HKSAR v. Yau Mee Kwan and Others

CACC000096/2003

CACC 96/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CRIMINAL APPEAL NO. 96 OF 2003

(ON APPEAL FROM DCCC NO. 898 OF 2001)

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Coram: Hon Stuart-Moore V-P, Stock JA and Jackson J in Court

Date of Hearing: 18 December 2003

Date of Judgment: 18 December 2003

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J U D G M E N T

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Hon Stock JA (giving the judgment of the Court):

Introduction

1These applicants were tried in the District Court before Deputy Judge M. Jenkins upon three charges. The first alleged conspiracy to defraud upon which they were acquitted. The third charge was an alternative to the first and it was as follows:

"

Statement of Offence

Conspiracy to promote a pyramid selling scheme, contrary to section 159A of the Crimes Ordinance, Cap. 200, and section 3 of the Pyramid Selling Prohibition Ordinance, Cap. 355.

Particulars of Offence

YAU Mee-kwan, TSOI Lai-ha, Sandra, CHAN Wai-ming, Raymond, LEUNG Hoi-man, PO Wai-ping and KWONG Chi-yan, between the 8th day of June 2000 and the 22nd day of December 2000, in Hong Kong, conspired together with other persons unknown, to knowingly promote a pyramid selling scheme operated by Cheung Wo International Group (HK) Limted."

2In the circumstances of this particular case the efficacy of the second charge, levelled only against the second, third and sixth applicants depended, in the event, upon the outcome of the third charge, for it was a charge of dealing with property known or reasonably believed to represent the proceeds of an indictable offence, contrary to section 25 of the Organized and Serious Crimes Ordinance, Cap. 455, and once the charge of conspiracy to defraud had been dismissed by the judge, the indictable offence upon which the second charge depended was pyramid selling, or a conspiracy to effect such selling.

3The applicants were convicted on 10 March 2003 on the second and third charges, and sentenced to terms of imprisonment ranging between 12 to 18 months' imprisonment. They are on bail pending this application which is an application for leave to appeal against conviction and sentence.

The facts

4The facts can be shortly stated.

5The applicants operated a scheme through a company called Cheung Wo International Group Ltd. That company promoted and put into effect two schemes. One was called the "Interactive Increment Development Scheme", the second the "Property Purchase Appreciation Development Plan".

6Individuals were approached and asked if they wished to do part-time work at the company. Thereafter they went to the company premises with friends where the schemes were explained to them. But it transpired that there was in fact no part-time work. Instead, they were asked to become members of the schemes by opening an account through the payment of a fee of HK$3,500. A member was entitled to open more than one account. Upon joining the scheme he had a right to introduce other members to the scheme and, if others joined, the introducer would be paid a commission, 70% of which was paid by cheque upon the introduction of the new members, and the balance of 30% was accumulated as "electronic money" which could be used by a member purportedly in exchange for products of the company.

7Members of the second scheme were referred to as property purchasers and they were required to pay HK$3,500 to join the scheme and that sum of money was purportedly to be used as a deposit for "the subscription of property in advance" and could be used, so it was said, towards the purchase of a property within one year.

8Those who joined the second scheme were again entitled to earn commission for introducing new members. The method employed to calculate the commission payable to members of the second scheme was similar to that used to calculate the commission payable in relation to the first.

9It is unnecessary for present purposes to rehearse in any detail the role of each applicant. It suffices to say that each played an active part in the company's operations. The prosecution called twenty one witnesses to establish the modus operandi of the scheme. The true nature of the scheme was well described by the learned Deputy Judge in the Reasons for Verdict:

"31. ... the essentials of each scheme was that commission was payable on the recruitment of new members, but that part of the commission would be withheld by Cheung Wo and could be used to purchase products through Cheung Wo.

....

35. The new recruits were told that part of any commission they earned would be withheld and could be used to buy items such as jewellery and motor cars that Cheung Wo dealt in, or they were told that Cheung Wo dealt in real estate, but there was no catalogue or price list of any of the products that were said to be available....

36. Unsurprisingly, and no doubt because of the lack of specific information on what precisely was available through Cheung Wo, none of these witnesses said that they were particularly interested in making purchases through Cheung Wo....

....

55. Out of the 21 witnesses who joined Cheung Wo, all save three gave as their reason for joining that they wished to make money by recruiting others. All, though, were told by a Cheung Wo representative how money would be earned by introducing others.

....

113. I have set out this evidence in some length because it does show that Cheung Wo did make some effort to introduce goods and services to its members which could be paid for with electronic money....

....

170. The evidence of the 21 witnesses who joined Cheung Wo was overwhelmingly to the effect that they each joined in the hope and expectation of making money by introducing new members. The whole thrust of the plans explained to these prospective members was that by subscribing to one or more accounts with Cheung Wo, the new member would be entitled to introduce further members, thereby earning a commission.

....

177. ... There was no genuine business of the sort described. The reality of it was that Cheung Wo's only business was accepting payments from new members and distributing the money received to the introducing member and those above him; the up lines.

178. It is right to say that this was explained to those prospective members who gave evidence and each of them understood that their chance of earning commission depended on them recruiting new members themselves. No doubt, some found recruiting new members less easy than they had been led to expect. Some would find it easier than others. Those who did recruit seem to have received what they were expecting to receive. It is not suggeted that anyone received less than he should have done."

10The evidence showed that members did not sell nor were they expected to sell, nor did they expect themselves to sell any goods. In particular, they were not buying the right to sell goods nor did the scheme envisage the onward selling of such a right. In short, this was not a scheme for the distribution of goods. They had a right to purchase the goods but that was for their own benefit if they so chose, and the amounts paid by participants to the company did not include an amount for the right themselves to on-sell goods. So too the commission that was paid was not based on the value of goods sold by the members, but was instead paid for the introduction of new members, and solely according to the number of members thus introduced.

The judge's finding

11In his Reasons for Verdict, the Deputy Judge recited the provisions of section 2 of the Pyramid Selling Prohibition Ordinance, Cap. 355 and said in relation to it and to the facts which had been established as follows:

"183. This [the section] precisely describes the operation of Cheung Wo. By opening and paying for an account with Cheung Wo, the member has a right to introduce a new member, who in turn has the same right, and so on. Further, the member received commission after introducing a new member, which commission had nothing to do with any goods or services, other than the reference to courses in the application form which, as I have found, was illusory; a fiction."

12Accordingly, the judge convicted the applicants on charge three, and as to charge two he based his conviction of the second, third and sixth applicants upon the fact that "each of the defendants knew that the earnings were the proceeds of a pyramid selling scheme."

Analysis

13It is contended by this appeal, and conceded by counsel for the respondent, that the judge erred in his finding that the scheme established and operated by the applicants was one proscribed by the Ordinance.

14Section 2 of the Ordinance provides as follows:

"In this Ordinance, unless the context otherwise requires-

"goods" (貨品) includes all chattels personal and things in action;

"promote" (推廣) means establish, advertise, manage or assist in the management of a pyramid selling scheme;

"pyramid selling scheme" (層壓式推銷計劃) means a scheme whereby-

(a)	a participant in the scheme is granted a licence or right to introduce another participant into the scheme who is also granted such licence or right and who may further extend the chain of persons who are granted such licence or right, notwithstanding that there may be a limitation to the number of participants or that there may be any further conditions affecting eligibility for such licence or right; and
(b)	a participant receives a reward on, or at any time after, the introduction into the scheme by him of another participant which reward is based, whether wholly or in part, otherwise than on the fair market value of goods or services actually sold by him or by or through that other participant;

"reward" (報酬) includes refund, commission, discount or allowance but does not include payment for sales demonstration equipment and materials supplied at not more than their fair market value and not resold."

15We have heard Mr Turnbull this morning in justification of his concession for it seemed to us at first blush that it could be argued, given the wording of the section, that if there were no goods then the section bites. The section, we have to say, was hardly drawn with clarity, and we can see perniciousness in schemes the sole purpose of which is to make money from the recruitment of other participants with no element of trading in goods at all, for such schemes which involve no more than the ongoing introduction of members might be said to be objectionable in that loss down the line is inevitable. But we are persuaded that this section assumes a scheme which envisages the selling of goods by a participant and a reward for the selling of goods. It is clear on the facts of this case that there was no sale of goods by the members of the scheme, nor was any anticipated. All that was anticipated, if it was truly anticipated at all, was that members might themselves acquire goods, although that seems to have been a peripheral aspect of the matter.

16In so far as the wording of the section may well be said to be less than clear, one is entitled to look at the statement of the minister or official who introduced the legislation: see Pepper v Hart [1993] 1 A.C. 593. What the official said in this instance supports the interpretation for which Mr Turnbull contends. In moving this legislation, the Financial Secretary said, on 11 June 1980:

"There are several variations on the theme but, in essence, pyramid selling is related to the sale of goods or services. A participant pays for the right to sell and then for the goods he is to sell. He then becomes eligible to receive rewards for recruiting new participants. Thus he can earn money in two ways: by profits on sales he makes himself and from payments for recruiting other participants.

Such schemes can be objectionable on two grounds. First they often serve no economic purpose and contain the elements of disaster for those who participate. A person who pays to join a scheme may find that he is unable to recoup his money by selling the goods. As the rewards for recruiting usually far exceed those the participants can earn from selling, he concentrates on recruiting other participants. The same consideration can affect the attitudes of those who he recruits an so on down each stage of the pyramid. The goods are forgotten as the salesmen multiply, yet each new recruit is probably having to buy from the organizers a fixed quantity of goods to sell. But one day there are no more people willing to be brought into the scheme. And so we end up with a situation in which those at the top of the pyramid are rich as the results of selling the right to sell and the goods that are to be sold. As we lookdown the pyramid the participants appear to be less well off until we find at the base a large number of salesmen who have paid for their position on the one hand and have no alternative but to settle down and sell those long forgotten goods on the other. If the goods turn out to be virtually unsaleable, what's then?"
See: Hansard 11 June 1980, page 874.

Conclusion

17It seems to us therefore that the ground of appeal is made out. Accordingly, we shall grant to each applicant leave to appeal, and treating the hearing of the application as the appeal, we allow the appeal and quash the convictions in relation to each applicant on charges two and three, and set aside the sentences imposed.

Representation:

Mr Michael Blanchflower, SC leading Mr Eric Kwok instructed by Messrs Ng & Partners for D1, D2, D3 and D6

Mr John Halley instructed by Messrs C.K. Mok & Co for D4 and D5

Mr R G Turnbull, SADPP and Mr Eddie Sean, SGC of the Department of Justice for the Respondent