% shareholdings in Ying Wing to Angel Field.  A1, Chau and Mo represented the purchaser side, and A2 and Jango represented the vendor side.  There were no other named co-conspirators.

116.  Chau and Mo were clearly the bosses and A1 was their assistant.  There could be no doubt that A1 had to carry out the instructions of Chau and Mo, although as a senior executive in the companies set up by Chau and Mo, she also had a very important managerial role to play in the running of those companies as disclosed in the evidence.

117.  In the introductory paragraphs, the judge, in setting out a short summary of the allegations in the 1^st charge in four paragraphs, stated the following (referring to A1 as D1 and A2 as D2):

“(1)     As to who were behind which companies: Chau, Mo and D1 were behind imGO, Angel Field, Shanghai Land, Shanghai Merchants, Park Well (a subsidiary of D2’s Ying Wing before the takeover by Angel Field), Great Hero, Great Center, Eastar, Wing Victory, Wisevest Profits, Shun Loong Finance, Modern Shine, Smartway, and Shanghai Finance.

… D2, assisted by PW1 (Jango), was behind Ying Wing & its subsidiary Park Well (before Angel Field took over), Feng Lin, and Show Good.

(2)      D1 et al and D2 et al, against stock market rules, made an illegal agreement (the ‘secret agreement’) whereby D1 et al, in form and appearing to outsiders, were buying D2’s Ying Wing for $61.8M in toto including its subsidiary Park Well which was operating a fabric business, but in substance D1 et al were only buying Ying Wing’s listed status (or ‘shell’) while leaving behind its fabric business for D2 to continue to operate under Park Well, and one year later, for D1 et al to ‘sell back’ the business to D2 so that eventually all would look regular to the outside world.

(3)      Ying Wing was worth more than $61.8M if the fabric business had been included.  But D1, D2 and their co-conspirators, including PW1 only informed Ying Wing’s minority shareholders of the understated value of $61.8M, putting the minority shareholders and the market regulators in the dark.  The minority shareholders blindly sold their shares to D1 Et al at only $0.418 per share pursuant to a Mandatory General Offer issued by D1 et al.  The minority shareholders sold up, and Angel Field took over Ying Wing completely.  D1 et al then turned Ying Wing into Shanghai Merchants, and D1 became one of its directors.

(4)      One year after the takeover, pursuant to the secret agreement, D1 et al needed to officially ‘sell’ the fabric business to D2, and this must be done in a way which appeared legitimate.  Therefore, via the use of veil company names (the British Virgin Islands companies, or ‘BVI companies’) and veiled bank transfers, the following was done:

(a)       In order to avoid declaration and detection, D1 et al artificially made the sale price to be below the disclosable 15% of Shanghai Merchants total net asset value (‘NAV’).  To enable this to be done, Angel Field injected $50M into Shanghai Merchants by the latter’s artificial issue of shares, in order to boost its assets to $106.7M, and at the same time Shanghai Merchants artificially devalued the fabric business from $45M to RMB 15M (HKD 14.5M).  Hence the percentage was now only 13.25% of Shanghai Merchant’s NAV.

(b)      D1 et al provided money ($14.13M) to D2’s veil company Show Good for the ‘buy back’ of the business, appearing to an outsider that D2’s Show Good had paid money and ‘bought back’ the business from D1’s subsidiary Park Well.  But the money eventually went back to D1 et al themselves.

(c)      After the above had been done, D1 et al now owned Shanghai Merchants (the successor of D2’s Ying Wing) officially free of D2’s business, and D2 officially ‘bought’ a business which he had never lost.  In the meantime, following the acquisition of the whole of Ying Wing, D1 et al had successfully defrauded Ying Wing’s minority shareholders and the regulators by hiding the value of the fabric business, i.e. successfully grossly underpaying the minority shareholders a total of between $30M and $49M, depending on which expert’s view one adopts (PW35 and W34).”

118.  As to the 3rd charge, the judge made the following summary:

“(1)      On the 10 February 2003 (one year after the takeover) D1 et al bought Eastar, hence owned land on Wu Zhong Road in Shanghai.

(2)        On the 4th April 2003 Great Center (Mo’s puppet PW25) via an ‘Intent Contract’ purported to buy decoration materials from suppliers for Eastar to Furnish the Wu Zhong Road project but the contract was a sham, because the Materials were neither ordered nor bought, while the money ($53.1M) was part of the veiled bank transfers in the overall scheme to further the conspiracy.”

119.  It is clear from the judge’s summary of the prosecution case that when he referred to D1 et al and D2 et al, he was referring respectively to the purchaser side represented by A1, Chau and Mo, and to the vendor side represented by A2 and Jango.

120.  When the judge referred to acts attributable to A1, Chau and Mo collectively, he would be using D1 et al.  However, the judge was careful in that when he referred to acts attributable only to A1, he would just refer to them as those of D1.

121.  The judge referred to, e.g. “documents as bearing D1’s signature or signed by D1”, “D1 representing Angel Field at meetings with Jango”, “D1 giving instructions and discussing about finance matters”, “D1 running day to day affairs of Shanghai Land and approved fund transfers or payments up to certain amount”, “D1 taking a witness to solicitors and instructed him to append signatures on blank documents”, “D1 provided details about the selling price of the Business at $15 million without the need of a valuation by a surveyor as it was expensive to engage one”, “D1 discussed with others about the timing of the sale”.

122.  There can no doubt that the judge was carefully drawing a distinction between acts attributable to A1, Chau and Mo, and acts attributable only to A1 herself.  The suggestion that the judge failed to identify with precision the criminal conduct of A1 is totally unjustified.

123.  Mr Egan is right is saying that the judge used many pages of his Verdict to cover the prosecution case and only a few pages to cover A1’s case.  He is perhaps also right in saying that the judge’s highlight of the evidence favourable to the prosecution was much more extensive than those favourable to A1.

124.  However, it is not correct to say that the judge had failed to evaluate the defence case properly, thus depriving her of a fair trial.

125.  Because of the nature and the complexity of the case, and the convoluted way in which the offences were committed, the judge had to set out in detail the prosecution evidence consisting of not less than 40 witnesses and almost 500 exhibits.

126.  On the other hand, A1, whilst not disputing substantially the prosecution evidence, claimed to be unaware of the true nature of what she did and said.  Despite the overwhelming evidence to the contrary, A1 claimed that the Indent Contract was a genuine contract and that the $53 million was paid to Great Center for the supply of building materials.

127.  The judge, being over-cautious perhaps, found it necessary to analyse the prosecution evidence to demonstrate why A1’s case was simply untenable.  The judge also considered, in great detail, A1’s record of interviews in order to demonstrate why he rejected A1’s case.

128.  The judge did not fail to highlight evidence favourable to A1.  However, it is clear that other than her own evidence, there was hardly any evidence that could be regarded as favourable to her.

129.  Jango’s evidence was clear and direct.  He spoke of the agreement reached in A1’s presence to acquire only the listing status of Ying Wing and that the $61.8 million paid to A2 was not intended to cover the Business, as it was part of the agreement that A2 would get back the Business free of charge one year after the takeover.  

130.  Jango’s clear evidence was supported by contemporaneous documents.  A1 either gave instruction for or was personally involved in the preparation of the relevant documents.  She, either personally or with Mo, authorised and/or effected the transfer of the necessary funds.  A1 decided the price and the timing of the purported sale of the Business to Show Good without obtaining a surveyor’s report, as “it was too expensive to do so”.

131.  The evidence of her colleagues at Shanghai Merchants gave evidence and produced documents consistent with the prosecution case.

132.  In the light of such overwhelming evidence, A1’s defence was that she had done the acts complained of without dishonesty or knowledge of the conspiracy, as she was a naïve girl who did not understand Cantonese and was acting purely on what Chau and Mo told her.

133.  Despite the undisputed or undisputable evidence pertaining to the movement of over $50 million and its eventual use as payment for the 125 million new shares of Shanghai Merchants, and the fact that Great Center did not even have the materials to supply to Eastar, A1 insisted that the Indent Contract was a genuine contract.

134.  The way the judge dealt with A1’s case is not and cannot be said to be unbalanced or unfair.

135.  Before admitting A1’s record of interviews as evidence, the judge had considered the evidence of both the ICAC officers and those of A1 and her witness.  In particular, the judge had watched the video recording of those interviews.

136.  The judge was perfectly entitled, as a judge of facts, to reject the evidence of A1 and those of Ms Zhang, her close friend since childhood.  The matters, alluded to by Mr Egan to demonstrate that the ICAC officer was not truthful, do not deserve the attention he seeks.

137.  In so far as Mr Egan has relied on suggested contradictions between certain remarks made in the interviews and the interviewing officer’s suggestion that prior to the interviews there had been no informal conversation, the points might have had some force had they been put to the officer with a resulting unsatisfactory explanation. But they were never put and for all we know, the officer may well have had a ready answer to them.  One can hardly be surprised that in the circumstances the points, left thus unexplored, carried no weight with the judge.

138.  The judge was entitled to accept the evidence of the ICAC officers and concluded that the record of interviews was free from unfairness; coercion, coaching and other alleged improper conducts on the part of the ICAC officers.

139.  The judge was perfectly entitled to accept those records of interviews as evidence against A1.

140.  None of the matters put forward by Mr Egan causes us any concern at all.  On the evidence, the judge was driven to the only sensible and reasonable conclusion open to him, namely that A1 was guilty of both the 1^st and the 3^rd charges.

A2’s Application

141.  When Mr Cheng submits that the MGO documents clearly indicated that the Business was included in the takeover deal, he appears to be completely oblivious to the evidence of Jango, which was accepted by the judge, that there was an agreement between A1, A2 and the other co-conspirators that the price paid by Angel Field for A2’s 74% was intended to cover Ying Wing’s listing status only and that the Business, ostensibly included as part of the deal, would be transferred back to A2 after one year without any consideration.

142.  Mr Cheng ignores the undisputed or the undisputable evidence that despite the declared intention that Ying Wing would continue with the Business, and true to their secret agreement, the Business remained under A2’s firm control after Angel Field’s takeover.  And then after one year, the Business was transferred to Show Good, a company set up by A2 in the name of a clansman, purportedly at the price of RMB 15 million, when he in fact did not provide the money.

143.  This was all along the intention and the MGO in terms represented quite the contrary, namely, that the new owners would continue to engage in the processing of and trading in raw fabric.  This was a lie that was at the heart of the case, specifically included as a material lie in the charge, conceded upon appeal, as we understood it, to have been a lie, and one that has not been met either at trial or upon appeal.  The charge alleged in terms a decision to conceal the fact that the amount offered was only for the listing status; and that the decision to acquire the business back for free was not revealed.  No defence has been disclosed by A2 to these incontrovertible facts.

144.  The MGO documents were prepared and the financial advisers’ advices were given on the basis of the information supplied by “A1 et and A2 et”, and on the prosecution case, supplied to cover up the true picture in order to defraud.  Those documents had to appear convincing, or else they would not serve the intended purposes.  Clearly those advisers were not told that the $61.8 million paid by Angel Field was only intended to cover 74% of the Ying Wing’s listing status and not the Business.

145.  Angel Filed was prepared to pay $61.8 million for 74% of the listing status of Ying Wing alone and there being no dispute that the NAV of Ying Wing, based on value of its tangible assets, exceeded $45 million, the total value of Ying Wing, including is listing status, must therefore far exceed $100 million.

146.  Insofar as the MGO made to the minority was based on the $61.8 million for A2’s 148 million shares, namely $0.418, it was clearly a gross undervalue.

147.  The alleged book debt due to Ying Wing from the Business or Park Well is completely irrelevant as Ying Wing as a group had a NAV of not less than $45 million and together with the value of its listing status, its total value far exceeded $100 million.

148.  Much has been said about the value of the Business, in particular, its value when it was transferred to Show Good in 2003 purportedly for RMB 15 million.

149.  What is in issue is not the value of the Business in 2002 or in 2003.  What is important is the value of Ying Wing as a whole, including the value of its tangible assets and the value of its intangible assets, in particular the value of its listing status when the MGO was made to the minority.

150.  The value of a company is not confined to tangible assets such as land, plants and equipment, stock-in-trade, account receivable and the like, the value of which can be ascertained with reference to their market prices.

151.  There are intangible assets in the form of goodwill, clientele, and connection and in the case of a public listed company, its listing status.

152.  There can be no market price of such listing status.  After all the SEHK does not allow the sale of just the listing status of a company.  How much a party is prepared to pay for such a listing status depends on human factors or perhaps the question of supply and demand.

153.  The evidence, rightly accepted by the judge, indicates that Angel Field was prepared to pay $61.8 million for 74% of Ying Wing’s listing status alone.  However, it was represented to the minority shareholders, the SEHK, the SFC and the Independent Board Committee that the $61.8 million included also the other assets of Ying Wing, which exceeded $45 million.

154.  If Ying Wing’s minority shareholders were aware that 74% of Ying Wing’s listing status alone was worth $61.8 million and therefore the total value of Ying Wing, including the value of its other assets must far exceeded $100 million, they would not have accepted the MGO at $0.418 per share.  If independent advisers of the Independent Board Committee were aware of the secret agreement reached between the applicants and their co-conspirators, they would not have made the recommendation to the minority to accept the offer.

155.  If the SEHK and the SFC were aware of the true nature of the agreement between “A1 et el and A2 et el”, they would not have approved the takeover, as it was against the listing rules and indeed a fraud upon the minority.

156.  The 1^st charge was committed in early 2002 during Ying Wing’s takeover by Angel Field and what happened thereafter, was strictly not relevant.

157.  The prosecution adduced evidence relating to the secret documents, A2’s continuous control of the Business, the transfer back of the Business to Show Good in 2003 as post facto evidence showing the existence of the conspiracy.

158.  By such evidence, the prosecution was trying to demonstrate that the conspiracy was indeed carried to its intended conclusion i.e. by allowing A2 get back the Business without any consideration.

159.  Yet the defence sought to make use of such matter by introducing evidence in order to demonstrate that the Business was worth nothing and therefore it was legitimate for A2 to hide it from the minority.

160.  With the greatest respect, the conspiracy in question was not attempts by businessmen to keep commercial agreements confidential.  It was an outright fraud, against the minority shareholders’ financial interests, and against the SEHK, the SFC and the Independent Board Committee so that their officers would not perform their public duties properly.

161.  A defence is not strengthened by the production of witnesses and documents on collateral matters to create an illusion of complexity or confusion when none exists.  The same or similar tactics certainly will not enhance any ground of appeal.

162.  The evidence against both applicants is overwhelming.  There is nothing unsafe or unsatisfactory about their conviction.  The applications for leave to appeal are therefore dismissed.

Hon Stuart-Moore VP:

163.  The application of A2 was so unmeritorious and devoid of any possible arguable material that we called on Mr Cheng to address us as to why a “loss of time” order, pursuant to s 83W of the Criminal Procedure Ordinance Cap 221, should not be made. Having heard Mr Cheng, we are satisfied that this is an appropriate case in which to make such a order.

164.  Accordingly, in the case of A2, we order that three months of the time he has spent in custody awaiting these proceedings shall not be counted towards the sentence he is serving.

165.  We have also considered the question of costs in these proceedings. A1 is legally aided and it is not therefore appropriate to consider an order in her case.  A2 has the means with which to pay costs and we accede to the application made on the respondent’s behalf by Mr Dunn for costs.  We make an order that the respondent’s costs in these proceedings, so far as A2’s leave application is concerned, are to be borne by A2, to be taxed if not agreed.