Securities and Futures Commission v. Dfrf Enterprises Llc and Others

HCA 2189/2016

[2022] HKCFI 1288

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2189 OF 2016

_____________

_____________

Before:  Deputy High Court Judge Paul Lam SC in Chambers

Date of Hearing :  20 April 2022

Date of Judgment : 20 April 2022

Date of Reasons for Judgment : 10 May 2022

__________________________________

R E A S O N S  F O R  J U D G M E N T

__________________________________

A. INTRODUCTION

1.This is the trial of the action commenced by the Securities and Futures Commission (“SFC”) against the Defendants (“Ds”). The trial took place in the absence of Ds, who never appeared in these proceedings. In short, SFC’s case is that Ds were parties to a Ponzi and pyramid scheme; and a number of Hong Kong residents had fallen victims to such fraudulent scheme.

2.I had considered all the documentary evidence, and oral evidence given by four factual witnesses as well as very helpful submissions made by SFC’s counsel. The four factual witnesses are Mr. Shum Yau Sing (“Shum”), Mr. Chan Man Chiu (“Chan”), Ms. Cheung Lo Wa (“Cheung”) and Mr. Tam Yiu Cheong Raymond (“Tam”). Shum, Chan and Cheung are the victim investors whereas Tam is a Senior Manager in the Enforcement Division of SFC.

3.At the end of the trial, I made an order in terms of the draft Judgment proposed by the SFC, a copy thereof is attached (“the Order”). These are my reasons.

B.   THE FACTS

4.I accepted the evidence adduced by the SFC in full. Insofar as necessary, I shall draw adverse inferences against Ds, who did not appear or give any evidence in these proceedings even though reasonable and sufficient notices had been given to them to do so.

B1.    Personal backgrounds of Ds

5.As to Ds:

(a)  D1 is a Massachusetts limited liability company incorporated in the United States of America (“USA”) on 21 July 2014.

(b)  D2 is a Florida limited liability company incorporated in the USA on 15 April 2013.

(c)  D3, a Brazilian, is the founder of D1 and D2 (collectively “DFRF”). DFRF are, in fact, the initials of D3. He was named as the resident agent and the manager of D1 in its company filings in the USA in 2014, and the registered agent and an authorised person of D2 in its articles of organisation, annual report and amended annual reports filed in the USA in 2013 to 2015.

(d)  D4 was named as one of the authorised persons of D2 in its amended annual reports filed in the USA on 20 February 2014 and 16 June 2015. He claimed to be a representative and was listed as the administrator of the “Platinum Swiss Trust”. It was and is the holder of an integrated back account no. 840-027965-888 (“D4’s Account”) at the Hongkong and Shanghai Banking Corporation Limited (“HSBC”) which was opened purportedly for the purposes of managing household expenses, crediting director revenue from business and accounting for expenses in Hong Kong.

(e)  D5 is a company incorporated in Hong Kong on 30 May 2013. Its sole director and shareholder is a Mr. Jose Ramon Mayorquin. It was and is the holder of a business integrated account no. 023-217656-838 (“D5’s Account”) at HSBC, which was opened purportedly for the purposes of D5’s seafood trading businesses. In the account opening form, it was stated that D5 was trading seafood such as sea cucumbers from Mexico to Chain.

6.None of DFRF or D3, or any of the persons purportedly acting as their agents, servants or employees, were licensed by the SFC to carry on any of the regulated activities as set out in Part 1 of Schedule 5 to the Securities and Futures Ordinance (Cap. 571) (“the SFO”).

B2.    DFRF’s Membership Program

7.It appears that, starting from about the summer of 2014, D3 began selling membership in DFRF through meetings with prospective investors many of which took place in Massachusetts, USA. Since about October 2014, he promoted DFRF primarily through videos available to the public on the internet. Most of the videos featured D3.

8.According to documents including promotional materials and business model summary published by DFRF, DFRF’s purported business model was as follows:

(a)  They claimed to have headquarters in the USA (Orlando and Boston) and Canada (Vancouver). Their main business was gold mining operations at gold mines and reserves in Mali, Brazil and USA. They made 13 to 16 metric tonnes of gold per month, and made a gross return of 100% on every kilogram of gold produced. They would donate 25% of their profits to charitable organizations around the world.

(b)  They offered a membership program that enabled individuals around the world to invest in them by acquiring “membership units” (“Membership Program”). To subscribe to the Membership Program, a prospective investor must buy membership units priced at minimum US$1,000 per unit.  “Member benefits” would be up to 15% per month, and placed in the Platinum Swiss Trust, Geneva, Switzerland. Access to those benefits would be via an issued DFRF Visa debit card. The contributions by members were fully insured by Accedium, an insurance company. They described the investment as a zero risk business.

(c)  An invitation to join the Membership Program could only be extended to prospective investors by an existing DFRF member (“Referring Member”). The Referring Member would provide potential investors with instructions on how to subscribe to the Membership Program. DFRF would then vet the potential investor, and once approved, the investor (“Approved Member”) would receive (i) a contract entitled “Operating Agreement” which must be counter-signed and returned to DFRF; (ii) information on the “Accedium” insurance policy, which insured the membership units acquired (each member was required to pay an annual insurance fee of 7% which was calculated by reference to the initial subscription fee); (iii) one VISA debit card issued by the “Platinum Swiss Trust” that provided “towering limits for daily shopping and ATM”; and (iv) instructions on how to access and manage his/her online account balance.

(d)  Referring Member would receive a commission paid at 10% of the initial subscription fee of the Approving Member with a further 10% to be paid on any re-investment of the returns by the Approved Member.

(e)  The returns would be paid by DFRF on the first day of every month on a pro-rata basis into the Approved Member’s account at the “Platinum Swiss Trust”. They would then be accessible via the VISA debit card.

(f)  Approving Members who wished to withdraw from the Membership Program may do so on the expiry of 12 months from the time of their initial subscription if the fee paid was US$1,000, 6 months from the time of their initial subscription if the fee paid was between US$1,000.01 and US$5,000, or every month if their initial subscription fee exceeded US$10,000.01.

9.DFRF operated a website www.dfrftv.com (“the Official Website”), which is no longer accessible. The Official Website included the following representations:

(a)  About DFRF:

“DERF is a subsidiary company of a business group.

Already traded and produced gold for over 11 years.

DFRF emerges as an option to give new members the opportunity to the business as members, in concept “membership”.

The company has all legality. His current record is in Massachusetts and Florida, in the United States and in Brazil.

They also have agreement or working with Citibank and other banks in the US and also with the Private Bank Switzerland STP “platinum Swiss Trust”.

DFRF also signed an agreement with British insurer “Accedium” to ensure the risk of the entire business. This allows us to say that the entire capital contributed by the members so far, is insured by the insurer.”

(b) About the investment returns:

“As a member or a member, actions will have access to a tremendous profit plan.

To begin you will receive up to 15% of DFRF month. Actually we received 15% and remembering that is every month and that this gain is also covered by an insurance.

If you start, for example $1,000, next month will have $1,150 and therefore, as is compound interest, you will receive 15% of $1,150 and so on.

You will also have an added bonus, membership, 10% of all amounts that contribute, forever, both of initial and subsequent contribution as reinvestment of all people you bring to the company.”

(c)  About the guarantee offered:

“We offer complete peace of mind with 100% principal protection and guaranteed positive returns.”

10.DFRF (or their agents, servants or employees) also maintained a Facebook page (http://www.facebook.com/dfrftv) and a Youtube channel (www.youtube.com/c/dfrftv) under the name of “DFRF TV” for promoting their business. They are also no longer accessible.

11.In a Youtube video published at an unknown time, the following five persons were present: Ms. Monita Chan (Canada Manager) (“Monita Chan”), D3, Mr. Darren Cober (legal advisor) (“Darren Cober”), Ms. Marie Saint-Jean (France Manager) (Marie Saint-Jean), and Mr. Eddie Beranto (Vice President of a Swiss Bank). The interview was conducted in English but partly translated into Cantonese by Monita Chan and Putonghua by Marie Saint-Jean. It was expressly targeted at the “Chinese community”. What is most extraordinary about this video is that it purported to convince the viewers that the Membership Program was legal.  Darren Cober, introduced as a former FBI special agent, said “…I used to be a special agent and I worked for the government”; “So being a former law enforcement officer it’s very important for me that everything is done legal”; “I had a history of investigating Ponzi schemes when I was a special agent, so I know what’s right and what’s wrong, and I have a very strict compliance policy to make sure that we’re doing everything right.”; “We’ve also utilized outside resources, such as going to the Head of the SEC, the former head of the SEC to work with us and review and make sure everything is done proper.”; “As a retired special agent, I set my career doing things the right way and I promise I will continue doing the same things now.”; “You’re absolutely right about it. The way Daniel has it set up is perfectly legal.”.

12.The US Securities and Exchange Commission (“SEC”) did not believe that Darren Cober was an FBI special agent though he did have a law enforcement background claiming that he had “worked with” the FBI.

13.Nevertheless, in fact:

(a)  There were no gold mines, no gold reserves, and no gold operations as alleged.

(b)  “Platinum Swiss Trust” had not been authorised to conduct banking activities in Switzerland. It had been on a warning list on the website of the Swiss Financial Market Supervisory Authority (“FIAMA”) of companies and individuals that may be carrying out unauthorized services and were not supervised by the Swiss authority. Further, there was no banking transaction between DFRF and Platinum Swiss Trust.

(c)  There was a real company called Accedium Insurance Company registered in Barbados and London, which was not a top-rated company. In any event, DFRF had paid no premium to Accedium and there was no banking transaction between them.

(d)  Monies received from the members were dissipated to D3 personally and his associates.

(e)  While some members had received small amounts of returns, they were apparently coming from investments paid by other members.

B3.    Conversion of membership units into preferred shares in DFRF upon public listing in the USA

14.Since about late March 2015, in particular by a video dated 25 March 2015, DFRF, D3 and their associates claimed that DFRF was registered with the SEC, their stocks were about to become publicly traded, and current investors may convert their membership units into stock options at US$15.06 per share.

15.The SEC observed that, after that announcement, receipts from investors soared to more than US$4.3 million; and the high rate of investment continued: DFRF raised more than US$2.5 million in April 2015 and more than US$4.1 million in May 2015.

B4.    DFRF’s activities in Hong Kong

16.At least since about March/April 2015, DFRF began to carry out marketing activities in Hong Kong:

(a)  They operated from a business centre located at 10/F, Miramar Tower, 132 Nathan Road, Tsimshatsui, Kowloon. Office numbers 1010 and 1056 were frequented by Monita Chan and investors.

(b)  Monita Chan was involved in the operation by explaining DFRF to potential investors and receiving investment funds from investors.

(c)  One Mr. Kam Kai Cheung (Anthony Kam) (“Anthony Kam”) and one lady called “Cindy Leung Suen” (“Cindy Leung”) worked at DFRF to assist their operation by explaining DFRF to potential investors and receiving investment funds from investors. One Ms. Wei Yu Chen Nancy (“Nancy Wei”), the mother of Anthony Kam, also provided assistance. Anthony Kam and Nancy Wei also invested in DFRF.

(d)  Various investors were introduced by existing members, and were assisted by their Referring Members in subscribing to the Membership Program. All of them relied on their Referring Members or online accounts at DFRF as confirmation that DFRF had received the amounts they remitted as purported subscription fees.

(e)  Communications with members included emails sent from “DFRF HK [email protected]”, which apparently was an email address created for DFRF’s activities and their members in Hong Kong (“the Official HK Email Address”).

17.All the Hong Kong investors were told that DFRF would become a listed company, and that the value of their investments would rise threefold after the listing.

18.On 5 May 2015, DFRF held a dinner reception for its Hong Kong members at Mira Hotel, Hong Kong, to celebrate the launch of their Hong Kong office (“the Launch Event”). The venue was booked on 24 April 2015; the dinner was initially scheduled for 30 April 2015 but was subsequently postponed. The backdrop read “DFRF NEW SOLUTIONS FOR A NEW ECONOMY”. During the Launch Event, via video-conferencing, two representatives of DFRF told the participants that DFRF would be listed in the USA soon and the value of the shares in DFRF would increase three times after the listing; and they urged the participants to invest in DFRF.

B5.  The Promotional Videos

19.On or about 6 May 2015, DFRF (including their agents, servants or employees) released three promotional videos featuring interviews with D3 in Cantonese, Putonghua and English (“the Promotional Videos”). The Promotional Videos could be seen on the Official Website, the Facebook page and the YouTube channel. In the purported interviews:

(a)  D3 announced that DFRF became a listed public company in the USA on 5 May 2015 and that a “conversion process” for DFRF members would begin. He explained the conversion process as meaning that each of the DFRF members would receive an authorisation form (by email or post) giving them the option to convert all or part of their membership units into preferred DFRF shares at US$15.06 per share. He said that the DFRF share price was then already US$18 per share. He also claimed that the option would only be available until 3 June 2015, although members were not precluded from recruiting or referring new potential investors during that period.

(b)  He claimed that the benefit of becoming a shareholder of DFRF was that the value of the member’s investment in DFRF would then depend on DFRF’s performance. The investors could liquidate their shareholdings by selling their preferred shares back to DFRF through the online platform or on the market through a broker.

(c)  D3 further stated that the stock symbol or stock code of DFRF would not be released to the public until 3 June 2015 after the conversion process had been completed, and the reason was to protect the value of the DFRF stock.

20.The Promotional Video partly in Cantonese and partly in English was apparently targeted at the current or prospective investors in Hong Kong. It purported to show an interview of D3, introduced as DFRF’s CEO, by Monita Chan. Monita Chan began by saying this to D3: “So it’s my pleasure honour to have Daniel, you are in talking with our members in Hong Kong. Everybody’s listening, I’am translate to Cantonese.” Towards the end, she said “so we’re going to thank you for you to answer all the questions, it’s from Asia, from Hong Kong. So thank you very much.”

21.For the present purpose, it is pertinent to highlight the following representations made by D3 during that interview:

(a)  The very first question Monita Chan asked was whether DFRF was listed in the USA on 5 May 2015 as scheduled. D3’s answer was “Yes. Well, we announce few weeks ago that we are preparing to launch on 5 May. And on the past three days I received personally thousands of messages, people asking me to hold, to delay, to postpone. But we accomplished our mission and we launched the company, so we’re already public as of today and we are on schedule.”

(b)  D3 then explained the procedure to convert the investments of the current members into shares of DFRF; and further that there was a deadline on 3 June 2015 before which new members may join as well. What he said was “The processing is very simple. We try to do something simple. And the reason why we simply was to accommodate those thousands of people that enquire or almost begging us to hold and delay, and what kind of benefit and how we can accommodate everybody. So we found a way, a formula, to accommodate everybody. And now we, we need a time, normal time for processing of conversion from the private agreement that we have with DFRF with the members, and converting into options, and then finally on 3 June we convert into stocks. So the processing is simple, it’s an authorisation letter that will come with the agreement. So every member will sign this authorisation. We can liquidate the agreement and convert into options and further the stocks. During the process, we determinate that on 3 June would be more than enough time for us to do for all current members, and also to accept new members during the process.”

(c)  He then explained the benefits to the investors: “It’s a big difference, because everything depends on the company’s performance now. So today we decide to fix it at $15 per share until 3 June. The company is still working and producing so the performance will determinate the value of the stocks for tomorrow and the next day until 3 June, which will bring a lot of benefit to the members that joined today before 3 June. And after that, the company still growing in performance increasing more assets. So performance and assets, the result is the benefit of growing increasing the value of the stocks. So if today the amount of money you have and the conversion will bring it to you a certain number of shares. Tomorrow the same shares will have a different value. So you will get the dividends of 15 per cent in the value of the shares, will be much more money. So performance, results, increasing assets, we develop more benefits.”

(d)  He then said that preferred shares would be offered to members only: “We’re offering the preferred stocks only to members. And to the open market that they can go through any stockbroker. Once we release the symbol of our company that it not yet available for public. So until 3 June we are holding the symbol because we are also holding the value of the shares, $15 per member per stock.”

(e)  After that, he explained that the members could easily sell the shares and obtain cash: “Yes. We have two options. The first one will be since you’re a member and you can sell the valuation of your portfolio online in your page, you have the number of shares and we will show the value of the shares. You can sell online. So the company will liquidate. The company itself will buy the shares. So you will get the funds into your account online right there ready to use. Or you go to the stock market and you can offer open to, to the stock brokers. But it will be much easy and simple because you are a member and the preferable stock is only for members. You already are on the page. We have all the tools in front of you. You can request to sell and we’ll convert into cash, you can use it right away.”

(f)  He further said that there was a new platform for the members to manage their shares in DFRF; after the shares were sold, the proceeds could be transferred from that platform in any amount, in any currency, and to any bank anywhere. He also said that the members would receive new credit cards in a few more days.

22.The Promotional Video partly in Putonghua and partly in English was an interview of D3 by Marie Saint-Jean, who appears to be a Chinese. It was expressly translated into Putonghua “for our members in Asia”. The content of the interview was substantially similar to the one mentioned above. Suffice to highlight the following statements made by D3:

(a)  “As we announce, as we have been informing our members, even the past two months, we finally have – there’s a privilege to confirm today that since yesterday we are public, we already launched, we already started process to be of commercial for the members, from the private to the options, and that timeline that we’ll take a few more days until we’ll be able to convert all members balance into stocks. So yes, we are officially public company.”

(b)  “…we are not yet announcing the symbol of the company until we finalise the conversion process for the members.”

“Members are priority for us. So we have to finalise the process, so everybody will be secured before we go to the open market and announce and review the symbol of the company.”

(c)  “Yes. And this is something that we decide yesterday. I received a tremendous number of requests from current members to hold before we launch the public company because many people didn’t have the opportunity to join and to increase the participation with us. And we couldn’t hold the process, however, and that’s why my answer is `yes’, they can join. It’s because we decide to fix it, the price, the value of one share at $15, during the entire month, even that right now the value is already increasing, next week we will be more and keep growing until 3 June. And we decided to hold fixed rate, fixing the price, and new members can join at the same rate. And the current members, they can increase the participation at the same rate of $15. So yes, they can join, they will have the same benefit for a few more days. So we extend a few more days. This is how we accommodate everybody.”

(d)  “The advantage is that we fix it at $15 the value of the share and we will hold the same value until 3 June, which is not what is happening in the market. According to what we are increasing the assets in the company, proportionally with the dividend is going to be paid off for the next month, and the performance of the company automatically the value increase, so that is the benefit. You will pay today or tomorrow until 3 June, today’s price that we fix at $15 and whatever number that the stock will have the value on 3 June, the member will get the benefit.”

(e)  “We have a new platform, a new system that is already available. We are going to start to teach the members and the manager how to operate a new system, where you go online, you see your balance, you see all the projection of your stocks and you are able, based on your balance, to sell the stock online, if there’s a preferred stocks, you can liquidate it right there online, turn into cash. So you have the funds available, then you can either unload privately to your debit card or you can request an outgoing wire transfer in the system that – which already have the system, invest for several weeks and now we are going to release for all the members.”

23.The Promotional Video wholly in English shows an interview of D3 by one Ms. Sabrina Wei (Canada Manager). Ms. Wei said at the beginning that they were live in Orlando, Florida and that day was 6 May 2015. Again, what D3 said was virtually identical to what he said in the other two interviews. He started off by announcing that DFRF was listed on the previous day “Sure. Well, a few weeks ago we start to announce that we are converting the company from private to public. And finally we accomplish that. Yesterday was the day where we officially launch the company. We already start the process today of conversion for the members. So that’s the great news, official public company to benefit and to deliver everything that we promise a few weeks ago regarding this transaction from private to public.” It is noteworthy that:

(a)  D3 explained why the details of the listing of DFRF were not announced publicly “We are holding this information until 3 June in order to protect the value and also the entire project. Plus we are added – we are increasing our IPO. We are making significant increase during the next few weeks and we decide not yet release the symbols and the information is in United States, since we already mention that before, and we are also about to have registration and ready to go in other countries, but we cannot review just yet.”

(b)  In answer to the question that there was always a level of skepticism in that it was too good to be true, he said “…we have over 100,000 people already registered today. So I believe that we have over 100,000 people that already did the research, including the financial institutions, thousands of attorneys, including Justice Department in more than one country, so – but going public like we are now and after we reveal the symbol, people will be able to fulfil and to eliminate all the questions, all the doubts they have, because information – we cannot lie, numbers are there, and we are regulated. There’s no way for them to get confused on the numbers.”

24.In the Promotional Videos, D3 admitted that DFRF had told their members a few weeks, and about two months, ago that DFRF would be publicly listed in the USA. The most important representation of fact made by D3 in those videos was that DFRF had in fact been listed in the USA on 5 May 2015. This was a false representation. The SEC  confirmed that DFRF have never been listed in the USA.

25.A standard form document entitled “Application for Conversion Process” was prepared for the members. The document enabled a member to “convert my Private Placement Memorandum (PPM) with DFRF Enterprises LLC into an Option which may be exercised to convert my Membership Units into the purchase of Preferred Shares of a public company…” It was stated that the conversion process was expected to be completed by 3 June 2015 but may be extended by DFRF; and that DFRF “is offering an `Option’ to convert my Membership Units into the purchase of Preferred Shares at a price of USD$15.06 per share (available only until June 3, 2015).”

26.On 17 June 2015, “DFFR Canada & Asia” issued an email to members stating that the stock value was then US$64.17. DFRF asked the members to submit the conversion forms within the next 48 hours and to buy shares at US$15.06 per share. At the end, it was stated that “If you have any questions, please contact us.”

27.On 19 June 2015, “DFRF Canada and Asia” sent another email stating that in the next 72 days, the preferred shares could be converted at US$15.06 when the market price the day before was already US$64.17. It was also said that the shares could be sold after 23 June 2015.

28.On 22 June 2015, DFRF Administration Team issued an email claiming that as less than 45% of the members had completed the conversion process, it was decided that the deadline be extended to 30 June 2015. They also stated that only once the process was completed could they announce the stock symbol.

29.On 2 July 2015, “DFRF Hong Kong” issued an email stating that they were completing the conversion process at US$15.06 per share until midnight 5 July 2015 and intended to announce the stock symbol on 6 July 2015.

30.The above emails (collectively “Conversion Promotional Emails”) were sent to the Hong Kong members from the Official HK Email Address. The end of the email shows the following physical address “DFRF Enterprise LLC Unit 1001, 10/F Miramar Tower, 132 Nathan RD, Tsim Sha Tsui, Kowloon, Hong Kong, Hong Kong”.

B6.    The victims in Hong Kong

31.From June 2014 to May 2015, DFRF raised more than US$15 million from more than 1,400 investors worldwide.   Some of them came from Hong Kong, including Shum, Chan and Cheung.

32.As to Shum:

(a)  In April or May 2015, he was introduced to DFRF by his brother in law, Mr. Yu Kwok Wing (“Yu”) (who was also an investor).

(b)  On 16 April 2015, he received an email from Anthony Kam. Attached to the email was a membership application form and the payment instructions with the details of D5’s Account for subscribing to the Membership Program

(c)  Shum instructed Yu to complete and send the membership application form. On 25 April 2015, he paid HK$85,350 into Yu’s account at the Bank of China. On 29 April 2015, Yu transferred US$11,000 from his said account into D5’s Account. The application form was signed on or about 28 April 2015.

(d)  On 6 May 2015, he received an email from Yu attaching a membership registration form and an operating agreement for his review and signature. He signed the form and the agreement, and sent them back to Yu.

(e)  In early May 2015, he attended the Launch Event. After that, on or about 27 May 2015, he invested a further sum of US$11,000 by depositing the sum into D5’s Account.

(f)  On 8 May 2015, he received two emails from DFRF containing instructions on how to access DFRF’s online platform.

(g)  On 11 May 2015, he received two emails from DFRF containing hyperlinks to the Promotional Video partly in Cantonese and partly in English as well as the one partly in Putonghua and partly in English mentioned above.

(h)  On 13 May 2015, he received an email from DFRF attaching an “Application for Conversion Process”. On 29 May 2019, Yu completed the form and returned it by email to him; he then countersigned the document and sent it to DFRF. In the form, he chose to convert all the monies he had invested into preferred shares in DFRF. He completed the conversion process on or about 19 June 2015.

(i)  In June and July 2015, he received a number of emails from the Official HK Email Address of DFRF regarding the conversion and the purported listing of DFRF.

(j)  In November 2015, Yu collected on his behalf an “Acknowledgment of Debt” dated 9 November 2015 whereby DFRF and D3 purportedly agreed to pay him US$11,000 with interest at the rate of 3.25% per annum from 1 June 2015 to 31 May 2016.

(k)  He never received any return from the investments.

33.As to Chan:

(a)  He was introduced to DFRF by another investor, Ms. Sheung Ka Shan (“Sheung”). At a meeting held at a café in Tsimshatsui in early May 2015, Sheung said DFRF would go public and that investments in DFRF shares could generate monthly returns of 15%. She added that DFRF would open an office in Hong Kong very soon. She asked Chan to acquire one membership unit of US$1,100.

(b)  On 5 May 2015, he deposited a sum of HK$8,544 (about US$1,100) into Sheung’s account at Hang Seng Bank.

(c)  On 11 May 2015, he received two emails from the Official HK Email Address containing hyperlinks to the Promotional Video partly in Cantonese and partly in English as well as the one partly in Putonghua and partly in English mentioned above.

(d)  On 26 May 2015, Sheung asked him to meet a DFRF employee (who should be Cindy Leung) at the Hong Kong office of DFRF. He attended the office and signed an “Application for Conversion Process” indicating that he chose to convert all the monies invested in the Membership Program into preferred shares of DFRF. He also received password to his membership account.

(e)  In June and July 2015, he received a number of emails via the Official HK Email Address regarding the conversion option, his online membership account and the purported listing of DFRF.

(f)  In late 2015 or early 2016, Sheung asked him to meet her to collect a DFRF certificate. At the meeting, he received from a Chinese lady an “Acknowledgment of Debt” in which DFRF and D3 confirmed that they would pay him US$1,100 with interest at the rate of 3.25% per annum from 1 June 2015 to 31 May 2016.

(g)  He could no longer access his online account with DFRF after that.

34.As to Cheung:

(a)  She was introduced to DFRF and Monita Chan by her friend Nancy Wei in March 2015. At the meeting, Monita Chan told her that DFRF were taking steps to become a listed company whereby investors in DFRF could receive monthly returns of 15% and the value of the stock would rise threefold.

(b)  She gave Monita Chan US$11,000 in cash for investment in early March 2015.

(c)  In about April 2015, she visited DFRF’s office at Mira Mall. She completed the application forms for subscribing to the Membership Program.

(d)  She deposited US$730,000 on 19 March 2015 and US$589,683 on 15 April 2015 into D5’s Account as investments for herself and her family members. She also deposited US$1,390,000 into an account held by DFRF Enterprises LLC at Citibank N.A. on 20 March 2015. She further deposited US$17,725 on 1 June 2015 and US$50,368 on 2 June 2015 into D4’s Account. Her total investments amounted to US$2,788,776.

(e)  She never received any return from her investments.

(f)  On 14 June 2018, she issued a writ against D5 in HCA1383/2018 claiming the sum of US$1,319,683 being the total sum she deposited into D5’s Account. On 29 October 2018, she obtained a final judgment.

(g)  On 14 November 2018, she issued a writ against DFRF Enterprises (HK) Limited in HCA2672/2018, and claimed damages in the sum of US$1,319,683. On 27 December 2018, she obtained a final judgment.

B7.     Actions taken by BCSC in Canada

35.On 6 May 2015, about the same time when the Promotional Videos were published, British Columbia Securities Commission (“BCSC”) issued an Investor Alert to warn the public not to purchase membership or securities of DFRF or other companies associated with D3. It stated that:

“The BCSC has become aware that Filho is offering investments to British Columbians with returns of up to 15% per month. Filho is also promising that DFRF will soon be listed on a public stock exchange, after which the value of members’ investments will triple within 30 days. Members will continue to receive up to 15% per month on their investment. These returns are economically impossible. Also, when selling securities, it is illegal to represent that those securities will be listed on an exchange without certain conditions being met.

Other claims being made by Filho include:

• Investors’ principal is guaranteed and safe

• Investor funds are held offshore

• He manages $144 billion in assets

• The company is extracting ten tonnes of gold month from its mining properties in Mali, Africa

• 25% of the profits are donated to social and humanitarian causes

• Existing members who refer new members are paid commission of 10%

Several of these claims are characteristic of investment fraud…”

36.In 2020, the BCSC commenced actions against five Canadian residents including Monita Chan, Sabrina Wei, Marie Joy Vincent. In April 2021, the BCSC entered into settlement agreements with Monita Chan and Marie Joy Vincent. They agreed to pay a total sum of CAD$141,500.

B8.  Actions taken by SEC and the US Attorney’s Office in USA

37.On 30 June 2015, the SEC filed a complaint against DFRF, D3, D4 and their associates in the United Stated District Court, District of Massachusetts.

38.On 21 July 2015, D3 was arrested in Florida pursuant to fraud charges filed by the US Attorney’s Office, District of Massachusetts.

39.In November 2018, the US court dismissed the criminal charges against D3, on a without prejudice basis, on the ground that he was psychiatrically incompetent to stand trial and non-restorable in the foreseeable future. D3 was then released from prison.

40.Between May and October 2019, SEC obtained final judgments against DFRF, D3 and D4 under which there were restrained from committing further breaches of the US securities regulations, and ordered to pay various sums in disgorgement as well as civil penalty.

B9.    Actions taken by the SFC in Hong Kong

41.On 19 May 2015, BCSC wrote to the SFC under the International Organisation of Securities Commissions Multilateral Memorandum of Understanding for assistance in relation to DFRF. BCSC also provided information on investments that might have been made by 306 Hong Kong residents. The SFC contacted these individuals insofar as possible and invited them to attend interviews or complete questionnaires. It received responses from about 18 individuals. Their responses show that an additional 27 individuals had also been deceived. The total amounts invested by the Hong Kong investors which SFC could identify are US$3,335,541.35 and HK$117,000.

42.On 13 May 2016, the SFC issued a Direction to Investigate pursuant to s.182(1) of the SFO on the ground that there was reasonable cause to believe that during or around the period from 1 May 2015 to 13 May 2015 DFRF and/or its related companies and/or persons connected with it may have committed offences contrary to ss.103, 107, 109 and/or 114 of the SFO. An additional Direction to Investigate was issued on 20 September 2019.

43.On 24 August 2016, SFC commenced these proceedings. Mareva injunctions freezing D4 & D5’s Accounts were granted on 13 December 2016 and 22 March 2017.

B10.  Amounts remaining in D4 & D5’s Accounts

44.Most of the monies paid by the Hong Kong investors were gone save and except some remaining balances in D4 & D5’s Accounts.

45.As of 6 January 2021, D4’s Account had the following balances:

Account No.	Balance
840-027965-888	HK$67,961.99
840-027965-001	HK$74,112.00
840-027965-201	US$291,470.67
840-027965-202	GBP10,263.79
840-027965-205	CHF10,388.47
840-027965-212	CNY4,702.55
840-027965-220	EUR10,457.42

46.As of 6 January 2021, D5’s Account had the following balances:

Account No.	Balance
023-217656-838	HK$2,380.34DR
023-217656-001	HK$239.61
023-217656-201	US$823.96
023-217656-220	EUR568.66
023-217656-000	HK$100,000.52

C.   Ds’ CONTRAVENTION OF THE SFO

C1.    S.114(1) of the SFO

47.First, SFC claimed that DFRF and D3 contravened s.114(1)(a) and (b) of the SFO.  They provide that:

“Subject to subsections (2), (5) and (6), no person shall—

(a) carry on a business in a regulated activity; or

(b) hold himself out as carrying on a business in a regulated activity.”

48.The meaning of the key terms of the above statutory provisions are as follows:

(a)  S.1, Part 1 of Schedule 1 provides that “regulated activity” means “any of the regulated activities specified in Part 1 of Schedule 5”; and Part 1 of Schedule 5 includes “Type 4: advising on securities”.

(b)  S.1, Part 1 of Schedule 1 defines “securities” as including “shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority” and also “rights, options or interests (whether described as units or otherwise) in, or in respect of, such shares, stocks, debentures, loan stocks, funds, bonds or notes”.

(c)  S.7, Part 1 of Schedule 1 provides further that “a reference to securities (however described) as those of a corporation shall, unless the context otherwise requires, be construed as a reference to securities (having the applicable meaning, whether under section 1 or otherwise) which are… (b)proposed to be issued, made available or granted by the corporation”.

(d)  Part 2, Part 1 of Schedule 5 defines “advising on securities” as “(a)giving advice on—(i)whether; (ii)which; (iii)the time at which; or (iv)the terms or conditions on which, securities should be acquired or disposed of; or (b)issuing analyses or reports, for the purposes of facilitating the recipients of the analyses or reports to make decisions on—(i)whether; (ii)which; (iii)the time at which; or (iv)the terms or conditions on which, securities are to be acquired or disposed of.”

(e)  The question whether something amounts to carrying on of a trade or business is question of fact and should be answered by a consideration of all the circumstances (SFC v An unknown person or persons purporting to carry on a securities and/or futures trading business known as BROADSPAN SECURITIES & Ors [2021] HKCFI 1444, §22 (“Broadspan”)). Ordinarily, a series of acts will not constitute a business unless they are continuous and repetitive and done for the purpose of making a gain or profit (Lee Yee Shing v Commissioner of Inland Revenue (2008) 11 HKCFAR 6 at 31, §70).

(f)  “Hold out” means “to represent or pretend” (Broadspan, §21). The “holding out” may be by websites, emails or cold calls (Broadspan, §35; SFC v Unknown Persons trading as Cardell Ltd et al [2019] 1 HKLRD 702, §23 (“Cardell”)).

49.It appears that the difference between s.114(1)(a) and s.114(1)(b) is as follows. The former subsection covers cases where the person involved actually carried on business in a regulated activity whereas the latter subsection covers cases where the person involved represented or pretended that he was carrying on business in a regulated activity (which may not be true in fact). Hence, a person may be convicted of breaching s.114(1)(b) but not s.114(1)(a) (e.g. SFC v CL Management Services Ltd and another, HCMA288/2015 & HCMA382/2014 (2 June 2016, unreported)). On the other hand, it seems to me that, in practice, it is most probable, if not virtually certain, that a person found guilty of breaching s.114(1)(a) would have also contravened s.114(1)(b).

50.I agreed that DFRF and D3 had contravened both s.114(1)(a) and s.114(1)(b):

(a)  SFC did not contend that marketing the Membership Program, by itself, constituted “advising on securities”. However, advising the members on the option of converting their membership units into preferred shares of DFRF to be listed (or already listed) in the USA, (“the Option” and the “Preferred Shares” respectively), in particular, the benefits of exercising the Option and when the Option had to be exercised, clearly constituted “advising on securities” bearing in mind the wide definitions of “securities” and “advising on securities”. By asking members to contact them if they had any questions in the Conversion Promotional Emails, DFRF also indicated that they were prepared to give further advice in this respect. The fact that “securities” concerning one entity only i.e. DFRF was involved does not matter. I also took the view that the fact that the advices involved false statements (in particular that the shares of DFRF would be or had already been listed in the USA) is neither here or there.

(b)  The advices about the Option and the Preferred Shares were given to current as well as prospective members in Hong Kong repeatedly from about March to June 2015 by various means including oral statements made by DFRF’s servants or agents in Hong Kong at face-to-face meetings and during the Launch Event, Promotional Videos sent by emails to members (which were also accessible online), and Conversion Promotional Emails issued to members in June and July 2015. The purpose of giving such advices was plainly to induce current and prospective members to invest, or increase their investments, in the scheme so that they may then exercise the Option and acquire the Preferred Shares. More monies could then be taken from the investors. There was an office in Hong Kong with staff members. There was also the Official HK Email Address. It is clear that the persons involved actually carried on, and also held out as carrying on, the business of, inter alia, “advising on securities”.

(c)  There is no doubt that D3 was the mastermind behind the whole scheme and DFRF were his corporate vehicles used to perpetuate the scheme. He featured prominently in the promotional materials, in particular, the Promotional Videos. The irresistible inference is that he and DFRR (under his control) were the persons giving directions to their associates regarding the said activities in Hong Kong.

(d)  DFRF and D3 were not licensed under the SFO to carry on the said activities.

C2.    S.109(1) of the SFO

51.Second, SFC claimed that DFRF and D3 contravened s.109(1) of the SFO, which provides that:

“Subject to subsections (3) to (6), a person commits an offence if he issues, or has in his possession for the purposes of issue—

(a) an advertisement in which to his knowledge—

(i) a person holds himself out as being prepared to carry on Type 4, Type 5, Type 6 or Type 9 regulated activity; and

(ii) the person is not licensed or registered for such regulated activity as required under this Ordinance; or

(b) any document which to his knowledge contains such      advertisement.”

52.As to the meaning of the key term of this statutory provision:

(a)  According to s.102(1), “Advertisement” includes “every form of advertising, whether made orally or produced mechanically, electronically, magnetically, optically, manually or by any other means”. Representations about the matters covered by the statutory provision contained in websites constitute a means of issuing, in effect, electronic “advertisements” as they are public media aimed at promoting the content thereof, and webpages containing such representations are electronically produced “documents” containing such advertisements (Broadspan, §30; Cardell, §21).

(b)  According to s.102(1), “Issue” in relation to any material (including any advertisement, invitation or document), includes “publishing, circulating, distributing or otherwise disseminating the material or the contents thereof, whether—(a)by any visit in person; (b)in a newspaper, magazine, journal or other publication; (c)by the display of posters or notices; (d)by means of circulars, brochures, pamphlets or handbills; (e)by an exhibition of photographs or cinematograph films; (f)by way of sound or television broadcasting; (g)by any information system or other electronic device; or (h)by any other means, whether mechanically, electronically, magnetically, optically, manually or by any other medium, or by way of production or transmission of light, image or sound or any other medium, and also includes causing or authorizing the material to be issued”.

53.I agreed that DFRF and D3 had contravened s.109(1):

(a)  As mentioned, in the Promotional Videos and the Conversion Promotional Emails, DFRF held themselves out as being prepared to carry on Type 4 regulated activity i.e. advising on securities i.e. the Option and the Preferred Shares. Such representations were also made orally during the Launch Event and face-to-face meetings with the investors.

(b)  The Promotional Videos which were emailed to members and accessible online, as well as the Conversion Promotional Emails, were published electronically to promote their content. Their publication constituted issuance of advertisements. Making the relevant oral representations during the Launch Event and face-to-face meetings also constituted issuance of advertisements.

(c)  The irresistible inference is that D3 and DFRF (under his control) caused or authorised the issuance of the Promotional Videos and Conversion Promotional Emails; and also the making of the relevant oral representations during the Launch Event and face-to-face meetings with the investors.

(d)  There is no doubt that D3 and DFRF knew about the content of the Promotional Videos (in which D3 featured prominently), the Conversion Promotional Emails, the relevant oral representations; and also that they had not been licensed to carry out Type 4 regulated activity in Hong Kong.

C3.  S.103(1) of the SFO

54.Third, SFC claimed that DFRF and D3 contravened s.103(1), which provides that:

“Subject to subsections (2), (3) and (5) to (9), a person commits an offence if he issues, or has in his possession for the purposes of issue, whether in Hong Kong or elsewhere, an advertisement, invitation or document which to his knowledge is or contains an invitation to the public—

(a) to enter into or offer to enter into—

(i) an agreement to acquire, dispose of, subscribe for or underwrite securities;

…

unless the issue is authorized by the Commission under section 105(1).”

55.The meaning of the key terms of this statutory provision (save and except terms appearing in other sections which have already been considered above) are:

(a)  S.102(1) provides that “Invitation” includes “an offer and an invitation, whether made orally or produced mechanically, electronically, magnetically, optically, manually or by any other means”.

(b)  S.102(1) also provides that “Document” means” any publication (including a newspaper, magazine or journal, a poster or notice, a circular, brochure, pamphlet or handbill, or a prospectus)—(a)directed at, or the contents of which are likely to be accessed or read (whether concurrently or otherwise) by, the public; and (b)whether produced mechanically, electronically, magnetically, optically, manually or by any other means”.

(c)  S.1, Part 1, of Schedule 1 provides that “public” means the public of Hong Kong, and includes any class of that public.

56.I agreed that DFRF and D3 had contravened s.103(1):

(a)  The Promotional Videos, Conversion Promotional Emails, the oral representations about the Option and the Preferred Shares made during the Launch Event and face-to-face meetings with the investors and also the Application for Conversion process constituted advertisements, invitations or documents, which contained offers or invitations to current or prospective members (which formed a class of the public of Hong Kong) to enter into agreements with DFRF to acquire securities, namely, the Option and the Preferred Shares.

(b)  The irresistible inference is that D3 and DFRF (under his control) caused or authorised the issuance of the said advertisements, invitations or documents.

(c)  It is also clear that D3 and DFRF knew about the said content in those materials.

C4.  Contravention of s.107(1) of the SFO

57.Fourth, SFC claimed that DFRF and D3 contravened s.107(1), which provides that:

“A person commits an offence if he makes any fraudulent misrepresentation or reckless misrepresentation for the purpose of inducing another person—

(a) to enter into or offer to enter into—

(i) an agreement to acquire, dispose of, subscribe for or underwrite securities;…”

58.According to s.107(3)(a) and (b) respectively:

(a)  “Fraudulent misrepresentations” means “(i)any statement which, at the time when it is made, is to the knowledge of its maker false, misleading or deceptive; (ii)any promise which, at the time when it is made, its maker has no intention of fulfilling, or is to the knowledge of its maker not capable of being fulfilled; (iii)any forecast which, at the time when it is made, is to the knowledge of its maker not justified on the facts then known to him; or (iv)any statement or forecast from which, at the time when it is made, its maker intentionally omits a material fact, with the result that-(A)in the case of the statement, the statement is rendered false, misleading or deceptive; or (B)in the case of the forecast, the forecast is rendered misleading or deceptive”.

(b)  “Reckless misrepresentations” means—“(i)any statement which, at the time when it is made, is false, misleading or deceptive and is made recklessly; (ii)any promise which, at the time when it is made, is not capable of being fulfilled and is made recklessly; (iii)any forecast which, at the time when it is made, is not justified on the facts then known to its maker and is made recklessly; or (iv)any statement or forecast from which, at the time when it is made, its maker recklessly omits a material fact, with the result that—(A)in the case of the statement, the statement is rendered false, misleading or deceptive; or (B)in the case of the forecast, the forecast is rendered misleading or deceptive.”

59.I agreed that DFRF and D3 had contravened s.107(1):

(a)  D3 personally made oral representations in the Promotional Videos that DFRF had been listed in the USA on 5 May 2015 and that the market value of the shares had already increased significantly and would continue to do so. He clearly knew that it was untrue that DFRF had already been listed and there was certainly no justification for him to assess the value of the shares of DFRF as alleged. They were clearly fraudulent misrepresentations.

(b)  Furthermore, he and DFRF (under this control) made and repeated the same fraudulent misrepresentations in the Conversion Promotional Emails, and also caused their associates to make and repeat them orally during the Launch Event and face-to-face meetings with the investors.

C5.    Secondary liability for contravention of the SFO

60.Aiding, abetting, assisting as well as directly or indirectly knowingly involved in a contravention of the SFO would result in secondary liability. Aiding and abetting are familiar concepts in the criminal context, and should be given their ordinary meaning (Broadspan, §§41-42; Cardell, §25).

61.D4 and D5 allowed their bank accounts in Hong Kong to be used to receive the investments paid by the investors. Those accounts were not used for the purposes for which they were opened. The irresistible inference is that they knowingly assisted DFRF and D3 by allowing their accounts to be used to perpetuate the fraudulent scheme.

D.   REMEDIES

62.S.213 of the SFO provides that:

“(1) Where—

(a) a person has—

(i) contravened—

(A) any of the relevant provisions;…

(ii) aided, abetted, or otherwise assisted, counselled or procured a person to commit any such contravention;…

(iv) directly or indirectly been in any way knowingly involved in, or a party to, any such contravention; or

(v) attempted, or conspired with others, to commit any such contravention; or

(b) it appears, whether or not during the course or as a result of the exercise of any power under Part VIII, to the Commission that any of the matters referred to in paragraph (a)(i) to (v) has occurred, is occurring or may occur,

the Court of First Instance, on the application of the Commission, may, subject to subsection (4), make one or more of the orders specified in subsection (2).

(2) The orders specified for the purposes of subsection (1) are—

(a) an order restraining or prohibiting the occurrence or the continued occurrence of any of the matters referred to in subsection (1)(a)(i) to (v);

(b) where a person has been, or it appears that a person has been, is or may become, involved in any of the matters referred to in subsection (1)(a)(i) to (v), whether knowingly or otherwise, an order requiring the person to take such steps as the Court of First Instance may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into;

(c) an order restraining or prohibiting a person from acquiring, disposing of, or otherwise dealing in, any property specified in the order;

(d) an order appointing a person to administer the property of another person;

…

(f) for the purpose of securing compliance with any other order made under this section, an order directing a person to do or refrain from doing any act specified in the order;

(g) any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f).

…

(4) The Court of First Instance shall, before making an order under subsection (1) or (3A), satisfy itself, so far as it can reasonably do so, that it is desirable that the order be made, and that the order will not unfairly prejudice any person.

…

(8) Where the Court of First Instance has power to make an order against a person under subsection (1) or (3A), it may, in addition to or in substitution for such order, make an order requiring the person to pay damages to any other person.”

63.G Lam J (as he then was) considered s.213 in detail in SFC v Qunxing Paper Holdings Co Ltd (No 2) [2018] 1 HKLRD 1060, §§44-55. The main points may be summarised as follows:

(a)  S.213 confers a right of action on the SFC as plaintiff.

(b)  It is not a mere procedure providing a representative mechanism for enforcing existing individual rights already vested in the investors under the common law or otherwise. It is a substantive statutory cause of action vested in the SFC.

(c)  It is complementary to the civil liabilities created by other sections in the SFO.

(d)  The purpose is to provide remedies for the benefit of investors, who may otherwise be deterred by costs and other considerations from instituting legal proceedings individually to obtain redress for their losses.

64.First, SFC sought various declarations (§§1-7 of the Order). I agreed that such declarations are necessary to make clear the jurisdictional basis of various orders to be made under s.213(2) (Cardell, §§27).

65.Second, SFC sought various prohibitory injunctions against Ds (§§8-13 of the Order). The injunctions against D4 and D5 are to ensure that they cannot or will not withdraw the balances remaining in their accounts; they are in effect continuation of the mareva injunctions already granted by the Court. As to the injunctions against DFRF and D3, I noted that the fraudulent scheme had stopped a long time ago in about July 2015 due to the intervention of law enforcement agents in USA. Further, as DFRF and D3 are out of the jurisdiction, it was doubtful whether the injunctions would be effective to deter them from committing similar wrongful acts in the future. That said, according to SEC, before this particular scheme, back in January 2010, D3 was named as a target in a federal civil forfeiture proceeding in Florida arising from allegations about drug trafficking, money laundering and a Ponzi Scheme; in August 2010, a default judgment was entered against him; in August 2010, he consented to civil forfeiture of more than US$25 million held in bank accounts in the names of his minor children and two businesses that he controlled. However, he embarked on the present fraudulent scheme in 2014 and 2015. When the criminal charge against him was discharged in 2018, the US government informed the US court that they believed D3 posed a financial danger to the public. D3 is now a free man. In the circumstances, it was not a fanciful concern that he may repeat yet again the same or substantially similar fraudulent scheme in the future. Irrespective of how effective the injunctions may be, in principle, they should be granted to make it clear that the Hong Kong court found it necessary to restrain him and DFRF (under his control) from committing similar illegal activities in Hong Kong in the future. The injunctions may, hopefully, also assist in putting the public in Hong Kong on alert of any future investment scheme associated with D3.

66.Third, SFC applied for restitution orders and the appointment of administrators to assist in implementing the restoration orders (§§14-20 of the Order). As explained by Le Pichon JA in SFC v C [2009] 4 HKLRD 315, §36, s.213(2)(b) is restitutionary in nature and in conjunction with s.213(2)(c) would provide compensation to those who have sustained losses through the wrongdoing in question. In SFC v Tsoi Bun [2014] 2 HKLRD 1, G Lam J (as he then was) held at §§12-13 that the breadth of the language of s.213(2)(b) is striking and while the nature of the steps that may be required may be limited by the spirit and intendment of the statute and the content and purpose of the application under s.213, there is no reason why they are confined to making restitution in specie; instead, the section permits an order to be made requiring restoration of the parties to their relevant financial position prior to the transaction impugned. In principle, an order should be made to restore the victims in Hong Kong to their financial positions before investing in the Membership Program. This would entail ordering the repayment of their investments in full. However, it is clear that the remaining balances in D4 & D5’s Accounts would not be sufficient. In Cardell, §32 and Broadspan, §61, in similar circumstances, the Court agreed that the most cost effective and fairest order to make would be to distribute the amounts frozen in the bank accounts to the victims on a pro rata basis. i.e by dividing the amount left in each of the bank accounts among the victims by reference to the amounts they respectively remitted into each of them; although such an order would not fully restore the victims to their pre-transaction positions, it was nevertheless desirable because it provided compensation to them to the extent that was reasonably practicable. I agreed that a similar order should be made in this case. 

67.I also agreed that, as held in Cardell, §34, an order for the appointment of administrators with consequential directions is desirable and would not unfairly prejudice any person since it merely seeks to facilitate the recovery, receipt and administration of the proceeds of the fraudulent activities remaining in Hong Kong for the benefit of the victims. As held in Broadspan, §62, this is a fairly conventional order made in cases where there is a need for a third party to go through the logistics and calculations to ensure and give effect to the restitutionary order. I had some concerns that the administrators would recover their fees and disbursements from the remaining balances in D4&D5’s Accounts with the result that the amounts available to be distributed among the victims would inevitably become less. However, I was persuaded that it is fair and reasonable to require the victims to bear the administrators’ fees and expenses as they are incurred to enable the victims to recover a part of their investments. The victims’ interest in this respect should be safeguarded by imposing a ceiling on the total sum that the administrators may receive (Broadspan, §63). I was satisfied that the maximum total sum to be received by the administrators in this case, i.e. HK$140,000 including fees and expenses, is reasonable. I also noted that the SFC sought costs against Ds only and would not recover any of their costs from the remaining balances in D4 & D5’s Accounts.

68.I was also concerned that HSBC, who was not a party to these proceedings, would be directed to transfer the remaining balances in D4 & D5’s Accounts to the administrators. But I noted that the Court did not see any difficulty to make a similar order in Broadspan. The reason for my concern was that the bank had not been given the chance to make any submission on the Order (e.g. the bank may wish to deduct a small amount of money as fees and expenses for complying with the Order). However, if there is any issue between the administrators and the bank, the administrators may invoke the liberty to apply proviso in the Order and the bank may be heard by the Court there and then.

69.Lastly, as DFRF and D3 are out of the jurisdiction, I agreed that orders for substitution service of the Order and any other necessary notification concerning the enforcement thereof shall be made (§§2-23).

E.   CONCLUSION

70.For the above reasons, I was satisfied that the Order should be made.

71.This case (like Cardell and Broadspan) demonstrates the practical difficulties of enforcing the SFO and the law in general in this or similar type of fraudulent and unlawful investment schemes. The fraudsters and their associates are either unknown, or most likely out of the jurisdiction, so that they cannot be brought to justice in Hong Kong. Despite the best efforts made by the SFC, other law enforcement agents and the Court, the victims in Hong Kong will in most cases lose all their investments; or, at best, might be able to recover a small part of their investments only. It is sad that even though Ponzi and pyramid schemes have been widely publicized, there are still fraudsters running or intending to run such or similar fraudulent schemes. Apparently, old tricks that worked in the past are still working now, and will probably work in the future. To maintain Hong Kong’s status as an international financial centre and to safeguard the interest of the general public in Hong Kong, the SFC may consider enhancing general public education to equip the general public with sufficient knowledge to judge whether any particular investment scheme may contain fraudulent elements; and to give timely warnings of any suspected unlawful activities in contravention of the SFO once it receives relevant information from its international counterparts or otherwise. At the same time, members of the general public must always remain vigilant. While it is understandable that we are all easily attracted by investments that promise and guarantee high returns, when things appear to be too good to be true, they are in all probability untrue.

Mr. Norman Nip SC leading Ms. Kelly Shum instructed by Securities And Future Commission

The 1st to 5th Defendant is being Absent

Attachment