HKSAR v. Chiu Duncan and Others
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DCCC1086/2010 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CRIMINAL CASE NO. 1086 OF 2010 ----------------------
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--------------------- Reasons for Verdict --------------------- 1.Far East Holdings International Limited (FAR EAST) is a public listed company in HK. At all material times between March 2007 and April 2008, Mr Duncan Chiu (D1) was the Managing director and CEO of FAR EAST, he is also a son of Mr Deacon Chiu the chairman and founder of FAR EAST. Mr Lui Hung Kwong (D2) was the Company Secretary and Financial Controller and Ms Yung Kim Bing Wendy (D3) was the personal assistant to Mr Deacon Chiu and appointed as Senior Investment Manager for FAR EAST from January 2007. 2.FAR EAST was an investment holding company engaged in various business activities including property development, financial investment including securities and derivative investment. 3.The prosecution says in the above period, D1 to D3 had conspired with Deacon Chiu (the Chairman) to defraud FAR EAST, namely by dishonestly transferring funds of FAR EAST to personal bank accounts of the chairman (HSBC & UBS) for application for Initial Public Offerings of shares (IPO) but they failed to obtain authorization from the board of directors or general meeting, nor were the transactions properly documented; they also failed to recover the funds not used on a timely basis, knowing that most of the funds were to be used for the personal investments of the chairman. 4.There were particularly 3 sum of funds in question, firstly 15 Million on 9th March 2007; then 5 Million on 3rd April 2007 and 41 Million on 25th September 2007. 5.Alternatively, prosecution says the Defendants stole the chose in action, namely each of the above sum, as the debt owed by the bank to FAR EAST. 6.Further or alternatively, the Defendants had wilfully authorized or knowingly procured each of the above sum as a loan to the chairman, a director of FAR EAST, in breach of s.157H(2)(a) of the Companies Ordinance for transactions favouring director. 7.Defendants did not dispute the above transfers, D1 essentially says the funds were grouped together with his father’s for more shares might be allotted and that more preferential treatment might be given in his father’s name as a famous person. D1 says he did so for the benefit of FAR EAST without any dishonest intent. 8.Counsel for D2, Mr Yu SC submits that the omissions as alleged could at most only indicate poor corporate governance but far from dishonesty while Counsel for D3, Mr Yeung SC states that the chairman’s accounts were clearly used as an investment vehicle for FAR EAST and there was no attempt to conceal, divert nor withholding the funds. 9.Before commencement of the trial, the prosecution sought to add the conspiracy charge with other theft charges as alternatives. Defence objected to that, however, I see the whole case still rested on the same facts and that the substantive charges are clearly stated to be alternatives to the conspiracy count. Therefore in the interest of justice, as it may not be all Defendants had conspired to commit the offence but the substantive charge may have been committed by an accused, I thereby approved the joinder and I failed to see any prejudice may have caused to any Defendant. Background 10.In the above mentioned period, the stock market was hot, a number of enterprises from China were taking turns to be listed in the HK stock exchange, could be as frequent as every couple of days where another new company was listed. The market of initial public offerings were thus very demanding, the allotment rate for subscription was therefore quite low. As reflected from evidence, even substantial amount of money was put in for subscription, e.g for 15 Million subscription, the final allotment could only be as low as $100,000 odd dollars of shares, however, the share price soared within days or weeks and it could be doubled or even more. It was against such background the material transactions were being conducted. 11.The prosecution however says, the Defendants had conspired to transfer some funds from FAR EAST to the personal account of the chairman enabling IPO subscription dishonestly, yet knowing that most of funds were for personal investment of the chairman. 12.The crux of the case was on dishonesty. 13.The prosecution relies on the following matters to draw irresistible inference;
14.All the above matters, when considered separately, may not be as significant as it was, but when viewed together, it might be compelling to point towards a direction or the other. I shall go through and deal with them in details. Evidence from accounting manager Ms Karen Kwan and assistant accountant Mr Joe Wong, admitted facts and documents 15.Mr Joe Wong was a reluctant witness, he refused to testify until warrant of arrest was issued against him where he was brought to court to give evidence. He appeared to be emotional unstable yet when going to details he could be very meticulous. 16.Concerning the said 3 transfer of funds, he was responsible to prepare the Journal Voucher (JV) stating the particulars of the transactions with supporting documents if any, he would fill in the form of Requisition for Cheque Payment, to be authorized by Karen Kwan and approved by D2 (see admitted facts para.14-23). He would also cause entry of the particulars in the Other Receivables (O/R) account on the General Ledger of FAR EAST in the computer system. 17.For the 1st transfer for 15 Million on 9th March 2007, Exhibit P3 shows the said form,
18.For the 2nd transfer for 5 Million on 27th March 2007, Exhibit P8 shows the said form,
19.For the 3rd transfer for 41 Million on 24th September 2007, Exhibit P14 shows the said form,
20.Ms Karen Kwan, the accounting manager of FAR EAST, stated that she approved the above vouchers and D2 would sign as well. She remembered it was the first time funds from FAR EAST had been paid into personal account of the Chairman for the purpose of IPO subscription. She was told the reason as for taking advantage of chairman’s reputation. However, in 2006, it was the chairman transferring fund to FAR EAST for IPO subscription of Nine Dragon papers instead. 21.The first transfer of 15 Million was put into chairman’s personal account and grouped with his funds for over 30 Million for subscription of IPO shares of China Agri on 9th March 2007. On 21st March 2007, 40,000 shares @$3.72 were allotted for total costs of $148,800. The O/R account of FAR EAST indicated purchase of 30,000 shares. On 30th April 2007, shares were sold at @$6.31 and a net gain of $77,000 was also later recorded. However, the balance of unused fund for more than 14 Million had not been immediately returned to FAR EAST. 22.By the voice logs kept by HSBC for the conversation between its staff Ms Florence Deng and D3, D3 expressed that the allotment is too small and Ms Deng replied that they cannot control but will see what chance there is next time and give it a try and her belief was that her boss had the discretion and it was possible to fight for more allocation for a particular account. 23.Carol Cheung of HSBC also said “yes crazy enough but anyway I manage to get more for you” and she admitted this is the normal conversation to make the client feel happier. 24.From above dialogue, Defendants also argued that it had at least cause the impression that more preferential treatment would be given. 25.In any event, such remaining funds were in fact added to the 2nd transfer of 5 Million from FAR EAST on 2nd April 2007 for subscription of Country Garden. From all the evidence, it appeared the subscription was on international offering where the allotment proportion would be by the bookrunner instead of a definite proportion to the size of the subscription. 26.On record, 8,000 shares of Country Garden @$5.38 were purchased through the chairman’s account totalling about $43,000 and the O/R account of FAR EAST indicated purchase of 7,000 shares. These 8,000 shares were kept in the chairman’s account until next year in April 2008, the said shares were sold at about $60,000 and 7/8th of proceeds were also transferred from chairman’s account to FAR EAST. 27.At this point after April 2007, there remained unused FAR EAST’s funds kept at chairman’s account for about 20 Million. It was not until September 2007 another 41 Million was transferred from FAR EAST’s account to the chairman and then 40 Million was put in for IPO subscription of Soho China Limited. On record it showed altogether 670,000 shares were purchased at @$8.3 totalling about 5.6 Million. Between 10th to 15th October 2007, these shares were sold with a total profit of about $880,000. 28.Karen Kwan recalled at some time after the 3rd transfer in September 2007, she had asked D2 whether minutes of meeting completed and D2 said there was no problem. 29.The prosecution submits that there were a lot of problems surrounding the above transfers. Not only was there no written resolution of Board of Directors but also was there no approval from the general meeting nor any written agreement existed between the chairman and FAR EAST. 30.Counsels for the Defendants replies that there was never such a requirement of the company and in fact as admitted, the Chiu family already owned or controlled around 54% of the shares of FAR EAST and that 2 directors shall constitute a quorum for meeting, thus any approval if necessary would not cause any problem to the chairman and D1. 31.However, absence of such records would of course cast doubt or at least bring suspicion to any third party as to the actual reason or cause of effecting such transfer, particularly in mind that FAR EAST is a public listed company. Besides, to say that a resolution would have been easily obtained is so different from whether it did exist beforehand. 32.D1 of course also referred to his evidence that he had prior discussion with his father the chairman for such use of his account and taking advantage of his reputation which I shall deal with it later. 33.The prosecution further submits that there was no actual transfer of shares to FAR EAST effected and there were also some missing journal vouchers in support, particularly for the purchase or actual sale. However, fairly speaking, though the vouchers or actual transfer was not there, it did appear in the entry of the O/R account of FAR EAST and it must also be mentioned, taking into account the manpower of the accounting department, in fact only Joe Wong was doing all the odd jobs, it was not at all surprising to find some missing links in the record rather than inference of deliberate act or concealment. 34.But exactly because of the absence of written resolution or other records, the whole matter came to light when audit was conducted. The auditor did query the management, particularly on these transfer of funds, the basis of distribution of allotment of shares between FAR EAST and the chairman. 35.It must also be mentioned between August 2007 and March 2008 the investment activities of the chairman’s account increased significantly including some IPO subscriptions for chairman himself, at one point the forensic accountant even commented that without the funds from FAR EAST these private investment would not be possible. However, upon cross-examination by defence counsels, the expert fairly accepted that if the General Ledgers were incomplete, her conclusion would be different. But the evidence did show that there was some late-adjustments by Joe Wong where the expert did not take into account and if both UBS and HSBC accounts were looked at together, the total cash balance of the chairman could have never been in shortfall. 36.One must also note that in November 2007, 2 sums totaling 40 Million were transferred back from chairman’s account to FAR EAST. 37.In or about March & April 2008, Deloittes conducted the audit and raised the above query, Ms Man and Mr Andrew Lam of Deloittes gave evidence that what they got from the Defendants were in gist that the funds were transferred to chairman’s account for subscription of IPO shares and other investment activities for FAR EAST. D3 further indicated that after the successful IPO applications, share would be allotted with the discussion between the chairman and D1. The principle was to allot more shares to the company, yet there was no record showing the basis of allocation. D2 also related to Deloittes that certain transactions in chairman’s account should be shown as sales and purchases of FAR EAST including some ELN and other shares. 38.In April 2008, further sum of $8.2 Million was transferred from the chairman’s account to FAR EAST. 39.In or about the same period, the independent non-executive director Dr Lee G Lam was advised the first time about the said 3 sums of transfer to the chairman’s account. 40.On 22nd April 2008, a meeting of the audit committee was held with all Defendants, auditors and other directors present. The minutes of which particularly stated the following (P60 para.4),
41.As to the accounting procedures and approval for disclosure of account due from a director resulting from above matter, the minutes disclosed that 2 scenarios were presented to be adopted. 42.Scenario 1 is basically to treat the company’s investment activities within Deacon’s personal bank accounts as private and personal transactions so that no late adjustments of company’s ledger were necessary, interest be charged against the chairman. 43.Scenario 2 is that the company’s investment activities within Deacon’s bank account were considered as an investment agent account. Ms Wendy Yung performed investment activities on behalf of the company in a bona fide way, by then late journal adjustments for company’s investment activities should be accounted for and it would trigger off a qualified audit report. 44.It was unanimously resolved that Scenario 1 be recommended to the Board for approval and adoption. 45.Dr Lam in court had confirmed this matter, but when asked why when the truth is more like Scenario 2 the committee and he still adopted Scenario 1, Dr Lam did not give a meaningful answer. Clearly, the underlying reason was to prevent a qualified audit report be issued, which would certainly damage the reputation and trust by the investors to the Company. 46.On 25th April 2008, further sum of about 13.9 Million was transferred from chairman’s account to FAR EAST and the Annual Report on the same date also recorded Amount due from Director, unsecured, interest bearing at 3.67% to 6% and repayable on demand. The amount was then fully settled. Cautioned statements of D2 47.D2 stated that approval from board of directors was required depending on the size of investment, 15 Million was a material amount in which approval is required. D2 also said the account department would prepare the cheque, given to him to check before passing to the boss for signature. D2 knew about the said 3 transfers to Deacon Chiu was for subscription of IPO for FAR EAST and because his account was more powerful and more could be applied for. Sometimes there would be some private placement, more could be applied when there will be someone seems to have the effect of celebrity. 48.The remaining fund after China Agri & Country Garden was left in Deacon’s account because as at that tme the IPO was heating up, after this one applied, another would be applied, to deposit and withdraw is troublesome. He further said that there should have been verbal discussion and there might not have any formal meeting for approval. He further said the transfer was not a loan to the director and he said Chiu family had more than 50 % of shareholding so that approval could have been by way of written resolution in lieu of extraordinary meeting. The repayment of 62.1 Million by Deacon was made at the suggestion of auditor with interest included. He did not have any personal interest. If there was no repayment, the auditor would issue a qualified report which would lead to the suspension of stock trading in the market. D1’s evidence 49.D1 stated that at the material times the IPO activities were hot and he would take the opportunity to get more involvement and through D3 he asked the bank to see if there was any better offer. According to HSBC, if Chairman’s account could be used and funds were grouped together, more shares might be allotted. As his father is a famous person, he asked his father to borrow his account and he treated the account as Company’s, but it never crossed his mind that a board resolution was required for any transfer. 50.He then decided to use 15 Million to subscript IPO and asked D2 and D3 to follow up details. After the subscription of Country Garden in April 2007, his original intention was for the remaining fund at UBS (chairman’s a/c) be transferred back to HSBC (FAR EAST’s a/c), (also see the email D2-4 by D1 to D3 ccD2 “Remaining fund at UBS will be transferred back to HSBC next week” ), but then he had second thought that it was not necessary to make the transfer immediately and to see if what further subscription could be made as at that time he thought UBS had more investment products and sponsored more shares subscription than HSBC. By that time he travelled a lot and the company was not urgently in need of money and he thus adopted a “wait and see approach”. 51.For the time being he had conversation with D3 concerning the possible transactions of shares for different company interested but the plan was for someone to look at the market regularly and that’s why Clovis So was also appointed as investment manager. 52.He had never thought of any risk his father might abscond with the company as his father was the founder and chairman and he treated the company as his son. Looking back for the whole arrangement he said he could have dealt with it in a better way. Analysis 53.All Defendants are of clear criminal record. D2 and D3 elected not to give evidence, no adverse inference could be drawn against their choice. 54.Concerning D1’s evidence, he explained why FAR EAST’s money was transferred to chairman’s personal account, particularly for grouping the fund and taking advantage of his father’s celebrity effect to have more allotment of subscription of IPO shares. 55.D1 had joined FAR EAST since 1996 and had been appointed Managing Director and CEO of FAR EAST since 2003 & 2004 (AF para.2). However, it was the first time very substantial sum of money was transferred out from FAR EAST to a private bank account of a director, it would be so surprising when he said it had never crossed his mind that a board resolution may be required. It must be either that he had treated FAR EAST’s money as his own or he simply couldn’t careless where the funds would eventually go. Given his experience in FAR EAST and background, it is highly unlikely to be the case. 56.Even if it really did not appear in his mind, would he not bear any thought that any written record might have to be made concerning the actual reason or cause for transfer to protect himself or his father lest someone might treat it as a loan to his father or even any kind of misappropriation of company fund ? Not to mention further that there was also no record of respective contribution and/or distribution for any successful subscription made. Would the principle of just more shares go to the company a suitable or proper way to deal with this substantial fund of a listed company? 57.In any event, would D2 or D3, as Company Secretary, Financial Controller and Senior Investment Manager, those who help in to implement the plan also failed to remind D1 nor cause any written record or note for the actual reason behind and/or distribution ratio or would it just be a kind of deliberate act not leaving any trace? We are not here to speculate, suffice to say, D1’s reason is less than compelling. 58.Secondly, if it were for the celebrity effect, wouldn’t the FAR EAST itself, a public listed company, with Deacon Chiu well known as its founder and chairman, not more reputable or prominent than the chairman himself. Were the newly listed companies not looking more for an institutional holder rather than a personal entity? Mind that in fact there came a previous occasion in 2006 when it was the chairman putting funds to FAR EAST for application of IPO instead of the other way round. 59.Be that as it may, after two relatively very low allotment subscriptions, would D1 still prefer or change his mind to leave the funds at chairman’s account rather than returning to FAR EAST? 60.Further, if the plan were only for subscription of IPO, why later on after the funds were apparently mixed with the chairman’s then other investment products or non-IPO share activities were also going on? Was D3 not knowing the very purpose as told by D1 or was it a deliberate act of keeping funds for personal profit? Again, we are not here to guess, but it seems there was also absence of written proper records to tell which funds were doing for what. In the circumstances, one must have wondered what was the actual plan or plot behind the whole arrangement. 61.In fact, even in the audit committee meeting in April 2008, both D1 and D2 admitted that they should have done the proper trust instrument and disclosures, so the lack of proper record in the present case was really a substantial matter to consider, and it could hardly be an excuse or real reason just because of the dynamic and competitive market. 62.All in all, I do not find D1 telling the whole truth, I reject his evidence and explanation. 63.Yet all Defendants are not to prove anything, the entire burden rests upon the prosecution to prove the charge beyond all reasonable doubt. 64.As said above, the prosecution tries to draw irresistible inference from the circumstantial evidence. Counsels for the Defendants essentially say, one could not be sure, whether all or any Defendant did conspire at the outset to transfer funds or most part of it for the personal investment of the chairman, as particularized in the charge. 65.Mr Plowman SC for D1submits, were it the intention, why were there still some records, though incomplete or insufficient, to show how the funds flow with its nature stated? The facts were that anyone can tell from the account how the money went, how much was transferred and where it remained, and there was no concealment, subterfuge, circular fund flow nor transfer out to any third party. 66.Further, with Deloittes’ analysis, at most there could only be one shortfall of cash balance of FAR EAST’s fund at chairman’s account in August 2007 of about 1.6 Million, but that was offset by a positive amount due to director balance, thus one could hardly say the funds, not mentioned most of it were used for personal investment of the chairman. 67.After careful evaluation and assessment against all the background, I agree with the analysis, however much suspicious the whole arrangement of transfers as they were, to say that it must be planned at the outset or at a later stage for the personal investment of the chairman could not be the only irresistible inference, though later on, some part of it, be it a negligent or reckless act by using it after mixing up of funds, would of course be another highly possible scenario. 68.In addition, as controlling shareholders, when the company could make quick profit through the subscription and sale, would the profit not in turn mostly go to them as majority? So apparently what is the point of going to private account to do the same thing, particularly when FAR EAST is frequently doing the same or similar activities of trading in and out of stocks. On the other hand, nobody could secure a must win, so when the trade results in a loss, could it be simply returning and making account back to the company? Especially after doing it in a private account? It appears if the whole exercise is for private investment, it might bring more trouble than good. 69.One must also not lose sight that in fact the said transfers did involve quite some parties, at least the whole accounting department, apparently they all stated the purpose was for subscription of IPO for FAR EAST. 70.I also understand that D2 tries to exonerate himself by saying that he only had knowledge without taking part in it. However, not only from the journal vouchers which showed he approved the transfers, but also from the evidence it must be that he knew the purpose as told by D1, implementing and preparing all the necessary steps, while acknowledging that there should have verbal discussion, he could not be just playing a passive role considering his background and conversation with Karen Kwan. 71.As to D3, she certainly took a more than active part in implementing the transfers, from selecting and suggesting the IPO, from communicating with bankers and D1 and directing the trades in and out. 72.However, as said above, I could not be sure that they were conspiring to transfer the company’s funds to chairman’s account for his private investment dishonestly. Therefore I shall find them not guilty on the conspiracy charge. 73.Alternatively, the prosecution goes for a theft charge, likewise, dishonesty is the crux, I could not be sure the said transfers did carry a dishonest intent, though how much suspicious it was, particularly without any written record or minutes of doing so. 74.The prosecution lastly resorts to transactions favouring directors, it might be successful or arguable were it not confining to entering into a loan to a director, which I found not the case, but by turning it into joining funds for subscription, where someone might query why would a director then have a better chance for better allotment with a larger funds from the company. However, it remains academic when it was not the prosecution case at all. 75.Therefore I shall also find them not guilty on the respective charges on theft or transactions favouring director. 76.To conclude, all Defendants are acquitted of all the respective charges. Postscript 77.This is quite an example how easily a family controlled business of a listed company be manipulated without any transparency nor information given to the minority or public investors. It is also so surprising to find, even the independent non-executive director and the auditor, though knowing the background and with underlying reason given, would still offer, suggest or adopt an apparent false reason (i.e. scenario 1 : treating it as director’s personal activities and be accounted simply as loans to director, which was not true), so to prevent from a qualified audit report be issued, which should have been the case as clearly reflected from obvious poor or sloppy corporate governance of the management of the company, not only from the lack of proper approval or written record, but also from the subsequent dealings to conceal the whole arrangement by the management. 78.I shall therefore be minded to refer this matter to the appropriate authority or SFC for further action or sanction. I shall further add that the whole matter was caused by the poor or sloppy management from D1 to D3 on their own, I fail to see how and why the company should suffer, for costs or incidental matters thereby resulting.
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