HKSAR v. CHAN KWONG HUNG AND ANOTHER

CACC 49/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

criminal APPEAL NO. 49 OF 2006

(ON APPEAL FROM DCCC NO. 74 of 2005)

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REASONS   FOR   JUDGMENT

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

1.  On 13 January 2006, following a trial in the District Court before Deputy Judge W Ng, the applicants, Chan Kwong-hung and Lau Kwok-ming (D1 and D2 respectively), were convicted of conspiracy to defraud, contrary to Common Law and punishable under section 159C(6) of the Crimes Ordinance, Cap. 200.

2.  D1 and D2 sought leave to appeal against conviction.  At the conclusion of proceedings on 9 November 2006, we dismissed both applications and now give our reasons for so doing.

3.  The prosecution set out the essential elements of its case in the detailed particulars of the offence alleging that the applicants conspired together and with other persons unknown, between 16 December 1997 and 29 May 1998, to defraud Kee Fung Sing International Finance Company Limited (“KFS”), its shareholders and the owners and beneficial owners of securities and monies held by KFS, and Chark Fung Securities Company Limited (“CF”) on their behalf, by dishonestly:

“(i) causing the transfers of funds totalling HK$62,700,000 Hong Kong currency (‘the funds’) from the bank account of KFS, into the bank accounts of Chark Fung Securities Company Limited, Ming Fung Bullion Company Limited, and Winton Commerce Limited;

(ii) causing misleading, false and deceptive accounting entries to be made in the margin accounts of customers of KFS, namely; Lo Kwok-keung, Sin Tak-ho, Lo Suk-yee, Kong Mei-kam, Poon Long-hoon, Lau Jok-pui, Kevin, Lau Miu-ling, Chan Wai-kwan and Steven Lee, with a view to showing that the transfers of the funds were withdrawals by them from their accounts with KFS;

(iii) causing the transfers of the said funds back from the bank accounts of Ming Fung Bullion Company Limited, Chark Fung Securities Company Limited and Winton Commerce Limited into the bank accounts of KFS; and

(iv) causing misleading accounting entries to be made to show that the transfer of the funds as described in (iii) were funds deposited by the said Chan Kwong-hung into KFS which resulted in an apparent reduction of his personal indebtedness of a total amount of $HK62,700,000 Hong Kong currency, owed to KFS.

(v) Making misleading, false and deceptive entries in the ‘Accruals’ account No. 401010 and other accounts in the general ledger of KFS, with a view to showing that the entries [‘the entries’] related to genuine transactions between D1 and KFS;

(vi) on or about the same days as the entries were made, causing transfers of funds in amounts similar to the entries, from CF, MFB and WC into the bank accounts of Lau Miu-ling (his wife), Link Standard Limited, and others, thereby concealing the true nature of the transactions.

(vii) On or about 27 April 1998, causing false, misleading and deceptive entries to be made in the margin accounts of customers of KFS, namely Lo Kwok-keung, Lau Jok-pui, Sin Tak-ho and the account of Liu Siu-mun/ YP Fung, with a view to showing that a total amount of HK$9.725 million had been paid into their accounts by KFS, when in fact the payments were made to the account of Link Standard.” (Appeal bundle pp. 2-3)

4.  The companies to which reference is made in the particulars of offence were part of the Ming Fung Group (MFG).  CF was a stockbroking company; KFS was a finance company; Ming Fung Bullion (“MFB”) was a foreign exchange trading company; and Winton Commerce Limited (“WC”) was a commodities trading company.  These four companies were genuine trading companies.  CF had clients who bought shares either with cash or on margin.  Margin clients were financed by KFS and their shares were held by KFS as security.

5.  D1 was the chairman of the MFG, with a 50 percent shareholding in each of the companies with which this case is concerned.  This made him the majority shareholder in each of them.

6.  In May 1998, the Securities and Futures Commission ordered CF, of which D2 was the manager, to cease trading following an inspection of its books.  Shortly afterwards, winding up orders were applied for against KFS, CF, MFB and WC.

7.  Eleven witnesses were called by the prosecution and a large number of documents were produced.  Most of the evidence was not disputed.  The issues to be decided largely depended on the inferences to be drawn from the facts.  The two vital witnesses in support of the case for the prosecution were Li Ching-yee (PW11), a treasury accountant, and Chung Yuet-ming (PW10) who was formerly the manager of KFS.  PW10 gave evidence under immunity.  The defence called no evidence.

Prosecution’s case

8.  PW11’s evidence showed that on six occasions, between 16 December 1997 and 29 December 1997, funds amounting to $62.7 million were transferred from CF, MFB and WC to KFS and credited by D1 as “pay-ins” in the Shareholders Current Account (SCA).  The ‘pay-ins’ were followed, on or about the same time as they were shown as having been made, by entries in the margin accounts of KFS customers purporting to show amounts, equal to the ‘pay-ins’, as having been withdrawn from their accounts.  These ‘pay-outs’ to customers were in fact transferred to CF, MFB and WC.  These were referred to at trial as ‘Payments A to F’ and were succinctly described by the judge (with specific regard to the Particulars of Offence (i) to (iv)) in the following way:

“11.   Payment A: On 16 December 1997, WC transferred $2.4 million to KFS, which KFS credited as a ‘pay-in’ by D1 in the SCA. On 17 December 1997, KFS transferred $2.4 million by a cheque to WC and debited the sum to the margin account of Kong Mei-kam (‘Kong”).

12.     Payment B: On 23 December 1997, CF transferred $4.3 million and $15 million by 2 cheques to KFS, which KFS credited as a ‘pay-in’ by D1 in the SCA.  On the same day, KFS transferred $2 million, $2.3 million by 2 cheques to CF and debited the sums to the margin accounts of Steven Lee (‘Lee’), and Lo Kwok-keung respectively.

13.     Payment C: On 23 December 1997, WC transferred $3 million and CF transferred $15 million to KFS, which KFS credited as a ‘pay-in’ of $18 million by D1 in the SCA.  On the same day, KFS transferred 1 million, and $2 million by 2 cheques to WC, $3 million, $5 million, and $7 million by 3 cheques to CF, and debited the sums of the margin accounts of Chan Wai-kwan (‘Chan’), Lau Miu-ling, Lau Miu-ling, Lo Suk-yee and Kong respectively.

14.     Payment D: On 23 December 1997, MFB transferred $4 million to KFS, which KFS credited as a ‘pay-in’ by D1 in the SCA.  On the same day, KFS transferred $1.5 million and $2.5 million by 2 cheques to MFB and debited the sums to the margin accounts of Kong and Lau Miu-ling respectively.

15.     Payment E: On 24 December 1997, CF transferred $18 million to KFS, which KFS credited as a ‘pay-in’ by D1 in the SCA.  On the same day, KFS transferred $5 million, $4 million, $5 million, and $4 million by 4 cheques to CF and debited the sums to the margin accounts of Sin Tak-ho (‘Sin’), Lau Jok-pui Kevin, Poon Long-hoon (‘Poon’), and Lo Suk-yee respectively.

16.     Payment F: On 29 December 1997, CF transferred $16 million to KFS, which KFS credited as a ‘pay-in’ by D1 in the SCA.  On the same day, KFS transferred $2 million, $ 3 million, $5 million, and $6 million by 4 cheques to CF and debited the sums to Lo Kwok-keung, Kong, Lau Miu-ling and Lo Suk-yee respectively.”

9.  The judge later referred to the interrelationship between some of the nine margin account holders involved in Payments A to F, pointing out that five of them were relatives of D1.  Lau Miu-ling is D1’s wife; Lo Suk-yee (PW8) is D1’s sister-in-law; Lo Kwok-keung (deceased) was Lo Suk-yee’s brother; Chan Wai-kwan is D1’s daughter; and Poon Long-hoon (PW9) is Chan Wai-kwan’s husband.

10.  Although the judge went on to summarize the evidence in relation to (v) to (vii) in the Particulars of the Offence, we were not directly concerned with these in the present proceedings.  It was agreed that the evidence of conspiracy against D1 and D2 was confined to Particulars (i) to (iv).

11.  In PW11’s 1^st Report, covering November and December 1997, she drew the conclusion from her examination of the accounting entries in the SCA of KFS that the SCA “did not reflect correctly the actual movement of funds to and from the shareholders.  Inter-company transfers of funds among the MFGroup of companies, and payments to persons and companies other than the shareholders were described as ‘Pay Out’ and ‘Pay In’ of CKH [D1]”.  She reached the same conclusion about the SCA in her 2^nd Report covering the period between 1 January 1998 and 23 May 1998.

12.  PW10 joined MFG in 1991 and she was transferred from CF to KFS about two years later with responsibility for the maintenance of accounts, the preparation of clients’ statements and the preparation of cheques for D1’s signature or for his instructions.  Her concern was raised, in about mid-November 1997, because of the frequent “pay-outs” of large sums to D1 which accounted for a deficit of about $46 million in the SCA.  D1’s explanation was that these monies were for running the company.  The pay-outs continued and each time PW10 made further enquiries from him, she received a similar answer.  In early December 1997, when D1 was told that a lot of money had been withdrawn, he said that he knew and would make arrangements.

13.  In February 1998, PW10 completed her report on the annual accounts which D1 was given to read after she had informed him that there was a large deficit in the SCA.  Later, D2 informed PW10 that the report was incorrect, saying that some of the margin clients’ account statements she had used to compile the report were wrong.  He then supplied her with about ten margin clients’ account statements which he said were the correct ones.  He requested her to amend the SCA by debiting some of the entries to the margin clients’ accounts.

14.  PW10 observed that the account statements she had been given by D2 differed from the statements she had seen before in that the amounts that the clients were shown as owing to KFS were larger.  This caused PW10 once again to see D1 who informed her that he had told D2 to show her the account statements and that she was to follow D2’s instructions.  As both D1 and D2 had told PW10 that she had prepared her report wrongly, she followed their instructions and amended the SCA to accord with their request.  PW10 confirmed that the statements D2 had given her related to the same client account statements as those covered by Payments A to F.  These had had the effect of turning D1’s debt to KFS into debts owed by margin clients but the fresh statements purported to relate to far greater sums owed by the margin clients.

15.  Importantly, so far as D2’s alleged involvement in the conspiracy is concerned, PW10 did not possess the alteration code which was required to alter the computer-generated account statements.  D2 was, we were informed, one of only two or three to know it.  An additional feature of the case relating to D2 was that his residential address appeared on all except one of the margin account statements covered by Payments A to F.

16.  On arrest, D2 merely remarked:

“All the false margin accounts of Kee Fung Sing were opened by Chan Kwong-hung [D1] who instructed me to do so.  I know nothing else at all”.

As he declined later to answer questions, this reply was never fully explained.

Defence case

17.  Neither D1 nor D2 gave evidence and no witnesses were called on their behalf.  Essentially, the prosecution was put to proof of its case.

18.  D1’s case was presented on the basis that while Payments A to F effectively turned D1’s debt into debts owed by margin clients, the prosecution had failed to show that the payments from the clients’ accounts were not in fact made to settle their purchases with the companies concerned.  It was emphasised that D1 was, as the person in charge of MFG, a very busy man and as such, could not question the use of every single cheque and there was some challenge to PW10’s credibility arising from her immunity and the reasons she gave for testifying against D1 when, initially, she had not inculpated him in her statements to the police.

19.  It was also contended at trial that there had been no evidence to show how much D2 had been aware of the extensive withdrawal of funds from KFS by D1.  In such circumstances, it was argued that the conspiracy between D1 and D2 gave rise at most to an agreement to falsify accounting documents.  There was, it was suggested, no evidence from which an inference could properly be drawn that there was an agreement between D1 and D2 to defraud KFS, its shareholders and security owners.

Judge’s assessment

20.  The judge, in his Reasons for Verdict, indicated that the defence suggestion that the payments from KFS might have been made for clients’ purchases, rested on “a speculative suggestion that Lau Miu-ling (D1’s wife), who left Hong Kong in 1996, could have carried out trades with telephone calls”.  In addition, PW8 had said that she allowed her late brother and close friends to trade with her account and PW9 said that there was a “possibility” that the $5 million debited to his account was to finance his purchase of shares.

21.  As to these contentions, the judge stated:

“37.   Leaving aside that it is too much of a coincidence that the transfers of funds from CF, MFB and WC were reciprocated by KFS in identical amounts on account of clients’ purchases as suggested by [counsel for D1] on the same or next day, a look at a KFS margin account statement will show, had an account been debited for purchase of shares, the names and quantities of shares purchased would have appeared under the heading ‘Description’.  But in all the account statements connected with the Payments A to F, the debit entries were simply described as ‘pay-out’, and I am sure that those payments were what the statements said they were, only that they were not paid to the clients, but to CF, MFB and WC in exchange for their cheques to KFS.  It is also worth noting that according to KFS’ ‘Uniform Agreement for Margin Client’ credit facilities are only provided for securities transactions, and there is no explanation why KFS would make payments for margin clients to WC and MFB.” (Appeal bundle p. 49)

22.  The judge went on to observe that PW10 was a straightforward witness who had not been shaken in cross-examination.

23.  So far as D2 was concerned, it had been suggested (appeal bundle page 311) to PW10 that D2 had not given her the falsified account statements and, as to this, the judge said that he could find no need for PW10 to make up a story about D2 if her aim was to implicate D1.  The judge found that the evidence against D2 was supported by a number of undisputed facts to which we shall turn when dealing with the grounds of appeal raised on his behalf.

24.  The judge accepted that there was no evidence to connect D2 with the overt acts particularized in (v) to (vii) in the charge but, as he rightly observed, this did not mean that a conspiracy to defraud between D1 and D2 had not been in existence.  He went on to say that “other persons unknown” were alleged to have conspired with them and that:

“… It is trite law that a conspirator need not be involved in all the overt acts, so long as there is evidence of overt act or acts from which a court can draw the only proper inference that he is a party to the agreement.  There is ample evidence to show D1 is involved in all the overt acts, and indeed [counsel for D1] does not seek to argue otherwise.  From the sometimes circuitous and sometimes complex routing of huge funds, together with false accounting entries, it is obvious that other persons must have been involved in the scheme.” (Appeal bundle p. 51)

D1’s grounds of appeal

25.  Mr Philip Wong, on D1’s behalf, advanced two grounds of appeal which were closely connected.

26.  He submitted in the first ground that the judge had “failed to consider sufficiently or at all”, in his analysis of PW10’s evidence, whether D1’s actions in November and early December 1997, “prior to the commencement of the conspiracy as particularized”, amounted to theft from KFS or fraud.  By reason of this alleged omission, it was said in effect that the judge failed to appreciate that what followed between 16 December 1997 and 29 May 1998, as set out in the particulars of the offence, amounted to a mere “cover-up” for D1’s misdeeds by the falsification of the relevant account statements “in order to turn the apparent ‘debts’ owed to KFS by D1 into apparent debts owed by the margin clients”.

27.  The second ground of appeal alleged in effect that the judge had failed to recognize the true objective behind the false account statements, namely the concealment of D1’s misdeeds, and had wrongly concluded that KFS and its shareholders were prejudiced “having failed to consider that KFS and its shareholders had already been prejudiced” by D1’s earlier acts of dishonesty.  It was submitted that what D1 and D2 had done after D1’s withdrawals of the monies from the SCA “could only amount to a conspiracy to commit an offence under section 90(1) of the Criminal Procedure Ordinance, Cap. 221” (assisting an offender).

28.  There was no substance whatsoever in Mr Wong’s submissions.  To suggest, in the present circumstances, that to leave a misleading trail by the introduction into the KFS accounts of false statements of account could not have amounted to a conspiracy to defraud was bordering on the absurd.  Mr Wong undoubtedly presented a powerful argument that his client was a thief and a fraud but, as Mr Mackay on the respondent’s behalf pointed out, the prosecution had never attempted to prove that D1’s withdrawals, as reflected in the SCA, were unlawful.  D1 had for a long time made such withdrawals which appeared, for whatever purpose they were made, to have been within the scope of his authority.  As Mr Mackay submitted, whether D1’s withdrawals were “misdeeds” was beside the point.  It was the later re-routing of the debts and the concealment of who owed the debts to KFS which lay at the root of the allegation against D1 and D2 of a conspiracy to defraud KFS.  The judge was well aware of this just as he was aware of the argument, again raised by Mr Wong in these proceedings, that a conspiracy to falsify accounts rather than to defraud was the limit of what the prosecution was able to prove.  Rightly, in our opinion, the judge rejected this.

29.  In his Reasons for Verdict in this regard, the judge said:

“43.   In my view, one has to ask what was the object of falsifying the account statements.  I do not think [counsel for D1] is suggesting that there was a conspiracy to falsify documents for its own sake …” (Appeal bundle p. 51)

Later, the judge continued:

“45.   In this case, the net effect of Payments A to [F] was to reduce or to hide D1’s debt to KFS by transferring them to margin account clients.  Obviously, KFS and its shareholders were prejudiced by such dishonest acts.” (Appeal bundle p. 52)

30.  In conclusion, the judge found that from the overt acts disclosed by Payments A to F, and for the other reasons he had commented upon, the conspiracy had been proved between D1 and D2 and others unknown to defraud KFS and its shareholders by dishonestly “hiding or reducing the debts that D1 owed KFS … by transferring them to margin account holders by circuitous transfers of funds and false accounting”.

31.  The case against D1 was overwhelming and, for the reasons we have given, his application was dismissed.

D2’s application

32.  The case against D2 was, by contrast, far more restricted.  He only emerged as a participant of the alleged offence in February 1998 when he gave the altered account statements to PW10.

33.  In a well-presented argument by Mr Francis Cheng on D2’s behalf, where sensibly none of the arguments advanced for D1 was adopted, it was submitted that the evidence had not shown D2 to be a guilty participant in the conspiracy.   Amongst the pointers relied on by Mr Cheng, he reminded us that D2 was employed as the manager of CF and no evidence had been adduced to show that he appreciated the nature of the ten margin clients’ account statements or had a sufficient knowledge of D1’s involvement in a dishonest scheme as there was nothing to show that D2 was aware of D1’s indebtedness to KFS.

34.  Whilst it is right that the evidence against D2 fell within a comparatively narrow compass, the judge found the inferences to be drawn from it to be compelling.

35.  Dealing with D2’s role in causing PW10 to alter the margin clients’ account statements in her annual report, the judge said about PW10’s evidence, which he accepted:

“27.   In February 1998, PW10 finished her report on the year-end accounts.  She told D1 that the deficit in SCA was huge, and D1 said he would read her report first.  After that, D2 came to tell her that her report was not right, and that some of the margin clients’ account statements she used to compile the report were wrong.  He then gave her about 10 margin clients’ account statements, which he said were the correct ones, and asked her to amend the SCA by debiting some of the entries to the margin clients’ accounts.  PW10 said she noticed the clients’ account statements were different from before, in that the amounts that the clients owed KFS had become much larger.  She felt unhappy about it, and went to see D1.  She told D1 what happened and asked him if he knew, and D1 said it was he who told D2 to do that and told her to follow D2’s instruction.

28.     PW10 said since D1 and D2 insisted that she had prepared the report wrongly, she had to follow their instructions and amended the entries in SCA accordingly.  She was then taken through the Payments A to F by Mr. Graeme Mackay, counsel on fiat for prosecution, and confirmed that the statements handed to her by D2 related to those payments.

29.     Clients’ account statements were generated by computers.  Alteration of clients’ account records after they have been posted required a special code (‘alteration code’), which she did not possess but D2 did.” (Appeal bundle pp. 46-47)

36.  Added to these features of the evidence, the judge summarized others which we have touched upon already, namely:

“… (1) D2 possessed the alteration code (albeit 2 other persons also possessed that code), which enabled him to alter the entries on margin account statements; (2) Lo Suk-yee’s (PW8’s) margin account statement, containing the pay-outs in Payments C, E, F, had D2’s residential address on it, even though she was residing at the address on her account opening form; (3) Kong’s address on her account opening form and the account statement (containing the payments in Payment A, D, and F) was D2’s residential address; and (4) on his admission to the police, he was privy to the misdeeds hatched by D1.  In the circumstances, I find [PW10’s] evidence credible, and I attach full weight to it.” (Appeal bundle p. 50)

A little later, the judge added:

“39.   As regard PW10’s evidence that D1 told her ‘I asked Lau Kwok-ming to do that, just follow his instruction.’  In my view, it makes perfect sense that PW10 had gone to see D1 after being told by D2 to amend the SCA and account entries. D2 is not KFS’ staff, but what he told PW10 to do would seriously affect KFS’ accounts, not to mention that PW10 felt there was nothing wrong with her year-end report.  I find her evidence credible and I attach full weight to it,, even though she did not mention it in her statements.” (Appeal bundle p. 50)

Shortly after this, the judge said:

“… It appears to me that D2 did much more than just giving the altered account statements to PW10.  The doctored item was a ‘pay-out’ entry, and he told PW10 to amend the SCA.  In the circumstances, it is difficult to see how could he not know that funds were being withdrawn, and that the SCA being distorted.  The question is who would be prejudiced by those acts?” (Appeal bundle p. 51)

37.  As Mr Mackay rightly submitted in his written argument, when the small strands of evidence are put together, as the judge had done, D2 is shown to have been closely involved in a number of ways with the false documentation of KFS.  The statements which D2 had given to PW10 related to very large sums of money and were false in ways which combined to produce a wholly distorted picture in the accounts.  At the very least, he submitted, if $62.7 million remained outstanding, KFS and its shareholders would be prejudiced in their right of action against the person responsible for the shortfall when his identity had been covered up.

38.  We were in agreement with the judge’s findings although, with respect, we would have been helped if these had been set out explicitly rather than being left for counsel and each of the members of this court to discover what was implicit from his findings.  One rather important example, cited earlier, is to be found in the passage from the Reasons for Verdict where the judge said:

“43.   In my view, one has to ask what was the object of falsifying the account statements.  I do not think [it is suggested] that there was a conspiracy to falsify documents for its own sake.”

The point was well made but the rhetorical question asked by the judge was never directly answered, perhaps because he regarded the answer as being too obvious to state.  At the very least, the false picture presented in PW10’s report on the annual accounts would have been likely to delay a realization on the part of the shareholders of the size of the monetary shortfall at KFS, besides which the person responsible for that shortfall, namely D1, had been covered up.  Both of these results had the effect of injuring a proprietary right of the victims of the cover-up or gave rise to a risk of prejudice to their right.

39.  The judge was satisfied that there was an agreement by D1 and D2 to carry out that which had been alleged against them in the charge and we can find nothing with which to disagree in his analysis of the evidence which, it seems to us, produced a convincing case against D2.

40.  Accordingly, D2’s application was dismissed.