YAM CHI MING STEPHEN v. MAO TAI FONG GEORGE

HCA 1434/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1434 OF 2004

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J U D G M E N T

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Introduction

1.  In two contracts dated 6 December 2002 (the 1^st contract) and 29 May 2003 (the 2^nd contract) the plaintiff purchased from the defendant shares in a private company which effectively gave him a 10% interest in a company called Integral Mortgage Corporation Pty Limited (IMC), an Australian incorporated company whose directors had aspirations of a listing on the Hong Kong Stock Exchange Board.  The plaintiff paid a total of $3,950,000 for the shares.  Thereafter in a series of advances paid to the defendant, IMC and a Hong Kong based company set up to administer the listing called Integral Mortgage Corporation Limited, the plaintiff says he advanced a total of $513,675 for operating and/or listing expenses of IMC.

2.  By this action the plaintiff claims that he entered into the 1^st and 2^nd contracts and made the advances when under the undue influence of the defendant, and/or as a result of misrepresentations made by the defendant whether fraudulently or otherwise.  He claims that at the time of the purchasing IMC was insolvent and its shares were not worth what he paid for them if anything at all.  He seeks a declaration that he has validly rescinded the 1^st and 2^nd contracts and is entitled to a return of the sums of $3,950,000 and $513,675 and further or alternatively damages.

History

3.  The defendant was at the material time and to date is a registered investment adviser and commodities trading adviser licensed to operate under the Securities and Futures Ordinance.  He is also chairman of AIM Consultants (Investment) Limited which is similarly licensed.

4.  In 2000 Raymond Yu, a Hong Kong solicitor, Bill Salouris, an Australian businessman and the defendant founded IMC.  IMC’s primary business activity is to solicit and manage mortgage loans on behalf of banks and other financial institutions.  The defendant describes it as the outsourcing agent of the mortgage departments of banks, earning its income from sourcing the loans and managing the repayments.  Its shares were and remain held by three holding companies called Kumagai Trade Limited (Kumagai, as to 70%) Ultrawealth Management Limited (UML, as to 20%) and Easturn International Limited (Easturn, as to 10%).  The founders of IMC held variously the shares in these holding companies.  The defendant through Kumagai and UML was the majority shareholder.  The founders were represented on the Board of IMC; Mr Salouris was the resident director in Australia, until his departure in July 2002 which was, apparently, under a cloud as I shall come to.

5.  The plaintiff is 51 years old and is a practising barrister, but with an interesting and varied curriculum vitae.  He was born and schooled in Hong Kong before emigrating to Canada.  At Concordia University, Montreal he qualified with a B. Com in 1977 and two years later achieved an MBA.  For 4 years from 1980 he taught courses in general business and accounting at universities in Newfoundland and Toronto.  He then returned to Hong Kong and for 10 years held the position of lecturer (renamed assistant professor) in the School of Business at the Chinese University.  Between 1992 and 1994 he completed a CPE course at Hong Kong University, which permitted him to enter the PCLL as a prelude to practising law.  He was called to the Bar in 1994.  Between 1995 and 1997 he continued to lecture, at the Open University of Hong Kong.  In 1997 he began practising as a barrister.  These areas he has chosen to promote as his particular specialties include company law and the law of insolvency.  In the meantime he applied for and was made a CPA in Texas, is a Fellow of the Hong Kong Society of Accountants and is part owner of a company that runs a school for US CPA exams.  He has also written a series of books with such titles as ‘Finance and You’, ‘Financial Beat’, ‘A Guide to Worldwide Investments’, ‘The Way to Making a Fortune’ and others of like title.  In the 90’s he spent some time hosting a television programme in which guests who were leaders in industry spoke of the economy, stock markets and financial investments.  He claims to have knowledge and experience in business, accountancy and law.

6.  The parties met at about the end of 2000.  The defendant and his wife were being sued.  Raymond Yu acted for them.  Yu engaged the plaintiff as counsel.  The case in the event was settled, but the parties become friends and socialised and that included two trips overseas.  By this means they got to know of each other’s backgrounds and aspirations.  The defendant introduced the plaintiff to several investments; in particular, two in which the plaintiff achieved a return on interest well above the market rate.  There was another in which he scored a significant capital profit after taking up a share in an IPO that the defendant had introduced him to.

7.  In mid 2002, the defendant and Yu fell out with Salouris.  There had been an attempt at a sale to Salouris of IMC lock, stock and barrel but that fell through.  There was a suspicion that Salouris was milking IMC and he was dismissed.

8.  Shortly after this the defendant and Yu engaged a company called Master Link Securities (Hong Kong) Limited (Master Link) to represent IMC as sponsor for a GEM listing.  Auditors and other professionals were employed.  It was at this time that the plaintiff was approached to buy an interest.  The 1^st contract of 6 December 2002 was the upshot.  The plaintiff paid the agreed consideration of $3.25m for 40% of UML purchased from the defendant which represented 8% of IMC.  How and why he came to commit are in dispute.  What is not is that he was given access to accounts for the years ending June 2001 and 2002 which depicted a loss and a modest profit respectively.  But the profit, as is apparent from the accounts, was achieved by the sale of a portfolio; in effect a capital transaction.  He also travelled to Sydney, met the staff of IMC and made himself familiar with the mechanics of its operation. 

9.  On 29 May 2003 under the 2^nd contract the plaintiff purchased another 10% of UML from the defendant for $700,000, thus increasing his share in IMC to 10%.

10.  It is the plaintiff’s case, disputed by the defendant, that he told him he was in effect buying the shares of a bankrupt called James Lee whose interest was being held by the defendant in trust, that the GEM listing was a ‘done deal’ for early 2003, that the defendant had himself poured $10m into IMC, that the price agreed upon was a bargain, that a profit of 3 to 4 times was achievable post-listing.

11.  The defendant’s choice of investments for him in the past had been spectacular, and there was no reason to suspect this would be less so.  He allowed himself to be persuaded to buy.  To achieve the necessary cash input, he liquidated a previous defendant-recommended investment and cashed in a savings plan intended for education and retirement.

12.  The planned listing was indeed scheduled for early 2003, but adverse market conditions were the principal reason for a delay.  The shareholders were required to contribute to IMC’s listing and operating expenses.  In February 2003 the plaintiff paid $24,000 and then between June 2003 and February 2004 a further $489,675, making in all the advances of $513,675. 

13.  Also in dispute is the degree of involvement of the plaintiff in IMC during this period.  The plaintiff says it was marginal, whilst the defendant says he was given the position of cost controller, and was hands on in dealing with the operation and listing activity of IMC.  This I regard as incidental for after all it is in a period after the plaintiff’s commitment to the investment in shares in UML.

14.  In early 2004 the plaintiff and Raymond Yu entered into a transaction of their own.  On the plaintiff’s case (Yu did not give evidence) Yu was in financial difficulty and could not afford his contribution to IMC’s operating and listing expenses.  His interest in IMC was 10% held through Easturn.  The plaintiff agreed to take half of that for nominal consideration but to meet all of Yu’s expenditure.  This preceded the plaintiff’s final contribution to IMC, which was the largest, $100,000, made on 19 February 2004.  These matters are significant in that they reveal that by February 2004 by virtue of these further commitments the plaintiff still held out prospects of a listing and profit; for why otherwise enhance his share?

15.  But in April 2004, there was a reversal.  He let it be known that he wanted to quit his involvement with IMC and offered his shares to the defendant and others for a price.  It is his case that this was because of a loss of hope in IMC triggered by accounts prepared by the auditor that he was sent at this time.  It is to be noted however that these were draft, incomplete and labelled ‘intended for discussion’.  Nothing came of his proposal.  In June he filed his writ.  In the same month he circulated to the press and interested parties that he had filed a suit against the defendant for fraudulent misrepresentation.  Word of that got back to Master Link, the sponsor in the listing process. No one from Master Link gave evidence, but a letter from a director was produced.  Making reference to the publicity of the plaintiff’s suit he wrote to the effect that Master Link paid heed to the serious implications of the pending suit and considered it no longer practical or advisable to proceed with the listing application and terminated the sponsorship contract.

The Pleadings

16.  The plaintiff pleaded undue influence in this way; the defendant holding himself out as an expert had introduced the plaintiff to a number of lucrative investments, clearly leading him to repose in the defendant trust and confidence such that under his undue influence he proceeded to enter into the 1^st and 2^nd contracts.

17.  He further claimed that the defendant had induced him its entering into the 1^st and 2^nd contracts by misrepresentations fraudulently made summarized as follows:-

(a)	IMC was scheduled to be listed on the GEM Board in the 1st quarter 2003 when in fact that was never going to be a realistic prospect;
(b)	the shares he bought were held by the defendant not in his own right but in trust for the undischarged bankrupt, James Lee.  In fact there was in the event no indication that James Lee owned the shares; the purchase price was paid direct to the defendant;
(c)	the defendant told the plaintiff he had invested more than $10m in IMC and his fellow shareholders had paid in several million more.  In fact he had paid less than A$1m and Raymond Yu much less than that;
(d)	the investment was a once in a lifetime opportunity.  The shares would gain at least 3 to 4 times in value post-listing.  In fact the price he paid was a gross exaggeration of their worth.  The price offered Salouris for the whole company was only A$1m just a few months prior to the 1st contract;
(e)	the listing was to proceed uneventfully because the defendant had secured the commitment of friends and relatives to the extent of $30m.  In the event there was not and never had been such a commitment;
(f)	in the accounts that the plaintiff reviewed before committing himself the total equity at given dates was overstated, and a net income stated at a given date was overstated.

18.  For completeness I should mention there are other matters raised which are insignificant or inherently improbable and I do not propose to deal with them.

19.  The defendant’s response in the pleadings and in evidence was to deny that the plaintiff was under his undue influence; that he was knowledgeable, experienced, inquisitive and well able in his own right to weigh the pros and cons of any prospective investment; indeed, it is the plaintiff’s impressive CV that attracted him to the plaintiff as being an investor who would materially assist in the operation and listing of IMC.  The plaintiff was not pursued and was well able to decide for himself whether or not to participate; and he was given and studied the management accounts which disclosed how the company was doing.  Those accounts had been prepared professionally; there was no reason to doubt their accuracy.  There was no guarantee given that the listing would eventuate.  There was of course hope of profit but no guarantee of that.  James Lee’s so called interest in UML was a figment of the plaintiff’s imagination; he had never said he was involved, the shares he sold were his outright.  He did not say that he had prospectively $30m assured from friends and relatives.  The price he and Yu were prepared to accept from Salouris was pre-listing and in circumstances far removed from those that pertained when he and the plaintiff contracted.  The prices were determined by agreement between vendor and an informed purchaser.

The Law

Undue Influence

20.  The leading authority on the principal is the House of Lords case Regal Bank of Scotland v. Etridge (No.2)[2002] AC 773.  In essence the law seeks to guard against the improper use by a person having some influence over another of that influence with the result that the other is materially disadvantaged.  An example of prospective abuse is where a parent persuades a child into a course of conduct to his detriment.  But the list is not confined to specific cases.  As Lord Nicholls said at page 775:-

“	11	Even this test is not comprehensive.  The principle is not confined to cases of abuse of trust and confidence.  It also includes, for instance, cases where a vulnerable person has been exploited.  Indeed, there is no single touchstone for determining whether the principle is applicable.  Several expressions have been used in an endeavour to encapsulate the essence: trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other.  None of these descriptions is perfect.  None is all embracing.  Each has its proper place.
	12	In CIBC Mortgages plc v Pitt [1994] I AC 200 your Lordships’ House decided that in cases of undue influence disadvantage is not a necessary ingredient of the cause of action.  It is not essential that the transaction should be disadvantageous to the pressurised or influenced person, either in financial terms or in any other way.  However, in the nature of things, questions of undue influence will not usually arise, and the exercise of undue influence is unlikely to occur, where the transaction is innocuous.  The issue is likely to arise only when, in some respect, the transaction was disadvantageous either from the outset or as matters turned out.
	13	Whether a transaction was brought about by the exercise of undue influence is a question of fact.  Here, as elsewhere, the general principle is that he who asserts a wrong has been committed must prove it.  The burden of proving an allegation of undue influence rests upon the person who claims to have been wronged.  This is the general rule. The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case.
	14	Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof.  On proof of these two matters the stage is set for the court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence.  In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties’ relationship.  He preferred his own interests.  He did not behave fairly to the other.  So the evidential burden then shifts to him.  It is for him to produce evidence to counter the inference which otherwise should be drawn.”

21.  So, the test is whether on the facts:

(a)	the plaintiff has been able to establish whether he reposed trust and confidence in the defendant in the management of his (the plaintiff’s) financial affairs;
(b)	the sale and purchase of the shares called for an explanation, as being demonstrably disadvantageous to the plaintiff; and, if so,
(c)	whether the explanation if any is satisfactory.

Misrepresentation

22.  Although both forms of misrepresentation have been pleaded, the plaintiff who whilst representing himself has the advantage over a layman of being a practising barrister chose to pursue his cause only on the basis of fraudulent misrepresentation.  The editors of Spencer, Bower, Turner and Handley’s Actionable Misrepresentation, 4^th edition, define it succinctly as follows:-

“A false representation made fraudulently to another with the object and result of inducing him to enter into a contract or transaction, or otherwise alter his position to his prejudice, may be the subject of a claim for damages by the latter.”

23.  Mr Pang succinctly summarized the issues to be determined:-

“… whether the Plaintiff was induced to invest in IMC by way of the plaintiff’s misrepresentations :
(i)	whether the defendant made the representations alleged;
(ii)	whether the representations were representations of fact;
(iii)	whether the defendant made the representations with an intention that the plaintiff would be induced to invest in IMC;
(iv)	whether the representations were false;
(v)	whether the defendant knew that the representations were false;
….”

24.  I turn now to consider the facts.

Matters of Fact

25.  The parties in their evidence approached the central issue of the circumstances surrounding the entering into the 1^st and 2^nd contracts from materially different standpoints.  The plaintiff put himself forward as an investing novice; someone with academic qualifications and experience but little practical involvement when it came to investing for profit.  He highlighted the various investments that the defendant had guided him into in which he had done so well as indicative of the reliance and trust he was able with confidence to repose in the defendant.  He put forward the proposition that the defendant had an ulterior motive, which was to win his confidence, expressly then to allow him to unload the UML shares for massive gain.  The defendant for his part pointed to the plaintiff’s CV as indicative of the worldliness of the plaintiff; that he was a man always asking questions that he learned all there was to know about IMC through asking questions; that he visited the seat of operations in Sydney, met the staff and studied the accounts; that only then did he make the commitment.  And then having done so, he was hands-on in the operation and the listing process. He paid his share of operating and listing expenses without fuss, and increased his shareholding by acquiring half of Yu’s shares in February 2004.  All in all he demonstrated he was an experienced and highly qualified investor who had done his homework and who paid over his money only when he was satisfied as to the soundness of the scheme.

26.  Certainly with the burden on the plaintiff to prove his case, the evidence is against his cause; he said he was alive to that.  That said, I have to say I was not impressed by the defendant.  He came across as a man capable of bending the truth if it suited him to do so.  An example pertinent to this claim was his protestation that he had not said to the plaintiff that James Lee was the vendor of the shares he bought.  The plaintiff produced jottings made by the defendant prior to the 2^nd contract having been committed to which made it apparent that there was a third party.  His attempt at explaining otherwise was nonsensical.  There was no reference in the notes as to who that was.  I am satisfied however that the plaintiff was told it was James Lee with intention to deceive.

27.  But I have difficulty in accepting the other examples pleaded have been made out.  Whatever may have been said about the timing and prospects of a GEM listing, the plaintiff would surely have known, or could have enquired, that the matter of success or otherwise and timing is very much a matter of market expectation and can never be said to be a done deal until completion.  And of course the same goes for the prospective worth of founder shares after listing.  Whatever the defendant may have said of the extent of his own participation, the plaintiff had the management accounts to establish the accuracy of that.  I am not satisfied they were wrong or misleading.  Other accounts looked at were not complete and intended only for discussion.  The plaintiff had sufficient knowledge, experience and opportunity to make his own assessment; to consider the prospect of a 3 to 4 times profit enhancement.

Undue Influence

28.  With a CV as interesting and varied as he has, it was always going to be difficult for the plaintiff to be categorized as a person dependent upon another.  That the defendant had introduced him to successful investments prior to IMC makes little or no difference.  The plaintiff studied the accounts; he had the opportunity to ask questions.  He did ask questions.  He knew about listing and IMC’s pending application.  He would have known about the old adage ‘the value can go down as well as up’.  He entered into the transactions because he wanted to of his own free will.

Misrepresentation

29.  I have found as a matter of fact that the defendant misrepresented the presence of James Lee as the actual vendor.  I am satisfied he did so for the purpose of inducing the plaintiff to buy the shares.  But did the plaintiff buy because of that inducement?  It seems he took no steps to find out if James Lee was involved, perhaps by approaching James Lee himself.  Of course if he had bought from an undischarged bankrupt the transactions would have been tainted with illegality.  As a barrister whose specialized interests include company and insolvency laws he must have known that, and perhaps was reluctant to get too much information.  The plaintiff as I have found went to lengthy steps before deciding that the investment was for him.  I am satisfied that he was not induced to purchase the shares in reliance on their belonging to James Lee.  And there is no other fraudulent misrepresentation made out.

30.  The plaintiff said in his closing address with commendable frankness that he was in the end motivated by greed and so allowed himself to be persuaded to invest.  There I believe lies the answer.

31.  The plaintiff’s claims are dismissed.  The costs order is nisi in the first instance.  Costs following the event are to the defendant.  (The order for costs is nisi)