HKSAR v. Hau Tung Ying and Another

DCCC 97/2008

 IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

 CRIMINAL CASE NO. 97 OF 2008

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BETWEEN

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Before: His Honour Judge Browne

Date of Hearing: 29-30 September, 2-3, 8-10, 13-17, 20-24, 28, 31 October 2008

Date of Judgment:  4 February 2009

Date of Sentence:  24 February 2009

Offence: Conspiracy to defraud 串謀詐騙, etc.

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REASONS FOR SENTENCE

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1.  The defendants pleaded not guilty to five charges, one of conspiracy to defraud and four joint charges of thefts of choses in action. I convicted both defendants of the first charge and made no finding in respect of the other four charges. I was satisfied that the defendants had stolen the money as alleged but I was sure that the appropriations were part of the conspiracy.

2.In dealing with sentence I will refer to the monies mentioned in the four theft charges as they represent the largest movements of funds during the conspiracy.

3.The first charge alleged that between the 1^st September 2000 and the 28^th April 2005, they conspired together with Pan Rubo, Wei Junmin and others to defraud China Motion International Limited and/ or its wholly owned subsidiaries namely ChinaMotion NetCom ( Asia ) Ltd and China Motion Holdings Limited by dishonestly causing NetCom Asia to enter into consultancy agreements with Bioroad Developments Ltd and Headwise International Ltd and causing payments to be made by NetCom Asia and China Motions Holdings Ltd for services purportedly provided by Bioroad and Headwise pursuant to the said agreements which services were not provided thereby causing loss to NetCom Asia and/or China Motion Holdings Limited and/or China Motion Telecom International Ltd.

4.The second to fifth charges alleged the joint theft by D1 and D2 of choses in action, namely debts owed by the Hong Kong and Shanghai banking Corporation to either Netcom Asia or China Motion Holdings Ltd.

5.The second charge alleged that the defendants on or about the 12^th May 2003 stole a debt in the sum of HKD2,372,000 owed to Netcom Asia.

6.The third charge alleged that on or about the 8^th April 2004 the defendants stole a debt of HKD3,100,000 owed to NetCom Asia.

7.The fourth charge alleged the theft of a debt on or about the 16^th November 2004, in the sum of HKD2 million owed to China Motions Holdings Ltd.

8.The fifth charge alleged the theft of a debt on or about the 13^th January 2005 in the sum of HKD1,500,000 owed to China Motion Holdings Ltd.

 Background

9.The offences arise out of the defendants’ involvement with a publicly listed company called China Motion Telecom International Ltd ( China Motion Telecom) and two of its subsidiaries, China Motion Netcom Asia Ltd, ( Netcom Asia) and China Motion Holdings Ltd ( Holdings). There are a large number of companies run under the auspices of the listed company and during the trial references were made to companies with similar names but which did not fall within the corporate structure of China Motion Telecom.

10.The companies operated within the telecommunications industry. D1 was the founder of the parent company. He was the chairman of China Motion Telecom and a director of both of the subsidiary companies referred to in the previous paragraph. D2 was an executive director of China Motion Telecom, a director of Netcom Asia and it chief operating officer.

11.The charges relate to events that occurred between September 2000 and April 2005. They centre round 3 documents which purport to be consultancy agreements made between Netcom Asia and the two companies referred to in the first charge, namely Bioroad and Headwise. I was satisfied so that I was sure that the agreements were bogus and used as vehicles to divert funds from Netcom Asia to be disposed of as decided by the conspirators.

12.The first of the three agreements, Ex P1, is dated the 1^st September 2000. It purported to be an agreement between Netcom Asia and Bioroad whereby Bioroad would provide professional services to Netcom Asia in Asia Pacific and North America, for a monthly consultancy fee of HKD100,000. The agreement was for one year but could continue thereafter if the parties were agreeable. It appears to have in fact run until March 2004, a period of 3 years and 6 months.

13.Bioroad was not incorporated until 3^rd January 2001. It was set up at the request of Pan Rubo and had the same registered address as China Motion Telecom, namely 20/F Tower 11 Enterprise Square. Pan Rubo is connected to China Motion Telecom and other companies in which the D1 had an interest. Bioroad never traded and had no employees. No invoices were rendered for its services. Documents disclose that it was owed money under that agreement until March 2004, it’s bank account was closed in April 2003. The remaining funds were transferred to Wilgain Assets Ltd, a company operated by D1 and Pan Rubo.

14.The Bioroad account, Ex 315 p323, shows receipts of only HKD300,000 when it was purportedly owed $3.1 million during the period the account was in operation.

15.The director of Bioroad was  Wei Junmin, an accountant who worked at the offices of China Motions for most of the week. He was a director in name only. He followed the instructions of the other conspirators. Bioroad did not receive funds on a monthly basis and purportedly bore the cost of some of Netcom Asia’s corporate entertainment.

16.The second and third agreements were between Netcom Asia and Headwise, Ex’s P3 &4. They were dated the 1^st October 2002 and the 1^st October 2003. They were in similar terms to the Bioroad agreement but provided for monthly consultancy payments of HKD240,000 and HKD432,000 respectively. According to extracts from the general ledger in 2003/4 provision was made under the agreements to both Bioroad and Headwise. If the agreements under Exhibits 1 and 4 operated at the same time the total liability in that financial year was HKD 5,232,000.

17.Headwise was also set up at the request of Pan Rubo and incorporated on 6^th March 2003, six months after the date on P3. The original director was again Wei Junmin.

18.Payments were entered into the books of Headwise as loans from directors not as trading payments.

19.All three agreements were signed by D2 on behalf of Netcom Asia and Wei Junmin on behalf of Bioroad and Headwise.

20.A forensic accountant called by the prosecution, PW25, analysed the accounts CMT insofar as they related to payments to Bioroad and Headwise. He noted that a designated “Other Payables” account was used in recording the provisions for consultancy fees payable under the consultancy agreements and subsequent payments/ settlements. He observed that the account name “other payables” is used for non-trade nature of expenses.

21.At paragraph 83 of his report he noted that the total provisions made according to the consultancy agreements was $14,524,000. The amount charged through the  “Prepayment account” was $932,000 and the amount charged through the “other payables” account was $13,592,000.

22.The largest movements of funds from the Netcom accounts were effected by the four cheques referred to in charges 2 to 5 totaling $8,972,000 all payable to Headwise. All four cheques were signed by D1 and D2. Two other significant payments were a cheque for $300,000 payable to Bioroad dated the 6^th December 2001 signed by D1 and a cheque also for $300,000 dated the 20^th December 2004 signed by D2. Cash amounting to just over 1 million was withdrawn and cash cheques were drawn totaling just over $1.76 million. There were a number of payments which purported to relate to corporate expenses such as entertainment and the provision of gifts or other benefits.

23.In his record of interview, D2 , maintained that the consultancy agreements were genuine and that such services were provided by Wei Junmin. I disbelieved him.

24.D1 said he was not aware of Bioroad or Headwise but was aware that corporate entities were being used as vehicles to enable payments to be made to officials and business contacts on the mainland and elsewhere to further the business interests of CMT. I did not believe D1 did not know about Bioroad and Headwise. I was sure that D1, D2 , Pan and Wei Junmin conspired together to set up bogus companies to divert funds from Netcom Asia to spend as they wished. I accepted that some of those  funds were spent on the mainland and elsewhere by the conspirators to further the business interests of Netcom Asia.

The first defendant

25.In relation to D1 I was told he was the chairman and majority shareholder of CMT until he sold his shares in 2006. When Netcom Asia was set up in 2000 CMT had not long distance call business and by 2006 the annual turnover had grown to $368 million. Netcom Asia was eventually sold to CITIC 1616 in 2008 for $260 million. Lobbying was vitally important to the long distance call business. It was submitted that there had been no personal gain to the defendant and this was not comparable to cases which involve a breach of trust and both defendants did their best to further the interests of the company. There had been a delay of two years between the initial complaint to the ICAC and the trial of the defendants.

26.D1 is 54 and has a clear record. He is married and has two children, one at university and the other in her first year of high school. He came to Hong Kong in 1990 and started the business of China Motion Development which was the predecessor of  CMT.

27.He holds a bachelors degree in physics from the University of Zhongshan. Up to 2006 he served as a member of the Chongqing Committee of the Chinese People’s Political Consultative Conference. He has served a number of committees. Character references were produced which spoke of the esteem in which the defendant is held and his honesty and integrity. They speak of him as a caring and generous friend, a loving father and husband and the contribution he has made to society. I have also received a letter from the defendant. He is concerned about the distress and hurt he has caused his friends and family and states that he has been under tremendous pressure and enormous mental stress because of this case.

The second defendant

28.D2 is married and has two children aged 11 and 7. His mother and father are in their mid-70’s and both chair professors at mainland universities. He has an aged father-in-law  who is not in good health.

29.D2 is a PhD graduate from the Hong Kong University of Science and Technology and his wife is also a graduate from that university. A letter was produced from the Dean of that university which describes D2 as a helpful alumnus, dedicated to his career and with a passion to help young people. A number of other reference letters were submitted to the court which spoke of his sincerity, integrity and caring attitude.

30. After leaving Netcom Asia he joined Citic 1616 Holdings Ltd as an Executive Director and Chief Operating Officer. Letters of support were submitted from his employers and those serving describing his dedication and support. He resigned from his position in Citic in November 2007 because of this case and has been living on his savings.

31.D2 joined CMT in 1999. I was told that the scale of entertainment demanded by those with whom they were obliged to do business was enormous and the consultancy agreements were vehicles designed to meet these expenses. Counsel for D2 said that this was regrettably part of the corporate culture and D2 was guided by those with more experience in the industry. Both D1 and D2 said they had no personal gain from the conspiracy and they were serving the best interests of the company.

Observations

32.The court recognizes that conviction of this offence will have very serious consequences for both defendants and their families. The conviction marks a significant fall from grace for each of them. However, previous good character and the impact of conviction on the defendants and their future careers count for very little in mitigation in cases of this nature. Persons holding the positions held by the defendants will invariably be of good character.

33.The scheme devised by the defendants was elaborate and sophisticated. It involved the creation of bogus documentation and false accounting  records. It was a scam devised principally by D1, D2 and Pan. At that time, D1was the founder of the Group and had been its Chairman since 1994. D2 was a rising star in the group and in April 2004, whilst the conspiracy was still in existence, he became one of the three executive group directors. The other executive director, PW16, had been effectively sidelined and the group was being run by D1 and D2

34.The scam was not detected by the auditors. I make no criticism of them in relation to this matter. The audit they conducted involved a huge corporate structure and they would rely on information and documents supplied to them. Had the scam been detected by the auditors the consequences for this publicly listed  company and its shareholders would have been extremely serious. This scam put the future of the company in serious jeopardy. Independent auditors would have to be brought in and if the fraud were confirmed it would have to be disclosed leading to very serious consequences for the company and its shareholders. The board would be seriously compromised. 

35.It was submitted that this is not a breach of trust case. I am not sure where the money went. I accept some of it was spent as asserted by D1 in his record of interview. However, at least $1,500,000 was not used for that purpose. It was used to discharge a personal liability of D1. The cheque was signed by D1 and D2.

36.However, even if I had been satisfied that all the money had been used to pay off officials and lobbyists abroad, executive  directors of publicly listed companies are expected to behave honestly and with integrity and they are entrusted to handle the companies business in a lawful manner and in compliance with proper business and accounting procedures and the listing rules. It is this trust that has been breached.

37.Offences of this kind are difficult to detect and their prosecution involves many hours of investigation and analysis at huge public expense. The scheme seriously compromised the integrity of the  employees of the company some  of whom gave evidence under immunity. There was a cynical assumption that the employees in the accounts department  would go along with the scheme. When publicly listed companies behave in this fashion they seriously undermine the integrity of Hong Kong’s international reputation in the business world. Scams such as this perpetuate dishonest and corrupt business practices. They undermine the enormous efforts being made by the regulatory authorities in Hong Kong to ensure that publicly listed companies in Hong Kong comply with internationally recognised corporate governance standards.

38.Taking all these factors into account, I take the view that a sentence of four years imprisonment is appropriate in respect of each defendant and that is the sentence I impose.

Ms A P Campbell-Moffat, Counsel on Fiat, for HKSAR/DPP.

Mr. Cheng Huan, S.C. leading Mr. David Ma and Mr. Bernard Cheng instructed by Messrs Chong & Partners for D1.

Mr. Lawrence Lok, S.C. leading Mr. Caesar Lo instructed by Messrs Sit, Fung, Kwong & Shum for D2.