HKSAR v. Chung Yuet Sheung Lorrain and Another
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HCCC138/2009 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CRIMINAL CASE NO. 138 OF 2009 ----------------------
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----------------------------------------------- Transcript of the Audio Recording -----------------------------------------------
COURT: Chung Yuet-sheung, Lorrain, stand up, please. You have been convicted by a jury of three counts of fraud and three counts of theft relating to the operation of a stockbroking business of which you were, in effect, the proprietor. You now fall to be sentenced for those offences. I must first explain a little of the background. You started Great Honest Investment Company Limited, GHI, in 1987, and were, at all material times, the majority shareholder and managing director. You were a securities dealer licensed by the SFC, and you attracted a large number of clients. The firm probably had in the region of 1,000 clients overall, though not all were active in trading. Your staff included two of the witnesses in this trial, PWs 5 and 6, who were with you from the start, as well as the 2nd accused in the trial, D2, Li Wai-huck, who has been acquitted of all charges. Through those staff and on behalf of your clients, you traded in shares on the Hong Kong Stock Exchange. It is apparent that clients kept much of their portfolio of shares in your company, and it is this that provided the foundation for the offences that you have committed, because over the period between October 2005 and November 2007, when the company collapsed by being taken into administration, you engaged in unauthorised trading of clients’ shares - that is, buying and selling on their accounts - without their permission in a manner which, in certain cases, amounted to theft of the choses in action which represented the shares, and in other cases you concealed your activity by delivering statements of account to clients which did not record the transactions which had actually taken place on their accounts and which did not truly state stock in hand on their accounts. These were documents which told lies. This is what amounts to the fraud charges in respect of which you have been convicted. At the same time, you were operating a bank account which had been opened by your brother-in-law, Siu Yun-piu, but which you controlled and which you used as a depository for the proceeds of unauthorised sales of clients’ shares and as a source of funds for unauthorised purchases of shares on clients’ accounts. It is as if you treated those clients’ accounts as being entirely yours to dispose of in whatever way you chose. The charges relate to four clients of the company. PW1 was by far the most significant complainant in Count 1, fraud; PW2 was the complainant in Count 2, fraud; PW3 the complainant in Counts 4 and 5, fraud and theft; and PW4 was the complainant in Counts 3 and 7, both of theft. PW1, Josephine Yung Pui-lai, was a friend of yours as well as a client. She trusted you to act properly towards her with regard to the shares she left with your company, and she believed that you would account honestly to her in full for what happened in that account. It was a misplaced trust, and you acted fraudulently towards her between October 2005 and November 2007. You acted with deceit towards PW1 with intent to defraud her, which had the result of her maintaining her account with your brokerage which of course she would not otherwise have done. PW2, Shen Kar-chun, was a substantial trader through your brokerage and others. He was in poor health for part of the relevant period, and you took advantage of that to carry out transactions which he had not authorised and which are represented by Count 2, fraud, between August 2006 and November 2007. The terms of the fraud are similar to those in PW1’s case. PW3, also someone you knew socially, had an account which was, to all intents and purposes, dormant. There were shares held in her account worth over $700,000 in 2004, but she did not trade after 2003, and therefore had no regular interest in her account. You sold some of those shares and gave her deceptive statements of account - Count 4, fraud, December 2006 - and stole others - Count 5, theft, May 2007. PW4 was also a client of the firm with a dormant account. Part of those shares belonging to him were stolen by you by being sold on the market in October 2005 - Count 3 - and another lot were similarly stolen in September 2007 - Count 7. During the time when you were carrying out these fraudulent activities and thefts, your company was put under inspection by the SFC, which spotted that you were transferring funds to third party accounts, including Siu Yun-piu and Great Honest Finance another of your companies, to name but two. The SFC asked for the client opening documents, which would reveal whether authorities for such transfers existed and would also contain contact addresses for clients which would enable the SFC to contact those clients directly. You realised that that would lead to questions about the activities on the accounts which would quickly reveal the unauthorised transactions. As a result, you directed that new account opening documents be prepared relating to these four clients in which false contact details were inserted together with forged signatures of those clients. The addresses were those of your friends or a relative, and therefore addresses to which you had access, and thus the SFC could not make direct client contact. This was designed to frustrate their investigations and to cover up what had been going on. It directed the SFC away from the clients and enabled you to intercept correspondence from the SFC to the clients and thereby to give you the opportunity to speak to the clients first if the SFC tried to make contact. Thus, when the SFC wrote to PW1, you were able to speak to her first, and you persuaded her to lie to the SFC to protect you. You also managed to speak to PW2 before his interview in November 2007 with the SFC, though there is no evidence as to what was said, because he could not remember. The lies told by PW1 at your behest, which, incidentally, put her at risk of prosecution, are not part of the particulars of the charges you face. The prosecution have not brought charges of making false instruments or perverting the course of justice. But it is relevant to the fraud, because it was done to cover up the activities which gave rise to the fraud itself. There has been some debate as to how to value these frauds and thefts. For the thefts, there is little difficulty. For frauds, it is more problematic. The key, in my judgment, is not to become too embroiled in the issue of what losses might have been suffered by these clients, but rather to look at what was improperly handled in their accounts, and in particular, what unauthorised transactions took place in their accounts which gave rise to the deceptive statements of account both as to transactions and as to the stock in hand. Such transactions, both buying and selling transactions, generate risk for an investor, and the assessment and acceptance of such a risk is that of the investor to undertake, but it is the investor’s decision, not the broker’s. I have undertaken an analysis of the unauthorised transactions which were identified by the evidence of PWs 1 to 4. I can say that the headline figure so far as these clients is concerned is that the unauthorised buying and selling transactions amounted to around $95 million over a period of about two years. Looking at PW1 first, not every month of the period covered by Count 1 can be analysed because not all the paperwork is available. Essentially, like others, she was receiving statements of account which included transactions which she herself had ordered. The stock in hand recorded on those statements reflected what she had herself ordered. The comparison with the ledgers in the GHI computers shows a wholly different picture regarding both transactions and stock in hand. A few months will suffice to illustrate. In October 2005, you made three unauthorised sales of PW1’s shares. These are recorded in table 1, items 1 to 3 of the Admitted Facts, and they amounted to just under $8 million worth of shares. You transferred the proceeds out of PW1’s account to Siu Yun-piu’s account. Later - much later - during the SFC inspection, the SFC asked about these transactions. You then generated three letters, Exhibits P386, 387 and 388, purportedly signed by PW1 and authorising the transfers and backdated to 2005. PW1’s signature was forged. She never saw those letters which were sent by you to the SFC. In February 2006, you made three transactions amounting to $5.2 million, and five transactions worth $5.26 million. In November 2006, you made six such sale transactions worth $11.12 million and at least five buy transactions worth $4.89 million. None of these unauthorised transactions is included in the particulars of the statement of account. You claimed in that statement that 1 million Bank of China shares were being held, when in fact, as is shown in the ledgers for that month, P55, there were none, because they had been sold without authority on 24 November. I can give further examples of transactions, but I do not think it is necessary to do so at this point. But I do think it is necessary to give the totals of my analysis of the amounts of unauthorised transactions. So far as sales are concerned, in October 2005, the figure is $7.93 million; June 2006, $1.6 million; February 2006, $5.2 million; November 2006, $11.1 million; December 2006, $2.7 million; March 2007, $2.2 million; May 2007, $2.4 million; June 2007, $7.5 million; and August 2007, $1.4 million. This amounts to approximately $42 million. The unauthorised buy contracts total $22.8 million, and therefore the total unauthorised transactions so far as PW1 was concerned are $65.1 million. PW2’s case follows a similar pattern. In November 2006 and December 2006 and August 2007, which were described in detail in the evidence, the total value of the unauthorised sales was $17.6 million, and the total value of unauthorised buy contracts was $12.4 million. So the total is just over $30 million. On one occasion in August 2007, he instructed the purchase of three lots of shares, and on the same day you sold those shares without authority at a loss which totalled over $200,000, and that was concealed from PW2 because the sales were not recorded in his statement of account. In his case, on 5 November 2007, just before the collapse of this brokerage, you signed an IOU to him for $22 million in respect of cash and shares which you agreed was owed to him. P196 at page 136 of the core bundle is your handwritten note giving rise to that $22 million figure, which was later revised at $30 million. In PW3’s case, you sold a quantity of HSBC shares owned by her and kept in her dormant account in 2004 without her permission for $138,000, and thereafter you concealed that sale on her statement of account by claiming that stock in hand included the shares already sold - Count 4. That claim was a deceit and was done with intent to defraud PW3, because you intended it would benefit you or your company and prejudice her by her keeping her account with you despite your unauthorised dealing, which indeed she did, and that thereby enabled you later on to sell 1 million of her Compass Pacific shares without her authority - Count 5. Of the sale price of $364,000, you drew $350,000 in cash out of your bank, using D2 to do so, and you received that cash and disposed of it. You have been unable to say what happened to it. So far as PW4 is concerned, you sold two lots of shares belonging to him held in his dormant account without his permission in October 2005 when you sold $92,000 worth of Automated System shares - Count 3 - and secondly in September 2007, when you sold $145,000 worth of Ping An shares - Count 7. By this means, one reaches that figure I mentioned earlier of both buying and selling transactions revealed by the evidence of the four complainants exceeding $95 million in value over the two-year period. Although it has been suggested in mitigation on your behalf that had the administrators not moved in to this company, it would have continued as a viable operation, I firmly and unequivocally reject that submission. This company was being operated on an improper basis in terms not just of the theft of shares, but on the massive scale of unauthorised transactions. Such a situation could not be sustained, and the company was bound to collapse if it had not been taken over in an orderly manner by the administrators, who could seek to liquidate what assets there were available to creditors. Of course, that takeover did not involve, so far as I am aware, taking over the bank account of Siu Yun-piu, which was unaudited but which was being used as the destination account for many unauthorised withdrawals from the accounts in question. Money was paid into that account and from that account, as the tables in the Admitted Facts show. The account was overdrawn in November 2007. It is suggested on your behalf that there were enough funds available there or in the property assets owned by you to pay off all claims by these four clients. I make no determination as to that. It is not necessary for me to do so. As I have indicated, there is dispute as to the extent of the losses suffered by the four clients, particularly so far as PW1 and PW2 are concerned. The prosecution have today submitted the documents setting out what are claimed to be the losses in shares, so far as PW1 is concerned, and in cash and shares so far as PW2 is concerned. It is evident that you have made over some properties owned by you to PW2 in an attempt to satisfy his multi-million dollar claim, though it appears the net value of the properties may not be great, and it is also clear that these matters may yet be the subject of civil proceedings. I do not intend to engage in this matter beyond saying that it is clear that PW1 ended up losing a significant quantity of shares, some of which were lost by apportionment of assets in the company made by the administrators as between her and other clients. But it is impossible, either with her or with PW2, to state with any precision what they lost as a result of your criminal conduct. It seems to me, as I have earlier indicated, that the more appropriate way of measuring the financial scale of your criminality is to assess, as I have done, the volume of unauthorised transactions which you were willing to make. Obviously the theft of particular lots of shares can be valued with some precision, but this is not, in my judgment, a case for the direct application of sentencing guidelines for breach of trust and theft cases as set out in a Court of Appeal case called Cheung Mee Kiu CACC99 of 2006. This is not a case where, aside from one particular part, it can be seen that you have made any identifiable gain from your misconduct. I exclude from this the $350,000 which you appear to have pocketed from the theft in Count 5. You were a wealthy woman running a successful brokerage. There is, however, nothing to suggest that such wealth was not legitimately earned. Indeed, one of your victims, PW2, spoke highly of your qualities as a stockbroker, describing you as highly competent and successful. I accept that to be the case. I must also note, with regard to cases from the Court of Appeal, the case of So Tai Fai Anita CACC23 of 2007. The gravity of these offences is to be measured by wide considerations. Stockbrokers are entrusted with money and shares of their clients. They are in a position to act dishonestly with that property if they so choose. They have a duty towards those clients and towards the system of trading in stocks and shares of which they are a part to act with honesty and propriety. That system depends on trust in stockbrokers, and your conduct giving rise to these offences has significantly and seriously undermined that trust. Given the wide involvement in trading in stocks and shares by a broad section of the community here in Hong Kong, it is essential that those in such positions of trust as you chose to be are deterred from breaching it, and that it is known that if the trust of the community is breached, that significant punishment will follow. It must be known by all those working in the financial services industry that society will not tolerate financial irregularities by those placed in a position of trust and responsibility. I am in no doubt that public sentiment is firmly in favour of treating such financial impropriety with clients’ assets, often hard earned by those clients, in ways which amount to criminal offences with severe penalties, and rightly so. I recognise that you are a woman in your 50s with no previous convictions and that your fall has been from a great height to a great depth. You have lost everything. You are ruined. You are banned for life by the SFC from working in the financial sector. Of course, you only have yourself to blame for this situation. It has taken quite a long time to unravel this case and bring it to court, but that agony of waiting has been extended by your decision, as you are entitled to do, to fight this case in the face of strong evidence. It would all have been over a long time ago if you had co-operated and accepted your guilt. I am told that you and your husband have made valuable donations to charity over the years, and I accept that to be the case, but it can be of no significance given the scale of this case and your denial of the charges. I am bound to say there really is no mitigation available to you. It seems to me to be just to have regard to the totality of sentence. It must be severe, but not crushing, and that overall term is a matter for judgment, rather than simple calculation. I judge that an overall term of 7 years’ imprisonment is appropriate. It will be made up as follows:
Please refer to CACC408/2009 for the relevant appeal(s) to the Court of Appeal. Please refer to CACC408/2009 for the relevant appeal(s) to the Court of Appeal. Please refer to CACC408/2009 for the relevant appeal(s) to the Court of Appeal. Please refer to CACC408/2009 for the relevant appeal(s) to the Court of Appeal. Please refer to CACC408/2009 for the relevant appeal(s) to the Court of Appeal. Please refer to CACC408/2009 for the relevant appeal(s) to the Court of Appeal. |
Cases cited in this judgment