HKSAR v. Chan Chin Yuen and Others

DCCC683/2008, DCCC685/2008,
DCCC686/2008 AND DCCC688/2008(CONS)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 683 OF 2008, 685 OF 2008,

686 OF 2008 AND 688 OF 2008 (CONS)

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Reasons for Sentence

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1.D1 to D4 stand convicted after trial of one count of conspiracy to carry out false trading contrary to section 295(1)(a) and (6) and 303(1) of the Securities and Futures Ordinance Cap.571 and sections 159A and 159C of the Crimes Ordinance Cap.200.

2.The maximum penalty on conviction on indictment under part 13 is a fine of $10 million and imprisonment for 10 years. This court found that the four defendants between 1 August 2005 and 5 September 2005 in Hong Kong conspired together to place or caused to be placed bid and ask orders for the shares of a ASH, listed corporation, with the intention that it had or it was likely to have the effect of creating a false or misleading appearance of active trading in respect of the securities of ASH, a listed corporation traded on the stock market operated by the Stock Exchange of Hong Kong Limited.

3.I have set out this court’s findings in my Reasons for Verdict and I do not propose to recite the same in details. This court found that the four defendants collaborated together in the trading in ASH shares during the relevant in pursuant to an agreement. The four defendants conspired together to place bid and ask orders for the ASH shares. Under the said agreement D2, D3 and D4 would play the roles of traders whereas D1 would be responsible for the financial aspects of the trades in ASH shares. Amongst other things, D1 would allocate funds between the accounts of D2, D3 and D4 to ensure that each of them has sufficient funds to settle sums due to the brokers acting for D2, D3 and D4.

4.D1 provided funding for D2, D3 and D4 to carry out their trading of ASH shares. During the relevant period D2, D3 and D4 employed 12, 8 and 12 brokers respectively in their trading in ASH shares. They carried out trades between themselves through the marketplace on a frequent basis; i.e., trades which neither involved outside parties nor changing the aggregate beneficial holdings in ASH, and therefore these trades had no impact on their overall investment portfolio. These trades amounted to matched trades as described by the prosecution expert, Mr Lung, or wash trades as described by the defence expert, Mr White.

5.For some of the orders placed by D2, D3 and D4 the orders were split between several brokers. The matched or wash trades undertaken by D2, D3 and D4 increased the turnover of the ASH shares and, hence, the investors’ or speculators’ interest in the stock. It was the intention of the four defendants that the implementation of the conspiracy would have or likely to have the effect of creating a false a or misleading appearance of active trading in ASH.

6.The four defendants wanted to attract the interest of the investors or speculators by increasing the liquidity of ASH shares through trading amongst the three traders. During the relevant period D2, D3 and D4 traded very heavily in ASH shares, accounting for 60.2 per cent of all the ASH shares bought and 53.3 per cent of all the ASH shares sold. 30 per cent of all ASH shares traded during the relevant period, both the buyer and seller were two of D2, D3 or D4; i.e., one was selling to the other. Out of the 26 trading days in the relevant period in 12 days the day trades of D2, D3 and D4 accounted for over 50 per cent of the turnover in ASH.

7.The share price in ASH increased by 78.3 per cent during the relevant period and dropped dramatically immediately after. It is not possible to quantify to what extent the rise of the share price was attributable to the market manipulative activities of the defendants. Apart from the artificial liquidity created by the market manipulative activities involved, there were other equity drivers at force before and during the relevant period. I note that given the opening positions of D2, D3 and D4 at the beginning of the relevant period each individual trader and the group, as a whole, had made some unrealised profit at the end of the relevant period though the amount cannot be quantified as it is not known at what cost the opening positions were acquired. It seems much of the accumulated profit had evaporated as the share price of ASH dropped dramatically after the relevant period.

8.In the light of the light criminal record of D1 and the clear records of D2, D3 and D4, I acceded to the request for Background Reports before sentence. I have before me the Background Reports of D1 to D4. I have considered the contents of the reports.

9.The Background Report of D1 sets out the background information of D1. D1 was born in 1961 and is now aged 48. He was educated only up to primary level. He is in the garment business.

10.The wife of D1 is the director of the company which owns the family garment business. D1 has one son and one daughter, both in their 20s, and have careers of their own. D1 is suffering from severe obstructive sleep apnoea. He has to use an oxygen cylinder with an MC mask beside his bed to prevent suffocation during his sleep. D1 also suffers from diabetes and bladder stone. The ageing parents of D1 are being taken care of by D1’s elder sister. Although D1’s wife is the director of the company which owns the family garment business, D1 is the real boss who runs the business.

11.A letter of the Dongguan City Dongzhan District verifies D1’s long-time effort to provide employment for hundreds of local citizens and avoid redundancy during the economic downturns in the past decade. For charitable donations, D1’s wife produced to the Probation Officer a receipt from the Guangdong authorities’ receipt for donation after the Menchuan earthquake in May 2008 and the World Children’s Fund Award certificate. I have the same before me today.

12.D1 denied his involvement in any market manipulated activities. D1 has some previous convictions that seem to be related to his garment business. I will ignore the remarks made by the Probation Officer that D1 “jumped on to the bandwagon of exploiting the cheap labour and land for the production in Guangdong and earned his first bucket of gold.” I will also ignore the references made about the outstanding matters that D1 is being involved.

D2

13.D2 is now 46 years old. She had a hitherto clear record. She attained secondary school education in 1980. She has been working as a clerk since 2003 earning about $10,000 per husband month. D2’s husband is a metal-plating factory worker and is stationed in China. D2’s daughter is now 14 years old and is a Form 3 student. D2’s daughter is receiving treatment from a private psychiatrist for her anxiety problem. D2 denies her guilt regarding the present offence.

D3

14.D3 is now 43 years old. He is the younger brother of D1. He had received vocational training in carpentry at the Construction Industry Training Centre. D3 last worked as a decoration worker on a casual basis earning $20,000 per month on average. D3 is married. His wife works as a clerk. They have a 10 years’ old son. D3 is the main breadwinner of the family. D3 denies his guilt when interviewed by the Probation Officer.

D4

15.D4 is now 55 years old. He completed his secondary education in Hong Kong. He had worked for the Supplies Department and the Customs and Excise Department respectively between 1973 and 1995. He then left the government and had worked as a clerk and later as a manager in various factories between 1998 and the end of 2008 when he retired. D4 lived with his wife who is a housewife and is suffering from diabetes. D4’s mother is in her 80s and is being taken care of by D4’s brother. D4’s mother suffers from heart disease and is being kept in the dark of D4’s involvement in the present case. Regarding the index offence, D4 denies his guilt and claimed that he had just carried out normal and proper trading of stocks at the material times. D4 asked for a non-custodial sentence so that he can look after his elderly mother and wife.

16.Counsel are not aware of any local sentencing authorities as far as the regime under the Securities and Futures Ordinance is concerned. Mr Lai, for the prosecution, submitted some authorities on sentencing which concerned the now repealed Securities Ordinance. Mr Lai also submitted the case Scook v The Queen [2008] WASAC 114, a decision from the Supreme Court of Western Australia. Mr Lai submitted that the sentencing principles in those cases are also applicable to the present case.

17.In The Securities and Futures Commission v Choy Wai Zak and Another HCMA264/2002 unreported, the defendants were convicted of the offences of intentionally creating or causing to be created, a false or misleading appearance of active trading in the shares of a listed company on the Stock Exchange of Hong Kong contrary to sections 135(a)(a) and 139 of the then Securities Ordinance. The offences involved intentional deception of the investing public, leading the public to believe to believe that the shares were being more actively traded than they really were. The maximum sentence provided for that offence under the now repealed Securities Ordinance was 2 years’ imprisonment.

18.Lugar-Mawson J makes the following observation in paragraph 19 of the judgment:

“What has to be borne in mind is this - and it may well have been forgotten by counsel at trial and today on appeal - market manipulation is a serious offence.  It is one the legislature has chosen to penalise by providing for a sentence of immediate imprisonment of 2 years’ imprisonment.  It is an offence that strikes at the fair and honest operation of the securities market.  It is not a victimless crime; its victims are all other members of the investing public.  It is an offence that can lead to large profits for the offender and to as equally large losses to the investing public.  And, perhaps most importantly, it is an offence that necessarily involves those who commit it doing so by deception and dishonesty.”

19.His Lordship also observed in paragraph 21:

“...that the existence of a clear record in a sufficiently serious case can never of itself be sufficient to save a person from an immediate sentence of imprisonment.”

20.The Court of Appeal in the case of The Securities and Futures Commission v Zou Yishang HCMA859/2005 unreported considered the sentence imposed after trial of an offence of dealing in securities with an intention of creating a false or misleading appearance of active trading in those securities contrary to section 135(1)(a) and section 139 of the now repealed Securities Ordinance. After dismissing the appeal against conviction the court went on to consider the appeal against sentence. McMahon J makes the following observations in paragraph 49 of the judgment of the court:

“We do not think, however, that it can be said that the present offence would normally attract a non-custodial sentence.  The offence is of a nature which may vary enormously from case to case in terms of the method of creating a false impression of active trading and the degree of success in creating that false market impression.  The context in which that is done will also be of relevance in determining sentence.  Nor do we think that comparisons with sentences in other cases are of great assistance.”

21.His Lordship states in paragraph 51 of the judgment:

“The protection of the integrity of the stock market is an important public concern in Hong Kong and deterrent sentences, depending on the facts of an individual case, are justified.”

22.In Securities and Futures Commission v Lee Sing Wai HCMA132/2006 McMahon J considered the sentence passed on the same offence brought under the now repealed Securities Ordinance. His Lordship says at paragraph 10 of the judgment:

“It was suggested by the appellant during the appeal that in virtually all previous such prosecutions sentences of suspended imprisonment were handed down.  I am surprised by that.  These offences are serious and cause real and substantial losses to investors and bring an important part of Hong Kong’s economy into disrepute.  Sentences of imprisonment, in my view, cannot be complained of even for first offenders.”

23.His Lordship agreed with the reasons of the Magistrate who said amongst other things:

“The defendant might have lost money in the exercise but what his group did had created false or misleading appearance of the Essex shares in the market during the relevant period.  Whether the defendant or others gained or lost because of that was not important.  The misdeed was that it hampered the proper practice of shares trading in the Unified Exchange and this in turn hampered the reputation of Hong Kong as a significant stock market in the world.”

24.In Scook v The Queen, the Supreme Court of Western Australia considered the sentence passed on the appellant for the offences of creating a false or misleading appearance of active trading and doing something that was likely to create a false or misleading appearance of active trading. The Supreme Court of Western Australia considered the circumstances under which delay in proceedings can be considered as a mitigating factor. The court also took the view that the appellants’ offending was at high level of seriousness of offences of this type as it involved considerable effort and guile on the appellant’s part for its implementation. The nature and seriousness of the offending in that case required a significant weight to be given to the sentencing objective of general deterrence.

25.I have borne in mind all the matters urged on behalf of the defendants by learned counsel. I am also told that a settlement has been reached between the defendants and the prosecution that the defendants shall pay to the SFC costs in the present matter.

26.In my judgment, the present case is a serious case of market manipulation. The facts revealed that the four defendants had actively involved in creating a false appearance of active trading in the shares of ASH during the relevant period which spanned over the period between 1 August 2005 and 5 September 2005. The scale and extent of the market manipulative activities were large in terms of the number of transactions, the amount of money involved, the number of brokers used and the fund flow.

27.As observed by Mason J in North v Marra Developments Ltd (1981) 148 CLR 42 referred to by the prosecution in their opening, the objective of the anti-market manipulation legislation is:

“To protect the market for securities against activities which will result in artificial or managed manipulation.  The section seeks to ensure that the market reflects the forces of genuine supply and demand.”

28.In my judgment market manipulative activities undertaken by the four defendants, if undeterred, would undermine the fairness of the shares trading in Hong Kong which forms an important part of Hong Kong’s economy. The sentence imposed should reflect the public’s disapproval of the defendant’s conduct and the sentence passed should also have the effect of deterring those who are like-minded from doing the same. I do not think there are humanitarian grounds with exceptional circumstances justifying the suspension of the sentence.

29.On the facts before me I do not think any sentence short of immediate custodial sentence is appropriate.

30.Of the four defendants before me I find the role of D1 to be most important. He played a pivotal role in the whole scheme.

31.As for D2, D3 and D4, I find the three of them equally culpable amongst themselves.

32.I have considered counsels’ submissions on the issue of delay carefully. I am told the SFC’s investigation started in August 2006 and D3 was brought to court in July 2008 and the trial started on 27 July 2009. On the question of delay I follow the illuminating analysis by Buss JA in Scook v The Queen paragraphs 57 to 65 inclusive. In the present case I find that the delay is reasonable in the circumstances and it is certainly not the type described in the second, third and fourth guiding principles as Buss JA reckons; hence, the situation of uncertain suspense or reasonable expectation as envisaged in the sixth guiding principle do not apply to the defendants.

33.Learned counsel make no criticism of the conduct of the investigation and the prosecution; hence, the seventh principle does not apply. For the fifth principle, I do not think it can be said in favour of the defendants that the defendants have made progress towards rehabilitation or other circumstances favourable to the defendants have emerged. I am aware that the seven guiding principles are not intended to be exhaustive or inflexible. I am aware that the appellant in the case of Scook had been convicted of over 100 charges and was sentenced to a head sentence of 3 years’ imprisonment. It seems to me that in Scook each substantive charge laid against the appellant was grounded on each buy or sell order. Given that the four defendants in the present case are convicted of one single charge of conspiracy it may not be helpful to assess the seriousness of the case of Scook and compare it with the present case in terms of the number of charges.

34.I agree with learned counsel that the conduct of the defence has saved a lot of time and cost and the defendants deserve some reduction in the ultimate sentence that they are to receive.

35.D2, D3 and D4 each have a hitherto clear record and I should take that into account. In the case of D2 I do not think mitigation letters written on behalf of D2 advance her case any further. Although D1 is not a man of clear record he had made some charitable donations in the past and that goes some way in his favour in mitigation. I do not think the fact that D1 has been providing employment to hundreds of workers in the past can count as a mitigating factor in his favour. The success of his business and the possible effects of D1’s incarceration on his employees is not something that I accept as a mitigating factor.

36.I am aware of the sentences of 16 months and 13 months passed on the two applicants in the case of HKSAR v Cheung Sing Chi and Another CACC193/2003. The applicants in that case were convicted after trial of an offence of conspiracy to defraud. The case concerned effectively market manipulation by dishonestly creating a false or misleading appearance of active trading in shares in the stock market. At the material time of that case the now repealed Securities Ordinance was still in force and the maximum penalty for the offence of carrying out false appearance of active trading was 2 years’ imprisonment.

37.Though it is not clear from the judgment it is only reasonable to assume that the sentencing judge in Cheung’s case in sentencing the applicants to the term of imprisonment as she did must have had regard to the maximum terms of the substantive offence despite the facts that the maximum term for the offence of conspiracy to defraud was 14 years.

38.For the health conditions of D1 I do not think that diabetes and gall bladder problem amount to a mitigating factor. I would, however, reduce the sentence on account of his severe obstructive sleep apnoea which no doubt would cause D1 some additional hardship in prison.

39.In the case of D2 I do not think the neck and right shoulder pain of her can count as a mitigating factor. I am sympathetic with the condition of her daughter, but again I do not accept the illness of D2’s daughter can count as a mitigating factor in D2’s favour.

40.On the facts before me in the case of D1 a starting point of 3 years’ imprisonment is appropriate. In the case of D2, D3 and D4 a starting point of 2½ years’ is appropriate.

41.In the case of D1, I will allow D1 2 months’ reduction because of the charitable donations that he had made in the past. I will allow him another 2 months’ reduction for the severe obstructive apnoea suffered by him. Finally, for the time saved through the conduct of the defence I will allow D1 another 2 months’ reduction. For the reasons given, I sentence D1 to 30 months’ imprisonment.

42.In the case of D2, D3 and D4, I will allow 2 months’ reduction for their clear record. I will also allow them an additional 2 months’ reduction for the time saved through the conduct of the offence. For the reasons given for D2, D3 and D4 I sentence each of them to 26 months’ imprisonment. These are immediate terms of imprisonment.

(Discussion re costs order)

43.I make the cost order that each of the defendants shall pay to the SFC costs in the amount of $288,400. In the case of D1 his cash bail will be used towards the payment of the cost order and the balance shall be paid within one month. In the case of D2 and D3 the cost shall be paid within 3 months; in the case of D4, within one month.

Application for leave to appeal against conviction and sentence dismissed. see CACC416/2009 dated 23 August 2010