DR. YIP CHI HIM ROGER AND ANOTHER v. LEE KWOK LEUNG AND ANOTHER

HCA 356/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 356 OF 2009

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JUDGMENT

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1.  In this action, the 1st plaintiff (“Roger Yip” or “Yip”) claims against the 1st defendant (“Stephen Lee” or “Lee”) for damages for defamation. The 2nd plaintiff (“Capital”) claims against the 2nd defendant (“Green Dragon”) for damages for breach of a contract dated 30 March 2007 (“the Listing Contract”).

2.  Yip is a shareholder and director of and controls Capital.  Yip owned a BVI company also called Characters Capital Group Ltd. (“BVI Capital”).  Lee is a shareholder, director and CEO of Green Dragon. 

3.  The Listing Contract is dated 30 March 2007, but was actually signed by the parties on about 28 May 2007.  By this contract, Green Dragon engaged Capital to assist Green Dragon to obtain a listing on the United States Over the Counter Bulletin Board (“OTCBB”).

4.  Lee defends the defamation claim by justification and qualified privilege.  He also counterclaims Capital for damages for breach of a stock purchase contract dated 31 March 2007 and made between Capital as the seller, Lee as the buyer and a US company called Tabatha V, Inc. (“Tabatha” or “TBVI”) as the company (“the Tabatha Contract”).

5.  Green Dragon’s defence to the breach of Listing Contract claim is rescission because Green Dragon had allegedly entered into the Listing Contract as a result of misrepresentations made by Yip on behalf Capital.  Green Dragon further counterclaims Capital for breach of the Listing Contract.

6.  Lee and Green Dragon also counterclaim against Yip and Capital for damages for fraudulent misrepresentations.

7.  I will deal with the misrepresentation and breaches of contracts claims before the defamation claim as the alleged defamation by Lee arose out of the matrix of the alleged misrepresentations and breaches of contracts by Yip and Capital. 

MISREPRESENTATION AND BREACHES OF CONTRACTS CLAIMS

The defendants’ misrepresentation and breaches of contracts claims

8.  Lee and Green Dragon pleaded in the counterclaim that Lee became acquainted with one Terrence Wong (“Terrence Wong” or “Wong”) in September, 2006.  Wong introduced Lee to Wong’s business partner/associate Yip in January 2007.  Yip claimed to be an expert in the promotion of public listing of businesses in the USA. 

9.  Lee, Yip and Wong discussed the possibility of listing Green Dragon in the USA to raise capital for its business.  In these discussions, Yip and Wong advised Lee to acquire a “pink sheet” shell company.  Such a company is already quoted on a US electronic trading system of public trading.  The business of Green Dragon could then be injected into or combined with the pink sheet shell. A registration statement should then be filed with the US Stock Exchange Committee (“the SEC”).  Upon the satisfaction of SEC with the financial and other information filed, the combined business would be given a public listing status on OTCBB.  This procedure for listing is called a “reverse merger”. 

10.  Yip and Wong told Lee that this procedure was much faster than the procedure of “direct filing” wherein Green Dragon had to file directly and in its own name a registration statement with the SEC to apply for listing on the OTCBB.

The alleged representations

11.  Yip and Wong represented to Lee that if Green Dragon should engage them to assist it to obtain a listing at OTCBB, they would adopt the reverse merger procedure for a more speedy result.  It was necessary to purchase a pink sheet company for reverse merger.  The defendants pleaded this as the 1st representation. 

12.  Yip introduced Lee to his partner Clarence Chan (“Clarence Chan” or “Chan”) in about February 2007.  Chan conducted preliminary examination of the accounts of Green Dragon. 

13.  Yip sent Lee an e-mail on 11 March 2007 representing that Yip had located a pink sheet company that was for sale at US$350,000 payable in seven instalments of US$50,000 each provided that Yip would give a personal guarantee for the payments.  The defendants pleaded this as the 2nd representation.

14.  Yip sent Lee another e-mail on 12 March 2007 saying that it was the first time that Yip had come across a shell owner who was prepared to accept instalment payments and that Yip would not provide a personal guarantee for another client.  Yip also said that the shell was a clean pink sheet and it was an opportunity too good to miss.  The defendants pleaded this as the 3rd representation.

15.  Yip sent Lee a further e-mail on 20 March 2007 saying that Capital would sign a share purchase agreement with Green Dragon for Green Dragon to pay the US$350,000 in seven instalments and the shell owner would deliver the shell upon the third payment.  Capital would enter into a back to back agreement with the shell owner to guarantee the payment of the last four instalments.  The defendants pleaded this as the 4th representation.

The Listing, Tabatha and EECL Contracts

16.  Lee and Green Dragon pleaded that they in reliance of the representations entered into the Listing, Tabatha and EECL Contracts. 

17.  The Listing Contract is dated 31 March 2007 but was signed on about 28 May 2007.  The agreed translation of its relevant terms at CB 113-117 are:

“Responsibilities of Our Company

Your Company appoints Our Company as Your Company’s exclusive financial advisor/consultant for the Listing Matters. After Your Company’s restructuring, Our Company, being Your Company’s exclusive financial advisor/consultant for purchasing a shell to get listed in the US, will proceed with substantive work, and we will be responsible to render services to Your Company on the following items:

1. To search for a US Pink Sheet shell for Your Company;

2. To purchase a US Pink Sheet shell for Your Company;

3. To obtain listing status on the US Pink Sheet Board for Your Company, including the obtainment of an exclusive CUSIP number and stock quote ‘ticker symbol’;

4. To appoint US attorneys and auditors for Your Company so as to complete the documentations required by the Pink Sheet Board (SEC filings);

5. To arrange and introduce Market Maker to Your Company so as to assist Your Company to obtain stock quotations on the Pink Sheet Board;

6. To assist Your Company to coordinate work of the attorneys and auditors, so as to complete the requisite documentations for US Securities and Exchange Commission filing;

7. To apply for the listing of Your Company at the (OTCBB), and to complete the requisite documents for listing for Your Company;

8. To assist Your Company to maintain the budget on listing expenses;

9. After successful listing, to assist Your Company to carry out financing activities and to arrange for introduction of Market Maker, funds houses, public relations companies and other related cooperation units; and

10. After successful listing on the OTCBB), to provide opinion/advice on change-of-board and related matters, to contact and introduce intermediaries/brokers and institutions, to actively participate in its operation.

Fees and Expenses

Our Company will, according to the Listing Matters described in this Agreement, charge Your Company the following fees, shares and commissions:

1. Shell cost and handling fee, financial advisory/consultancy fee and documentation-handling fee, totalling US$650,000 payable by installments as follows:

I. Total shell price of US$350,000 to the shell owner or its nominated representative by 7 monthly installments of US$50,000 each starting from the first Friday of April 2007;

II. a total of US$300,000 to Our Company as listing promotion fee and documentation fee payable by a maximum of up to 24 monthly installments of US$12,500 each starting from the first Friday of April 2007. If Your Company obtains funding after successful listing within 24 months, Your Company shall expedite payment for the remaining balance;

III.After successful listing, Your Company shall pay to Our Company US$8,000 per month as long term financial consultancy/advisory fees.

2. 18% of shareholding after successful listing on the (OTCBB) in US;

4. 10% of the final funding amount for each fund placement activity in the course of the Listing Matters (if applicable) as placement bonus commission for Our Company.

5. 5% of the final funding amount for each fund placement activity after listing as placement bonus commission for Our Company.  Also, Your Company shall directly engage US attorneys and auditors and pay for their fees in the total sum of no more than US$150,000.”

Terms of Agreement and Termination

1. Except under the situation stipulated below (mainly for breach), the term of the Agreement shall be 3 years (counting from the date of signing the Agreement);

Others

10. This Agreement cannot be modified without written consent from both parties.  …  This Agreement shall be governed by and construed by the laws of Hong Kong.  Both parties agree to resolve by a Court in Hong Kong under the non-exclusive jurisdiction of Hong Kong.”

18.  The material clauses of the Tabatha Contract are (C2 282-289):

“STOCK PURCHASE AGREEMENT

THIS AGREEMENT FOR SHARE EXCHANGE … is made and entered into as of March 31, 2007, among (Capital), the shareholder of (Tabatha), … (… the ‘Sellers’), (LEE) … (… the ‘Buyer’), and (Tabatha), a Colorado corporation (… the ‘Company’ or ‘TBVI’).

This Agreement sets forth the terms and conditions upon which Sellers are selling to the Buyer and the Buyer is purchasing from the Sellers 267,250 shares (hereinafter referred to as the ‘Shares’) of the issued and outstanding common stock of the Company, representing approximately 72.85% of the issued and outstanding common stock of the Company.

…

1. SALE OF THE SHARES

1.01 Shares being Sold.  Subject to the terms and conditions of this Agreement, the Sellers are selling the Shares to the Buyer.

1.02 Consideration.

(a) Purchase Price.  The Purchase Price of the shares shall be US$350,000.00, representing a price of US$1.31 per share.

(b) Issuance of New Shares.  The Buyer shall issue newly issued shares of the Company’s common stock to the Seller (the ‘Newly Issued Shares’).  The Newly Issued Shares will not be registered under the Securities Act of 1933, as amended, and will be considered restricted stock and will only be transferable in connection with an effective registration statement pertaining thereto or pursuant to an applicable exemption from registration there from.

1.03. Settlement:    The Buyer will transfer cash in the amount of US$350,000 in seven (7) instalments each of US$50,000 to be paid on every first Friday of each month starting from April 2007 for a consecutive of seven (7) months, to the Seller.

1.04. Closing.  The Closing of the transactions shall take place on the first Friday of June, 2007, or at such other date and time as the parties may mutually agree in writing.

1.05. Delivery by the Seller.  At the Closing, the Sellers shall instruct the transfer agent to deliver to the Buyer certificates representing the Shares.

1.06 Delivery by the Buyer.  At the Closing, the Buyer shall have transferred to the Sellers a cash payment of at least US$150,000, i.e., three (3) installments as specified in Section 1.03 to the Seller.  However, Buyer is obligated to pay to Seller all seven (7) installments to fulfil the obligation of this Agreement.

…

III.  REPRESENTATIONS AND WARRANTIES OF COMPANY & SELLERS.

The Company and the Sellers hereby represent and warrant as follows:

3.01 Organization, Capitalization, etc.

(a) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Colorado, and is qualified in no other state.

(b) As of the date of execution of this Agreement, the authorized capital stock of the Company consists of 100,000,000 shares of no par value common stock of which 366,875 shares are validly issued and outstanding.  The Newly Issued Shares to be issued under this Agreement are ‘restricted shares’ for the purpose of the Securities Act and the holders of the transfer shares will not be able to transfer such shares except upon compliance with the registration requirements of the Securities Act or reliance upon an available exemption there from.

…

8.09 Applicable Law.  This Agreement shall be governed by, and construed in accordance with the laws of the State of Colorado.” (emphasis supplied)

19.  Yip was also a shareholder and director of a company called Entrepreneurial Engineering Corp Ltd (“EECL”).  The defendants pleaded that Lee in reliance on the four representations and pursuant to the Listing Contract procured Green Dragon to engage EECL from April 2007 to provide accounting and financial re-engineering services on a monthly basis (C7 1520-1527).  The engagement was for twelve months.

20.  The financial services to be provided by EECL included the liaison with banks and financiers and to negotiate for loans and banking facilities for Green Dragon.  The accounting services included the improvement of Green Dragon’s accounting reports and their presentation for bankers, the minimization of the impacts over the personnel changes in the accounting department and the provision of close and continuous support for the new accounting department.

21.  It seems that when Yip and Lee were discussing this proposal on or prior to 30 March 2007 (C7 1520), they were contemplating a new accounting department for Green Dragon.  If so, this could be linked to the departure of the Chief Operating Officer (“COO”) Mr Thomas Lui on 31 March as referred to below.

22.  The remuneration for EECL for the services was (i) a monthly fee of HK$32,000; (ii) a success fee at 1.5% of new or increase in loans or facilities; and (iii) 0.5% of loans or facilities replacing loans or facilities of shorter tenor.

Falsity of the representations

23.  The defendants pleaded that Lee in January 2009 with the assistance of one Aaron Stein, a certified accountant in the USA discovered that the 1st to 4th representations were false. 

24.  The defendants pleaded that Yip and Capital did not arrange Green Dragon to adopt the reverse merger procedure, but had arranged it to go through the direct filing procedure for listing on the OTCBB and they did so without the knowledge or consent of the defendants.

25.  The defendants also pleaded that as of 30 March 2007 Tabatha was not and had never been a pink sheet company.  It was at all material times only a grey market company which was not quoted on the pink sheets platform.

26.  They further pleaded that BVI Capital had on 22 June 2007 purchased 1,298,440 or 88% of the issued shares of Tabatha from one First Asia Private Equity Investment Ltd (“First Asia”) at US$150,000.  BVI Capital paid the said sum on 14 June 2007 and acquired the control of Tabatha from First Asia on 22 June 2007. 

27.  Hence, the defendants pleaded that the following statements comprised in the 1st to 4th representations are false:

(i)  that the plaintiffs would adopt the reverse merger mechanism in the application and hence it was necessary for the Green Dragon to acquire a pink sheet shell company.

(ii)  that the plaintiffs located an owner of a pink sheet shell company who was willing to sell the shell at US$350,000.

(iii)  that the owner of the shell was willing to accept payment by 7 installments of US$50,000 each provided that Yip would provide his personal guarantee.

(iv)  that Tabatha was a clean pink sheet company.

(v)  that the opportunity to acquire Tabatha at US$350,000 was too good to miss.

(vi)  that the sellers of Tabatha’s shares would deliver the subject shares upon the payment of the first 3 installments of US$500,000, viz. a total of US$150,000 yet still required the payment of the remaining balance viz. US$200,000.

(vii)  that Capital would enter into a back-to-back agreement with the shell owner for the purpose of guaranteeing the payment of the last 4 installments, viz. a total of US$200,000.

Particulars of fraud

28.  The defendants further pleaded that the plaintiffs made the 1st to 4th misrepresentations fraudulently knowing them to be false.

29.  They pleaded that Yip is a self-proclaimed expert in public listing in US.  He had to discharge the duties owed by Capital to Green Dragon.  He therefore must have conducted searches and enquires on Tabatha.  Such searches and enquiries would have revealed that Tabatha was merely a grey market company.  The plaintiffs also knew that First Asia merely asked for a single payment of US$150,000 as the price for its entire shareholding of Tabatha.  First Asia did not ask for the grossly inflated price of US$350,000 payable in seven instalments as stated in the Tabatha Contract.  The shares of Tabatha as held by First Asia could be delivered after payment of US$150,000 and no guarantee was given by either the plaintiffs to First Asia for the 4th to 7^th instalments of payment.

30.  They further pleaded that there was a meeting on about 24 March 2007 between Yip, Chan, one Michael Daniels (“Daniels”), a law clerk of an American law firm Harrison Law, PA (“Harrison Law”) and one Micah Eldred (“Eldred”) of an American securities firm, Spartan Securities wherein Daniels and Eldred advised Yip and Chan that Green Dragon should use the direct filing procedure to obtain public listing. 

31.  Harrison Law was engaged at the end of April 2008 to proceed with direct filing for Green Dragon for a public listing on the OTCBB. But Yip, Chan and Wong never told Lee that direct filing was used instead of reverse merger.  They further said that Yip and Capital all along intended to proceed with direct filing for Green Dragon and never intended to proceed with reverse merger.

32.  They also denied that Green Dragon had suffered from a liquidity problem in mid-2007.  However, the contemporary e-mails referred to below clearly show that Green Dragon did experience a tough liquidity problem starting from sometime in early May 2007 to early August 2008.  It commenced after the engagement of Harrison Law to proceed with direct filing.

The defendants’ counterclaims of loss

33.  Lee on behalf of himself and Green Dragon then rescinded the Listing Contract, the Tabatha Contract and the EECL Contract on the ground of the misrepresentations.

34.  The defendants said that but for the misrepresentations, Lee would not have entered into the Tabatha Contract and paid Capital US$350,000 as it was unnecessary to purchase Tabatha for the application for listing.  They further said that but for the misrepresentations, Green Dragon would not have entered into the Listing and EECL Contracts with Capital and EECL respectively.

35.  Green Dragon thus counterclaims Yip and Capital the HK$2,190,430.29 it paid Capital as consultancy fee under the Listing Contract and the HK$1,321,273.04 it paid EECL for the services under the EECL Contract.  It further counterclaims the HK$328,029 that it paid Harrison Law as legal fees, the HK$255,450 it paid the auditors Madsen & Associates CPA Inc as audit fees and the HK$156,000 it paid Nickson CPA Co as audit fees.  The defendants are willing to give credit to the plaintiffs for a reasonable fee for the services provided by Capital for obtaining the listing for Green Dragon on OTCBB on 7 November 2008 through the direct filing procedure.  They put the reasonable fee at US$250,000.

36.  The defendants pleaded an alternative counterclaim against Capital on the ground that Capital had breached the Listing Contract in failing to locate for Green Dragon a pink sheet company and to use it for reverse merger.  Green Dragon also denied that Capital was entitled to any payment from it under the Listing Contract because of its breaches of the Listing Contract.

The plaintiffs’ defence to counterclaim

37.  The plaintiffs pleaded in §9 of their reply and defence to counterclaim that Yip had advised Lee that there were three methods to obtain a listing for Green Dragon on OTCBB.

38.  The 1st method pleaded in §9.1 of the reply is the reverse merger of Green Dragon with a pink sheet company.  The plaintiffs pleaded that in this method, a low-tier pink sheet shell company has to be purchased first. The business of Green Dragon is then injected into the shell.  Proper and accurate financial statements and information of the merged business should then be submitted to the SEC.  If the SEC should be satisfied with the statements and information, the merged business would be upgraded or migrated to a full OTCBB listing.  In early 2007, if the financial statements and information of Green Dragon should satisfy the SEC, this would be the most economical, efficient and low risk method of listing Green Dragon on OTCBB.  This description of the 1st method by the plaintiffs is however not entirely satisfactory. 

39.  The parties have appointed a joint expert Mr Mitchell Nussbaum, Partner and Chair, Securities Practice Group of Loeb & Loeb, LLP (“the joint expert”) to provide opinions on some issues in the action.  Mr Nussbaum has provided two reports.  In his first report dated 4 June 2010, he advised that reverse merger has two steps.  The first step is to merge the business in question with the pink sheet company.  The second step is to file a registration statement under the Exchange Act.  This is the same as the method of “Direct Filing - Exchange Act registration”.  Hence, the cost of reverse merger is the cost of acquiring a pink sheet company plus the cost of direct filing under the Exchange Act (CB 217 §2(b) and 218 §3(iii)).  I will refer to the joint expert reports in more detail below. 

40.  The 2nd method is the reverse merger of Green Dragon with an OTCBB shell company.  It is necessary to purchase a higher-tier OTCBB shell company which is already listed on OTCBB.  The business of Green Dragon is then injected into the shell.  This is the fastest but most expensive route because OTCBB shells are substantially more expensive than pink sheet shells.

41.  The 3rd method is the self-filing or direct filing of Green Dragon’s own Form SB-2 registration statement with the SEC without using any shell company.  In early 2007, this was the riskiest method for Green Dragon because the success rate was substantially lower, the queries from the SEC on the form SB-2 were difficult to answer and it usually took a much longer time to complete. If the attempt by this method should fail, all costs incurred would be lost.  This again is not a satisfactory description of the direct filing method. 

42.  According to the joint expert Mr Nussbaum, there are two types of direct filing.  One is “Direct Filing - Securities Act registration” (CB 217).  That is the method eventually adopted for Green Dragon.  The other is “Direct Filing - Exchange Act registration” (CB 218).  Both methods require the filing of a registration statement under the relevant act (CB 213-217).  As mentioned above, Mr Nussbaum said that the method of reverse merger also required the filing of a registration statement under the Exchange Act (CB 217 §2(b). 

43.  Different types of registration statements would be required for different filing method under different acts.  For direct filing under the Securities Act, Forms S-1, S-3, S-4 and S-11 were used (CB 215).  For direct filing under the Exchange Act, Form 10 was analogous to Form S-1 in Securities Act. (CB 217).  As will be shown below, Green Dragon filed a registration statement in Form SB-2 under the Securities Act.   

44.  The plaintiffs then pleaded that Lee, after having had the benefit of Yip’s explanation on listing methods, decided to use the first method of reverse merger with a pink sheet shell.  He then entered into the Tabatha Contract with Capital on 31 March 2007 and Green Dragon entered into the Listing Contract with Capital on about 28 May 2007 but with effect from 30 March 2007.

45.  Yip denied that Chan was his partner or associate as pleaded by Lee (But Yip did refer to Chan as his partner in his e-mail to Lee dated 12 March 2007 as referred to below).

46.  Yip said that Capital had incurred US$392,000 for the purchase of Tabatha but did not charge Lee for the US$42,000 in excess of US$350,000 out of goodwill, good faith and best intentions.  Thus Capital suffered a loss of US$42,000 in Green Dragon’s purchase of Tabatha.  The US$392,000 was paid to the following entities as follows:

Master Focus Investments Limited (“Master Focus”): HK$896,700;

Fugu Enterprises Inc. (“Fugu Enterprises”): HK$1,010,100; and

Rich Key International Investment Limited (“Rich Key”): HK$1,151,475.

47.  The plaintiffs then pleaded in §20 of the reply that after they had started working for Green Dragon pursuant to the Listing Contract and according to the 1st method, Green Dragon encountered financial, accounting and human resources problems of an internal nature.  These problems are particularized in §20 as follows:

“20.1 Essentially, it transpired that Green Dragon’s books and accounts were in a mess. Its internal accounting data had never been properly computerized or computer-automated, were incomplete and, worst of all, plainly inconsistent.

20.2 More specifically, it transpired that Green Dragon had in fact been keeping 2 sets of “consolidated accounts” – 1 set for obtaining loans from banks and 1 set for taxation purposes. The consolidation of accounts was by itself problematic as the 3 companies being referred to in the consolidated accounts appeared to be legally unrelated to each other.

20.3 Tammy Lee (the Finance and Administration Manager) and Thomas Lui (the COO) appeared to have produced and used false payroll and accounting documents in the course of or in connection with their employment with Green Dragon. Green Dragon was unable to produce proper and auditable financial statement as it transpired, inter alia, that some of its tax filings were untruthful and that its actual relationships with the various Mainland Chinese companies appearing on its books and accounts, including but not limited to XY〔東莞市森源貿易有限公司〕 and NWS〔東莞市厚街鎮隆基木業營業部〕, were, to say the least, questionable.

20.4 On or about 1st May 2007, most if not all of Green Dragon’s banks received an anonymous letter, which alleged, inter alia, that Green Dragon was involved in the use of “artificial invoices”. Upon receiving the anonymous letter, Green Dragon’s banks threatened to terminate their relationships with Green Dragon.

20.5 All of the above matters, none of which had anything to do with the Plaintiffs and were not within the contemplation of the Plaintiffs when they started working for Green Dragon pursuant to the (Listing Contract) and the (Tabatha contract), caused substantial delay in Green Dragon’s OCTBB listing application.

20.6 Without prejudice to the generality of paragraph 15 above, the Plaintiffs rely on the following:

(1) An email from Stephen Lee to Roger Yip dated 24^th May 2007, in which Stephen Lee admitted that Green Dragon’s books and accounts had been manipulated by Thomas Lui.

(2) An email from Stephen Lee to Roger Yip dated 18^th July 2007, in which Stephen Lee admitted that it was wrong for the Defendants to have purported to consolidate the accounts of (1) Green Dragon; (2) XY; and (3) NWS in the manner as they did.”

48.  The plaintiffs then pleaded in §21 that because of these problems, Yip orally advised Lee at a meeting at the end of April 2007 in the presence of Chan and Wong to attempt the 3rd method of direct filing simultaneously with the 1st method of reverse merger.  The defendants then fully supported this simultaneous approach. 

49.  The plaintiffs relied on the following acts of the defendants to show the defendants’ support for the simultaneous approach.  These acts are Lee’s arrangement for the senior employees, consultants and related business parties to subscribe for the shares of Green Dragon by signing about 50 subscription forms.  That was to enlarge the shareholder base of Green Dragon to more than 25 shareholders.  Lee had reviewed and approved various SEC documents such as Form SB-2, Form S1 and their amendments which, as Yip had orally advised Lee in various meetings, were solely for use in the 3rd method of direct filing.  Lee had also read through each of the said documents meticulously before accepting and signing them.  Furthermore, the 3rd method required Green Dragon to be re-domiciled to the US and become a US domestic corporation.  This could only have been done with the express personal approval of Lee.

50.  The plaintiffs further pleaded in §22 that Capital would have been entitled to charge Green Dragon for payment for the increase in workload in undertaking the 3rd method.  However, it did not do so out of goodwill, good faith and best of intentions.

51.  Yip also pleaded that Green Dragon entered into the EECL Contract because of its need of the extra accounting and financial re-engineering services from EECL and not because of its reliance on any alleged representations. Green Dragon needed the extra services because its COO, Thomas Lui and Finance and Administration Manager, Tammy Lee had left and it was unable to produce true and accurate accounts for tax and auditing purposes.

52.  Eventually Green Dragon obtained the listing status on OTCBB on 7 November 2008 through the 3rd method of direct filing.

53.  Regarding the defendants’ allegations of falsity of representations, the plaintiffs maintained that Tabatha was a genuine, clean and immediately usable pink sheet shell company formerly traded on the pink sheet platform with the ticker TBVI.PK given to it by NASD.  In the alternative, they said that Tabatha was at least pink sheet ready which meant that it could be placed quickly back onto the pink sheet platform at minimal costs.  It could be used for reverse merger under the 1st method and had a very high market value.

54.  Regarding the purchase of the controlling shares of Tabatha from First Asia, the plaintiffs pleaded in §25.5 of the reply that Yip had for and on behalf of the plaintiffs given an oral guarantee to one Albert Li of First Asia for the payment of the price of Tabatha and that the oral guarantee was not required to be and could not be filed with SEC.

55.  The plaintiffs also denied that Daniels and Eldred had in a meeting on about 24 March 2007 advised them that Green Dragon should go by the 3rd method of direct filing for public listing.  They said that Daniels’ advice was that Green Dragon was ineligible to apply by direct filing for listing on OTCBB.  In order to be eligible, it had to be substantially reformed and reorganized. It had to be re-domiciled as a US domestic corporation before it could file a registration statement with SEC.  It should also have over 25 shareholders.

56.  However, Yip in his oral evidence did not back up this averment.  He agreed that Daniels had advised in the meeting of 24 March 2007 that Green Dragon should go by direct filing and not reverse merger (transcript 181A-K).

The defendants’ rejoinder

57.  The defendants then filed a pleading called reply to defence to counterclaim.  It should be called a rejoinder and it should not have been filed save with leave under O 18 r 4.

58.  The defendants in the rejoinder denied that the plaintiffs had ever advised them to attempt simultaneously the 1st and 3rd methods.

59.  They pleaded in §14(5) that Lee was asked by Chan at the end of April 2007 to sign a document to engage Harrison Law to conduct necessary listing procedure for Green Dragon, but Chan did not explain to Lee that the procedure was direct filing.  Lee executed the document thinking that it was for the purpose of reverse merger.

60.  They admitted that Lee had signed subscription forms to increase the number of Green Dragon shareholders to 25, signed forms for submission to the SEC and changed Green Dragon’s domicile to Florida, but they said that Lee did all these at the advice of the plaintiffs that they were necessary for the 1st method of reverse merger.

THE EVIDENCE AND ANALYSES

Lee acquainted with Wong

61.  The background leading to the making of the Listing and Tabatha Contracts can be traced to Lee becoming acquainted with Wong in about September 2005 on a social occasion.  Lee said in his witness statement that after he and Wong had become friends, they had dinner together several times.  Lee said that Wong claimed to have expertise in promoting businesses which Lee at that time believed.  Lee then engaged Wong in January 2006 as Green Dragon’s consultant at a monthly salary of HK$15,000.  Wong had no fixed working hours. 

62.  Wong, however, said in his witness statement that he was only Lee’s personal advisor advising Lee on his business.  His advice for improving Green Dragon’s image, including human resource management, marketing and sales strategy was rendered to Lee.

63.  Unbeknown to Lee, Wong was adjudged a bankrupt in 2004 and his bankruptcy was only discharged on 18 February 2008.

Background of listing of Green Dragon

64.  Lee further said that in about August or September 2006, Wong told him that Green Dragon had performed well in its business with turnover close to HK$150 million.  Wong suggested that Green Dragon could be listed in the OTCBB in the US.  If Green Dragon should be listed, it could raise capital with ease and could expand its business.  Wong also offered to introduce Yip, a specialist in listing in the OTCBB, to Lee to explain the procedure for listing.  Since Lee wanted to expand Green Dragon’s business, he agreed to meet Yip to discuss listing.

65.  Wong in his supplemental witness statement denied that he had suggested to Lee to obtain listing for Green Dragon.  He said it was Lee who raised this matter with him and he recommended Yip to Lee.  He also said that it was his first time in referring listing business to Yip.

66.  The first meeting of Yip, Wong and Lee was in about January 2007.  Yip claimed to Lee that he was an expert in listing in the US for Chinese and Hong Kong businesses.

Lee was told to purchase a pink sheet shell company

67.  In a subsequent meeting, Yip and Wong suggested to Lee that he should purchase a pink sheet company.  The shares of a pink sheet company could be traded in the US electronic trading system.  Lee could then inject the business of Green Dragon into the pink sheet company.  Steps could then be taken to comply with the rules and requirements of the SEC to procure a listing for Green Dragon on the OTCBB. 

68.  Yip and Wong explained to Lee that this listing method was called “reverse merger”.  It could achieve listing with greater ease and in a shorter time than the other method of “direct filing” of a “registration statement”. They further said that if Lee would engage them to obtain a listing for Green Dragon at the OTCBB, they would use reverse merger to achieve a quick result.  But Lee and Green Dragon must purchase a pink sheet shell company first. 

69.  Lee said that his knowledge of listing in the US was very limited.  He therefore relied on Yip’s professional opinion and acted accordingly. Lee further said in oral evidence that he had never traded in shares. His only experience in investment was the buying of some unit trusts on the advice of his bankers.

70.  Lee said that on 15 February 2007, Yip, Wong together with Chan visited the office of Green Dragon.  Yip introduced Chan to Lee as Yip’s partner and a specialist in strategic accounting for preparation for listing.  They also met Green Dragon’s COO, Mr Thomas Lui and Finance and Administration Manager, Ms Tammy Lee.

71.  It is also the defence case that in the beginning of March 2007, Wong told Lee that Yip and Chan had studied the accounts of Green Dragon and were of the view that the finance of Green Dragon satisfied with the listing requirements.  Wong then repeatedly urged Lee to prepare for Green Dragon to be listed by purchasing a pink sheet shell company.

The making of the Tabatha Contract

72.  On 11 March, Yip e-mailed Lee telling Lee that Yip had come across a pink sheet shell owner who was willing to sell the shell at US$350,000 (C7 1567).  Yip’s mail reads:

“I manage to get a listed shell owner to sell a pink shell by 7 installments (US$50,000 each) to Green Dragon provided that I can give him my personal guarantee. I suggest we can sign a formal contract among us at a decent HK lawyer this week and you can start your listing progress. THIS MONTH! I’ll take up responsibility of keeping the listing budget as low as possible for other listing fees (i.e. legal, audit, regulatory bodies, market makers, and financial advisors, etc, to be paid over next 18 months, at around US$0.4 – 0.5 million in total).

Please give me a call for details.”

73.  On the next day 12 March, Yip e-mailed Lee again urging him earnestly to promptly purchase the shell company (C7 1566).  The mail reads:

“I tried to contact you during the weekend for a rare excellent deal. I knew you’d been out of town for business…hope this e-mail finds you well, and in time.

Please kindly let me know if you will give green light to a deal of purchasing a pink sheet shell by 7 monthly installments of US$50,000 from March to September of 2007 (i.e. US$350,000 in total). With your approval, we will try to secure the shell from its present owner immediately on Monday, and then we will arrange other details of the deal for you within this week (e.g. auditing, legal, etc.). We will also help you maintain the whole listing budget to be as economical as possible. Of course, all will be subject to the final signing of the papers in the legal process.

This is the first time I come across a case when the shell owner may agree to installment payment. I cannot imagine this to happen to my clients from China or Taiwan. I would also never give my guarantee to the seller for subsequent payments.

We need your prompt reply, as this shell is ‘clean’ and will go away any time. Without your saying ‘go ahead’, we will not ask the shell owner to stop looking for someone else or keep the shell for his use in the next year (as this Monday is his annual filing date on which date he has to pay for owning this shell for another year).

Please reply to all (including my partner Clarence as well). I will be in Guangzhou on Monday, but my mobile is on. Call me if you have any question.” (Emphasis added)

Lee said he phoned Yip and told Yip that he needed time to consider whether to commit to the purchase.  Lee was concerned about the substantial fees for obtaining the listing.  He was also worried that diverting such funds from Green Dragon might affect its daily operation.

74.  I note that that Yip in the above e-mail referred to Chan as his partner, a fact that Yip had expressly denied in §14 of his reply (A1 75).  Yip obviously wanted to distance himself from Chan in this case. 

75.  On 13 March, Yip e-mailed Lee and attached for his consideration the first draft of the Listing Contract (C7 1560-1565).  The draft contract provided for Green Dragon’s engagement of Capital as its sole financial consultant for obtaining a listing on the OTCBB and, after listing, for obtaining investment funds for it.

76.  Lee said he phoned Wong again and asked Wong to relay to Yip that he still needed time to consider the matter.  Wong told him that that was a very good opportunity to develop Green Dragon and was an opportunity not to be missed.

77.  On 20 March, Yip e-mailed Lee with copy to Wong informing Lee of an arrangement that Yip had worked out with the shell company owner (C7 1559). The mail reads:

“Hi Stephen, Terence:

I’ve come up with the following arrangement with the shell owner:

-- Characters Capital Group signs a share purchase agreement with Green Dragon, with Green Dragon pays the consideration for the shell in 7 installments, shell delivered upon receipt of at least 3 installments out of 7. The first date of payments in April 1, 2007. The remaining instalments are to be paid on the 1st of the 6 subsequent months.

-- Based on the above, a back-to-back agreement between Characters Capital Group and the shell owner, for guarantee purpose. In case Green Dragon cannot make payment, Characters Capital Group has to pay the shell owner the remainder of the installments. It will then be Characters’ own issue in redeeming the outstanding payments later on.

If you are fine with this, the shell owner will have his lawyer prepare the legal documents, for us to sign within this week prior to the shell owner’s departure for a business trip on this Friday.

Cheers,

Roger” (Emphasis supplied) ”

Lee said he phoned Wong again and told Wong that he wanted to read the terms of the share purchase agreement and the back to back agreement before deciding on whether to purchase the shell company.  Wong instead told him that the terms of the two agreements were standard and had nothing special.  However, Wong in his supplemental witness statement denied of having said this.

78.  On 22 March, Yip sent Lee and Wong by e-mail the draft Tabatha Contract said to be provided by the seller of the shell for their consideration (C7 1546-1558).  Yip’s mail reads:

“Dear Stephen, Terence:

Please take time review (sic) the attached stock purchase agreement, which is what we got from the seller of the shell overnight. The seller still wants to see the first installment paid this week, yet I asked to get an agreement with the closing date left empty. If we get him a signed agreement today, at least we show commitment to the deal -- i.e. our deal is for real. For the closing date, please see when we can make the first payment, and fill in a date -- there is no guarantee the seller is happy with the date, but at least we have tried our best. My guess is that we will be able to set aside money given the strength of the latest financial statements received two days ago. Hence it seems that the first week of April may make sense to us (and hopefully for the seller, too).

Cheers,

Roger”

Lee said he phoned Wong again and told Wong that he would like to seek legal advice on the draft Tabatha and Listing Contracts.  Wong immediately said that it was not necessary to have legal advice and Yip was trustworthy.  Wong further said that there had never been any problem in all the transactions that Wong had handled with Yip.  Wong further opined that the engagement of lawyer would delay the listing as the lawyer would need time to read the documents.  Wong also said that the terms and content of the contracts were quite standard and had no special problem.  He urged Lee to sign them as soon as possible.

79.  Wong in his supplemental witness statement again denied that he had dissuaded Lee from seeking legal advice on the draft contracts.

80.  On 23 March, Yip’s staff Ms Hung e-mailed Lee and Wong fresh drafts of the Tabatha and Listing Contracts (C1 190-206).

81.  On 30 March, Yip again e-mailed updated drafts of the two contracts to Lee and Wong (C7 1528-1545).  In the draft Tabatha Contract, Lee was called “Stephen Lee” (C7 1534) and “Stephen Kwok Keung Lee” (C7 1540). Yip said in the e-mail:

“Please kindly review the updated versions of the two agreements. We had a phone conference overnight with sellers’ representative -- if we can send sign the agreements today and fax the signed copy to the sellers, we will still ensure we get this shell and the installment payment arrangement -- meaning that we will be able to speed up the whole process and get our first round of financing in autumn this year.

My personal view is that we should take this deal now, as we are still having the ‘China Heat’ phenomenon on the raw materials industry in China. Next year, I believe people pay more attention to the real estates sector and the consumer product markets in China, or may even shift back to the US. We may not achieve the same kind of stock pricing at fund raising as we do this year.

Let’s discuss about this when we meet today.”

82.  On 31 March at 1:46 a.m., Yip sent a further updated draft of the Tabatha Contract to Lee with copy to Chan (C2 269-281).  Yip told Lee in the mail that his name had been updated to “Kwok Leung LEE” with the removal of “Stephen” (C2 270, 276).  Yip also told Lee to sign the signature page and fax it back to him at the fax number provided.  Lee then signed the signature page and faxed it back to Yip.  Yip also signed it and e-mailed it to Chan with copy to Lee and Wong also on 31 March at 4:08 hours (C7 1518-1519). 

Problems of the drafts of the Tabatha Contract

83.  If the document as signed by Lee and Yip should be the Tabatha Contract, then it is a problematic one as it contained errors on the identity of the seller and the number of shares sold because of the description of the seller and the presence of Exhibits A to D.  These exhibits were present in all drafts sent by Yip to Lee on 22, 23, 30 and 31 March (C7 1554-1558, C1 198-202, C7 1541-1545 and C2 277-281).

84.  In the latest draft (C2 269-281), Capital was defined as the seller at the beginning.  Tabatha was said to have an authorized capital stock of 100,000,000 shares of no par value common stock of which 366,875 shares were validly issued and outstanding.  The quantity of shares being sold under the contract was 267,250 or 72.85% of a total of 366,875 issued shares.  However, clause 1.01 stipulated (C2 270):

“1.01 Shares being Sold. Subject to the terms and conditions of this Agreement, the Sellers are selling in the case of each individual Seller that number of shares set forth by their respective names on Exhibit C attached hereto.”

85.  Exhibit C to this draft (C2 279-280) contained 33 shareholders with the quantity of shares they held and quantity of shares they were going to sell to Lee listed against them.  The following is its abbreviated form:

86.  There was thus the contradiction between the body of the contract and Exhibit C on who was the seller and how many shares were sold.

87.  There was another problem on the issuance of new shares by Lee as part of the consideration to be given to the sellers.  Clause 1.02(b) stipulated:

“1.02 Consideration.

(b) Issuance of New Shares. The Buyer shall issue newly issued shares of the Company’s common stock of each Seller as set forth by their respective names on Exhibit D attached hereto (the ‘Newly Issued Shares’). The Newly Issued Shares will not be registered under the Securities Act of 1933, as amended, and will be considered restricted stock and will only be transferable in connection with an effective registration statement pertaining thereto or pursuant to an applicable exemption from registration there from.” (emphasis supplied)

88.  Exhibit D (C2 280-281) named the sellers and the quantities of new shares to be issued to them.  They were the same as those in Exhibit C. 

89.  This purported Tabatha Contract signed by Lee and Yip for Capital thus appeared to be unenforceable as there was ambiguity on who was the seller, how much shares were being sold and to whom should the new shares to be allotted. 

90.  If Lee should have sought legal advice on the drafts or the latest draft, his lawyer would have discovered these problems.  With all these problems in the latest draft, I cannot understand why Yip would have urged Lee so earnestly to sign it if he was dealing with Lee in a bona fide manner and had Lee’s interest in mind as he had claimed all the time.

The Tabatha Contract

91.  Fortunately, Yip seemed to have discovered the problem created by Exhibits A to D.  Hence, he sent another draft of this contract to Lee also on 31 March at 4:38 a.m. (C2 282-289).  This draft had Exhibits A to D and all references to them in the body of the draft removed.  This cured the problems of who was selling how many shares.  Nevertheless clause 1.02(b) remained save with the removal of the reference to Exhibit D.  Hence, Lee still had to issue some new shares as part of the consideration under the contract.  But without Exhibit D, there is no stipulation in the contract on how many new shares Lee should issue to Capital.  This however is a relatively minor error and can only result in Yip not getting any new shares.

92.  In the end, Lee, Yip and Tabatha signed this contract (CB 124), but the signing page was wrongly stapled to the earlier erroneous draft sent to Lee on 31 March at 1:46 a.m. though without Exhibits A to D. (CB 118-124 and C2 269-276).  Hence, the references to Exhibits C and D are still present in clauses 1.01 and 1.02(b).  I will, however, ignore this error of stapling the signing page to the wrong draft and treat the terms in the latest draft (C2 282-289) sent at 4:38 a.m. as the terms of the Tabatha Contract.  I have already excerpted the relevant terms of this contract when I dealt with the pleadings above.

No or no adequate search conducted on Tabatha

93.  The Tabatha Contract provided that it was governed by the laws of the state of Colorado.  There was the obvious need for Lee to seek advice on the laws of Colorado before committing to it as its consideration was US$350,000.  But no such advice was sought either by Yip or Lee. 

94.  Yip did not appear to have conducted any search of any kind on Tabatha as he had not provided any search result for Lee’s consideration before he asked Lee to sign the contract.  Though Capital had warranted to Lee in the contract that Tabatha was a corporation incorporated in Colorado, there was nothing to prove that there was such a company incorporated in Colorado.  Yip had not even produced a copy of the certificate of incorporation of Tabatha to Lee. There was also nothing to show that the authorised capital stock of Tabatha was 100,000,000 shares or that there were 366,875 shares issued. 

95.  I note that Yip did say in oral evidence that he had checked the several latest filings of Tabatha which claimed that it had business. Its ticker was also “.TK” (transcript 94P to R).  But even if Yip had really conducted the checking, it was limited to the self-serving filings of the company and not of any independent information on the company.  The jointly expert Mr. Nussbaum has pointed out in his second report dated 8 October 2012 that searches could be conducted at the websites of the relevant markets for the ticker symbol of Tabatha or for trade data for the trading symbol TVBI or TVBI.PK and he relied on such searches (CB 232).  I will refer to the joint expert reports below.  I also add that Yip had not provided Lee with any of the filings that he had allegedly checked.

96.  Furthermore, since Yip only found this shell on about 11 March (as evidenced by his e-mail to Lee), his alleged checking of Tabatha’s latest filings should be at about that time.  However, as will be shown below, the issued shares of Tabatha had been increased to 439,625 as at 7 December 2006.  But Yip failed to discover this from his checking.  I would go further and say that if he should have asked the owner for such filings, his would be provided with them as these filings were not kept as secrets by the SEC.  In either case, Yip would have obtained the filings and he would have naturally provided the same to Lee. He would also discovered from the latest filings the increase in issued shares. But he did not provide any information on Tabatha to Lee and was unaware of the increase in issued shares.  I therefore reject his oral assertion that he had checked the latest filings of Tabatha before he procured Capital to enter into the Tabatha Contract with Lee.

97.  There was also no information in the contract on the identity of the seller.  There was no need to keep the seller’s identity secret as Capital was not supposed to make any profit out of this transaction.  Instead, Yip or Capital was supposed to give a guarantee for Lee’s payment of the price to the seller (Yip’s 1st witness statement, §157(7) and (8).

98.  The failure of Yip to conduct and provide Lee with search document on Tabatha resulted in the ignorance about the total number of issued shares of Tabatha as at or shortly before 31 March 2007.  A “current report” dated 7 December 2006 filed by Tabatha with the SEC revealed that Tabatha indeed had 366,875 issued shares as at 30 June 2005 and the controlling shareholder was First Asia, but the number of such shares had been increased to 439,625 as at 7 December 2006 (CB 35, 38, 43 and 44).  Hence, the 267,250 shares covered by the Tabatha Contract were only 60.75% of the issued shares of Tabatha and not 72.85% as stated in the contract. 

99.  If Yip should have wanted to conduct a search of the shareholders of Tabatha, he could have done so.  He did one after the commencement of this action.  Lee said in §70 of his witness statement made on 31 March 2010 that he was not a registered shareholder of Tabatha even on 9 April 2009.  Yip then produced in his supplementary witness statement Exhibit RY-53 (B6 1224-1230) a certified shareholder list of Tabatha as at 13 May 2009 which showed that Lee had become a shareholder of Tabatha on 11 May 2009 holding 1,405,000 or 79.898% of the issued shares.  That however was not the 267,250 shares that Lee had contracted to buy from Capital under the Tabatha Contract.  The evidence suggests that Lee was in the dark as to the manipulation of the shares of Tabatha by First Asia and then by Capital.

100.  The list in Exhibit RY-53 also showed that apart from Lee, there were 37 other shareholders (including Fugu Enterprises that Yip claimed to be a company owned by his partner Chan).  These 37 shareholders together held the remaining 20.102% of the issued shares.  They had all become shareholders of the company on or before 14 December 2006 and could have been discovered by any search conducted in March 2007. 

101.  The evidence showed that Yip had exercised immense efforts to coax and cajole Lee into signing the Tabatha Contract.  If he should have exercised the same efforts and professional skill to protect Lee’s interest, he would have at least obtained and provided to Lee a certified shareholder list of Tabatha on or shortly before 31 March 2007.  If he should have done so, he would have discovered that Tabatha already had 439,625 issued shares.  He would then have to liaise with the seller of the controlling shares as to the exact quantity of the shares to be covered by the Tabatha Contract.  It is clear that Yip was just keen to get Lee’s signature on the contract and commit him to pay Capital US$350,000. He had failed to do even the most basic search on Tabatha.

102.  I also note here that Lee, despite having a bachelor degree in business administration from the University of Michigan and a master degree in management and economics from a university in Japan, did not appear to be conversant with the skills in handling contractual documents.  He said in his witness statement that he had told Wong that he wanted to read the terms of the draft Tabatha Contract. I have no doubt that he wanted to do so before committing to pay the US$350,000. However, he was not able to raise to single question on any of the drafts despite the problems mentioned above.  He also did not appear to understand the need to conduct searches on Tabatha before committing to the contract.  

“Registration Statement” appearing in the Tabatha Contract

103.  One of the major disputes between the parties is whether Lee was aware of the implication of the words “registration statement”. Mr Lam, counsel for the plaintiffs, had earnestly submitted that Lee was fully aware of the difference between listing by “reverse merger” and listing by “direct filing” of a “registration statement”.  He further submitted that when Lee saw the words “registration statement”, he knew that it meant listing by “direct filing” of a “registration statement” and not by “reverse merger”.

104.  However, I have already referred to the joint expert opinion above that a registration statement is required regardless of whether Green Dragon was to use the 1st or 3rd method.  Under the 1st method, it would be merger of business to be followed by filing of a registration statement under the Exchange Act.  Under the 3rd method, it would be the direct filing of a registration statement under either the Securities Act or the Exchange Act.  Different acts require different forms of registration statements.  Hence, the expression “registration statement” need not refer exclusively to direct filing.  Mr Yip, being an expert in procuring public listing in the US, should be fully aware of this as the methods of listing should be the basic and elementary knowledge in listing in the US.

105.  Furthermore, clause 1.02(b) of the Tabatha Contract provided that Lee, apart from having to pay Capital US$350,000 for the 267,250 Tabatha shares, also had to issue some new Tabatha shares to Capital.  These new shares were said to have a restriction on transfer and were only transferrable in connection with an effective “registration statement” pertaining thereto or pursuant to exemption from registration (CB 118).  The reference to “registration statement” certainly has nothing to do with the 3rd method of direct filing.  It is the registration statement required as the second step of reverse merger.  Hence, “registration statement’ is not a document linked exclusively with listing by “direct filing”.

The EECL Contract

106.  In addition to the Tabatha and Listing Contracts, Lee on about 30 March 2007 also negotiated with Lee the EECL Contract between Green Dragon and EECL.  Lee said in his witness statement that since he regarded Thomas Lui not conversant with the US accounting standard and listing procedure, he therefore decided to terminate Lui’s service.  He knew that Tammy Lee, the Finance and Administration Manager, who had recommended Lui to him, would also leave soon afterwards.  He was thus in urgent need of accounting staff. 

107.  Yip then proposed the EECL Contract to him 30 March 2007 for the provision by EECL to Green Dragon accounting, finance and information technology service on a monthly basis (C7 1520-1527).  I have already referred to the terms of the EECL engagement above.  The accounting services offered by EECL included the minimization of the impacts over the personnel changes in the accounting department and the provision of close and continuous support for the new accounting department. 

Departure of COO and Finance and Administration Manager and revamping the accounts department

108.  Lee terminated Thomas Lui’s service on 31 March 2007. As can be seen from an e-mail dated 1 June 2007 from Yip to Lee, Lui’s departure was somehow related to the entry of new professionals under the EECL Contract (CB 125-127).  Yip said in that e-mail:

“MY VIEW ON EX-STAFF PROBLEM. Mate, I frankly have never felt myself liable for the ex-COO incidence (sic). The participation of any new professionals would have the same effect. In fact, the earlier the entry of any new professionals, the earlier you can discover the ex-COO’s problem. In this sense, I have unintentionally helped you save money from paying the unworthy ex-COO, and have prevented your company from exposing to financial and tax risks.”

109.  As expected by Lee, Ms Tammy Lee also resigned upon the departure of Thomas Lui.  She formally left on 11 April 2007 (C2 383) but appeared to have been non-functional even before that.  This left the accounts department seriously understaffed. There was apparently only one person named Kathy working in that department on about 2 April, 2007.  Yip in an e-mail to Lee of that day suggested that new accounting staff should be employed (C7 1517, §§2 and 4).

110.  On 10 May, Yip sent Lee another e-mail.  Since this e-mail is relevant on other matters as well, I set out its contents in extenso below (B7 1232-1233 or C2 403-404):

“This is an e-mail I hate to write but have to, for getting you the realistic picture.

As I realize that the current cash flow position is still highly uncertain, I have reasonable doubt that we are not going to make payments to auditors, financial advisors, and indeed the shell owner within this week. ... we must make payment in time for their timely delivery of professional services.

Since, we are not able to ask the US auditors to come to Green Dragon next week. Also, the financial advisory team should not proceed with anything … in the meantime, and has to report to the shell owner about our current situation (the shell owner is furious – a reasonable reaction indeed).

However, when the auditors come again, the visit fee will be the normal one, or around US$20,000 (not the current HK$20,000), and we have to …their next arrival in several months (meaning that our listing will be delayed for several months).

As of now, there should still be lots of work on re-engineering the company.

We need to see the following before we can help Green Dragon actualize its market value.

1. company reform: organizational structure in legal ownership, organizational structure in accounting/document/commodity flows, and organizational reform in management structure. Form BVI to hold the business to be listed in stock market.

2. Information package for preparing the subscription statement to be submitted to regulatory bodies in US.

…

3. Accounting:

- Clear up all existing accounting questions

- Base on re-defined business, re-structure the books

- Prepare for auditing

4. Funds:

- prepare funds for auditing, sign engagement letter with auditors

- prepare funds for financial advisory, engagement letter with financial advisor

- prepare funds for subsequent legal work

All the above have to be done timely and properly. However, the current management is incomplete for these, as it only manages to engender the functions of sales and purchases only. There are no efficient systems for other management functions: accounting, finance, operations, and human resource management. There are still lots of work to do!

In short, for growing the current company into an enterprise, we need good team-building and organizational structures, NOW.”

(emphasis supplied)

111.  Yip in this e-mail was advising Lee to reorganize Green Dragon and that a lot of funds were required for this.  Yip also said that owing to shortage of funds, the listing would be delayed for several months.  Lee in his reply e-mail dated 12 May (B7 1233) said that he would try to look for more funds.

112.  On 16 May, Yip e-mailed Lee again and advised him that an addendum to the EECL Contract (C7 1516) had to be added.  It was to provide for a monthly fee of HK$15,000 for the provision by EECL of the service of an accountant, Mr Stanley Ho and a monthly fee of HK$13,000 for the temporary service of an accountant Mr Alvin Chan (C7 1495).

113.  On about 24 May 2007, Lee e-mailed Yip and Wong and told them of his discovery of certain problem in Green Dragon’s accounts that had been planted there by Thomas Lui.  Yip has referred to this e-mail in §20.6(1) of the reply (C2 432-433).  Lee said in the mail:

“Dear all,

How are you? Wish you all have a relaxed Buddhist day!

Just found out that Thomas Lui has planted the bomb with bad intention already right before he left and his manipulation of such accounting entries become one of the allegation against us.

What an ill mind he has!

Hope we can get through this crisis smoothly ASAP.

Many thanks again for your hard work and dedication to help our company!

Regards,

Stephen”

114.  Thomas Lui and Tammy Lee had also made a unilateral change to Lui’s employment contract with Green Dragon for taxation purpose so that the bulk of his salary would be credited retrospectively to his service company. When Green Dragon found out this, Yip introduced solicitors to assist it to lodge complaints with various professional bodies against Lui.  Yip was copied the e-mails exchanged between Green Dragon and its solicitors on this matter (C2 434-446). Yip has referred to this matter in §20.3 of the reply.

115.  In late June 2007, Yip, Chan, Wong and Lee began organizing the audit of the accounts of Green Dragon for the year ending 31 March, 2007 and reworking its management accounts.  This can be seen from an

116.  The audited accounts of Green Dragon for the years of 2004/2005 to 2005/2006 were problematic and had been qualified by the auditor. The audited accounts were consolidated with the accounts of〔東莞市森源貿易有限公司〕and〔東莞市厚街鎮隆基木業營業部〕, the two mainland suppliers.  The basis for the consolidation was that the suppliers were Green Dragon’s subsidiaries.  This was done according to the suggestion of Thomas Lui.  The reason being that the suppliers owed Green Dragon substantial sums and their owners had executed trust instruments acknowledging beneficial ownership of Green Dragon over them.  However, subsequent legal advice on mainland law obtained in about July 2007 cast doubt over the validity of the instruments. 

117.  On 3 July 2007, Yip and Chan visited Green Dragon’s former auditor Mr Jimmy Cheung.  They discovered from Mr Cheung that the audited accounts were qualified by the auditor because of the consolidation of accounts. Yip advised Lee in an e-mail dated 3 July that there was this problem and he, Chan and an employee of Green Dragon were considering how to solve it (CB 129-130, §2). Yip also suggested to Lee in the same e-mail to reorganize the accounts department (CB 129-130, §1). 

118.  Yip in this e-mail also reminded Lee to pay the July 2007 installment of US$50,000 under the Tabatha Contract.  He said in the

“Payment for US Listing Shell – the first Friday of the month will be this coming Friday. Please arrange payment on or before Thursday.” (CB 129-130, §5)

119.  On 18 July, Lee e-mailed Yip and agreed with YIP’s suggestion to undo the consolidation of accounts with the mainland companies (C2 464 or B2 355).  Lee agreed in oral evidence that the consolidation had to be unravelled (transcript 391L-M and 392I-P).  Yip referred to this e-mail in §20.6(2) of the reply.  This e-mail was in fact Lee’s reply to Yip’s advice on how to prepare Green Dragon’s audited accounts.  Yip’s e-mail also dated 18 July said (C2 462-463):

“AUDITING

As for auditing, we will do the following:

1. Auditing the HK company. Please ask Stephen to engage Nickson immediately (see and sign engagement letter). Nickson uses a separate company for the engagement in order to “buffer” the potential problems that may lead to negative or even adverse reaction from his auditing firm, CCIF. The result will still be: a good audit report from CCIF.

2. Management accounts for the 2 PRC companies. No audit is necessary for them, but the management accounts are still to be prepared by reputable accounting firms.

3. We will base on the 06-07 audit of the HK company, and the management accounts of the 2 PRC companies, and then prepare pro-forma consolidated accounts, which will be submitted to the commercial banks.  This is the ONLY proper way to do the accounts.  It is illegal to audit the consolidated accounts at this stage, since the two PRC companies are not legall related to the HK company.  Also, it is stupid to reveal the pro-forma accounts to the HK government, since these 2 PRC companies have no obligation to be subject to HK taxation.  It is never necessary to submit the pro-forma account or the management accounts to the PRC government, since this will have serious tax consequences.  Yet, the commercial banks in HK will base on all these accounts to judge the financial strength of Stephen, whose personal guarantee may mean much more to them.”

120.  Lee replied on the same day and agreed with YIP’s suggestion to undo the consolidation of accounts.  Lee said (C2 464 or B2 355):

“Roger,

Thanks for your prompt working action right after your BD! I agree completely with all your points especially 1 and 2 and at least it seems the best way and most sensible to reflect and disclose our financial picture to commercial banks and not HAVE obligation to continue the wrong thing to do which is to forcibly consolidate all three companies’ accounts .

…

Regards,

Stephen”

121.  Yip in §20.2 of the reply charged Green Dragon of having kept two sets of consolidated accounts with one for obtaining loans from banks and another for taxation.  This was denied by Lee.  Yip did not proffer any evidence to prove it save his own words.  Yip in his e-mail of 18 July referred to above also did not mention that Green Dragon had two sets of consolidated accounts. He only advised against the preparation of audited consolidated accounts for the Hong Kong or PRC Government for taxation.  But he advised Lee to prepare a set of pro-forma consolidated accounts for the eyes of the banks only.

122.  On 29 July, Yip suggested to add an addendum II to the EECL Contract to provide for additional fees for the provision of more accounting service by EECL to Green Dragon (C7 1487-1496). 

Engagement of Harrison Law, PA to do direct filing

123.  Before the execution of the Tabatha Contract on 31 March, Yip and Chan already had a meeting with Daniels of Harrison Law and Eldred of Spartan Securities on about 24 March in Hong Kong.  Records of the Immigration Department (C6 1446) showed that Lee was not in Hong Kong around that time and had not attended the meeting.

124.  Harrison Law was in the business of procuring public listing in the US.  Despite the defendants’ denial in the reply, Yip admitted in oral evidence that both Daniels and Eldred had advised Yip and Chan in the meeting that Green Dragon should use the direct registration (or direct filing) method to obtain listing rather than the reverse takeover (or reverse merger) method.  Yip also admitted in oral evidence that he had not told Lee about this advice.  Yip instead tried to persuade Lee to commit to the Tabatha Contract (transcript 195G to 197I, 210P to 211E and CB 88).

125.  On 28 April 2007, Lee signed on behalf of Green Dragon a contract with Harrison Law (“the Harrison Law Contract”) (CB 152-155).  The contract was for Green Dragon to engage Harrison Law to assist it to obtain a listing at the OTCBB by direct filing of a registration statement in its own name.  It is the defendants’ case that Lee had been deceived by Yip into thinking that the entering into the Harrison Law Contract was just a step in the reverse merger.  The plaintiffs of course disagree.  The plaintiffs said that Lee was fully aware of what he did.

The liquidity crunch of Green Dragon

126.  Right after 1 May 2007, the bankers of Green Dragon received an anonymous letter containing many disparaging allegations about the financial position and financial dealings of Green Dragon (C2 385).  Lee thought that this letter was sent out by Thomas Lui.  As a result of this letter, the banks tightened their facilities to Green Dragon which immediately suffered a liquidity crunch (C2 401-402 and B6 1232-1233).

127.  The grim picture of Green Dragon’s liquidity is revealed in an

“Dear Stephen,

Sorry for the late email.

Refer to the records, we have cash shortfall about HK$1 million for last week to meet the min. requirement.

We never miss your instructions but we need cash to settle those cases.

For the coming week, we have following forecast for you:

Payment to suppliers (T/T, D/A, D/P)* $4m

Payment to suppliers (AAPO0705-027) $0.1m

Freight charge $0.9m

Provision for admin exp – payroll $0.15m

T/R to settle $0.85m

Payment to Tai Wah (cheque) $1.4m

Early settle T/R (SCB, DBS) $1.3m

Early settle bank loan BL (BOC, HSB) $0.8m

We need to have settlement to release the facilities for new applications.

In which, we need HK$2.5m to settle the loan to release the facilities from HSBC.

The cash required is around $9m for coming week in settlement and additional HK$2m for working capital as agreed.”

128.  Another e-mail from Lee to Yip and dated 28 February 2008 (C4 949) indeed showed that Lee had fought very hard against the liquidity crunch:

“Dear Roger,

Long time has not heard from you …

I know you have helped me a lot and I always appreciate a lot but I do not want to take it for granted and if there is a money matter, pls feel free to speak to me. For the loan you granted to me, I will try to pay you back the soonest plus interest as soon as any bank will grant us the bank facilities as with the current situation I am indeed not feeling comfortable as I feel at mercy at somebody’s financial help without their will.

Not only I have problem with the banks after Thomas Lui’s letter but other personnel problem as well. …

… I need to discuss with you before making any big change in our HK office.

As you know I have been carrying tons of pressure (probably ALONE!) as a result of our deep shrinkage of our bank facilities which was paid back by HKD 15M in the past 7 months besides the fund needed for the US listing such as purchase of shell, audit, etc., at the time when we decided not to do the audit requested by hsbc, I was still optimistic and thought you would have tapped us into other fund to help offset the effect of the bank facilities shrinkage but unfortunately it never comes (I have been waiting and waiting with much hope which was fortunately the only positive momentum to back up my morale to fight, otherwise, I don’t think I could survive until now!)

…

Your comment will be highly appreciated!

b. regards,

Stephen”

129.  Lee said in evidence that with the indulgence of banks and his efforts to raise funds, he tied over this problem without default in payment of staff salaries or dues to creditors.  He however failed to pay the fees and other dues to Yip’s companies on time.  He had to pay interest for the delay pursuant to his personal pledge and guarantee to Capital and EECL (C7 1478, B4 748-751).  He also borrowed HK$390,000 from Yip in the summer of 2007 which he later repaid (B4 753).

130.  In the end, Lee indeed succeeded in overcoming the liquidity problem in late 2007 or early 2008.  The auditors were satisfied with Green Dragon’s finance as demonstrated in its audited accounts ending 31 March 2008. The joint expert Mr Nussbaum also confirmed that the SEC has no liquidity requirement for listing by reverse merger or direct filing (CB 219, §7).  In the end Green Dragon obtained a listing on OTCBB on about 7 November 2008.   

The Listing Contract

131.  Despite the signing of the Tabatha and EECL Contracts in March 2007 and the Harrison Law Contract in April 2007, Green Dragon had not entered into the Listing Contract with Capital under which Capital was to assist Green Dragon to obtain the OTCBB listing.  Yip expressed impatience in an e-mail on 9 May (C2 401).  Eventually the parties signed this contract on about 28 May 2007 but back-dated to 30 March.

132.  Lee and Green Dragon pleaded in §9(2) of the defence and counterclaim that Lee procured Green Dragon to enter into this contract in reliance of the four representations referred to above.  I have already referred to the relevant terms of this contract above.

BVI Capital purchased Tabatha from First Asia

133.  Lee, after executing the Tabatha Contract, paid Capital three instalments of US$50,000 each on 13 April, 23 May and 4 June 2007.  According to clauses 1.04, 1.05 and 1.06 of the contract, closing under the contract should take place on the first Friday of June 2007.  That was 1 June 2007.  On closing, Lee should have paid the Sellers three instalments totalling US$150,000 and the Sellers should instruct the transfer agent to deliver to Lee the certificates representing the shares.

134.  Though Lee, in paying the 3rd instalment of US$50,000 on Monday, 4 June 2007, was a few days late, Capital did not complain.  Hence, Capital should secure the Tabatha shares for Lee despite the late payment.  But Capital did not then own the controlling shares of Tabatha.

135.  I have already mentioned above that First Asia was the controlling shareholder of Tabatha.  On 22 June 2007, BVI Capital entered into a contract with First Asia to purchase 1,298,440 or 88% of the issued shares of Tabatha at a price of US$150,000 the payment of which was acknowledged by First Asia in the contract itself to have been made on that day (“First Asia Contract”).  The total issued shares of Tabatha had since 7 December 2006 been increased to about 1,475,500 shares.  Lee said that he was given a copy of this contract by one Aaron Stein.  I will refer to the evidence of Stein below.  I will also deal with the Equity contract below.

Listing of Green Dragon

136.  A draft registration statement in Form SB-2 for direct filing under the Securities Act in the name of Green Dragon was ready on 13 October 2007 (C3 588) and Yip e-mailed it to Lee for comment.  The statement was then filed with the SEC on 11 December 2007 (C4 816-818).  After a few rounds of comments and queries from the SEC and answers thereto by Lee, Yip, Chan and Harrison Law, the SEC was satisfied with the application and gave Green Dragon a listing status on OTCBB on about 7 November 2008.

137.  It is the defendants’ case that Lee at that time thought that the listing was obtained by Green Dragon by way of reverse merger with Tabatha and did not know that it was by direct filing in Green Dragon’s own name. The plaintiffs’ case is that Lee knew that the listing was obtained by direct filing.

138.  Putting aside the dispute on whether Lee was aware of how the listing was obtained which dispute only arose later, Lee appeared to be very excited after Green Dragon had obtained the listing.  On 4 December 2008, he e-mailed Yip (C6 1235) and sought his advice on private placement.  He was also desirous of engaging Yip’s company as Green Dragon’s investment relation agent/broker. He said:

“Dear Roger,

Hi u? Hope everything is fine with you …

…

5. Private placement: what other cost will be incurred besides the above expenses? Do we get 100% of fund for our PP?

6. The PP can be divided into 2-3 times, let say within a period of six month? Any regulation on that?

7. Who is currently our official investment relation agent or broker?

8. I suppose your company will take up this job right?

9. Since Terence said we have no more outstanding contract with your company, shall we discuss for a new one? Can you send me a sample contract?

10. If there are some investors introduced by our friends who are interested in our company, how shall we handle that?

Since we have paid a lot of effort and money to get our ticker finally (thanks for your good work!) And we need to act fast! Can you be kind to reply soonest and give us some good advice, …

Thanks! Stephen”

139.  On 9 January 2009 Lee e-mailed Yip, Chan and Wong and provided them with a list of his 13 prospective private placees who would be investing US$1,253,000 into Green Dragon.  Lee said (C6 1237):

“Dear Roger and Clarence,

Happy New Year Clarence and Roger! How have you been? Wish you all a great year for 2009 with many many happy returns and good health?

Please kindly find the below information for your action. The fund will be coming in probably for 2-3 times and we might add a few investors in the meantime.

All the best!

Stephen

(A list of 13 prospective investors who would be investing USD1,253,000 into Green Dragon.)”

140.  On 12 January 2009, Lee e-mailed Chan and Yip an amended table of prospective investors and the proposed investment sums (C6 1247). He appeared to be keen in getting these placements accomplished quickly.  However, he suddenly turned very hostile to at least Yip and Chan.  

Telephone conversations

141.  A few days later on 16 January 2009, Lee telephoned Chan and had a conversation with him for 37 minutes 17 seconds.  This conversation was recorded by Lee in his Blackberry phone (CD in C6 item 219) (D1 p114 – p195).

142.  Lee at the beginning of the conversation asked Chan to handle the private placements for him.  He then mentioned for at least six times about the Tabatha Contract.  He asked Chan where was the group of original minority shareholders of Tabatha and how many shares were they holding.  He said that the previous (minority) shareholders had disappeared.  He told Chan that his friends had checked the filing in the SEC and could not find the reverse merger or the shell (Tabatha) he had bought.  He also referred to the agreement made at the purchase of Tabatha that the original owner of Tabatha should have some percentage of the shareholding of the company.  He asked Chan where was the original owner.

143.  Throughout the long conversation, Lee appeared to be unaware that the listing was not obtained by reverse merger of Green Dragon with Tabatha and that the listing did not involve Tabatha.  However, Chan did not say to Lee that Lee had agreed with Yip sometime in 2007 to change the listing method from reverse merger of Green Dragon with Tabatha to direct filing by Green Dragon itself.  Chan just repeatedly told Lee that the shell or listed company that Lee then had was different from the old one (Tabatha) and Lee owned 100% of the new shell and that was a lot better and was worth a lot more money upon sale.  He did mention that the shell (Tabatha) purchased by Lee was comparatively cheap. 

144.  He seemed to have mentioned once in the middle of the conversation that it was difficult to list that company (Tabatha), hence Yip changed to a better approach and directly listed Green Dragon (D1 p134 – p120). Chan also repeatedly said that it was just like the situation of Lee waiting to buy a revamped old vehicle but was given a new one and it was thus to Lee’s benefit. (D1 p121-43, p126-77, p127-82 to 86, p129-89, p130-top to p132-109, p133-111, p134-120 to 122, p138-139, p139-150, p142-165, p146-185 to 190, p147-192, p170-304 to 311, p187-382, p188-384 to 386 and p189-391) 

145.  If the method of obtaining listing had been changed with the knowledge and/or agreement of Lee, one wonders why Chan did not say so, but just tried repeatedly to pacify, persuade and convince Lee that he was now better off than what he had anticipated.

146.  Lee, after talking to Chan, also telephoned Yip and had a conversation with him.  This conversation was also recorded in Lee’s Blackberry phone (D1 p78 - p113). 

147.  Lee in the conversation reminded Yip that Tabatha had been bought initially.  He also said that there were then some minority shareholders, but they were not in the listed company. 

148.  Yip then mentioned something about the filing method. He then said that they had missed the chance of filing the pink sheet shell to the OTCBB.  But Lee challenged him for not having told Lee about that.  Yip agreed that he had not told Lee about it (D1 p86-43 to p87-44), but he continued to say that he solved the problem by kept on working for Lee until they moved his company to the OTCBB and he was going to do it by whatever means possible. 

149.  Yip then tried to explain that reverse merger with a pink sheet was difficult after the middle of 2007 and there were only two methods available; namely the 3^rd method of direct filing and the 2^nd method of reverse merger with an OTCBB shell.  They were also considering selling the pink sheet company.  Hence, they were not using the pink sheet under the 1st method simultaneously with the 3rd method.  Yip further said that the pink sheet was not in existence anymore and he would not do any more pink sheet company filing.  This dialogue in Chinese from D1 p88-53 to p90-58 and its free translation are as follows:

「53. A: … Pink Sheet filing上去(OTCBB)就誒唔得㗎嘞？

54. C: 係嘞，因為呢誒如果你喺美國呢，你問開啲朋友呢，…（聽不清）… 同你講呢，誒，如果 … （聽不清）… 嗰啲呢，你可以呢咁樣嘅，誒，係嘞，係嘞，… （聽不清） … 我哋嗰陣時其實呢係、係 …（聽不清）… 困難呀，…（聽不清）… 但係其實而家呢誒Pink Sheet呢你要file呢，誒，由Pink Sheet… （聽不清）…

55. A: 咁、咁 …

56. C: … （聽不清）…

57. A: 喀喀。

58. C: … 受到好大嘅挫折嘅，因為我哋 … （聽不清）… Pink Sheet …（聽不清）… 咁呢所以嚟講得、得兩個做法嘅啫，一個做法就係一係同佢用即係 direct filing 同佢… （聽不清）… 第二個做法就係真係 …（聽不清）… 搵一個OTCBB啲嘅殼喇，然之後再裝番入去囉咁樣，個安排係咁樣樣嘅。咁我哋當時嘅諗法就係諗吓將個Pink Sheet有冇辦法將佢可以誒trade咗出去喇，然之後加番 …（聽不清）… 嘅殼喇，咁嚟到去再做，可能就係用番呢個做法。咁第二做法就係direct filing，咁是但一個做法嘅。」

“53. A: … Pink Sheet filing up to the OTCBB was not possible?

54. C: Yes, because if you are in America, you happen to be asking your friends, … (not audible clearly) … tell you, eh, if … (not audible clearly) … those things, you can be like this, eh, yes, yes, … (not audible clearly) … we at that time in fact were, were … (not audible clearly) … difficult, … (not audible clearly) … But in fact now eh Pink Sheet if you want to file it, eh, from Pink Sheet … (not audible clearly) …

55. A: Then, then …

56. C: … (not audible clearly) …

57. A: Haak, haak.

58. C: … suffered very great set back, because we … (not audible clearly) … Pink Sheet … (not audible clearly) … Then therefore it could be said, there were only two working methods, one working method was to use direct filing for it … (not audible clearly) … the second working method was to really … (not audible clearly) … look for an OTCBB shell, then pack (it) inside like this, that was the arrangement.  Then our thinking at that time was to consider if we had any means to trade out the Pink Sheet, then to add … (not audible clearly) … the shell, to do it again in this way, possibly it was to use this method.  Then the second working method was direct filing, then it was either working method.”

150.  Though the dialogue is punctuated with inaudible parts, its meaning is clear particularly when read in conjunction with two e-mails from Yip to Lee dated 18 and 22 June 2010 which are referred to below.

151.  Lee then referred to the contract by which he had bought Tabatha at US$350,000.  He asked Yip whether this shell still belonged to him.  Yip replied that Tabatha had no more use.  He suggested to Lee to terminate it as there should be no one who was still working on pink sheet companies.

152.  Lee then asked Yip if Tabatha had only a zero value and Yip confirmed it.  Lee then asked Yip to return the purchase price but Yip refused. Lee then alleged that Yip had breached the contract.  But Yip denied it.  Yip maintained that his promise in the contract was to accomplish an OTCBB listing for Lee.

153.  Yip also confirmed to Lee that Lee had two shell companies.  One was listed on the OTCBB – Green Dragon - and the other was Tabatha that had no business.  But Tabatha had no or very little value.  Lee then suddenly challenged Yip for having breached the Tabatha Contract as Tabatha was not a pink sheet shell but a grey market company.  Yip denied the allegation.

154.  Throughout the dialogue, Yip did not mention that there was an agreement between him and Lee to change the method of obtaining listing from reverse merger of Green Dragon with Tabatha to the direct filing by Green Dragon in its own name (D1 p78-113, p83-29 and 32, p84-38, p86-42 to 44, p88-48, p88-53 to p89-58, p90-60, p92-61 and 62, p93-65, p94-66 and 69, p95-70, p96-78, p97-81 and 82, p99-89 to 96, p100-98 and 100, p106-125 and 127 and 128).

155.  Yip in oral evidence denied that he had agreed with Lee in this conversation that he had not told Lee about missing the chance of filing the pink sheet shell.  He said his answer “冇呀” ((I) did not) to Lee was just his quirk phrase or pet phrase which carried no meaning (D1 p87-44).  However, he only used this phrase once in the whole conversation.  This thus shows that the answer was not his quirk phrase or pet phrase but a truthful answer which he later regretted of having given.

156.  The third recorded conversation was a phone call made by Chan to Lee also on 16 January 2009 (D1 p1-p77).

157.  Lee told Chan in the conversation that Lee had lost confidence and could not ask Chan to work for him again.  Chan then explained that he and Yip might have done the wrong thing out of good intention.  Chan acknowledged that they had the duty to explain clearly to Lee and they were wrong in that, but they had done or chosen the best for Lee.  Chan also said that he did not know that Yip had discussed with Lee for US$350,000 for the shell (D1 p5-22 and 23, p8-32 to 35 and p18-71).

Aaron Stein

158.  I mentioned above that prior to the phone conversations on 16 January 2009, Lee appeared to be on very good terms with Yip, Wong & Chan. But he appeared to be very hostile at least to Yip and Wong in the phone conversations. Lee changed his attitude because he allegedly found out that Green Dragon’s listing was not obtained by reverse merger but by direct filing and that Tabatha was not a pink sheet company but a grey market company.  He though he had been cheated by Yip.

159.  Lee said he got this information from one Aaron Stein, a Certified Public Accountant practicing in New York.  Lee planned to visit friends in the US during the Chinese New Year in 2009.  Stein and Lee had a mutual friend and Lee telephoned Stein on about 5 January 2009 for advice on how to operate Green Dragon in the public market.  He told Stein that Green Dragon was listed in the US.  He provided the details of the listing for Stein’s reference before meeting him in New York.

160.  He met Stein on 12 January in New York.  Stein told him that Green Dragon was listed not by reverse merger, but by direct filing and Tabatha was never a pink sheet company but a grey market company.  He engaged Sichenzia Ross Friedman Ference, a firm of attorneys for advice.  They confirmed that Tabatha was merely a grey market company.  This has also been confirmed by the joint expert Mr. Nussbaum in his second report dated 8 October 2012 which will be referred to below (CB 232).

161.  Stein also gave him a current report of Tabatha filed with SEC on 22 June 2007 which showed that BVI Capital had on that day purchased from First Asia 1,298,440 shares or 88% of the shares of Tabatha at US$150,000, not US$350,000. 

162.  Lee’s evidence is corroborated by Stein’s evidence in his witness statement.

163.  Lee then conducted the phone conversations with Wong and Yip on 16 January.

164.  Lee afterwards told Stein of Yip’s allegation that there was a change in the laws relating to filing so that it was better for Green Dragon to conduct direct filing than reverse merger.  But Stein did not think that there was any change that adversely affected the reverse merger of Green Dragon with Tabatha.  The only change was in February 2008 to a Rule 144 that adversely affected promoters like Yip who would not be able to resell the shares given by the company.

Yip’s e-mails after the conversations

165.  After the telephone conversations on 16 January, Capital submitted to Lee on Saturday, 17 January 2008 its resignation from the appointment of Green Dragon’s financial advisor (as appointed in the Listing Contract) (CB 135). Yip further sent an e-mail to Lee on Sunday, 18 January 2008 attaching Capital’s resignation letter in the mail and said, among other things, the following (CB 134):

“Rest assured that you have both your (OTCBB) and Pink Sheets vehicles. Recall that we did tell you at your office that we were going to help you create your (OTCBB) vehicle and at the same time park your Pink Sheets under your corporation for future M&A use. There are witnesses for our having alluded to you about the change of methods. You may be either forgetful or having other thoughts.”

166.  This is the first time that Yip mentioned in writing that he had told Lee at Lee’s office that there was a change of listing method. But he did not give the date of the meeting.  Regarding Tabatha, Yip did not say as he had pleaded in §21 of the reply that it was still being used under the 1st method simultaneously with the 3rd method of direct filing.  He instead said that Tabatha was parked under Lee’s corporation for future M&A (merger and acquisition) use.

167.  On 22 January 2009, Yip e-mailed Lee again.  This is the first time he explained in writing the reason that dictated the change in the route to listing.  This e-mail is important for a number of issues that I deal with below.  I therefore set out its contents in extenso.  The relevant parts are as follows (CB 156-157 OR C7 1458-1459):

“Dear Stephen,

I received a call from Dr Terence Wong that you have one question regarding the reason why the Pink Sheets shell TBVI was not used in the (OTCBB) case. To avoid further troubles for Terence, I write to respond to this question. …

------

ABOUT OWNING THE PINK SHEETS SHELL

The shell TBVI’s bought and sold transaction was formally entered into and completed as per agreement in 2007 (see attached document with signed copy being kept by the three signing parties). You have already owned the TBVI shell — i.e. you are already owning it. There is no ambiguity of whether you have bought this shell or not. The fact is: You definitely have. We don’t have to do anything else now to let you own it.

…

ABOUT ENGAGEMENT AGREEMENT BETWEEN CHARACTERS AND YOU

As per engagement agreement between Characters and you on 30 March 2007, kindly note that the first paragraph of the whole agreement clearly indicates the objective of the engagement:

“本函件〔『協議』〕載有有關閣下持有公司〔『貴司』〕擬於美國Over The Counter Bulletin Board (“OTCBB”) 上市〔『OTCBB 上市公司』〕的計劃，並載有 貴司委任格特獅資本集團有限公上司及其聯屬公司〔『聯屬公司』指我司之任何附屬公司或控股公司或該控股公司之任何附屬公司〕〔『我司』〕擔任 貴司在OTCBB上市事項〔『上市事項』〕之獨家財務顧問之條款。”

The above means that the whole engagement has the objective of helping your company to get listed at the OTCBB.

…

ABOUT YOUR MISUNDERSTANDING OF THE COURSE OF EVENTS

…

However, a complication happened around mid-2007 due to two changes: there was a change of liquidity conditions in your company and a change in the regulatory framework that makes filling Pink Sheets to (OTCBB) very difficult. We therefore resorted to the riskier direct filling route (but the cost of listing is similar to the Pink Sheets route), hoping that we can still achieve the engagement’s objective. Frankly if that direct filing method failed, we would have to spend at least another half million USD funds (upon successfully selling the Pink Sheets shell) to find an (OTCBB) shell to achieve the listing objective.

Note that the all inclusive cost of Pink Sheets route should almost be the same as that for direct filing, depending on the quality of the shell and the period and amount of filing work.

The complication mentioned above was a change in external circumstances which could not be controlled by (Capital). Yet, we still managed to support you over the hard times.

Furthermore, please read the following recall of facts and events if you need to refresh your memory.

- In 2007-08 amid your company’s liquidity problems, we faced the problem of moving your TBVI-Green Dragon entity to the (OTCBB) due to increasingly stringent rules of the US over the period at late 2007-early 08. Kindly see the attached TBVI corporate structure as an example which indicates that we did plan to proceed along the Pink Sheets route to (OTCBB).

- However, the lingering issue of financial tightness at your company at that time, due to cutting of credit lines by all the banks following your dispute with your former COO and finance manager, prevented us from completing the task via the Pink Sheets route before the change of the rules.

- Note that we clearly alluded to you at your office in late 2007 with the presence of Dr Terence Wong and Mr Alvin Chan as witnesses about our use of a different method to achieve your goal of listing at (OTCBB), and we clearly told you that you can use your Pink Sheets shell to handle future M&As at your discretion. That route involves engaging our filling and legal team to file the listing directly to the (OTCBB).

- Note that you were not asked to pay us for this filing method. …

And, note the following:

- If the shell TBVI was used in the listing successfully, you would now have your (OTCBB)-listed company only.

- Now that the shell TBVI is not used in the listing, and therefore you have BOTH your (OTCBB)-listed company AND your Pink Sheets shell (which is now being kept at grey market with negligible maintenance costs, but with proper filling it will become a Pink Sheets again). In other words, you paid one price for one product, but are now given this product plus an extra product.

What complaints do you still have?

…

Regards,

Roger ”

168.  The plaintiffs in §9.1 of the reply explained the method of listing by reverse merger with a pink sheet company and upgrading it to the OTCBB as the 1st method of listing.  They in §9.2 explained the method by the purchase of a higher-tier OTCBB shell for reverse merger as the 2nd method.  That is the fastest but most expensive route because OTCBB shells are substantially more expensive than pink sheet shells.  They then referred to in §9.3 the self-filing or direct filing of Green Dragon’s own registration statement with the SEC as the 3rd method. 

169.  In §10, they pleaded that Lee had decided to use the 1st method, that was to purchase a pink sheet company and do a reverse merger.

170.  Then in §21, they pleaded that for various reasons as already referred to above, Lee on Yip’s advice agreed to attempt the 3rd method of self-filing or direct filing of a registration statement simultaneously with the process under the 1st method.

171.  However, in Yip’s e-mail to Lee dated 22 January 2009 referred to above, which is the first e-mail where Yip explained why there was a change of listing method, Yip did not say that Lee had accepted his advice to attempt the 3rd method simultaneously with the 1st method.  He instead said that there was a change in the liquidity of Green Dragon and a change in regulatory framework which had made the 1st method very difficult.  Hence, they resorted to the riskier route of the 3rd method.  Yip did not say that there was any other method which was being attempted simultaneously with the 3rd method.  Furthermore, he said that if the 3rd method should fail, then they would try to sell the pink sheet company, and then spend at least another US$500,000 to buy an OTCBB shell to achieve the listing objective.  The additional US$500,000 or more was required because an OTCBB shell was then substantially more expensive than a pink sheet shell. Hence, they had to add this sum to the sale proceeds of the pink sheet shell before they could by an OTCBB shell. 

172.  Thus, the changed approach to obtain listing as explained by Yip in this e-mail was not to have a simultaneous attempt of the 3rd and 1st methods, but just to go by the 3rd method, failing which, to go by the 2ndmethod by selling Tabatha first.  If Yip’s simultaneous approach should mean the use of one method and reserving the other method for use in case the first method should fail (transcript 179J-T), then he was using the 3^rd method simultaneously with the 2^nd method and not the 1st method as he pleaded in the reply.  This is also the purported scheme that he told Lee in their telephone conversation on 16 January as referred to above (D1 p88-53 to p90-58).  Yip made it plain in the phone conversation that there were only two available options; namely the 2nd and 3rd methods. 

173.  Yip was consistent from the phone conversation on 16 January to his e-mail to Lee on 22 January.  He only changed tactics to plead a simultaneous attempt of the 3rd and 1st methods in his reply.  He did not plead that there was any reserved plan of selling the pink sheet company, put in more funding and to buy an OTCBB shell for injecting the business of Green Dragon into it.  He changed tactics probably because he had to justify the purchase and keeping of Tabatha which was only purchased by BVI Capital in June 2007 whilst Harrison Law was engaged much earlier on 28 April 2007.

174.  Though Yip said in the e-mail that he had used the 3rd method with the 2nd method in reserve, he still maintained in the e-mail that he had planned to use the pink sheet company to proceed along the pink sheet route to listing on the OTCBB.  But reading this statement in the context of the whole e-mail, he was referring to what he had purportedly planned to do prior to the change of method and not that he had undertaken the 1st and 3rd methods simultaneously.

175.  He also attached some corporate structure charts to the e-mail to prove his previous planning of going by the pink sheet route (CB 166-167), but the charts he produced actually defeated him on this point.  The charts only showed the corporate structure to be attained in the course of the application for listing by the 3rd method of direct listing, not the 1st method with a pink sheet.  The company involved in the charts is one Fit Sum Group Ltd. (“Fit Sum”). It was used to re-domicile Green Dragon to BVI and then further re-domicile it to Florida to make it a US company for listing in the OTCBB.  Yip confirmed this in his oral evidence (transcript 183 K to R).

176.  Yip also said in the mail that one of the two changes that happened around mid-2007 was a change in the regulatory framework that made filling Pink Sheets to OTCBB very difficult.  He also said that the lingering financial tightness of Green Dragon had prevented him from completing the listing task through the pink sheet route before the change of rules.

177.  The joint expert Mr. Nussbaum has made two reports dated 4 June 2010 and 8 October.  In §6 of the first report, he said (CB 219):

“Rule Changes making OTCBB applications more difficult.

We are unaware of any regulatory change between 30 March 2007 and 7 November 2008 that would have made it very difficult for a Pink Sheet company to become quoted on the OTCBB whether in connection with a business combination (reverse merger) or otherwise.”

178.  Thus there was no basis for Yip to allege in his e-mail of 22 January 2009 that there was a change in the regulatory framework that had made filling of Pink Sheets to OTCBB very difficult.  This alleged change is also not one of the grounds pleaded in §20 of the plaintiffs’ reply.  Hence, Yip is not and cannot be relying on any change in the regulatory framework that had made the filing of pink sheets difficult.  In any case, the change in Rule 144 that Mr Lam relied on in his opening was only known on Friday, 16 November 2007 from an e-mail of Michael Daniels (C3 624).  Daniels did not suggest that this change had made listing by reverse merger with a pink sheet company any more difficult than before the change.  He merely advised Yip that if Yip wanted to make any filing for reverse merger before the amendment would take effect, Yip should be quick. Furthermore, the amendment only came in February 2008 and was too late to cause the change on 28 April 2007. 

179.  Regarding the change of liquidity conditions of Green Dragon, this change alone could have delayed the listing work and hence the time of listing.  But there was no need to beat any date of change of regulatory framework as there was none.  This liquidity problem would also not have made the filing of pink sheet to OCTB more difficult.  It would not have compelled Yip to resort to the riskier 3rd method of direct filing.  In fact, it would still have been easier to go by the 1st than the 3rd method. 

180.  Yip also said that he had to face the problem of moving Tabatha-Green Dragon entity to OTCBB due to increasing stringent rules of the US over the period at late 2007-early 2008.  I am not sure if this is just another way of referring to the change in regulatory framework.  But in any case, Harrison Law had already been engaged on 28 April 2007 to go by direct filing.  The allegation that the rules had become more stringent in late 2007 to early 2008 could not have caused the change to the listing method.  Furthermore, Yip was not moving a Tabatha-Green Dragon entity to OTCBB at that time.  This is thus a misstatement.   

181.  I also note that Yip had never condescended on the particulars of the alleged change in the regulatory framework that made filing of pink sheets very difficult or of the change that made the rules more stringent.

182.  For the above reasons, I find that Yip’s purported explanations in this e-mail could not explain the need to change the method of listing. These explanations are not truthful.

183.  Yip also said that he had clearly alluded to Lee in late 2007 in the presence of witnesses about the use of a different method to achieve your goal of listing.  He said in oral evidence that that meeting was not the meeting in which the change of method was agreed but was a meeting after the registration statement in Form SB-2 had been prepared (transcript 179C – I). 

184.  I find this explanation doubtful.  Yip was trying to explain in this e-mail the reasons for the change.  If he wanted to say that this change was known and agreed to by Lee, he would have referred to the occasion when the agreement was made.  Hence, he should be referring to the meeting in which Lee had purportedly agreed to the change.  I see no sense for Yip to have referred in the e-mail to a subsequent meeting in which he reminded Lee about the change but not to the meeting in which Lee had agreed to the change.  I am of the view that Yip was indeed trying to tell Lee that Lee had been advised about the change in a meeting in late 2007 and Lee was aware of it since then.

185.  Yip also asserted in the e-mail that Lee had paid the price for the 1st method for listing Green Dragon on OTCBB.  But in the end, Tabatha was not used and Green Dragon was listed on OTCBB.  Hence, Lee was given the listing of Green Dragon and Tabatha for just one price. However, if only the 3rd method had been engaged, it would not have been necessary for Lee to have incurred the costs for purchasing Tabatha and the related transaction costs.  The joint expert Mr Nussbaum said in §3(iii) of his first report that the costs of acquisition of the shell for the 1st method and its related transaction costs are in addition to the costs of direct filing (CB 218).  That means the costs for direct filing is cheaper than the costs for reverse merger to the extent that the costs for purchasing the pink sheet need not be incurred in direct filing.

186.  All in all, I find this e-mail an early version of Yip’s answer to Lee’s challenge.  He had chosen a date that did not fit well into his case.  His case has undergone major revisions when pleaded in the reply.

No mention in e-mail of no additional costs for extra work in simultaneous approach

187.  The plaintiffs pleaded in §22 of the reply that Capital out of good will, in complete good faith and with the best of intentions did not charge Green Dragon anything for the substantially increased workload in the 3rd method even though Capital could have done so. 

188.  Yip said in §9 of his supplementary witness statement that he decided to offer more services to Lee without any consideration. 

189.  Yip said in §9 of his supplemental witness statement (B1 96) that he did not stipulate the simultaneous approach in the Listing Contract because Capital was not going to charge any additional fee for attempting the 3rd method.  Hence, Yip on his case must have decided not to charge such fees on or before the signing of the Listing Contract which was signed on about 28 May 2007.

190.  Yip could chose to be generous to Lee, but one would expect that he would have mentioned his generosity in one or more of his many e-mails on price and costs of work done or to be done.  His many

191.  In any case, if Capital was entitled to charge for such additional work but waived the right in favour of Green Dragon, I cannot imagine that Yip would not have mentioned it in his e-mail dated 22 January referred to above.  In this e-mail, he was at pains to point out to Lee how kind he had been to Lee and Lee should have no complaint against him.  The alleged waiver of additional costs for the additional work, which was incurred solely by Green Dragon’s internal problems, was another big benefit he had conferred on Lee.  There is no reason why he would not have alluded to it in this mail if it was true.

192.  Yip instead said in this e-mail:

“the all inclusive cost of Pink Sheets route should almost be the same as that for direct filing, depending on the quality of the shell and the period and amount of filing work.”

He said this just to tell Lee that the change of route did not cause Lee any disadvantage.  However, this early stance he took in this case was in contradiction with his pleaded case as mentioned above.

193.  Yip’s assertion in the e-mail that the cost for reverse merger and direct filing are the same is also in contradiction with the opinion of the joint expert Mr. Nussbaum.  Mr Nussbaum said in §3(iii) (as excerpted below) of the first report that the cost of reverse merger is the cost for acquiring the shell and its related transaction cost plus the cost of direct filing under the Exchange Act.  The cost of direct filing under the Exchange Act is also similar to the cost for direct filing under the Securities Act except that there may be some more financing costs for direct filing under the Securities Act (CB 218).  There is no evidence of any financing costs having been incurred for Green Dragon as no financing work had been done for it.  That means the costs for direct filing is cheaper than the costs for reverse merger to the extent that the costs for purchasing the pink sheet need not be incurred in direct filing.  Hence, Yip’s assertion in the 22 January 2009 e-mail that the all inclusive cost of both routes are almost the same is yet another misstatement.

194.  There is another long e-mail from Yip and dated 1 June 2007 from Yip to Lee (CB 125-127).  That was just after the Listing contract was signed.  This is not a usual mail but a letter of review by Yip.  When Yip wrote this letter, Harrison Law had already been engaged and Green Dragon had laboured under the liquidity crunch for about a month.  Yip started off the letter as follows:

“Here are, in bits and pieces, a few reflections (and historical background) on what we discussed about in our phone call this evening. Too often, spoken words are ambiguous. Therefore, I write them down clearly here to avoid any further misunderstanding that may harm an otherwise harmonious business relationship.” (emphasis supplied)

195.  Yip then discussed in the mail how the business of Green Dragon can be expanded and improved.  He then said that he entered into the listing deal for Green Dragon because of Wong’s involvement in it.  He sang praises about Wong.  He further said that because of Wong’s involvement, he deviated from the norm and reduced the required shell costs from US$850,000 to US$350,000 and his financial advisory fee from US$500,000 to US$300,000.  He then discussed about Wong again and said that Wong deserved a lot more remuneration that what Lee had provided for him.  He then dealt with the departure of Thomas Lui, the ex-COO and tried to justify the termination of Lui’s employment.  Finally, he under the heading of “responsibilities” made a faint complaint that Green Dragon had not performed well on its responsibility to make payment.

196.  If there was the agreed change from the 1st method to the 1st and 3rd methods undertaken simultaneously at the end of April 2007, Yip would certainly have referred to it in this long e-mail.  He would certainly have reminded Lee that the change was caused solely by Green Dragon’s internal accounting and financial problems and Capital was not to blame.  He would also have said that despite Capital was not to blame and entitled to charge for the additional work, he still waived the additional costs.  He would also have mentioned the waiver when he talked about his reduction of financial advisory fee from US$500,000 to US$300,000.

197.  The absence of any reference to the waiver of costs in the mails above-mentioned drives me to the conclusion that there was no agreed change of listing method and Capital had no right to additional costs.

No mention of simultaneous approach in the Listing Contract or e-mail

198.  Furthermore, when Harrison Law was engaged on 28 April 2007 to do direct filing, the Listing Contract had not been signed.  It was signed on about 28 May 2007.  If there was an agreement to change the route to listing, the terms of the contract should have been changed before signing.  Mr Lam, counsel for the plaintiffs submitted in §41 of his closing submissions that the Listing Contract did not mention direct filing because it was to reflect what was agreed on 31 March 2007, hence, it was backdated to 31 March.  Yip said in §9 of his supplemental witness statement that he did not mention the simultaneous approach in the Listing Contract because he was not going to charge any additional fee for the 3rd method.

199.  However, the intention to reflect the original agreement as at 31 March or Yip’s generosity in not charging the additional costs would not have prevented the terms to be varied to incorporate the simultaneous approach. Clause 10 of the Listing Contract as referred to above expressly allows modification of the contract by written consent of both sides.  The amendment could say that there was the change to simultaneous approach from 28 April 2007 but with no additional charge to Green Dragon.  Furthermore, Yip could have produced an addendum to this contract, as he had done for the EECL contract (B7 1523–1533), to spell out the simultaneous approach at no extra charge.  Judging from Yip’s keenness to reduce the parties’ obligations in writing as shown in the various contracts and addenda that he had engineered and his very many e-mails, the absence of any written provision for simultaneous approach negates the existence of any agreement to undertake such approach.

200.  I have already mentioned above that Yip would certainly have referred to the change to the simultaneous approach in his long e-mail of 1 June 2007 if there was indeed such a change.  The e-mail made no mention of it and thus suggests that there was no such change.

Misleading statements in e-mails

201.  When I discussed about the reorganization of Green Dragon’s accounts department, I have already quoted Yip’s e-mail to Lee and Chan and dated 10 May 2007 (B7 1232-1233 or C2 403-404)).  Yip made it appear in this e-mail that reverse merger was undertaken actively and the purchase of Tabatha was very much part of the ongoing work for listing.  He at the same time mentioned the formation of BVI to hold the business to be listed in stock market.  That is a step to be done only for the 3^rd method of direct filing. 

202.  In fact, the procedure then undertaken was the 3rd method.  On Yip’s case, the 1st method of reverse merger was held in reserve at that time for use only if the 3rd method should fail (transcript 179J-T). 

203.  Yip in this mail made no attempt to clarify to Lee that Lee still had to pay the shell costs because there was the Tabatha Contract and/or Tabatha was needed for the reserved plan.  He made it appeared that the purchase was part of the ongoing process (and not the process held in reserve).  To the extent that this mail conveyed the meaning that the shell was needed as part of the ongoing process, it was confusing and misleading.  But it did not invoke any question from Lee.

204.  The next misleading statement is in Yip’s e-mail dated 1 June 2007 already referred to above.  Yip said in that mail that he had deviated from the norm and reduced the shell costs from US$850,000 to US$350,000 (CB 126).  He admitted in oral evidence that the price of US$850,000 was for an OTCBB shell and not for a pink sheet (transcript 154T – 155S).  Hence, there was no price reduction.  He must have assessed Lee to be ignorant about these matters that he dared to bluff Lee in this way. 

205.  I should point out that Yip tried to uphold this assertion in oral evidence.  He argued that prior to this deal with Green Dragon, he and those in his field only used OTCBB shells that cost US$850,000 each.  In this deal, he used a pink sheet that cost US$350,000 only.  Since the result would be the same, namely listing on OTCBB, he therefore argued that it was a reduction in price (transcript 154T – 155S).  However, the flaw in this argument is that if an OTCBB shell is acquired, the listing can be achieved simply by injecting the business into the shell.  It is in fact the 2nd method.  The shell purchased is already listed on OTCBB.  There is no need to incur time and expenses to file any financial or other information with SEC as in the case of reverse merger with a pink sheet.  The 2nd method is fast and convenient but expensive.  Hence, there was no real deviation from the norm by reducing the shell costs.  Yip just bluffed Lee.  Lee was bluffed without demur.  That showed Lee’s ignorance about how to list Green Dragon in the US.

206.  The 3rd e-mail that contains a misleading statement is dated 31 July 2007 (CB-131).  Yip said:

“The accounts of the period 2006.04.01-2007.03.31 will be redone by Wilson, Ivan, and Clarence. …

…

As for FA fee, it has already started, hence the subscription agreements, share restructuring, injection of business, etc., have all started already.  The regular practice is to receive 1/3 of fees on the day when a shell is located, and then 1/3 for injecting the business and completing the SEC filings, and then 1/3 when the stock is quoted and traded on the stock exchange.  The current special deal is to spread this fee throughout 24 months before any post-listing financing. I believe you will have paid less than 1/3 after successful trading at the board, and only have to pay the rest after you secure the first round of financing.”

207.  Yip said in this mail that the regular practice was for him to receive 1/3 of the financial advisory fee on the day when the shell was located and to pay him another 1/3 of the fee for injecting the business into the shell and completing the SEC filings.  But he gave Lee a special deal in spreading his payment over 24 months.  The shell that Yip referred to was clearly the pink sheet shell that he or Capital had to search for and purchase in discharge of Capital’s responsibilities under the Listing Contract.  The injection of business must mean the injection of business into the shell.  Hence, his statement at the start of this paragraph saying that the “… share restructuring, injection of business, etc, have all started already” is an assertion that the injection of the business of Green Dragon into Tabatha had already started.

208.  This of course is a lie as the business of Green Dragon had never been injected into Tabatha.

209.  Yip tried to explain in oral evidence that he was merely referring to the injection of the business of Green Dragon into Fit Sum for re-domiciling Green Dragon to BVI and then to Florida and not injection into Tabatha (transcript 222O – 224E).  But locating Fit Sum would not have invoked the first 1/3 payment as Yip also admitted that Fit Sum is just an ordinary shell that could be obtained from an accountant firm at HK$6,000 to HK$7,000 (transcript 223J – M). Searching for and purchasing Fit Sum is also not an obligation of Capital in the Listing Contract.  Fit Sum is not the vehicle for reverse merger but the vehicle for re-domiciling Green Dragon to BVI.  I reject this explanation.

210.  Yip dared to lie to Lee because he knew that Lee was ignorant enough to be so misled.

211.  The next misleading e-mail from Yip is dated 29 February 2008 (C4 950).  He said:

“… I wish to catch up with you sooner …

There are two things I have been striving hard to work out for you. First, get your company listed at the US.  Second, secure a good market valuation at listing such that you can use this platform for fund raising and M&A.  To achieve the first target, I have to get the shell paid and get the professionals paid to settle all SEC requirements, …”

212.  Yip clearly said that he had to get the shell paid so as to get Lee’s company listed in the US.  This is of course another lie as he was saying that Tabatha had to be paid but Tabatha was not involved in the listing application. 

213.  Yip tried to explain away his misstatement in oral evidence (transcript 227H – 228J).  He said that the registration statement had not been approved by SEC and thus implying that in case of failure, he would have to resort to reverse merger by using Tabatha.  If that was what he meant, he would have said so in the mail.  Having read his very many e-mails, I find that he was always capable to express himself clearly and accurately.  I do not think this e-mail of 29 February 2008 needed oral clarification in the way he did before it could be understood correctly.  He was saying in the e-mail in simple terms of what he meant.  His meaning is plain.  He clearly lied in the e-mail that he had to pay the costs of Tabatha so as to get Green Dragon listed in the US.  I reject his oral explanation.

214.  The last lie is in his long e-mail of 22 January 2009 where he said:

“Kindly see the attached TBVI corporate structure as an example which indicates that we did plan to proceed along the Pink Sheets route to (OTCBB).”

215.  The corporate structure he produced was to use Fit Sum to re-domicile Green Dragon to Florida as a step in direct filing.  Even at that stage, he still regarded Lee as gullible.

Sale of Tabatha by First Asia

216.  I have referred to the First Asia Contract by which BVI Capital purchased from First Asia 1,298,440 or 88% of the issued shares of Tabatha at US$150,000 on 22 June 2007.  First Asia acknowledged the payment of the sum in the contract itself.  The First Asia Contract was filed by Tabatha with the SEC in a “current report” also dated 22 June 2007 (signed by one Lau Hing Bun on 1 August 2007) (CB 194 – 202). 

217.  Yip said in his 20 March e-mail to Lee and Wong that there was a back to back agreement by which Capital would guarantee to the shell owner the payment of the price by Lee.  The First Asia Contract cannot be the back to back agreement referred to by Yip.  The reason being that the price, quantity and percentage of Tabatha shares sold by Capital to Lee under the Tabatha Contract were different from those in the First Asia Contract.  There was also no common party in the two contracts as it was BVI Capital and not Capital that had entered into the First Asia Contract as purchaser of the Tabatha shares. 

218.  Yip insisted that he had paid US$350,000 for Tabatha. He in fact pleaded in §§15.1 and 15.3 of the reply that he had paid US$392,000 for Tabatha and thus overpaid US$42,000 though he did not charge Lee for this extra US$42,000 out of good faith.  Lee however denied these allegations and in §11(3) of the rejoinder put him to strict proof of the overpayment of US$42,000.  But Yip did not provide any particulars or documents to show how and for what purpose this sum was incurred.  I therefore reject his case including the purported receipts issued by Fugu. Rich Key and Master Focus to the extent that they are said to be issued for this sum. 

219.  He also pleaded that he had given an oral guarantee to Mr Albert Li of First Asia as security for Lee’s payment of the 4th to 7th instalments. However, all the contemporary documentary evidence is against him on the existence of such guarantee.

220.  There is no written contract to evidence that First Asia had sold its shares of Tabatha for US$350,000.  The only contract is the First Asia Contract dated 22 June 2007 whereby it sold the shares to Capital for US$150,000. It also acknowledged in clause 1.03 of the contract that the US$150,000 had been paid to it on 14 June 2007.  By dated 22 June 2007, Capital had already received US$150,000 from Lee under the Tabatha Contract.  It is Yip’s case that this sum was used to pay First Asia. 

221.  The First Asia Contract was filed with the SEC and there is no reason to doubt the accuracy of its terms of the sale and purchase. Mr Lam, counsel for the plaintiffs is also of this view.  He said in §15 of his closing submissions that one would expect that public documents such as those filed with the SEC would be correct.  But Yip said that this document was for SEC filing and would not reveal all the terms of the backdoor listing (transcript 106H-I). He went on to say that the price paid to First Asia was not US$150,000 as stated in this contract, but was US$350,000 (transcript 108A-E).  I think even if First Asia or Yip did not want to reveal all the terms of the backdoor listing to the SEC, it is still important not to supply the SEC with inaccurate information to or to mislead the SEC.  If the transaction should be for US$350,000, the SEC would certainly be misled if the document filed with it should understate the consideration at US$150,000. 

222.  However, Yip tried to justify the understating of consideration by saying that he stated US$150,000 in the First Asia Contract because that was the sum he had received from Lee up to that time.  He further said that if he should have received US$200,000 at that time, he would have stated US$200,000 in the First Asia Contract (transcript 108F-G and L-O).  He was in fact saying that he could rightly mislead the SEC by not disclosing to it that there was a further US$200,000 to be paid for these shares.  In so doing, he also suppressed the price per Tabatha share from US$0.2696 to US$0.1155.  His explanation for so doing is a lame one and I reject it.  I also say that it is wrong to supply the SEC with any inaccurate information. 

223.  When Yip was confronted with the question that First Asia would be disadvantaged if the deal should be at US$350,000 but the First Asia Contract merely stated US$150,000, he answered that First Asia was aware of the Tabatha Contract between Lee and Capital which stated the consideration at US$350,000. But he should know that that was no answer to the question as First Asia was not a party to that contract and could not derive any protection from it (transcript 108P-S).  But he was prepared to say anything when he did not have a proper answer for the question.

224.  When he was told that there was nothing in writing to protect First Asia’s right to receive US$350,000 and that the only written contract stated the consideration at US$150,000 was against First Asia, he replied that he had given an oral guarantee to Albert Li of First Asia.  But he also admitted that he was not familiar with Albert Li (transcript 109B-R).

225.  When asked why First Asia did not even ask him for a written guarantee, he said Albert Li trusted Chan and Chan trusted him (transcript 110L-O).  I think if there was indeed an agreement that Yip would give a guarantee to Albert Li/First Asia to secure the last four instalments, I cannot imagine why Albert Li/First Asia would not have insisted on a written guarantee.  A written guarantee is also easy to arrange.  It was to cover US$200,000.  The legal costs for having one prepared by a solicitor would not be out of proportion to the amount secured.  This is particularly so when Albert Li was not familiar with Yip.  I reject Yip’s allegation that he had given an oral guarantee to Albert Li.

226.  Though Yip insisted that he had through BVI Capital purchased the shares of Tabatha from First Asia at US$350,000, it was strange that he was unable to produce any receipt issued by First Asia to him.  First Asia had indeed acknowledged receipt of US$150,000 in the First Asia Contract, but it had not given Yip any receipt for the US$200,000.  Yip was only able to produce some purported receipts issued by the three companies referred to in the reply as follows:

Master Focus: HK$896,700;

Fugu Enterprises: HK$1,010,100; and

Rich Key: HK$1,151,475.

227.  Yip said he was directed by Chan to make payments to these companies.  Regarding Fugu (which received a total of HK$1,010,100 (equivalent to US$129,500)) and Rich Key (which received a total of HK$1,151,475 (about US$148,000)), he said they belonged to Chan (transcript 130N-131C).  Fugu is indeed the shareholder of Rich Key and Rich Key appeared to be controlled by Chan (C6 1428-1435).  Regarding Master Focus (which received a total of HK$896,700 (about US$115,000)), it is a BVI company.  Yip said that he did not know who was the shareholder and director behind this company (transcript 129O-P and 136Q-R). 

228.  However, the annual return of his company EECL, which provided accounting services to Green Dragon under the EECL Contract (C6 1422) showed Master Focus was the holder of 49% of the EECL shares.  The other 51% shares belonged to a BVI company owned by Yip (transcript 139H-L).

229.  Upon being shown the annual return of EECL in cross-examination, Yip then admitted that Smart Focus was used by Wong to hold Wong’s 49% shares in EECL.  But he still maintained that he did not know who owned Master Focus (transcript 138P-140N).  In re-examination, he said this company should be controlled by someone whom Wong trusted (transcript 245A-H). 

230.  More information about Master Focus was extracted from Wong in his cross-examination.  Wong said that he purchased this BVI company from Chan (transcript 270Q-R).  He admitted that he used this company in his joint venture with Yip (transcript 270U-271A).  His wife was the shareholder and director of the company who also controlled its bank account (transcript 272F-G).  Though Wong did not regard his wife’s interest in Master Focus as a secret, he had not revealed it to Yip as Yip had never asked him for such information (transcript 265U-266I). I think it is incredible that Yip would not have asked Wong on who was the shareholder and director of Master Focus and Wong would not have given Yip such information. By reason of Master Focus being the 49% shareholder of EECL, I find that Yip was fully aware that Wong’s wife owned Master Focus which was used by Wong in business dealings as Wong was then still a bankrupt.

231.  Regardless of whether Yip knew of the ownership of Master Focus, he surely knew that it was owned by someone trusted by Wong as Wong could use it to do business.  Hence, if he had indeed been directed by Chan to pay a total of HK$896,700 to First Asia through Master Focus, he should have known that the payments would be subject to the control of Wong or someone Wong trusted.

232.  Yip’s payments to Master Focus were effected between 13 September 2007 and 5 November 2008 and totalled HK$896,700.  Wong said that he was aware that the payments were part of the US$350,000 for purchasing Tabatha (transcript 271P-Q).  He said Chan had asked him to lend Chan the use of Master Focus’s bank account for Chan to deposit in it part of the purchase price paid by Green Dragon to purchase of Tabatha.

233.  Wong admitted that Chan was not familiar with him or his wife (transcript 272O-Q).  Despite they were not familiar with one another, Chan did not ask for the return of the money so that Chan could use it to pay First Asia.  Chan just left the HK$896,700 in the bank account of Master Focus. 

234.  On 12 March 2009, Yip and Wong were allegedly kidnapped by some thugs in the mainland.  This sum was then withdrawn on about 17 March 2009 and paid out as part of the HK$5,000,000 alleged ransom money for their release.

235.  If the HK$896,700 was indeed part of the purchase price payable to First Asia, there was no apparent reason for Chan to direct Yip to pay part of it to Master Focus and just left it there. 

236.  Furthermore, Yip was unable to produce any receipt from First Asia for the US$350,000 (or US$200,000 as First Asia had acknowledged payment of US$150,000 in the First Asia Contract) that he had allegedly paid First Asia through three nominees as directed by Chan.  But Yip was a shrewd person. When he was hard pressed with the question of the absence of receipts from First Asia, he changed his case on the identity of the vendor from First Asia/Albert Li to Chan. 

237.  At this point, it is useful to recap Yip’s case on who was the vendor of the Tabatha shares.  He said to Lee in his e-mail of 11 March 2007 that he managed to get a shell owner to sell a pink sheet by seven instalments of US$50,000 each to Green Dragon provided he gave the owner his personal guarantee. He was clearly saying that the instalment sale was by the shell owner First Asia to Green Dragon.

238.  He then told Lee in his 12 March e-mail that with Lee’s approval, he would secure the shell from the then owner immediately.  He further said that it was the first time he came across a shell owner who might agree to instalment payment.  He would also not give his personal guarantee to the seller for another client.  Hence, Yip was presenting to Lee a sale by the then owner and Yip would give a guarantee to that seller.

239.  Yip in his 20 March e-mail told Lee that he had come up with an arrangement with the shell owner.  The arrangement was that Capital would sign a share purchase agreement with Green Dragon for Green Dragon to pay the price in instalments.  Capital would then sign a back to back agreement with the shell owner for guarantee purpose.  If Green Dragon should default on the payments, Capital would pay the shell owner the defaulted instalments.  Hence, it was still a deal with First Asia though with the interposition of Capital.  All discussions by Yip in subsequent e-mails on this transaction were on the basis that it was a sale by the then shell owner First Asia.

240.  YIP in §25.5 of the reply also pleaded and he had given a personal guarantee to Albert Li of First Asia.  He in §16 of his supplemental witness statement also said that it was uncommon for a vendor to sell a shell company upon instalment payments and that was the reason that the vendor (Albert Li) asked for an oral guarantee from Yip.

241.  In oral evidence, Yip still said that First Asia was the owner (transcript 109C – Q).  He also said that according to his knowledge, First Asia wanted him to make payment to it through Chan (transcript 121T-122C).

242.  However, when he was asked why he did not ask First Asia for a receipt(s), he then changed his case and alleged that Chan was not a broker, but a confirmor who had purchased the shell from the owner First Asia and then sold it to Green Dragon (transcript 122E-124J).  But he could not produce any agreement between First Asia and Chan or Chan’s nominee company.  Instead there was the First Asia Contract between Capital and First Asia.  This suggestion is also contrary to the case that he had presented to Lee in his e-mails, his pleadings and his witness statement. 

243.  If Chan was the conformor between First Asia and Yip/BVI Capital/Capital, then Yip’s case should be that First Asia was willing to sell the shell to the confirmor Chan with payment to be made by Chan by seven instalments of US$50,000 each.  He would then allege that Chan in turn sold Tabatha to Yip/BVI Capital/Capital also with payments in seven instalments.  To facilitate this chain sale, Yip then gave an oral guarantee to Albert Li to secure the payment by Chan of the last four instalments of US$50,000 each.  But this guarantee would be to secure instalment payments by Chan, not Lee’s under the Tabatha Contract.  But this is not Yip’s case.

244.  Yip’s new case of Chan being the confirmor is also built on oral evidence only and contrary to the case shown in the contemporaneous e-mails and contractual documents.  His new case has many oddities too. 

245.  There is no written contract between First Asia and Chan, but there is instead the First Asia Contract between First Asia and BVI Capital. There was no apparent reason why First Asia would have agreed to enter into an agreement with BVI Capital and not with its purchaser Chan.  Without a contract with Chan, First Asia would have difficulties in enforcing its contractual rights against Chan. The First Asia Contract would also be a good ground of defence for Chan to resist any claim made by First Asia.  If Chan were the confirmor and direct purchaser from First Asia, Yip’s personal guarantee given to Albert Li should be as security for the payments by Chan to Albert Li/First Asia and for payments by Lee.  But Yip pleaded and gave evidence that his guarantee was given to Albert Li to secure the payments by Lee.

246.  If Chan was the confirmor, there was no reason why First Asia would have acknowledged in clause 1.03 of the First Asia Contract it had been paid US$150,000 on 14 June 2007 as the receipts produced by Yip to prove his payments to Chan’s three companies only showed total payment of US$125,000 to Fugu up to that date.

247.  If Chan was the confirmor, there was no reason why he would have let US$115,000 or 32% of US$350,000 be paid to and remain in the bank account of Master Focus when he was not even familiar with those who owned and controlled this company.

248.  Instead, the case as shown in the contractual documents is simple, intelligible and straightforward.  They show that Capital entered into the Tabatha Contract with Lee on 31 March 2007 to purchase the Tabatha shares by seven instalments of US$50,000 each.  On 4 June 2007, Lee paid Capital the 3rd instalment and thus a total of US$150,000.  BVI Capital then paid First Asia US$150,000 on 14 June 2007 and entered into the First Asia Contract on 22 June 2007. 

249.  I hold that the sale and purchase of the shares of Tabatha was done in terms of these two written contracts.  Lee eventually paid US$350,000 to Capital.  Out of that sum, Yip paid about US$115,000 to Master Focus as Wong’s share of the profits made from the sale of Tabatha to Lee.  Judging from Chan’s involvement in the sale and purchase of the Tabatha shares and that receipts for payments totalling over HK$2 million had been issued by his two companies Fugu and Rich Key, I am sure he has also been benefited from the US$350,000 paid by Lee though there is no evidence as to how or how much he had been benefited.  Yip had also not paid out a total of US$392,000 for the purchase of Tabatha.  He had only paid US$150,000 through BVI Capital to First Asia and perhaps some miscellaneous fees and charges.

250.  I reject Yip’s oral evidence on the sale and purchase of the Tabatha shares insofar as it is contrary to the terms in the two written contracts aforesaid.  I also reject Yip’s allegation that he had given an oral guarantee to Albert Li, I find that First Asia had sold its Tabatha shares for US$150,000 and it had received sum on 14 June 2007.  There was no 4th to 7th instalments payable to it and no guarantee was needed.  I also reject the purported receipts produced by Fugu, Rich Key and Master Focus for a total sum of US$392,000.  I find that they are not genuine receipts for the payments made by Lee/BVI Capital/Capital to acquire the Tabatha shares from First Asia and other necessary fees and expenses.  Yip has also not given the particulars or produced documents for the alleged US$42,000.

251.  If Yip should have given First Asia US$350,000, First Asia should have issued a receipt(s) for this sum (or for US$200,000 bearing in mind the acknowledgment of payment of US$150,000 in the First Asia Contract).

252.  I also reject Yip’s last minute new case that Chan was the confirmor between First Asia and BVI Capital.  That was his desperate answer to the challenge of absence of receipts from First Asia.

ANALYSES AND DECISIONS ON YIP’S ALLEGED REASONS THAT CAUSED CHANGE OF LISTING METHOD

253.  Yip has filed two witness statements on 1 April 2010 and 6 July 2012.  His evidence is in line with the matters pleaded in the reply and defence to counterclaim.  He pleaded the causes that required the change of listing method in §20 with particulars in §§20.1 to 20.6 of the reply.  He gave evidence on these matters in §§50 to 58 of his 1st witness statement except that he did not mention the receipt by Green Dragon’s banks of the anonymous letter dated 1 May 2007 as one of the causes.  I think the exclusion of this letter from the evidence is for the obvious reason that it was only sent to the banks after the engagement of Harrison Law on 28 April 2007 to use the 3rd method of direct filing. Hence, it had nothing to do with the change of listing method.

254.  Yip had in his e-mail to Lee dated 22 January 2009 alleged that there was a change in the regulatory framework that had made the filing of pink sheets to OCTBB very difficult and that the rules had become stringent in late 2007 - early 2008.  He did not plead these in the reply as part of the causes necessitating the change.  He also did not refer to them in his two witness statements. However, Mr Lam, counsel for the plaintiffs still referred to these matters in §16 of his opening as part of the plaintiffs’ case.

255.  Though I do not need to deal with unpleaded causes, I would for the sake of completeness dispose of these matters as well.  My first observation is that anything that happened in late 2007 to early 2008 could not have been part of the causes for the change that took place at the latest on 28 April 2007.  My 2nd observation is that the joint expert Mr Nussbaum has already said in §6 of his first report of 4 June 2010 that there was no regulatory change from 30 March 2007 that would have made it very difficult for a pink sheet to become quoted on OTCBB whether by reverse merger or otherwise.  I therefore reject this alleged change in regulatory frame work and the rules had become more stringent as reasons that could have dictated a change in the listing method.

256.  I now consider the plaintiffs’ pleaded causes that necessitated the change of listing method and for which Yip has given evidence.

257.  Regarding the alleged cause of financial problem pleaded generally in §20 of the reply, Yip mentioned about Green Dragon’s liquidity problem from §156 of his 1st witness statement onwards.  He in particular relied on an e-mail dated 22 June 2007 from Stanley Ho to Lee (B4 746).  I have already set out this e-mail in extenso when I considered the liquidity crunch of Green Dragon.  But the situation described in the e-mail was brought about by the letter dated 1 May 2007 (B2 385).  In none of the e-mails produced prior to May 2007 was there any mention about Green Dragon having cash flow or liquidity problem. Yip in his 22 January 2009 e-mail also said that there was lingering financial tightness at Green Dragon due to cutting of credit lines by all banks following Lee’s dispute with Thomas Lui and Tammy Lee (CB 157).

258.  The e-mail from Lee to Yip dated 28 February 2008 which has also been referred to above made it plain that the liquidity problem was caused by the letter dated 1 May 2007 and that Lee thought that the letter was sent out by Thomas Lui.  Hence, it was a problem that came about after 1 May 2007 and not on or before 28 April 2007 when Harrison Law was engaged.

259.  The next alleged cause as pleaded in §20.1 of the reply is that Green Dragon’s books were in a mess, the internal accounting data had never been properly computerized and were incomplete and inconsistent.  This is denied by Lee.

260.  I have referred already to Yip’s e-mail to Lee dated 2 April 2007 (C7 1517) and 10 May 2007 (B7 1232-1233 or C2 403-404)).  Yip did deal with Green Dragon’s accounting problems in these mails.  But there was no allegation similar to those as pleaded in §20.1.  Yip mainly suggested in the mails that there had to be more accounting staff and the company had to be reorganized substantially. He also provided additional accounting staff by way of the EECL Contract and its two addenda dated 16 May and 29 July 2007 to assist Green Dragon to do the accounts.

261.  In the mail of 10 May, Yip referred to the delay of listing for several months as caused by the lack of funds for prompt audit. But there was no suggestion that the listing method therefore had to be changed or that for any reason it had already been changed on 28 April.

262.  I also find no evidence save Yip’s words that Green Dragon’s books and accounts were as bad as pleaded in §20.1.  I therefore reject this allegation as a cause that could have caused a change of listing method.

263.  Yip pleaded in §20.3 of the reply that Tammy Lee and Thomas Lui had used false payroll and accounting documents in the course of or in connection with their employment with Green Dragon.  No further particulars were given. 

264.  The only incident that this allegation may refer to was the unilateral change of Thomas Lui’s employment contract.  That matter arose in about mid-April 2007 and was handled by solicitors introduced by Yip to Green Dragon.  The matter that had to be rectified was the records of the IRD (C2 435). I cannot see how this matter could be related to the change of listing method on 28 April 2007.  I find that this allegation could not have caused the change of listing method.

265.  Yip further pleaded in §§20.2 and 20.3 of the reply that Green Dragon had two sets of consolidated accounts with one for taxation purposes and the other for borrowing from banks, the consolidation of accounts with〔東莞市森源貿易有限公司〕and〔東莞市厚街鎮隆基木業營業部〕was improper, Green Dragon could not produce proper and auditable financial statement, some of its tax filings were untruthful and its relationships with various mainland companies including〔東莞市森源貿易有限公司〕and〔東莞市厚街鎮隆基木業營業部〕were questionable. 

266.  However, save the names of〔東莞市森源貿易有限公司〕and〔東莞市厚街鎮隆基木業營業部〕, he gave no particulars for all these allegations.  There is also no evidence to support these allegations save that the consolidation of the accounts of Green Dragon with those of〔東莞市森源貿易有限公司〕and〔東莞市厚街鎮隆基木業營業部〕did cause problem in auditing.  But Yip only discovered this problem on 3 July 2007 when he visited the previous auditor, Mr Jimmy Cheung.  After visiting Mr Cheung, he then considered how to solve the problem.  On 18 July, he suggested to Lee to undo the consolidation.  Lee agreed with him on 18 June (CB 129-130, §2 (C2 462-463 and C2 464)).  This e-mail has been referred to by Yip as Lee‘s admission that it was wrong to have consolidated the accounts of Green Dragon with the accounts of〔東莞市森源貿易有限公司〕and〔東莞市厚街鎮隆基木業營業部〕.  Since Yip only learnt of this problem in July and the resolution was done in July, it could not have affected the change of listing method on 28 April 2007. 

267.  Apart from the above, Yip also referred to an e-mail dated 24 May 2007 from Lee to him and Wong telling them about Lee’s discovery of certain problem that Thomas Lui had planted in the accounts.  Since this problem was discovered on 24 May, it again could not have anything to do with the change of listing method on 28 April 2007.

268.  Apart from the accounting issues, Yip also referred generally to human resources problems in §20 of the reply but did not provide any particulars.

269.  He also mentioned the departure of Thomas Lui and Tammy Lee in §159 of his 1st witness statement.  But that was to explain that Green Dragon had to engage the accounting services of EECL.  He did not say that the departure of these two persons had created or contributed to the need to change the listing method.

270.  Finally, Yip in §§28 and 29 of his supplemental witness statement said that owing to various accounting problems of Green Dragon, he had urged Lee to stop the listing plan until all the defects were sort out.  He then referred to his e-mail of 10 May in support of this allegation.  But the e-mail of 10 May cannot support this allegation.  I have already referred to the contents of this mail above.  Yip in the mail merely asked Lee to raise funds for various works including audit works to be done.  He also suggested the re-organisation of Green Dragon.  He did say that owing to the lack of funds for prompt audit, the listing might be delayed for several months.  But he did not suggest stopping the listing or changing the listing method or that the listing method had already been changed.

271.  I would also reiterate that even if some or all of these grounds could have delayed the application for listing, they would not have made reverse merger more difficult and thus caused a change to the riskier 3rd method as Yip had suggested in his mail of 22 January 2009 (CB 156-157).

272.  Since none of the alleged reasons advanced by Yip would have caused a change in the listing method, I therefore conclude that there was no reason that would have produced the need to change the listing method.

273.  Following from this finding, I also find that there was no meeting or any occasion that Yip had advised Lee to change the listing method as there was no need or justification for Yip to do so.  The fact that none of the many e-mails and in particular those exchanged between the parties from March to May 2007 had mentioned anything about the change of method until Yip’s 22 January 2009 mail supports my finding.  Yip sent out the mail of 22 January 2009 after the telephone conversation on 16 January 2009 in which Lee told him that Lee had found out that the listing was not by reverse merger and wanted the money back.  I have explained above at length on why I say that Yip would have mentioned the change of listing method in his e-mails if there was indeed an agreed change. 

274.  There was also Lee’s sudden change of attitude towards Yip and Chan on 16 January.  Yip explained this in §100 of his 1st witness statement and §24(3) of the statement of claim.  He said Lee and Green Dragon got into financial difficulties during the financial tsunami in late-2008.  The financial tsunami had made it exceptionally difficult for Lee and/or Green Dragon to obtain credit or raise finance in the US or anywhere else whether through the OTCBB platform, banks, or otherwise despite Green Dragon’s success in listing on OTCBB.  Yip then said that because of these difficulties and the fact that Green Dragon had paid Capital substantial sums of money pursuant to the Listing Agreement, Lee therefore developed a personal hatred against both Yip and Capital.

275.  On Yip’s case, Lee even lied to Yip that he did not know the change of listing method when he knew it thoroughly well.  He lied because he wanted the HK$7 million back.

276.  However, Lee’s anger about Yip and Chan did not come about gradually from late-2008 to early 2009.  Lee denied financial difficulty in §32(3) of the reply.  He pleaded that he was outraged by Yip’s fraud tjhat was practised on him. 

277.  Lee’s e-mails as quoted above showed that at or prior to 12 January 2009, he was on very good terms with Yip, Chan and Wong.  On 4 December 2008 (C6 1235), Lee was still requesting Yip to act as Green Dragon’s official investment relation agent.  He asked Yip for a sample contract for that purpose.  On 9 January 2009 (C6 1237), Lee e-mailed Yip, Chan and Wong and sent them greetings for the new year to come.  He also asked them for help to deal with some private placements totalling US$1,253,000.  On 12 January 2009 (C6 1247), Lee e-mailed Yip and Chan again on the private placements. 

278.  However, his attitude to them changed suddenly on 16 January 2009.  Lee’s reason for his change of attitude and outrage is because he found out that he had been cheated.  His coarse attitude towards Yip and Chan in the telephone conversations on 16 January 2009 and his ferocious anger at Yip as shown in his six e-mails sent out from 9:27 pm on 25 January to 2:46 am on 26 January (referred to in the defamation case below) show that this change of attitude came suddenly and was extreme.  His fury appeared genuine.  His reason for the change and outrage is reasonable.  Yip put the blame on the financial tsunami and Lee’s financial difficulty.  That is far-fetched.  I reject Yip’s explanation.

ALLEGATIONS THAT LEE WAS AWARE OF THE CHANGE OF LISTING METHOD

279.  Yip also alleged that Lee was aware of the change of listing methods.  I would therefore deal with these allegations despite my finding that there was nothing that would have created the need to change the listing method.

280.  Yip said that listing by the 3rd method of direct filing required Green Dragon to enlarge its shareholder base to more than 25 shareholders. Lee had supported the 3rd method by requiring the senior employees and consultants of Green Dragon and other related business parties, associates and acquaintances to subscribe for Green Dragon’s shares to enlarge the shareholder base.  Lee also signed over 50 subscription forms (two for each subscriber) for such purpose.

281.  Lee has also reviewed, approved and signed various SEC documents including Form SB-2, Form S-1 and amendments thereto.  Yip said in §73 of his 1st witness statement that after a meeting in late April 2007, he had expressly informed Lee orally at various meetings and telephone conversations that these documents were solely for the 3rd method.

282.  Yip also said that Green Dragon needed to be re-domiciled to the US before it could apply by Form SB-2 for listing.  The re-domicile needed the personal approval of Lee.

283.  Lee replied that in about the end of April 2007, he was asked by Chan to sign an engagement document to engage Harrison Law to conduct the necessary listing procedure for Green Dragon.  Chan did not explain to him the details of the engagement or that Harrison Law was engaged to conduct direct filing.

284.  Lee also agreed that he had signed subscription forms to enlarge the shareholder base of Green Dragon to 25 shareholders by asking his personal friends including Yip and his wife, Chan and his girl friend, Wong and his wife and parents in law to subscribe for Green Dragon’s shares.  He had also signed forms from time to time when requested to do so by Yip and his collaborators. He also agreed that he had re-domiciled Green Dragon to Florida at the advice of Yip and his collaborators.  But he said that he did all these because he was told that these were steps to be taken under the reverse merger route and he was not explained that they were done for the direct filing route.

Yip also particular referred to two e-mails from Lee dated 12 and 13 December 2007.  These two mails should be read in context.  Lee’s e-mail of 12 December was in fact a positive response to a request from Yip made in an e-mail of 11 December 2007.  Yip said in his e-mail:

“Please send us an e-mail to acknowledge the filing of the registration statement. We have done all the required work, at last.” (C4 735)

The document Yip attached to this mail is entitled:

“Form SB-2 Registration Statement Under The Securities Act Of 1933”

285.  Lee by the mail of 12 December informed Yip that:

“Everything looks fine and please go ahead for filing procedure.” (B3 631)

286.  On the next day, ie 13 December, Lee sent Yip another e-mail in which he pointed out an error in the address of Green Dragon in that the word “ROAD” was wrongly spelt as “RAOD” (B3 633).

287.  Mr Lam, counsel for the plaintiffs submitted that Lee is a seasoned and highly educated businessman.  He studied finance and accounting. He is meticulous and careful.  He has read and checked every document sent to him as admitted by him in the numerous e-mails and attachments.  Mr Lam then cited a number of e-mails that he relied on to support this submission.  They are at:

“[C2/320], [C2/187 - 188], [C7/1479 - 1480], [C7/1483], [C2/464] reply to [C2/462], [C2/499] replying to [C3/500], [C5/1094] followed up by [C5/1095 and 1102], [C3/539], [C3 588], [C4/982], [C4/816, 820] and [B7/1509]”

288.  Lee in these e-mails mainly replied to questions or suggestions of Yip, corrected spelling errors, asked whether audit fees really needed to be paid up front rather than in arrears, enquired on progress of audit, enquired whether the ticker was available.  He also agreed to turn outstanding fees into loans.  His e-mail at C3 588 was his initial reply to Yip’s request at C3 539 to peruse a draft Form SB-2.  He made some comments on the price of veneer.  That was something he was familiar with.

289.  In his e-mail at B7 1509 of 23 June 2008, he asked Yip the difference between a market maker and an investment banker.  That showed his lack of knowledge of the operation of the New York Stock Exchange.

290.  Mr Lam referred to these e-mails to make the point that Lee was a person who would check and read his e-mails and attachments carefully. But it is not Lee’s case that he dealt with his mails sloppily and did not pay sufficient attention to them. His case is that he was never told and did not know that there was a change of listing method and Tabatha was not used for reverse merger.

291.  Mr Lam further submitted that Lee was well aware that reverse merger and direct filing were distinct methods of listing.  I do not think Lee would disagree with this.  Lee’s case is that Yip had explained the two methods to him and he then understood what they were.  But he did not know that “registration statement” meant the same as or synonymous with “direct filing” as Yip only explained to him direct filing.  He was only aware of that “registration statement” meant “direct filing” after he discovered that he had been cheated (transcript 350E – 351S). 

292.  I find that it is more likely than not that Yip had described to Lee the two methods of listing as “reverse merger” vis-à-vis “direct filing” than “reverse merger” vis-à-vis “registration statement”.  I have said above by reference to Mr Nussbaum’s 1st report that both direct filing and reverse merger require the filing of a registration statement.  For reverse merger, a registration statement under the Exchange Act has to be filed.  Hence, the cost of reverse merger is the costs of acquiring a pink sheet company plus the cost of direct filing under the Exchange Act (CB 217 §2(b) and 218 §3(iii)).  It would be confusing to explain the two methods as “reverse merger” and “registration statement” without mentioning “direct filing”.  It would rather be easier to explain the two methods as “reverse merger” and “direct filing”.  It is more likely than not that Yip would have explained to Lee the two methods as “reverse merger” and “direct filing”.

293.  Furthermore, it seems that the usual way for describing the two methods is to call them “direct filing” and “reverse merger”.  That is the way Mr Nussbaum described them (CB 213, 217, 218 and 219).  Mr Nussbaum also described “direct filing” as “self-filing” (CB 219§9).  Mr. Aaron Stein in his witness statement also referred to direct filing, initial registration, filing initial registration or filing own registration statement in his witness statement (B1 205-208).  He in oral evidence only used “direct filing” vis-à-vis “reverse merger” (transcript 415-423).  I am aware that Miss Diane Harrison did use “registration statement” as “direct filing” in her phone conversation with Lee on 18 January 2009 (D1 p208-56). However, her husband Michael Daniels who is also a law clerk in her firm used “self-filing” in his phone conversation with Lee on 24 January 2009 (D2 p259-46).  From the evidence of these Americans, it is clear that the term “direct filing” is more often used then the term “registration statement” as the description for the third listing method. 

294.  In the premises and for the many reasons I give below for accepting Lee’s evidence, I find that Yip had only described to Lee the two methods as “direct filing” and “reverse merger” and did not explain to Lee that “direct filing” meant or was synonymous with “registration statement”. 

295.  Lee also said he learnt that direct filing meant registration statement after discovering the deception.  If that was what he learnt, that was something not entirely correct as I have already explained above that registration statement is not used exclusively for direct filing.

296.  On my finding that Yip did not explain to Lee that direct filing meant or was synonymous with registration statement, Mr Lam’s submissions based on this point falls apart.  In any case, Lee had explained how he had adopted §17 of his witness statement in oral evidence which referred to direct filing of a registration statement (transcript 355F – 356J, 356S – 357B and 357M-P).

297.  Mr Lam also referred to the contents of the Harrison Law engagement letter and submitted that the expression “registration statement” was used a few times.

298.  He then referred to the Form SB-2 which has the title of “Registration Statement Under the Securities Act 1933” (C4 736). It contained a document called “Preliminary Prospectus” (C4 738).

299.  He then referred to the following contents of the document:

“(1) The title is “Registration Statement” [C4/736].

(2) Nothing is mentioned about Tabatha.

(3) “The securities offered by this prospectus may not be sold until the Registration Statement filed with the [SEC] is effected.” [C4/738]

(4) “the selling security holders named in this prospectus are offering to sell 1,000,000 shares of Green Dragon Wood Products Inc’s common stock through this prospectus …” [C4/738]

(5) “Green Dragon’s common stock is presently not traded on any market and securities exchange.” “Our common stock is not currently listed or quoted on any quotation medium…” [C4/738]  Also [C4/741] and [C4/762]

Underscored: One would immediately notice that this Green Dragon could not be anywhere near a company already listed as mentioned under the 1st Agreement, because a pink sheet company was already traded on a market.

(6) “(26) Without A Public Market There Is No Liquidity For Our Share, And Our Shareholders May Never Be Able to Sell Their Shares, Which May Result In A Total Loss Of Their Investment.” [C4/746]”

(7) “This prospectus will be used for the offering of share of our common stock owned by the selling security holders.” [C4/748]

(8) “This prospectus is part of a registration statement that enables the selling security holders to sell their shares on a continuous basis for a period of nine months…” [C4/750]”

300.  Based on the above, Mr Lam then made the point that even a brief reading of the document will show that Green Dragon was applying for listing by itself by direct filing of a registration statement.  The subscription forms he signed also showed that the shares to be listed were those of Green Dragon (B2 356).  Mr Lam also referred to a further e-mail dated 13 December 2007 whereby Yip furnished a link of the SFC for Lee to check the status of Green Dragon “to see the registration statement”.

301.  However, when Lee was cross-examined on the Form SB-2, he said he did not understand the meaning of the word “prospectus” even at that moment (transcript 362U – 363F).  He also said that at the material time he trusted Yip and Wong.  They all along said they would do reverse merger.  They throughout the exercise used just one form.  Lee therefore thought that that was the form for reverse merger. 

302.  Lee also said he had skimmed through the document before signing it (transcript 363M-Q).  There were statements in the prospectus that he did not understand.  Since he regarded these matters as outside his scope of knowledge, he would not doubt Yip or raise any question with Yip (transcript 360F-S).  I would also mention that the Form SB-2 had over 80 pages. 

303.  Lee also did not know the exact steps to be taken for reverse merger.  If there were things in the form that he had to fill in, then he would fill them in according to his knowledge.  Yip had also not enquired with him on anything.  He also though that the SEC needed the document.  Yip had also told him that he could try to deal with the shares after listing. 

304.  He also used an audit report as an analogy.  He said he would just sign the audit report after it was prepared by the auditors.  He trusted Yip as an expert and would not read through the whole Form SB-2 (transcript 368N – 369E).

305.  Mr Lam also cross-examined Lee on the subscription forms he signed to enlarge the shareholder base of Green Dragon.  Lee replied that he was told by Yip to look for subscribers for small private placements before approaching the ibanks.  Though the shares to be subscribed are of Green Dragon and not Tabatha, he thought that after reverse merger, Tabatha’s name would also be changed to Green Dragon.  Hence, he did not know that the subscriptions were not for the reverse merger method but for the direct filing method (transcript 370I – 371D).

306.  Mr Lam submitted that I should reject Lee’s evidence that he did not know what was a prospectus or that he did not find it strange that the prospectus as contained in the Form SB-2 had offered to sell the shares of the unlisted Green Dragon to the public rather than the shares of a company already listed.

307.  He further submitted that it is inherently improbable that Lee, being a seasoned businessman holding a degree on business administration could honestly give such evidence.  Furthermore, a plain reading of the documents would reveal their nature and the company involved.

308.  He also submitted in §23 of his closing submissions that it is inherently impossible that Yip and his co-conspirators to form such conspiracy to deceive Lee that Green Dragon was listed by reverse merger as a brief reading of documents like the Form SB-2 or asking a friend like Aaron Stein would reveal that the listing was done by direct filing.  He therefore submitted that it is inherently improbable, if not impossible for any dishonest people to form such easily exposed conspiracy. 

309.   ANALYSIS AND DECISION ON WHETHER LEE WAS AWARE OF THE CHANGE OF LISTING METHOD

310.  I think it is necessary to consider the whole cause of dealing between Yip, Wong and Chan on the one hand and Lee on the other so as to conclude whether Lee was aware of the change of listing method or that he had been misled and was unaware that direct filing had been undertaken since he signed the letter to engage Harrison Law on 28 April 2007.

311.  Right from the start when Lee was persuaded to commit to the Tabatha Contract and to pay US$350,000 for this pink sheet company, he was not shown anything about the company.  He just relied on the words of Yip and Wong. He said he wanted to read the draft contract first.  I am sure he had wanted to do so.  Mr Lam also submitted that he was careful and meticulous.  But in the end he just signed his name on a problematic draft.  He had not been given any document on or about Tabatha before he did so.  Yip later on gave him a corrected version and he signed again on a hard copy of that at Yip’s request.  That incident showed that Lee was not conversant with the skills in handling contractual documents or at least contracts outside his daily business.

312.  After Lee had entered into the Tabatha Contract on 31 March 2007, Yip should have started working for the reverse merger.  Yip said in evidence that there were soon financial, accounting and human resources problems that occurred within Green Dragon which made the approach of reverse merger very difficult to succeed.  Hence, he and Lee agreed in late April to change to a simultaneous method which in fact was to change to direct filing with reverse merger being held in reserve.  Harrison Law was then engaged to do direct filing.  Lee said he signed the engagement letter thinking that it was for reverse merger. 

313.  I have already held against Yip on the existence of any cause that required a change of listing method.  I held that there was no cause that would have produced the need to change.  If there were such problems as alleged, they at most would have delayed the listing application and would not have dictated a change to a riskier method.  The reason being that there was no change of regulations or regulatory framework that would have made reverse merger very difficult to succeed.  Since there was no cause for change, there was no cause for any meeting to agree to a change to a riskier method. 

314.  The alleged change in listing method was also not mentioned in the Listing Contract that was only signed on about 28 May 2007.  It simply provided for reverse merger.  There was not even any addendum to it recording a change of method.  I have given my view above on why there should be a contractual provision for change of method had there been an agreed change.

315.  Not only was the Listing Contract silent on the alleged change, there was also no e-mail saying that there was any cause for change or that there had been a change.  This was so even in Yip’s long e-mail of review dated 1 June 2007 where he said he would write down things discussed because spoken words were often ambiguous.  If there had been a change of method as occasioned by Green Dragon’s problems, it would have been discussed and recorded in this e-mail.

316.  Yip allegedly waived the additional costs for the substantial increase in work as a result of the change of method.  This was again strangely not reflected anywhere in the e-mails including the e-mail of review dated 1 June 2007.  It was also not mentioned in the e-mail dated 22 January 2009 that he sent out after the relationship between the parties had broken down.  He told Lee in this mail that he had done a lot of good work for Lee and Lee should have no complaint against him.  If there had been a change to a riskier method and Yip had waived the additional fees, he would certainly have mentioned it in the e-mails.

317.  Yip had repeatedly made misleading statements in his e-mails to Lee saying in effect that reverse merger was being undertaken when in fact it was not.  These misstatements did not provoke any response from Lee at all.  The lack of response showed that Lee was labouring under the belief at the material time that it was reverse merger that was being undertaken for the Listing Application. 

318.  Lee was on good terms with Yip, Chan and Wong up to about 12 January 2009.  But he, after meeting Aaron Stein and was given a copy of the First Asia Contract, became mad at Yip and Chan as he thought that he had been cheated.  I have ruled against Yips farfetched suggestion that Lee’s sudden deluge of anger against him and Chan was because of the financial tsunami in 2008.

319.  When Lee talked to Yip and Chan on the phone on 16 January 2009, neither of them had mentioned that there was an agreed change in listing method.  Yip in the phone conversation also said that the change was from the 1st method of reverse merger to the 3rd method of direct filing with the 2nd method of reverse merger with an OTCBB company held in reserve.  The pink sheet company was to be sold if direct filing should fail.  He said the same thing in his 22 January 2009 e-mail.  But his pleading says that the change was from the 1st method of reverse merger to the 3rd method of direct filing with the 1st method held in reserve. Such fundamental change of facts on the defence shows that the pleaded defence is not genuine.

320.  Furthermore, the lingering financial difficulty of Green Dragon and change of Rule 144 were the two grounds Yip gave in his e-mail of 22 January 2009 for his alleged previous advice to Lee to change method.  However, the financial difficulty came too late for the change as a matter of fact and it could not have been a cause.  Yip therefore could not have discussed with Lee for a change in the listing method because of such difficulty.  In other words, Yip was lying in this important e-mail of 22 January 2009 on why there was a change.

321.  The change in Rule 144 was only known on Friday, 16 November 2007 from an e-mail of Michael Daniels (C3 624).  I have already said that Daniels did not suggest that this change had made reverse merger with a pink sheet company more difficult.  He merely advised Yip to hurry up if Yip wanted to make filing for reverse merger before the amendment would take effect.  In any case, the amendment only came in February 2008 and was too late to cause the change on 28 April 2007.  This cause is not even relied on by Yip in the pleadings.  The joint expert also opined against it.  Without this cause, the other causes could at most caused a delay, but not for change to a riskier method.

322.  Regarding the purchase by Yip’s BVI Capital of Tabatha from First Asia, Yips case is an oral contract which is different from and contradicted by the terms of the First Asia Contract.  His allegation of his giving a guarantee to First Asia as security for Lee’s instalment payments is unbelievable.  Owing to his inability to produce receipts issued by First Asia for the US$350,000, he changed his case to purchasing Tabatha not from First Asia, but from Chan as a confirmor. That defeated all that he had alleged by way of the oral agreement with First Asia.

323.  Yip also gave about US$115,000 to Master Focus that was owned by Wong’s wife.  This further destroys his case of having purchased Tabatha from First Asia at US$350,000.  If First Asia had indeed sold Tabatha for US$350,000, Chan would not have asked Wong for permission to keep about US$115,000 of it in Master Focus’ bank account and not ask for this sum back for a long time.  Chan and Wong were not even familiar with each other.  

324.  In the light of these problems in Yip’s case and Lee’s lack of response even to Yip’s misleading statements on the listing method undertaken, I accept Lee’s evidence that he had all along been labouring under the belief as induced by Yip and Chan that the listing of Green Dragon was by way of reverse merger until he was told the contrary by Aaron Stein.

325.  I accept that Lee had been misled by Yip as described by Lee in evidence and Lee thought that all the documents relating to listing that he has signed were for reverse merger.  I accept that he was inexperienced in investment and had only invested in some unit trust as suggested by his bank manager.  He did not even know what a prospectus was or the difference between a market maker and an investment banker.  Despite his inexperience in investment, Lee regarded himself a highly educated and not a gullible person.  That explains the deluge of his anger as demonstrated in the phone conversations on 16 January 2009 and the six e-mails he sent Yip afterwards (to be referred to below) after he had learnt that he had been cheated. 

326.  Regarding the submission that it is inherently improbable for Yip and his co-conspirators would not have formed such an easily exposable conspiracy, I think Yip was always prepared to justify his conduct by saying that his task was to get Green Dragon listed on OTCBB.  So long as he could do it by hook or by crook, he would be delivering what he had contracted to deliver.  In the phone conversations on 16 January 2007, neither Yip nor Yip mentioned that there was an agreement to change the listing method.  But they did say that what Yip had given Lee was something better than what Lee had contracted for.  That was what the purported explanation given by Chan and Yip on the phone conversations. 

327.  Yip gave the same explanation in his e-mail of 22 January 2009 as excepted above).  He said:

“ABOUT ENGAGEMENT AGREEMENT BETWEEN CHARACTERS AND YOU

As per engagement agreement between Characters and you on 30 March 2007, kindly note that the first paragraph of the whole agreement clearly indicates the objective of the engagement:

“本函件〔『協議』〕載有有關閣下持有公司〔『貴司』〕擬於美國Over The Counter Bulletin Board (“OTCBB”) 上市〔『OTCBB 上市公司』〕的計劃，並載有 貴司委任格特獅資本集團有限公上司及其聯屬公司〔『聯屬公司』指我司之任何附屬公司或控股公司或該控股公司之任何附屬公司〕〔『我司』〕擔任 貴司在OTCBB上市事項〔『上市事項』〕之獨家財務顧問之條款。”

The above means that the whole engagement has the objective of helping your company to get listed at the OTCBB.”

328.  That was of course an erroneous explanation and was in blatant disregard of Capital’s responsibilities listed in the Listing Contract. Mr Nussbaum has also pointed out that different methods of listing have different advantages and disadvantages.  Hence, different method may suit the different needs of different companies and the different purposes of listing.  The costs and time involved are also different (CB 21217-218). 

329.  If Yip should have used Tabatha to do a reverse merger with Green Dragon, the shareholder base would also be broader.  There were thirty three existing shareholders in Tabatha.  With the addition of the existing shareholders and the twenty five new shareholders that Lee had obtained, the total number of shareholders for Green Dragon would be about sixty.  The company listed through reverse merger is also different from the company listed by direct or self-filing. In this case, the company listed by reverse merger would be the Colorado incorporated Tabatha whilst the company listed by direct filing is Green Dragon itself after having been re-domiciled twice from Hong Kong to Florida.

330.  Nevertheless, if Yip dared to write the misleading statements in the e-mails that I have referred to above, he must have known that Lee was gullible in matters of listing in the US and/or that he could get away with it by maintaining his stance that his duty was to procure a listing by hook or by crook.  He could also allege, though wrongly, that the costs would be the same. Hence, he was not afraid of his deception being exposed. 

331.  The claim by Capital for outstanding payments under the Listing Contract is also a demonstration of Yip’s attitude.  The Listing Contract only provided for application for listing by reverse merger.  There was no amendment to this contract and none was pleaded.  Despite the fact that the listing was not procured by reverse merger but by direct filing resulting in a different listed company, Capital still claims payments under this contract in the statement of claim on the basis that listing had been successively procured for Green Dragon.  The claim is not based on any variation of this contract for listing by direct filing as none is pleaded.  Hence, Yip’s stance is that Capital was only required by the contract to procure a listing and that it had procured it for Green Dragon though by direct filing. 

332.  I note that the burden is on Lee to prove the fraud and conspiracy.  These are serious allegations.  I also note that Yip is a professional in the business of listing in the US.  He is well educated having obtained a Bachelor Degree from the Chinese University of Hong Kong and Master Degrees from both the Chinese University of Hong Kong and the London School of Economics.  He has a distinguished career in the financial field with various banks and financial institutions.  He also serves on a number of charities.  In the light of the seriousness of the allegations, Lee must prove his case with evidence of a commensurate cogency.  His evidence must also be properly grounded in the primary facts.  Any inference of fraud should only be drawn where the inference is compelling (see Nina Kung v Wang Din Shin (2005) 8 HKCFAR, 387 §§182 to 192).

333.  However, in the light of the overwhelming evidence in favour of Lee and against Yip that I have set forth above, I must accept Lee’s evidence as a whole and reject the evidence of Yip and Wong wherever they are in conflict with Lee’s evidence.  I also accept the evidence of Aaron Stein save on the amount of costs for listing a company as different company may require different amount of work and hence different amount of costs.

Joint expert reports

334.  I have referred to two reports given by the joint expert Mr Nussbaum dated 4 June 2010 and 8 October 2012. 

335.  Mr Nussbaum said that a pink sheet company is one whose shares are quoted on the Pink Sheets, which is a privately owned quotation service. 

336.  In contrast, a grey market company is one whose shares are not quoted on either the OTCBB or the Pink Sheets but have trading symbols assigned to them.  Transactions of such shares are sometimes said to be on the grey market.

337.  Mr Nussbaum was not in a position to say definitely whether a market for “Grey Market Shell Companies” existed, but believed that there would be little demand for such a company in the reverse merger context, because no pre-established trading market for the shares of such a company existed.

338.  Mr Nussbaum also explained reverse merger and direct filing or self-filing of a registration statement in brief terms.

339.  He compared the advantages and disadvantages of the two methods and reverse merger with OTCBB shell as follows:

“3. Comparison of Advantages and Disadvantages of Methods.

It is not possible to make definitive comparisons of various methods of becoming eligible for OTCBB quotation, as the preferred method will depend upon the particular circumstances. Very generally, the characteristics of the various approaches may be as follows:

(i) Direct Filing—Securities Act registration: undertaken only in connection with a financing; greatest risk is time to completion, due to SEC comment process; other than financing costs, cost is approximately same was Direct Filing—Exchange Act registration.

(ii) Direct Filing— Exchange Act registration: quickest time to completion and least cost, but, unless shares are held by a sufficient number of stockholders, a trading market is unlikely to develop, because active trading requires an adequate number of sellers, i.e., stockholders, to satisfy demand.

(iii) Upgrading a Pink Sheet shell company: costs of acquisition of shell and related transaction costs are in addition to costs of Direct Filing—Exchange Act registration; time to completion believed to be less than Direct Filing—Securities Act registration; primary risks are in locating a suitable shell at a satisfactory price and potential shell company undisclosed liabilities.

(iv) Reverse Merger with OTCBB shell company: considered safer than a Pink Sheet shell, from standpoint of undisclosed liabilities, because the OTCBB shell has been filing financial reports with SEC, which is reflected in its higher acquisition price.

Also, note that these approaches are not mutually exclusive; for example, a business combination with a shell company may be consummated in conjunction with a financing, requiring both a Super 8-K and a subsequent Securities Act registration statement.”

340.  Mr Nussbaum also said that he was not aware of any regulatory change between 30 March 2007 and 8 November 2008 that would have made it very difficult for a pink sheet company to become quoted on the OTCBB whether by reverse merger or otherwise.  In fact the amendments to Rule 144 as relied on by Yip in his e-mail of 22 January 2009 was only was only known on Friday, 16 November 2007 from an e-mail of Michael Daniels (C3 624).  It was enacted in February 2008 (B9 2156, B1 207, §9 and transcript 416G – 417B).

341.  Mr Nussbaum did not say expressly in his first report whether Tabatha was a pink sheet company as at 31 March 2007.  He was thus asked to provide a 2nd report.  He said in the 2nd report that based on the information he gathered and set forth in the report, Tabatha became a grey market company on 14 November 2005.  He was of the view that Tabatha would have been considered a grey market company rather than a pink sheet company as of 31 March 2007 and it was not a pink sheet company on 8 October 2012.  This contradicted Yip’s oral evidence that his search in April or May 2009 showed that Tabatha was still a pink sheet (transcript 99N-Q). 

342.  Mr Nussbaum further gave a footnote saying:

“Although the trading symbol tag “PK” indicates a Pink-Sheet traded security, we do not consider its appearance in the Company’s Form 10-KSB to be dispositive in these circumstances, particularly as the Company said that trading was in the Other OTC market, rather than the Pink Sheets.”

MISREPRESENTATIONS

343.  Based on the above analyses, findings and acceptance of the evidence of the defendants, I make the following findings.

344.  Since there was not any incident or problem that had occurred between 31 March and 28 April 2007 that would have produced the need to change the listing method and Yip had not told Lee about the change of listing method, it is more likely than not that when Yip coaxed and cajoled Lee to commit to the Tabatha Contract, he had no intention of using Tabatha to do a reverse merger. Yip had thus fraudulently misrepresented to Lee that he intended to use Tabatha (or a ping sheet shell) for a reverse merger with Green Dragon.  Yip had thus fraudulently induced Lee to enter into the Tabatha Contract on 31 March 2007 and the Listing Contract on about 28 May 2007.

345.  I also find that Yip had fraudulently misrepresented to Lee that Yip had found an owner who was willing to sell a pink sheet shell for US$350,000.  Yip in fact found First Asia which was willing to sell Tabatha for US$150,000.  He paid first Asia US$150,000 on 14 June 2007 and got the transfer of shares on 22 June 2007.  This finding would lead to the next finding that Yip had fraudulently misrepresented to Lee that the shell owner was willing to accept payment by seven instalments of US$50,000 provided Yip would give his guarantee.

346.  On the basis of the joint expert reports, the representation that Tabatha was a clean pink sheet company must also be false.  Yip’s evidence showed that he had only checked the self-serving filings of Tabatha.  There is no evidence that he had checked any independent source of information on Tabatha like what Mr Nussbaum had done.  He was thus extremely careless in conducting the checking. But there is no evidence that he had made this misrepresentation knowingly.  I am not prepared to infer from the accepted evidence that he had made this misrepresentation knowingly or fraudulently.

347.  Since I find that Yip had found First Asia which was willing to sell Tabatha at US$150,000, he must have fraudulently misrepresented to Lee that the opportunity to acquire Tabatha at US$350,000 was too good to be missed. 

348.  He must have likewise fraudulently misrepresented to Lee that the sellers of the Tabatha shares would deliver the shares upon the payment of the first three instalments of US$50,000 yet still required payment of the balance of US$200,000. 

349.  He also fraudulently misrepresented to Lee that his company Capital would enter into a back to back agreement with the shell owner for the purpose of guaranteeing the last four instalments.

350.  I also find that Lee had not agreed with Yip to change from the reverse merger method to the so-called simultaneous method or the 3rd method with the 1st method being held in reserve.

QUANTUM

Lee’s claim for price of Tabatha

351.  Lee after discovering the deception sent Yip an e-mail on 23 January 2009 telling Yip that he considered the whole agreement and deal void (CB 168). He also demanded the refund of all the money amounting to more than US$1 million. That is all the money paid pursuant to the Listing contract, Tabatha Contract, EECL Contract and the contracts with the American attorneys and auditors.  Mr Pow, leading counsel for the defendants submitted and I accept that this is a notice of rescission by Lee in his own right and on behalf of Green Dragon to Listing contract, Tabatha Contract, EECL Contract.  Hence, Lee is seeking the return of the US$350,000 that he had paid Capital for the shares of Tabatha. 

352.  Lee has undertaken to the court to take all steps necessary to revert the Tabatha shares registered in his name to BVI Capital upon receiving the damages awarded to him (§16 of the defendants’ closing submissions).  Given that the joint expert opinion says that Tabatha was at all material times a grey market company, Capital cannot resist this claim of US$350,000.

353.  Furthermore, given my finding that Lee was induced by Yip’s fraudulent misrepresentations to commit to the Tabatha Contract and that he would not have entered into that contract had he known that Yip did not intend to use the pink sheet company for reverse merger with Green Dragon, Yip should also pay Lee damages for his misrepresentations at US$350,000.

354.  I therefore order Yip and Capital to pay Lee US$350,000 with interest on this sum at 2.5% above the best lending rate of the Hong Kong Bank from the date of the filing of the defence and counterclaim on 9 April 2009 until judgment.  Lee after receiving this sum and interest thereon shall take all necessary steps to revert the Tabatha shares registered in his name to BVI Capital.

Green Dragon’s claims

355.  Green Dragon makes the following claims all on the basis that Lee would not have procured Green Dragon to commit to the following engagements and incurred the expenses but for the misrepresentations made by Yip to Lee.  Green Dragon makes an alternative claim against Capital for damages in the same sum for breach of the Listing Contract on the ground that Capital did not proceed with reverse merger as stipulated in that contract.

(1) HK$2,190,430.29 (US$280,824.40) paid to Capital under the Listing Contract;

(2) HK$1,321,273.04 paid to EECL under the EECL Contract;

(3) HK$328,029 (US$42,055) paid to Harrison Law for preparing the Form SB-2;

(4) HK$255,450 (US$32,750) paid to Madsen & Associates for audit;

(5) HK$156,000 (US$20,000) paid to Nickson CPA for audit.

(Total: HK$4,251,182.33)

356.  However, Green Dragon is willing to give credit for the fact that it had obtained a listing status.  It proposes to give a fee of US$250,000 for the services that had been provided to it that resulted in its obtaining the status by direct filing (A1 44 §18(3)(vi).  This sum was suggested by Mr Stein for listing by direct filing (CB 207 §11).

357.  I would deal with the claim for refund of HK$1,321,273.04 paid by Green Dragon to EECL under the EECL contract.  Lee procured Green Dragon to enter into this contract on about 30 March 2007 for the provision by EECL of, among other things, accounting services.  The purpose of all these services and in particular the accounting services was for applying for listing by reverse merger.  If he should have known that Yip had no intention of conducting a reverse merger, he would not have procured Green Dragon to enter into this contract. Nevertheless, Green Dragon also needed these services in applying for listing by direct filing. 

358.  Owing to the departure of Thomas Lui and Tammy Li and the need to unravel the consolidation of accounts, Green Dragon needed the accounting services provided by EECL.  There is no suggestion of overcharge by EECL.  Green Dragon had the full benefit of such services.  Owing to the state of Green Dragon’s accounts, Green Dragon had to engage the services of EECL.  Otherwise, it would not have been able to obtain the listing status.  I would therefore not order any refund of the sum paid by Green Dragon to EECL under the EECL Contract and its two addenda and credit the sum to EECL as part of Green Dragon’s costs for obtaining listing by direct filing.

359.  Regarding the US$42,055 legal fees paid to Harrison Law, the US$32,750 audit fees paid to Madsen & Associates, the US$20,000 audit fees paid to Nickson CPA and the US$280,824.40 financial advisory fees paid to Capital, they add up to US$375,629.40.  The total sum exceeded the proposed US$250,000 by US$125,629.40.  However, I have no basis to consider whether US$250,000 is a reasonable fee for listing Green Dragon by direct filing under the Securities Act.  Different company may need different services in the preparation for listing.  For Green Dragon, it had to be re-domiciled to BVI and further re-domiciled to Florida.  I also cannot tell whether it had to pay more audit fees because of the need to undo the previous audited consolidated account.  For these reasons, I cannot accept the sum of US$250,000 as suggested by Mr Stein and offered by Green Dragon as a reasonable fee for Green Dragon to obtain listing by direct filing.

360.  Since there has not been any suggestion of overcharge and that all fees charged by Harrison Law, Madsen & Associates and Nickson CPA were for listing by direct filing, I would not order their refund but would treat them as part of Green Dragon’s costs for obtaining listing by direct filing.

361.  Regarding the US$280,824.40 financial advisory fees paid to Capital, it was paid for listing by reverse merger.  Mr Nussbaum said that the costs of reverse merger would be the costs for acquiring the pink sheet company and related cost plus the costs of direct filing under the Exchange Act.  The costs of direct filing under the Exchange Act would also be the same as the costs of direct filing under the Securities Act save that there may also be financing costs for the latter route (CB 217-218 §3). Hence, putting aside the costs for acquiring the pink sheet company and the financing costs, the costs for reverse merger and direct filing are more or less the same.

362.  Since the costs for reverse merger less the costs for acquiring the pink sheet company are more or less the same as the costs for direct filing under the Exchange Act, I would treat the costs paid by Green Dragon to Capital as costs for direct filing. Hence, I would not order any refund of this financial advisory.

Capital’s claim under the Listing Contract

363.  Mr Lam referred to Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH [1962] AC 93 at 115 in his opening submissions.  These cases are on frustration of contracts.  They involve the change of sea routes which increased the freight and insurance.  They are different from the present case.  I have already mentioned above the differences between listing by reverse merger and direct filing. Since Capital has not performed the Listing Contract by conducting reverse merger, its claim for US$US$31,287 under this contract must fail.  Furthermore, the Listing Contract had been rightly rescinded on 23 January 2009.  There is no more obligation for Green Dragon to make payment under this contract.  I therefore dismiss Capital’s claim for payment under this contract.

DEFAMATION CLAIM

The six e-mails

364.  After Yip’s e-mail of 22 January 2009, there were a few more e-mails exchanged between Yip and Lee where Lee demanded repayment from Yip and Yip threatened Lee with litigation.  Then Lee sent a string of six e-mails to Yip from 9:27 pm on 25 January to 2:46 am on 26 January.  These are the subject matter of the defamation claim.

365.  Yip has numbered the six e-mails from “the 1st words” to “the 6th words” but not chronologically.  I set them out chronologically hereunder:

“Sent: Sunday, January 25, 2009 9:27 PM

Subject: reply!!!!!!

Dear Clarence and roger,

I really want to settle our business with compromise on a fair basis, pls DO NOT TRY TO ESCAPE!!! You cannot run away from your responsibility!! Time is running out and you have the following choices but your switch (sic) action is very important and we cannot just sit and wait!

1. we sit down and talk

2. legal action again you

3. report to all authorities including US SEC, US FBI, HK police, etc.,

Hope I do not have to see you in jail for next chinese new year!!!

Best regards,

Stephen Lee

p.s. roger, pls note that your PHD degree is just phony as your mode of business!!!”

(the 1st e-mail or 2nd words)

366.  This mail was only sent to Chan and Wong and not Yip.  Wong later directed it to Yip (CB 172).  Yip then replied by the e-mail below:

“Date: Sun, 25 Jan 2009 23:32:18 + 0800

Subject: To Mr Stephen Lee of Green Dragon Wood Products about his threat for business

Mr Stephen Lee,

Your e-mail below addressed to Clarence Chan and I was not properly mailed to me, as you somehow did not include me in your addressees’ list (please do not try to escape); but I thank you very much for your e-mail, which I will give it to my lawyer for review, especially in the context of threatening and extortion implied in your words. I also heard that you had left voice messages to him, and I will present the messages to the lawyer as well. My lawyer is Anthony Siu & Co. Who is your lawyer? If you wish to act quickly, you should give us your lawyer’s name such that I can start the legal procedures immediately after the holidays.

Roger Yip”

367.  Lee then sent out the following e-mails:

“Sent: Sunday, January 25, 2009 23:48

Subject: Re: To Mr Stephen Lee of Green Dragon Wood Products about his threat for business

I think u are the most despicable person I ever met in my life, u cheated me and many others badly, u will be rewarded with terms!!! My lawyer will be the police and FBI !!!!! Don’t ever try to run away !!! Enjoy a few days of last CNY stay at home, u may end up in jail next year…” 

(the 2nd e-mail or 1st words)

“Sent: Monday, January 26, 2009 12:04 AM

Subject: Re: to Mr Stephen Lee of Green Dragon Wood Products about his threat for business

I think u r such a coward!!! U dare not to meet, u dare not to pick up my calls as I tried to call u thousand times!!! U cheated me a lot of money and others and we will all after you!!!!!!! Your doctor degree is as phony as and fake as your morality and conduct!!!! U know vy well what I m talking abt!!! I will come to look for u at your office next week, Pls be there!!! Don’t run away u u hv the gut!!!!! I will also call your wife at hsbc to inform her all abt what has happened and how you have cheated me and others….so she will understand what kind of person u r inside your heart….may be she can help u to feel regret and remorse and then turn yourself in and admit all mistakes u hv made and then apologize to all of us and pay us back all the money u hv cheated us…u hv a nice and expensive office but with fake sycamore veneer, u drive a nice porse but with no heart, u live in luxurious apt but cold, u bv the highest honor of education PHD but u paid for yet FAKE, hahaha!!!! Let’s meet and settle at a ring if u hv the gut, it is between u and me and many others, but I will do one on one and no need of others!!! Come on, pick u and phone and answer me u coward!!!!”

(the 3rd e-mail or 5th words)

“Sent: Monday, January 26, 2009 0:22

Subject: Re: To Mr Stephen Lee of Green Dragon Wood Products about his threat for business

On more reminder !!! I hv all your close friends’ contacts in facebook and they will be all informed abt your bad conduct and progress of event for our prosecution against u!!! Do they believe who u r (don’t forget your fake PHD which is already enough to ruin your reputation!!) and the facts and evidence that I hv….if u hv gut, let’s meet and settle our biz!!! Only u with crooked heart will try to seek legal route instead of facing the problem!!!!”

(the 4th e-mail or 4th words)

“Sent: Monday, January 26, 2009 1:36

Subject: Re: To Mr Stephen Lee of Green Dragon Wood Products about his threat for business

You coward!! Now u think only your lawyer can protect u!!! Universidad Empresarial replied me that they never hv u in their record!!!! Pls look at your phony honorable doctor degree certificate again who signed and where was it issued!!! It was simply a company registered in HK!!! U hv committed another crime by fake qualification which is already enough to put u in jail!!! If u r still hv shame in yourself and what u hv done, I may consider to forgive u if u come to beg me with your knees down…do u hv gut to meet me or not, u coward!!!!!!!!! We Chinese idiom called frequent visits to mountain eventually met by tiger! This time u r met by justice!!!”

(the 5th e-mail or 6th words)

“Sent: Monday, January 26, 2009 2:46 AM

Subject: RE: To Mr Stephen Lee of Green Dragon Wood Products about his threat for business

dear roger,

after all, you know, the least respect i still have on you is that you are still trying to be polite, thank, happy new year, have a good day…is said out of your heart? or it is our Chinese idiom that your are simply smiling with a knife…

I wish you a happy new year of bull too but pls settle our business as i hate to put someone in jail as it is the biggest sin to do in one’s life…don’t force me to commit a terrible sin like that!!! i will feel sorry for your wife, your parents….if you are ever in jail… now i give you another chance to admit your mistakes and pay us back all the money you took from us….

best regards,

stephen”

(the 6th e-mail or 3rd words)

Regarding publication, the 1st mail which Yip numbered as the 2nd words was sent to Chan and Wong, and Chan directed it to Yip.  The remaining five mails were all sent to Yip and copied to Wong.  There is no evidence of publication to other people.

The defamatory meanings

368.  Lee accepts that the six e-mails are defamatory of Yip.  He accepts that his e-mails had the following meanings which are more or less the same as those ascribed to them by Yip:

(1) Yip had defrauded and cheated Lee and Green Dragon and others;

(2) Yip should return the proceeds of his fraud to Lee and Green Dragon and others;

(3) Lee believed that Yip had offended US and Hong Kong laws and may end up in jail for the fraud he committed;

(4) Lee believed that Yip had committed criminal offences;

(5) The Doctorate Degree which Yip professed to hold was invalid;

(6) Yip had been running his business by using fraudulent means;

(7) Yip was avoiding Lee and Green Dragon and face up to his liabilities;

(8) Yip was a deceitful person of low business morality;

(9) Yip might have committed another crime by using his invalid Doctorate Degree qualification; and

(10) Yip was a dishonest person.

369.  Mr Pow submitted that the sting of the libel was the imputation that Yip had defrauded Lee and Green Dragon.  There is also a subsidiary charge that the doctorate degree that Yip professed to hold was invalid or a fake.

Decision on the imputation of fraud

370.  In the light of my findings on the misrepresentations, Lee has succeeded in the defence of justification on the imputation of fraud.

Decision under section 26 on the imputation of fake degree

371.  Regarding the imputation of the invalid or fake doctorate degree, Lee relies on section 26 of the Defamation Ordinance, Cap 21.  Section 26 provides:

“26. In an action for libel or slander in respect of words containing 2 or more distinct charges against the plaintiff, a defence of justification shall not fail by reason only that the truth of every charge is not proved if the words not proved to be true do not materially injure the plaintiff's reputation having regard to the truth of the remaining charges.”

372.  I agree that Lee can rely on section 26.  In the light of the findings on the misrepresentations, even if the imputation on the doctorate degree is not proved, that would not materially injure Yip’s reputation having regard to the truth of the imputation of fraud.

Further decision on the imputation of fake degree

373.  Nevertheless, I would also consider whether Yip can succeed on this charge in case I were wrong in applying section 26.

374.  Yip’s evidence in cross-examination on his doctorate degree is at transcript pp. 58-61 and pp. 66-81.  He said he was introduced by Wong to one Professor Dr Amen Lee also known as Lee Chi Shing.  Professor Amen Lee claimed to be the Associate Dean of Universidad Empresarial de Costa Rica. He told Yip that he was helping the university develop its curriculum in China and Hong Kong.  He was looking for some professionals or people who had made contributions to the community and confer them with honorary degrees.  After seeing Yip’s CV, he said that Yip was eligible for an honorary doctorate for 2 reasons.  The first reason was Yip’s successful professional career in that Yip was made an international strategist of a bank when he was less than 30 years old.  The second one was his involvement in voluntary charitable work.

375.  Yip in due course was conferred with the degree of Doctor of Business Administration (Honoris Causa) in a ceremony conducted on 10 February 2007 at the Hotel Miramar in Tsimshatsui.

376.  Lee said in evidence that he did not place much weight on this matter.  He regarded the offer of the degree as a matter of giving face to him by business acquaintance.  It would be disrespectful or not giving face to the offeror to decline the offer.  Nevertheless, he addressed himself as Dr Roger Yip.  His updated CV also contains a reference to this honorary degree.

377.  After the commencement of this action, Lee produced two

e-mails from Universidad Empresarial casting doubt on whether Yip had indeed been conferred with this honorary degree.  The first mail is dated 19 January 2009 from the office of the registrar of the university (CB 186).  It says:

“Dear Sir,

We can’t confirm Roger Yip’s diploma, he is not in our records. Definitely we will love to have a scan copy of that diploma so was can trace it and try to know where it come from.

Thanks

Registrar office.”

The second mail is from one William Zamora of the university and dated 16 March 2009 (CB 189).  It says:

“Dear Mr Lee,

After reading your email, is very sad to read all of that. Neither Terence Wong or Roger Yip are part of my university and don’t have legitimate documents from my university.

Hope this clears everything for you.

William Zamora”

William Zamora was said to be the President of International Operations and Development in a brochure printed for the degree conferment ceremony in which Yip was conferred with the doctorate degree (C1 181-182).  He did not seem to have taken part in the ceremony.

378.  Yip’s former solicitors also wrote to the university on 15 April 2009 requesting the university to provide verification and written confirmation of Yip’s honorary degree (C8-2000).  But the university did not provide any reply.

379.  The diploma purportedly given by the university to Yip for the degree also appears interesting.  The national language of Costa Rica is Spanish, but the content of the diploma is in English.  There is not a word of Spanish save the logo at the top and the name of the university.  The name of the university is not stated as “Universidad Empresarial de Costa Rica” or its English translation “Business University of Costa Rica”, but in the form of half-Spanish and half-English called “Empresarial University of Costa Rica” (C8-2001).

380.  Yip then came across a notice published purportedly by the university in the SCMP on 18 January 2010 (B6 1206).  The notice announced a new Hong Kong representative of the university one Mr Michael Li.  Yip then approached Michael Li to check the record of the university on his doctorate degree.  Michael Li told him that the fee for searching the record was HK$15,000.  If the search should produce a positive result, a sum of HK$38,000 had to be paid for the degree to be certified and confirmed.  Yip did not pay any money for the search.  He agreed that since he had refused to pay, the university had not admitted his possession of the degree and that his possession of the degree had not been confirmed (transcript 74E-F and 74S-75L).

381.  I agree with Mr Pow that the two e-mails from the university as produced by Lee, which are covered by a hearsay notice, have shifted to Yip the evidential burden of proving that Yip had indeed been conferred with the honorary doctorate degree by the university.  Yip however has provided no evidence to discharge this burden.  He also accepts that the university has not confirmed that he had been conferred with the degree.

382.  In the premises, I hold that Lee has also succeeded in the defence of justification on the imputation of a fake or invalid doctorate degree.

Decision on malicious falsehood

383.  In the light of my decision on the defamation claim, I also find for Lee on the claim of malicious falsehood.

COSTS

384.  Finally on the question of costs, since Lee has succeeded on the contested issue of the misrepresentations and also this minor issue on Yip’s honorary degree, I make a costs order nisi that the plaintiffs do pay the defendants the costs of this action to be taxed.