HKSAR v. LI JIALIN

DCCC 1282/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO.1282 OF 2010

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Reasons for Sentence

1. The defendant faced a total of 27 charges.

2. Charges 1 through to 11 are for price rigging of share transactions under s.296(1)(a)^[1] and (4) of the Securities and Futures Ordinance, Cap.571 (“SFO”). The defendant was convicted after trial of charges 1, 3 to 11. He was acquitted of charge 2.

3. Charges 12 to 27 are for the defendant’s failure to perform a duty of disclosure within a specified period under ss.341(1)(a), 347, 348(1)(a) and 351(a) of the same ordinance. The defendant pleaded guilty to these 16 charges and was convicted upon his admission to the summary of facts prepared specifically for the purpose of his pleading guilty.

Summary of facts

4. The defendant was at all material times the controlling shareholder and chairman of VST Holdings Limited (“VST”), a company listed on the Stock Exchange of Hong Kong (“SEHK”). Over 40% of the total shareholdings in VST was vested in the defendant.

5. There are 3 securities trading accounts involved in this case. One was held in the defendant’s own name, one was held jointly by the defendant and his wife and one was held in the name of a Li Baolin.

6. At trial, the prosecution proved that the defendant held the beneficial interest in the shares bought, sold and held by each of the 3 trading accounts, that the defendant initiated and completed transactions between the 3 trading accounts of VST shares, resulting in no change of their beneficial ownership, that these transactions by the defendant of VST shares between the 3 accounts had the effect of increasing the price of VST issued shares traded on the stock exchange.

Previous convictions

7. As with most, if not all, cases of this nature, the defendant is of previously clear record.

Mitigation

8. The defendant is 50 years old. He holds a degree in Electrical Engineering and a masters degree in Management in Engineering from Tsinghua University. The defendant founded the company VST Computers in Hong Kong in 1991. That enterprise started off with just 6 employees with HKD20,000 capital. It has since grown to become one of the largest distributors of information and technology products in the Asia Pacific region. VST now has a turnover of $26 billion per annum and employs over 3000 people.

9. The defendant is involved with various charities and is either president or vice-president of alumni and business bodies. He is also a member of the Inner Mongolia People’s Political Consultative Conference. In October 2010, he was nominated by a body managed by the Ministry of Industry and Information of the PRC government as one of China’s top 10 persons of the year in the IT industry.

10. The defendant had written 2 books in his spare time, sharing his vision of life with other people. The books are distributed to his business associates, friends and family to share his method as to how to improve one’s life experience.

11. It is Mr. Duncan’s submission that in late 2007 and early 2008 the defendant was under enormous stress from the contemplated take over of a much larger company in Singapore by VST. The defendant sought to alleviate that stress by conducting trades in the VST shares. It was “more or less a pastime”.

12. Mr. Duncan then pointed to the facts supporting that suggestion. They include the fact that there appeared to have been no pattern to the conducting of the wash trades; the fact that there was no sustained effort to keep the price of VST up and in certain occasions the defendant’s order actually decreased the price; and the fact that although the trades were conducted through 3 accounts, it was clear that those accounts were opened quite some time ago and were not set up in order to undertake nefarious trades.

13. Since the defendant had elected not to give evidence at trial, as was his right, this was the first time that the court heard about the defendant’s reason behind his trading.

14. It must be noted that in my findings, I did find that all the transactions set out in SF-22 by Ms. Stella Fung, the prosecution expert witness, were entered into or carried out, directly or indirectly by the defendant. Mr. Duncan in mitigation seemed to have suggested that the defendant did in fact conduct all those trades himself, supporting that finding.

15. In the case of R v CHUNG Kam-fai [1993] HKCLR 178, the court considered as to when the court should inform the defence that a certain ground of mitigation is rejected.

"Where mitigation is advanced which is patently incredible the court need not indicate it has doubts about its correctness before rejecting it. Where, however, the mitigation is not patently incredible the court should indicate it is not prepared to accept it from the bar before rejecting it. If nothing is said in such circumstances defence counsel might unwittingly be misled into thinking that the mitigation advance would be accepted."

16. I find the reason put forward by the defendant for his trading activities patently incredible. The defendant is not someone who is a director in name only. From the letter of Mr. Chow Ying Chi of VST Computers (Hong Kong) Limited put forward in mitigation, the defendant had taken up VST Computers 12 years ago and had been leading the company to continuous growth. The defendant is someone who obviously understands the business world, someone astute enough to be able to survive in the cut throat business of information technology products. It borders on the absurd to think that he would be trading in shares of a listed company just to relieve stress. In fact, if it was the pending takeover of the bigger Singapore company by VST that was the cause of his stress, trading in shares of VST would surely add to and not relieve the stress.

17. Furthermore, the amount of shares that the defendant dealt with during the charged period represent a not insignificant amount of the overall turnover. See paragraphs 23, 25 and 26 of Ms. Stella Fung’s 1^st expert report. Given the quantity and timing of the dealings, it is patently incredible that the defendant had conducted the transactions in question as a mere pastime. It must be noted that these paragraphs are only being used in the context of judging the credibility of the “pastime” mitigation being put forward. I am well aware that only a number of specific transactions had been found in relation to each charge to have had caused an effect in the VST share price and the defendant should only be sentenced on that basis.

18. I further find that even if the defendant did trade as a pastime, it would be impossible to accept that someone of his astuteness and ability and with his understanding of the business world to not know that trading in the shares of a listed company which he is a director and majority shareholder of by way of shares changing hands between his own accounts without change of beneficial ownership would create a false or misleading appearance with respect to the prices of securities. It does not make him any less culpable.

19. A number of letters in mitigation written by well respected and highly regarded members of society were submitted and it is clear that the defendant is a well respected person and had contributed a lot to society.

Sentencing cases

20. Mr. David Leung for the prosecution referred me to 4 cases. These are all cases relating to sentencing for insider dealing. I find that although a s.296(1)(a) offence shares the same maximum penalty of fine of $10 million and 10 years’ imprisonment, a charge of insider dealing involves a higher level of culpability as it would lead to more direct damage to the integrity of the financial system and those cases are of limited assistance when deciding on the correct sentence to impose in our present case.

21. The defence has submitted a list of cases taken from the SFC Enforcement News to demonstrate how in cases of similar nature the court had dealt with the defendants. Not all the cases are reported cases.

22. In the case of SFC v Choy Wai Zak, HCMA 264/2002, the 1^st appellant was convicted of 2 charges of intentionally creating, or causing to be created, a false or misleading appearance of active trading in the shares of a listed company contrary to sections 135(1)(a) and 139 of the Securities Ordinance, Cap.333 (now repealed). The maximum sentence provided for this offence in the Securities Ordinance was 2 years’ imprisonment.

23. The 1^st appellant was sentenced to 2 consecutive terms of 4 months’ imprisonment. On appeal, 14 cases involving prosecution under the same sections were referred to the court. None resulted in an immediate custodial sentence. The court was of the view that comparison of the facts of that case with the facts of the other cases was of very limited value and that each case has to be dealt with on its own facts. There the court considered that the offences were committed in an unsophisticated way and agreed with the magistrate’s approach of taking one quarter of the maximum sentence provided for by law and then reducing it to reflect the mitigating circumstances resulting in a sentence which was one sixth of the maximum.

24. Lugar Mawson J further remarked at paragraph 19 that “…market manipulation is a serious offence. It is one the legislature has chosen to penalise by providing for a sentence of immediate imprisonment of 2 years' imprisonment. It is an offence that strikes at the fair and honest operation of the securities market. It is not a victimless crime; its victims are all other members of the investing public. It is an offence that can lead to large profits for the offender and to as equally large losses to the investing public. And, perhaps most importantly, it is an offence that necessarily involves those who commit it doing so by deception and dishonesty.”

25. In the case of SFC v Zou Yishang, HCMA 859/2005, the appellant was again convicted after trial of sections 135(1)(a) and 139 of the repealed Securities Ordinance, Cap.333. He was sentenced to 4 months’ imprisonment.

26. The appellant within a 1 month period operated 5 share trading accounts held at separate stock broker’s firms, one account being in the name of his wife and 4 being in the name of a company of which the appellant was the controlling director and shareholder.

27. Those accounts were used by the appellant to buy and sell the shares of a listed company which resulted in no change in beneficial ownership. The appellant conducted some 40 transactions on 11 days during a period of 6 weeks. During that period his wash sales accounted for a significant percentage of the market’s total turnover. It was found that his trading activities were significant and conducted over an extended period of time.

28. In considering the appeal against sentence, the Court said that “the protection of the integrity of the stock market is an important public concern in Hong Kong and deterrent sentences, depending on the facts of an individual case, are justified.” The sentence of 4 months’ imprisonment was upheld on appeal.

29. In the case of SFC v Lee Sing Wai, HCMA 132 of 2006, the appellant was sentenced to 7 months’ imprisonment for the same sections 135(1)(a) and 139 offences of the repealed Securities Ordinance, Cap.333. There the appellant and 2 others used 9 accounts at 5 different brokerages to trade the shares of a listed company amongst themselves with a view to promoting the appearance of active trading in the shares and so enhance their market price.

30. The arrangement continued for about 32 trading days although the appellant’s transactions took place on only 4 days over that period. The appellant sold 12.5 million shares in total and purchased 13.3 million shares, ranging between 15% to 52% of all daily purchases of the shares and between 18-50% of all daily shares.

31. McMahon J found that it was a sophisticated and relatively large scale operation. That innocent members of the investing public would be misled by the false price and turnover created in respect of the shares and that a sentence of immediate imprisonment was justified. “Offences such as the present are not merely regulatory or technical offences, they amount to frauds on the investing public.”

32. When it was pointed out to the court that in virtually all previous such prosecutions sentences of suspended imprisonment were handed down, McMahon J expressed his surprise and said that the offences are serious and cause real and substantial losses to investors and bring an important part of Hong Kong’s economy into disrepute. Sentences of imprisonment in his view cannot be complained of even for first offenders.

Sentence

33. Ms. Fung in her 3^rd expert report at paragraph 21, in reply to Mr. White’s expert evidence that the defendant was actually trading for profits, stated the following:

  “21. I am also of the opinion that LI's trading pattern did not resemble that of a trader who traded the shares for a profit. For example, on 4 October 2007 LI sold a total of 1,550,000 shares for the three accounts, of which 1,046,000 shares were matched trades (see Exhibit SF.24), Other than the matched trades, LI bought 748,000 shares from the market at an average price of $3.221 and sold 504,000 shares to the market at an even lower average price of $3.212. This buy-high sell-low pattern could hardly show that LI was trading VST shares for a Profit.”

34. Ms. Fung at paragraph 22 explained how the defendant would still have benefited from his own trading despite her opinion that he did not make any trading profits:

  “22. Although LI did not make trading profits from the RTs and/or his other trades in VST shares, he could still benefit from the higher share price as the valuation of his total shareholding would increase due to the inflated share price. According to VST's announcement dated 11 October 2007, LI was holding 488,976,000 shares. As a result, every $0.01 increase in VST’s share price would raise the market value of LI's shareholding in VST by $4.9 million. Moreover, the higher share price would also facilitate the listed company to raise funds by issuing new shares at higher price. VST announced on 11 October 2007 a top-up placing of 186 million shares at $3.05 per share, raising a total of $567.3 million.”

35. Even though the defendant does not appear to have conducted those transactions in question with a view to direct and immediate profits, the ultimate effect of his trading must be the appearance of active trading, which might lead to an increase in the overall share price. This is what the section is ultimately trying to guard the market against.

36. I find that the court must send a clear message to the general public that any attempt to manipulate the stock market will lead to serious consequences for the perpetrator.

37. The integrity of the Hong Kong stock market is of paramount importance, if the integrity is gone or perceived to be gone, there will be devastating effect to the economy of Hong Kong, affecting virtually everyone’s life.

38. Despite the fact that the defendant is of previously clear record and the fact that he had given back a lot to society, the conclusion I have come to after reviewing the relevant cases is that in order to deter market manipulation, to protect the investing public and to maintain the integrity of the Hong Kong stock market, an immediate custodial sentence is called for in the present case.

Length of sentence

39. The question to decide then is the length of the sentence in relation to each charge.

40. In charge 1, there were 3 transactions which had caused the price of VST shares to be increased. Total number of shares traded in those 3 transactions were 216,000.

41. In charge 3, 7 transactions were found to have increased the share price. Total number of shares traded in those 7 transactions were 360,000 shares.

42. In charge 4, 2 transactions had the effect of increasing the share price. Total number of shares traded in those 2 transactions were 36,000.

43. In charge 5, 2 transactions had the effect of increasing the share price. Total number of shares traded in those 2 transactions were 200,000 shares.

44. In charge 6, only 1 transaction had the effect of increasing the share price. Total number of shares traded was 50,000 shares.

45. In charge 7, 6 of the defendant’s transactions had the effect of increasing the VST share price. Total number of shares traded was 74,000 shares.

46. In charge 8, 13 of the defendant’s transactions had the effect of increasing the share price of VST. Total number of shares traded in those 13 transactions was 756,000 shares.

47. In charge 9, 3 transactions had the effect of increasing VST share price. Total number of shares traded was 232,000 shares.

48. In charge 10, 4 transactions had the effect of increasing VST share price. Total number of shares traded was 210,000 shares.

49. In charge 11, there were 2 transactions which had the effect of increasing VST share prices. Total number of shares traded was 200,000 shares.

50. Bearing in mind that there is no evidence that the defendant had acted with others, that the operations were not sophisticated and were easily traceable and the amount of shares involved were relatively small, I find that in relation to charges 1, 3 to 11, in taking a global approach, a total overall sentence of 7 months’ imprisonment is appropriate.

51. I will reduce this sentence by 1 month to give credit for the defendant’s conduct of the case and his contribution to society over past years. I will therefore sentence the defendant to 6 months’ imprisonment on each of the 10 charges and order them to run concurrently.

Fines

52. I have considered whether in addition to the term of imprisonment a fine is necessary and have concluded that the term of imprisonment is sufficient punishment for the defendant.

Investigation expenses

53. The defendant is ordered to pay the investigation expenses of the prosecution in the amount of $168,282 as set out in the Statement of Investigation Cost, pursuant to section 182 of the SFO.

Disqualification

54. Pursuant to section 303(2)(a) of the SFO, I hereby order that the defendant shall not without the leave of the court, be or continue to be a director, liquidator, or receiver or manager of the property or business, of a listed corporation or in any way, whether directly or indirectly, be concerned or take part in the management of a listed corporation for a period of 1 year.

55. This order will take immediate effect.

Sentence in relation to charges 12 to 27

56. The maximum sentence in relation to an offence under s.341(1)(a), 347 and 348 as prescribed in section 351 of the SFO is that of a fine at level 6 and imprisonment for 2 years. A fine at level 6 is currently $100,000 according to schedule 8 of the Criminal Procedure Ordinance, Cap.221.

57. The defendant pleaded guilty to all 16 charges in relation to non-disclosure. According to the evidence of prosecution witness Mr. Lung, the former Company Secretary and Financial Controller of VST, it was he who had wrongly advised the defendant about the requirement to disclose the various transactions in relation to the 16 charges which took place between 17^th August 2007 and 10^th January 2008.

58. I accept this as a ground of mitigation and find that the proper sentence in relation to these 16 charges should be by way of fines.

59. Given the fact that the defendant had been misled by Mr. Lung and that the defendant remedied the situation shortly after he was made aware of his failure to disclose, I will impose a fine of $15,000 in relation to each of the 16 charges. Fine to be taken from the defendant’s bail money.

60. Pursuant to section 113A of the Criminal Procedure Ordinance, I hereby make an order that if the defendant fails to pay the fine in relation to any of the charges he is to undergo 14 days’ imprisonment for each failure to do so.

[1] 296(1) A person shall not, in Hong Kong or elsewhere-

(a) enter into or carry out, directly or indirectly, any transaction of sale or purchase of securities that does not involve a change in the beneficial ownership of those securities, which has the effect of maintaining, increasing, reducing, stabilizing, or causing fluctuations in, the price of securities traded on a relevant recognized market or by means of authorized automated trading services;