HKSAR v. Chiang, Lily and Others

DCCC265 & 266/2009(Cons)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CRIMINAL CASE NO. 265 AND 266 OF 2009

(Consolidated)

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Reasons for Sentence

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1.Now I announce my decision on the penalty which three distinguished members of the community, who have now fallen from grace, are to receive.

2.After trial, I found them guilty of the charges as follows:  D1 and D2 guilty of Charge 1, a charge of conspiracy to defraud.  D1 and D3 guilty of Charges 4 and 5.  Charge 4 is a charge of fraud; Charge 5 is a charge of false statement by directors.

3.In sentencing, I have taken into account the whole circumstances of the case including its nature and facts, background of each defendant and mitigation put forward on their behalf.

Facts

4.I have set out the facts of the case when I delivered my verdict.  The facts proved may be outlined as follows.

5.Charge 1 concerned the Pacific Challenge Holdings Limited (PCH).  Charge 4 and Charge 5 concerned Eco-Tek Holdings Limited (Eco-Tek).  The Eco-Tek charges took place earlier.  I will therefore consider them first.

Eco-Tek charges

6.Eco-Tek was a Cayman Islands company which was registered in Hong Kong as an overseas company.  At the material time, D1 and D3 were executive directors of the company.  D1 was the chairman as well.  In effect, she held 54.15% of the Eco-Tek issued shares.

7.In June 2001, Eco-Tek applied to be listed on the Growth Enterprise Market (GEM).  It was stated in the Prospectus inter alia that Yip Yuk-chun, Iris, held 8,844,800 shares of Eco-Tek and D1 only held beneficially 299,341,200 shares of Eco-Tek through Team Drive; and that the shares were allotted and issued to Iris as an incentive, and that she was independent of and not connected with Eco-Tek, its directors, chief executive, substantial shareholders or initial management shareholders. 

8.Iris was in fact holding the shares for D1.  The Prospectus, therefore, contains an untrue statement. 

9.As D1 was an initial management shareholder of the company she was to comply with certain GEM Listing Rules, including observing a moratorium period in relation to disposal of her securities. 

10.As a result of concealing of the fact that Iris was to hold the shares for D1, no moratorium period was imposed by the Stock Exchange on those shares upon approval of the listing of Eco-Tek on the GEM Board.

11.Eco-Tek’s listing on the GEM board took place on 5 December 2001. 

12.Upon the instruction of D1, Iris sold 844,800 shares and obtained $370,000.  Of this, Iris handed over $340,000 to D1.  D1 had also instructed Iris to transfer 8 million shares in her name to a company, IWK Net.Com.  Iris did so, but did not receive any proceeds of this transaction.

13.I found D3 had acted in concert with D1.  In providing information to answer queries from the Stock Exchange, he concealed the fact that Iris was holding the shares in question for the benefit of D1.

14.Both D1 and D3 authorised the issue of Prospectus which contains an untrue statement.

PCH charge

15.PCH has been a listed company since October 1998.  At the material time, D1 and D2 were two of the executive directors of the company.  D1 also held 0.87% personal interest and 32.65% of corporate interest in PCH. 

16.There was in place a share options scheme for some years by which the Board of Directors may grant to any full time employee of PCH or its subsidiaries, subject to conditions, as an incentive measure.

17.On 4 February 2002, share options were granted for the first time.  Ten employees of the Group were selected to be grantees.  Each of them was granted 2,388,800 share options. Grants to at least five of them were false.  Becky Poon, Tang Wai-shing and three Mainland grantees were only nominees.  Becky Poon and the Mainland grantees were holding the share options for D1.  D1 was involved in the selection of the five grantees knowing that they were only going to be nominees.

18.D2 and Teli Chan were the only executive directors present in the Board of Directors meeting which approved the grant.  Both of them knew that these five grantees were only going to be nominees and yet still approved the grant of share options to them.

19.In April 2002, there was a takeover offer by Ontime.  Soon afterwards, also in April, there was another takeover offer by Kandy Profits.  Eventually Kandy Profits succeeded in acquiring PCH and Ontime withdrew its offer.

20.In response to the general offer, nine of the grantees, including the five false grantees, accepted the offer and surrendered their share options.  As a result, each of them was paid $835,800.  However, D1 received the proceeds of the three Mainland grantees and part of the proceeds from Becky Poon.  Tang Wai-shing disposed of most of his proceeds upon instruction from others.

Background of the defendants and mitigation

D1

21.D1 is a lady from a renowned family in Hong Kong.  Like the other two defendants, she is a first-time offender.  Learned leading counsel stressed that she is a person of good character.  From all the information drawn to my attention, I accept that it was out of character for this lady to have committed the offences.

22.She is an engineer by background and also an MBA and PhD.  She is also a Fellow of Engineers. 

23.She has been successful in her business and career.  At the time of the offences, she was a member of the management of quite a number of companies and was their major shareholder. 

24.She is widely regarded as an economic leader in the Territory.  She played leading roles in many commercial organisations. 

25.She was elected one of the top 10 Outstanding Young Persons.  She was the first lady chairperson of the Hong Kong General Chamber of Commerce. 

26.She has active commitment in education.  She served in various advisory and executive boards and groups in top local universities and the Vocational Training Council.  She also served in a university in the Mainland. 

27.She has served in public offices such as the Immigration Tribunal and governing body of a public hospital. 

28.She contributed widely, both in terms of financial resources and personal effort, in charitable work.  She has set-up charitable trusts as well as scholarship.

29.Learned leading counsel stressed that D1 had done things to foster education and provide incentive for the young to develop their potential.  She made provision for others to facilitate a change of their life.  She also cares about the environment. 

30.I was also told that she is fair and generous and is willing to give up remuneration and benefit in situations she thinks fit.

31.Mitigation letters were produced on behalf of D1.  Authors of these letters include people of high standing in the community.  They include a JP, heads of universities and tertiary education institutions, people holding responsible position in charitable organisations and hospitals, senior executive of business enterprises, professionals and prominent politicians.  All of them speak highly of D1.  The general view is that she is trustworthy, responsible, passionate, caring for the community, in particular the young and under privileged, and generous in charitable work. 

32.There are also letters from her previous employees.  They attribute their present success to the encouragement, support and kindness of D1.

33.D1 is the mother of four young children.  I was told that despite her heavy commitment, both in commercial business and public service, she is a dedicated and dutiful wife as well as a devoted, caring and loving mother. 

34.Family members provided touching letters to the court.  It is a major concern that the children are going to be deprived of the care and love of mother.

35.I was told that D1 has, for a long time, not been enjoying good health. 

36.Learned leading counsel also stressed the age of the offences and thus there is no chance of re-offending by D1.

37.Learned counsel for the other two defendants said that these two points are applicable to D2 and D3.

D2

38.D2 is a 46-year-old Pakistani gentleman, who arrived in Hong Kong around 1990.  He is married with a son.  Back in his country, he was a qualified and registered medical doctor. He did not practice as a doctor in Hong Kong, but has done well in the commercial sector. 

39.He was a director of different companies. 

40.He has also contributed to charitable work.  He is a director of a charitable trust and has engaged in work concerning welfare of children and the disadvantaged.  He has made generous donations for various charitable causes.

41.Like D1, he has also voluntarily given up remuneration and benefit which he was otherwise was entitled to. 

42.People who had worked with D2 said he was sincere and friendly to all levels.  He did not hesitate to provide assistance and share his experience and knowledge.

43.He serves in an Islamic Society.

44.Learned counsel stressed that even though D2 have been convicted of having conspired with D1, he had not received a single cent of reward or benefit.

45.Learned counsel submitted that D2 was totally not responsible for the delay and stressed the resulting financial as well as psychological strain on him. 

46.I was told that D2 has been suffering from insomnia, loss of appetite and loss of direction and desire.  He is now unable to take up serious work.

D3

47.D3 is 55 years old.

48.As learned counsel says, the way D3 had worked hard and struggled from a humble background to success is what people should admire and learn.

49.When D3 first came to Hong Kong, he had received no formal education.  By his great effort, he acquired expertise in engineering and managed to obtain a PhD degree.  He is also a Fellow in Engineering. 

50.The standard of his engineering designs has been highly recognised.  Some of his designs were regarded as a breakthrough in technology.  He has also served in various boards of tertiary education institutions.

51.He is marred with two sons.

52.Back in 1993, the family met a traffic accident.  His wife and two sons were seriously injured. The incident changed his attitude towards life.  He quitted his high paid job in Chen Hsong and changed to work in Eco-Tek which aim at improving the environment and serving the people.

53.I was told that he has an aged mother to take care of.

54.D3 is also active in promoting education.  He set up scholarships and awards for tertiary education and encouraged young people to develop industrial technology. 

55.Apart from excelling in his own field, D3 had offered significant support and assistance in education and research.  He has shown his concern about the environment.

56.I was told that D3 is conscientious and responsible.  Despite his arrest and these proceedings, he still stayed and made contribution to Eco-Tek.  The management of Eco-Tek wrote and confirmed this.

57.The court has also received letters from respectable people including school principals, scholars and professionals.  D3 is described by many as good-natured, self-motivated, serious and hardworking. 

58.Family members also wrote and asked for leniency.  The letters from his sons impressed me that D3 is a responsible and caring father.

59.D3 has been suffering from depression disorder.  These proceedings have worsened substantially the condition.

Consideration

60.The Eco-Tek charges concern mainly a fraud practised on the Stock Exchange in the course of the application by the company to be listed.

61.The fact of a staff holding shares for D1, an initial management shareholder, was concealed to avoid imposing of moratorium period on shares in question.

62.There is also a related charge of authorising the issue of a Prospectus which included an untrue statement in relation to the same matter.

63.The PCH change is a conspiracy to defraud.  By false grant of share options to some employees, D1 obtained financial benefit when the share options were bought out in a subsequent takeover offer.

64.Parties defrauded included the company itself, its shareholders, its potential investors, SFC and the Stock Exchange.

65.Hong Kong has been working hard for decades to build itself up as an international financial centre.  The achievement was hard-earned and is now facing challenges from all directions.  Certain features are the cornerstone of our success.  Openness, fairness and compliance are the more significant ones.  The whole community must make our best endeavour to safeguard these features so that we can still have an edge in the rigorous competition.

66.Regulation of the stock market and the companies listed or applying for listing is very important to ensure that our position as an international financial centre can continue to develop healthily.  It is an important public interest we should not allow and cannot be allowed to be compromised. 

67.Investors should be able to trust and rely on information provided by companies, which seek to solicit their investment, to make an informed assessment and decision as to whether and how to make an investment. 

68.Provision of accurate and truthful information to the regulating bodies such as SFC and the Stock Exchange is also very important so that the design to monitor and regulate the system and the market will not be defeated.

69.The dishonest acts of the defendants as practised in the present case not only affected economic interests of the parties concerned, more importantly it shakes the confidence in the system and the integrity of our stock market.  In turn, it will have a severe adverse impact on our efforts to build Hong Kong as a leading financial centre.  The whole community has been working very hard.  The reputation and integrity of our market and its systems must be protected vigorously.

70.The defendants, for their own interests, disregarded totally the efforts of the whole community. In my judgment the offences in the present case are very serious.

Eco-Tek charges

D1

71.I have found that it was a scheme designed by D1.  She was able to succeed in obtaining the benefit by way of the fraud practised on the Stock Exchange to avoid a moratorium period.  The total amount of shares Iris held as a nominee was 8,844,800 shares.

72.Upon listing, she disposed of all these shares.  For the 844,800 shares she sold in the market, she obtained $370,000.  D1 receive $340,000 from Iris.

73.As regard the 8 million shares transferred to IWK, I found that the shares were disposed of under the instruction of D1.  She thereby enjoyed the benefit of being able to transfer that amount of shares to a party she designated.  The value of such an amount of shares was substantial.

74.The dishonest scheme involved a considerable degree of planning and careful implementation.  The concealment of fact was directed mainly to the Stock Exchange, a regulating body.

75.D1 was able to dispose of more than 8 million shares at a time she desired without being hindered by the moratorium period. 

76.In considering the financial benefit which D1 obtained, I bear in mind that when the dishonest scheme was designed it was uncertain whether Eco-Tek could be listed, when it would be listed, and how much its shares would be worth.  As a matter of fact, Eco-Tek was listed and the shares turned out to be of a substantial value.

77.Investors were provided with an untrue statement in the Prospectus.  There is little evidence to show the exact impact of this and whether it did cause actual financial loss to anyone and, if so, what was its extent.  The impact would have been great if it had concerned a company more prominent than Eco-Tek.

78.The dishonest scheme was a continuous one.  The listing process itself lasted for about six months.

79.There is no tariff for this type of offence.  In sentencing, as I have said, I take into account the whole circumstances of the case.

80.In my judgment, the gravamen of this charge is a fraud to avoid the moratorium period.  The amount of money which D1 obtained and was able to direct is just one of the factors to be taken into account.  Public interest, in particular, safeguarding of the integrity of the system is an important concern.

81.D1 was the mastermind of this dishonest scheme and the one who benefited.  In all the circumstances, I am of the view that an immediate custodial sentence is the only appropriate sentence to impose.  The maximum sentence for the offence of fraud is imprisonment for 14 years.  I am of the view that a starting point of 3 years is appropriate for Charge 4. 

82.The offence in Charge 5 carries a maximum sentence on a conviction on indictment of a fine of $550,000 and an imprisonment term of 3 years.  D1 knowingly committed the offence.  The untrue statement is necessarily in the implementation of the dishonest plan.  She was the one who obtained the benefit.  In all the circumstances, I consider a starting point of 1 year appropriate.

D3

83.D3 was only acting in concert with D1 and did not personally obtain any benefit out of the dishonest scheme.  However, in providing information to answer queries from the Stock Exchange, he knowingly concealed the truth for the benefit of D1.

84.Learned counsel submitted that D3 had done little in this offence and, in any case, had only played a minor role.

85.Whilst I found that D1 was the mastermind, D3 had been instrumental in the implementation.  He was the main person who was responsible for dealing with the queries from the Stock Exchange.  The public interest I mentioned earlier was seriously jeopardised.

86.In my judgment, the culpability of D3 calls for custodial sentences, though lower starting points are appropriate.  For Charge 4, I adopt a starting point of 2 years.  For Charge 5, I adopt a starting point of 9 months.

87.Learned counsel urged me to consider a non-custodial sentence.  I have given it careful consideration taking into account every relevant matter, including what I have already set out, and matters I am to mention shortly.  In my judgment, the nature and facts of the case are so serious that despite the personal attributes of D3 qualify him as a candidate for consideration of CSO, it is not an appropriate to make.  It is inadequate in reflecting the degree of seriousness of the case.  Besides, there is insufficient material to make me satisfied that D3 has a sufficient degree of remorse.

PCH charge

Charge 1

88.The scheme involved sophisticated planning as well and detailed and careful implementation.  It was not a single act of dishonest conduct; it was a prolonged one and involved a continuous and repeated representation to the parties defrauded.

89.Parties defrauded included the company itself, its investors, as well as the regulating bodies. Economic interests of the parties concerned were affected.  The public interest I have mentioned is an important concern.

90.Besides, this charge involved a violation of trust since the defendant had made use of the position as a director of the company to carry out the dishonest scheme which jeopardised the interests of the company and its shareholders.

D1

91.D1 was the mastermind of this dishonest scheme.  I further found that she had obtained the proceeds of the surrendering of the share options from Becky Poon and the Mainland grantees.  The total amount she received was in the region of $3.1 million.

92.She had involvement in approving the share options granted to Tang Wai-shing, knowing that he would not be the real beneficial owner.

93.Learned leading counsel stressed that Kandy Profits did not suffer any real loss and PCH had incurred very little extra costs.

94.Learned counsel also pointed out that if not for the share options D1 would have received a higher price offer for the shares she was originally holding.  It was said that taking this factor into account the actual gain was only in the region of $2 million. I accept the logic of the submission.

95.I bear in mind that there is no evidence that when the four share options were granted the defendants were aware that there would be a takeover offer.  Without a general offer, exercising the rights in the share options requires payment of the exercise price and any actual financial benefit would only arise when the share price in the market was higher than the exercise price.  Whilst the amount of money D1 obtained and the value of the four share options are factors to be taken into account, public interest is another important factor.

96.In my judgment, this offence is again so serious in nature and degree that an immediate custodial sentence is the appropriate sentence to impose.  The maximum sentence for the offence of conspiracy to defraud is 14 years’ imprisonment.  Taking the whole circumstances into account I am of the view that a starting point of 3½ years is appropriate.

D2

97.Although it is finding that D1 was the mastermind and there is no evidence that D2 has any financial gain out of this dishonest exercise, he was instrumental in the successful implementation of the defraud conspiracy.

98.He was present at a Board of Directors meeting in which the four share options’ grant was approved.  When he made the approval, he did so dishonestly, knowing that the grant to five staff was false and D1 was to benefit from it.  It was a serious breach of duty as a director.  On top of approving the false grants, he falsely represented to the various parties at different stages that all the share options were to be and were granted in accordance with the share options scheme and concealed the fact from these parties.

99.He put others’ economic interests at risk and caused SFC and the Stock Exchange to act contrary to their respective public duty.

100.In all the circumstances I am of the view that an immediate custodial sentence is called for.  Having regard to the relative culpability between D1 and him, I adopt a lower starting point of 2½ years.

Discount

101.All the defendants are persons of previous good character.  Each of them is a first-time offender.  All of them worked very hard and excelled in their own field.  They now fall from grace.  As for D2 and D3, it was a single fall.  I accept that it was out of character for each of them to commit the present case.  I also accept that each of them is unlikely to offend again.

102.Each of them has contributed to the community in various ways.  The contribution of D1 by way of her performing of public duties and engagement in education and charity work was substantial and worth particular recognition.  For this, I will give D1 discount of about 15% and each of the other two defendants a discount of about 10%.

103.The offences took place in 2001 and 2002, respectively.  There was a considerable lapse of time between the incidents and the completion of the trial.  There is no evidence that it has been the result of any fault of any party.  Understandably, a case of this nature is not easy to discover.  Investigation is seldom easy and straightforward.

104.D1 and D2 were arrested in October 2007.  D3 was arrested in February 2008.  Nothing has caused me to think that the prosecution authority had not tried their best to ensure the case progressed as expediently as possible.

105.Learned leading counsel mentioned that the prosecution had made further disclosure during the process.

There is, however, nothing to show me that it was something extraordinary. I do not consider it apt to describe the situation as a delay, let alone any undue delay.

106.I recognise the long lapse of time since commission of the offences.  The defendants have been put under the strain of legal proceedings for a substantial period of time.  In the interim, they have moved on and continued to serve and contribute to the community in various ways.  In consideration of the matter, I have considered cases such as HKSAR v Law King Yip CACC369/2003, SJ v Schmitt CAAR12/2006, HKSAR v Ho Hon Chung CACC350/2002, R v William Hung [1994] 1 HKCLR 47, and in particular Scook v R [2008] 185 A Crim R 164.

107.The proceedings were sidetracked at a stage when D1 made two applications for judicial review and lodged appeal against the decisions.  The first notice of application for leave to apply for a judicial review was filed on 5 May 2008.  This aspect of the proceedings completed on 26 March 2010.  The proceedings in the District Court had resumed earlier in October 2009.  I fully recognise the rights of D1.  I do not regard the time spent for this purpose as an undue delay.  I do not consider D1 should in any way be held responsible.

108.I note that, as a result, D2 and D3 have been caused to wait for a reason totally unrelated to them, but I do not consider the circumstances justify a significant distinction between the defendants in terms of discount they should get.  I consider each defendant deserves a further discount of about 10% for the lapse of time.

109.It was said that all of the defendants were not enjoying good health.  From what I have been told, the health problem is not of a nature and degree which would normally attract a discount.

110.D1 is the mother of four young children.  The oldest of them is 11 years of age and the youngest is only two.  I accept that the result of this case will cause enormous ramification to her family.  Her innocent children will undoubtedly suffer despite the pledge of family members to support and look after them.

111.Whilst exceptional circumstances are always recognised, the court has said many times that family circumstances should be disregarded particularly when sentences for serious offences are concerned.  It is also often said that the adverse effect on a family is what a wise man would take into consideration before he commits an offence and not after.

112.As a matter of clemency, I am prepared to give D1 a further discount of about 5%.

113.In my judgment, the ultimate discount I accord to the defendants is sufficient to reflect everything relevant to sentencing considerations of each of them.

114.I have considered whether the cumulative effect of all the relevant matters would justify imposing a non-custodial sentence.  The case against D1 is too serious to justify one.  Having considered very carefully the case against D2 and D3, taking into account everything said on their behalf, in the light of the seriousness of the matter, I am also of the view that it is only appropriate to impose an immediate custodial sentence on them.  Similar to situation of D3, I do not consider a community service order appropriate for the case of D2.

115.Having considered the collective impact of all the relevant circumstances bearing in mind what was said in cases such as AG v Yeung Kwong Chi [1989] 1 HKLR 266, R v Rahman [2006] 1 CrAppR sentencing 404, and AG v Wu Chi Sing [1989] 2 HKC 76, I do not consider there is sufficient exceptional circumstances which justify suspending the sentences imposed on each of the defendants.

Sentences

116.Based on the matters aforesaid, I sentence the defendants as follows.  D1, Charge 1, 29 months’ imprisonment; Charge 4, 25 months; Charge 5, 8 months.  Charge 4 and Charge 5 are by and large part and parcel of the same dishonest scheme.  I order the sentences for these two charges to run concurrently.  These two charges concern a completely different incident of offence from that of Charge 1.  As a matter of principle, the sentences should not run concurrently. Taking into account totality, I order 17 months of the sentence imposed on Charge 1 to run consecutively to aggregate sentence imposed on Charge 4 and Charge 5.  As a result, D1 is to serve a total immediate custodial sentence of 3½ years’ imprisonment.

117.D2, Charge 1, 2 years’ imprisonment.

118.D3, Charge 4, 19 months’ imprisonment; Charge 5, 7 months.  Same as D1, I order the two sentences to run concurrently with each other.  D3 is to serve a total term of 19 months.