HKSAR v. LI CHI YUNG AND OTHERS

CACC 55/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 55 OF 2004

(ON APPEAL FROM DCCC NO.757 OF 2002 )

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REASONS FOR JUDGMENT

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

1. On 5 May 2004, we allowed the applicants' application for extension of time to appeal against conviction. We quashed their convictions and set aside their sentences. We indicated that we would give our reasons in writing and this we now do.

2. The 1st applicant, Li Chi Yung (Li), the 2nd applicant, Lam Ka Sha (Lam) and the 3rd applicant, Ko Chi Keung (Ko) together with Chen Chau Ying-hui (Chen) appeared before Judge Saunders in the District Court on an indictment consisting of a charge of conspiracy to defraud and a charge of conspiracy to promote a pyramid selling scheme.

3. The charge of conspiracy to promote a pyramid selling scheme was an alternative charge to the charge of conspiracy to defraud. The conspiracies were said to involve also Chan Chun-to also known as Chen Chun Shen (Chan), the husband of Chen. Chan was not charged as he left Hong Kong on 4 January 2001 and did not return.

4. The applicants and Chen pleaded not guilty to the charges. Chen was acquitted at the conclusion of the prosecution case after the judge ruled that she had no case to answer.

5. On 5 June 2003, the applicants were acquitted of the charge of conspiracy to defraud but convicted of the alternative charge of conspiracy to promote a pyramid selling scheme.

6. On 11 February 2004, over eight months after the date of conviction, the applicants filed notices of application for leave to appeal in which they also sought extension of time to do so.

7. The application was prompted by a decision of this Court in HKSAR v Yau Mee-kwan unreported, CACC 96 of 2003, given on 18 December 2003. Such decision supports the applicants' case.

The Facts

8. Skybinet Ltd (Skybinet) was incorporated on 10 December 1999. The registered office of Skybinet, initially at 492 Lockart Road, moved to 8th Floor, Plaza 2000, Russell Street, Causeway Bay on 29 March 2000.

9. Lam was one of the first directors of Skybinet until the end of 2000 and its company secretary. Chen and Ko were appointed directors on 2 February 2000 and 16 May 2000 respectively.

10. Skybinet had a number of accounts with the Hang Seng Bank. The accounts were initially operated by the joint signatures of Chan and Li. The mandate for the accounts was subsequently amended so that they could be operated with the signature of Chan and that of Li or Ko.

11. Li appeared in the office of Skybinet regularly and allowed himself to be described as the founder of the company. Li signed every cheque issued by Skybinet. He also negotiated and signed the lease for Skybinet in respect of its office at Plaza 2000.

12. Lam worked as a frontline receptionist in Skybinet. She actively recruited people to the schemes operated by Skybinet.

13. Ko was also employed by Skybinet. He was in charge of the maintenance of the computer records that tracked the positions of investors in the schemes. Ko negotiated and signed the lease for Skybinet in respect of its office at Plaza 2000.

14. Skybinet operated a number of schemes and a large number of people were recruited as members of the schemes. The judge described the schemes operated by Skybinet in the following terms:

"Initially plans known as 'Plan A' and 'Plan B' were promoted. The A Plan involved the purchase of 'memberships' at Skybinet. A member did not become a shareholder in Skybinet. Membership cost $980 and entitled member to use the facilities of Skybinet. These included classes in English and Mandarin, computer classes, and later dance classes.

A member was entitled to use up to 5 MB of computer space on Skybinet's Internet linked computers to advertise any products they may wish to sell.

Although only one membership was required to use all the facilities, members were encouraged to buy more than one membership and to recruit other members. Any further membership purchased gave them an additional 5 MB computer space but gave them no priority or other advantage with any of the other facilities of Skybinet. The B Plan was inextricably linked with and funded by the contributions to the A Plan.

The real reason that members were encouraged to buy more memberships themselves or to recruit members was an advantage known as 'bingo'.

The A Plan worked by placing the first membership at the top of a tree and successive memberships, either purchased or recruited by the member, in two branches descending from the top membership. As each branch descended, two memberships were aligned, one on each branch, or, to use the parlance of Skybinet, one on the left and one on the right.

Each time balance was achieved between right and left, bingo took place and a payout was made to the investor at the top of the tree.

In the B Plan, the member was required to deposit a sum of $900 to start involvement in the scheme. This was effected by crediting $750 to the B Plan when the first level of balance was achieved by the investor, whether by introducing two new members, or by buying two additional memberships.

When level 2 and 3 were achieved, a cash payment, or 'bingo' of $450 at each level was made to the investor at the top of the tree. At level 4 again the member was credited with $450, but this time only $300 was paid in cash and the remaining $150 credited to the first level in the B Plan, thus completing the payment of the $900 due in that plan.

As long as the member recruited other members or purchased memberships themselves the bingos and credits to the B Plan continued. Ultimately in the B Plan there was a cash payout of $5,000.

As each new member joined, as well as forming part of his introducer's tree, he began his own tree. The introducer was known as the 'upline' and those who were introduced known as the 'downline'. The A and B Plans are adequately illustrated in Ex P1 and the A Plan in annex 1 to Ex P20....

The current scheme in December 2000 was known as 'Skyrich II'. That scheme involved payments being made to Skybinet by investors on a regular monthly basis and subsequent payments by Skybinet to investors also on a regular monthly basis. Skyrich II began in about July 2000 and payments out to investors were being made from about September 2000. In order to join Skyrich II an investor must first become a member of Skybinet. The A Plan continued to run after Skyrich II was established, and the advantages of membership of classes and computer space were still used as an enticement to prospective members, over and above the pure financial advantages of Skyrich II. The effect of the continued operation of the A Plan was to continue the bingo payments. The operation of skyrich II is clearly shown in Annex 1 to Ex P21.

Initially the monthly contribution to Skyrich II was $320. There was a suggestion in the course of evidence that the instalments were not necessarily monthly, but the whole of the evidence shows contributions and payments out being made on a monthly basis. A member could stay in the plan for either 16, 24 or 32 months. "

Findings of the Judge

15. The operation of Skybinet and the involvement of the applicants in such operation were not disputed. Based on the evidence adduced by the prosecution, the judge's findings were summarised by Mr. Eric Kwok, counsel for the applicants as follows:

"(a)	The real reason that members were encouraged to buy more memberships themselves or to recruit members was the advantage of 'bingo';
(b)	The advantages of facilities and computer space were used to entice people to join as members, over and above the pure financial advantages of the plans/schemes;
(c)	Skyrich II would inevitably fail and adjustments of the scheme would only delay but not prevent the inevitable collapse;
(d)	Inference that the three appellants did not believe the plans/schemes being capable of success cannot be drawn;
(e)	Facilities and computer space offered by Skybinet are services, goods or products;
(f)	These services, goods or products were sold by Skybinet to members; and
(g)	The 'bingo' payments are based solely on the introduction into the scheme of new participants."

16. The judge was unable to conclude beyond reasonable doubt that the applicants were acting dishonestly. He therefore acquitted them of the charge of conspiracy to defraud.

17. However, the judge found that the schemes operated by Skybinet were "pyramid selling schemes" under the Pyramid Selling Prohibition Ordinance, Cap 355 (the Ordinance) and that the applicants were parties to an agreement to promote such schemes. The judge therefore convicted them of the charge of conspiracy to promote a pyramid selling scheme.

The Appeal

18. The only issue in this appeal concerns the proper interpretation of "pyramid selling scheme" under the Pyramid Selling Prohibition Ordinance, Cap. 355.

19. Section 2 of the Ordinance defines "pyramid selling scheme" in the following terms:

"Pyramid selling scheme" means a scheme whereby-

20. Mr. Kwok, on behalf of the applicant, submitted that the schemes operated by Skybinet did not constitute "pyramid selling schemes" under the Ordinance.

21. In his written submission, Mr. Kwok suggested that no goods or services were sold under the schemes as the classes in English, Mandarin, computer and dancing as well as the computer space "were illusory, a fiction".

22. We can dispose immediately with this suggestion.

23. On the evidence accepted by the judge, those classes were actually provided as part of the schemes. The fact that few participants chose to avail themselves of such classes did not make them "illusory, a fiction".

24. However, the classes were provided by Skybinet and not by individual participants, and the reward to the participants did not depend on the provision of such classes, but on the number of new participants they introduced into the schemes.

25. Mr Kwok emphasized this and he further suggested that whatever memberships were sold, they were sold by Skybinet and not by the applicants to other members in the "next layer".

26. Mr. Kwok relied heavily on the judgment in Yau Mee-kwan (supra), a case of striking factual similarities with the present case.

27. Stock JA at paragraph 10 of the judgment set out the facts of the case as follows:

"The evidence showed that members did not sell nor were they expected to sell, nor did they expect themselves to sell any goods. In particular, they were not buying the right to sell goods nor did the scheme envisage the onward selling of such a right. In short, this was not a scheme for the distribution of goods. They had a right to purchase the goods but that was for their own benefit if they so chose, and the amount paid by participants to the company did not include an amount for the right themselves to on-sell goods. So too the commission that was paid was not based on the value of the goods sold by the members, but was instead paid for the introduction of new members, and solely according to the number of members thus introduced."

28. Stock JA in Yau Mee-kwan(supra) recognized the ambiguity of section 2 of the Ordinance. However, having referred to Hansard in accordance with the principles established in Pepper v Hart [1993] 1 AC 593, Stock JA ruled that "a pyramid selling scheme" "envisages the selling of goods by a participant and a reward for the selling of goods." (Emphasis added)

29. In paragraphs 15 and 16 of the judgment, Stock JA analyzed the issues as follows:

"15. We have heard Mr Turnbull this morning in justification of his concession for it seemed to us at first blush that it could be argued, given the wording of the section, that if there were no goods then the section bites. The section, we have to say, was hardly drawn with clarity, and we can see perniciousness in schemes the sole purpose of which is to make money from the recruitment of other participants with no element of trading in goods at all, for such schemes which involve no more than the ongoing introduction of members might be said to be objectionable in that loss down the line is inevitable. But we are persuaded that this section assumes a scheme, which envisages the selling of goods, by a participant and a reward for the selling of goods. It is clear on the facts of this case that there was no sale of goods by the members of the scheme, nor was any anticipated. All that was anticipated, if it was truly anticipated at all, was that members might themselves acquire goods, although that seems to have been a peripheral aspect of the matter. (Emphasis added)

16. Insofar as the wording of the section may well be said to be less than clear, one is entitled to look at the statement of the minister or official who introduced the legislation: see Pepper v Hart [1993] 1 A.C. 593. What the official said in this instance supports the interpretation for which Mr Turnbull contends. In moving this legislation, the Financial Secretary said, on 11 June 1980:

'There are several variations on the theme but, in essence, pyramid selling is related to the sale of the goods or services. A participant pays for the right to sell and then for the goods he is to sell. He then becomes eligible to receive rewards for recruiting new participants. Thus he can earn money in two ways: by profits on sales he makes himself and from payments for recruiting other participants.

Such schemes can be objectionable on two grounds. First they often serve no economic purpose and contain the elements of disaster for those who participate. A person who pays to join a scheme may find that he is unable to recoup his money by selling the goods. As the rewards for recruiting usually far exceed those the participants can earn from selling, he concentrates on recruiting other participants. The same consideration can affect the attitudes of those who he recruits an so on down each stage of the pyramid. The goods are forgotten as the salesmen multiply, yet each new recruit is probably having to buy from the organizers a fixed quantity of goods to sell. But one day there are no more people willing to be brought into the scheme. And so we end up with a situation in which those at the top of the pyramid are rich as the results of selling the right to sell and the goods that are to be sold. As we lookdown the pyramid the participants appear to be less well off until we find at the base a large number of salesmen who have paid for their position on the one hand and have no alternative but to settle down and sell those long forgotten goods on the other. If the goods turn out to be virtually unsaleable, what's then?'See: Handsard 11 June 1980, page 874."

30. Mr Gavin Shiu, on behalf of the respondent, agreed that in the present case, as in Yau Mee-kwan (supra), "...the commission that was paid was not based on the value of the goods or services sold by the members, but was instead paid for by the introduction of new members, and solely according to the number of members thus introduced." (Emphasis added)

31. Mr. Shiu conceded that the difficulties which arose in Yau Mee-kwan (supra) were the same in the present case and very properly he did not seek to uphold these convictions.

32. We would merely observe that in Black's Law Dictionary (7th edition), "pyramid scheme" is defined as "A property-distribution scheme in which a participant pays for the chance to receive compensation for introducing new persons to the scheme, as well as for when those new persons themselves introduce participants".

33. There is no requirement in the definition for the selling of goods or services or that the reward (compensation) must be based on the value of such goods or services.

34. Indeed, in moving the legislation on 11 June 1980, the Financial Secretary also said:

"For a scheme to constitute pyramid selling, it must have all the features specified in the definition of 'pyramid selling scheme' in clause 2 of the Bill. These features are

- a participant pays to join

- he acquires the right, for a reward, to recruit others into the organization and they also pay to join

- those he recruits also acquire the right to recruit others."

35. The aforesaid features were all present in the schemes operated by Skybinet.

36. A scheme that serves no economic purpose but only encourages the ongoing introduction of members, and provides rewards for such introduction is, in our opinion, as objectionable as a similar scheme that provides reward for the selling of goods or services.

37. It is in this context, that we note also the concluding remarks of the Financial Secretary in moving the legislation namely: "But it is a tricky area in which to introduce legislation, and if in practice we find we have not got it quite right, we may have to come back to this Council to amend the definition". No doubt Mr Shiu will draw our concerns to the attention of the Secretary for Justice.

38. Following the decision in Yau Mee-kwan (supra), the convictions against the applicants could not stand.

39. We therefore granted each applicant leave to appeal against conviction out of time. We treated the hearing as the appeal. We allowed the appeal and quashed the conviction in relation to each applicant, and set aside the sentences imposed.