In 2008, the Shanghai Land case resulted in the conviction and imprisonment of six individuals, two bankers, three lawyers and a financial controller, for conspiracy to defraud. The District Court held that the individuals had played a part in connection with the publication of incorrect statements in various public documents in relation to the takeover of a Hong Kong listed company, which was later renamed Shanghai Land. The trial involved a detailed forensic review of a significant volume of email and documents. The decision highlighted the real risk faced by corporate advisers in Hong Kong for material non-disclosure, suggesting a possible trend of criminalisation of disclosure failings. Following appeals to the Court of Appeal ("CA") and recently to the Court of Final Appeal ("CFA"), however, all six defendants have successfully overturned their convictions. The CFA decision highlights the high evidentiary threshold required to attribute criminal liability to professional advisers.
The chief protagonist behind the scheme was a Chinese businessman, Chau Ching-ngai, once ranked as one of China's wealthiest individuals. Chau's plan was to acquire the majority shareholding in Shanghai Land through a corporate vehicle wholly owned by him. At that time, Shanghai Land had approximately $2.2 billion in cash reserves whilst its business activities were minimal. Chau financed the acquisition from a bank loan which he intended to repay by procuring the sale of certain real estate assets to Shanghai Land. However, this plan was problematic from a regulatory perspective (if the full facts were known, the approval of the shareholders and regulators would have been required) and the issues had the potential to jeopardise the acquisition, including the company's listing status. Chau was therefore keen to conceal the asset injection element of his scheme and the prosecution contended that the defendants were party to such plan.
The trial, which lasted nearly 100 days, involved a detailed forensic review by the trial judge of significant volumes of email and documents. The explanations of the witnesses as to events were considered in the light of the contemporaneous documents. In many instances, the trial judge disbelieved the witness evidence of the defendants on the face of the paper trail. The District Court in September 2008 convicted each of the six defendants of at least one charge of conspiracy to defraud the Stock Exchange, the Securities and Futures Commission, and the existing and potential shareholders of Shanghai Land by making false representations about the acquisition in various public documents in order to conceal the asset injection plan. In addition, two of the lawyers were convicted of making a false statement by company directors. The defendants, who seemingly did not have any corrupt motive and were each of "unblemished character", were given prison terms varying from 12 to 33 months.
On appeal, the CA in March 2010 quashed the conviction of the principal banker for conspiracy to defraud and varied the lower court's findings in relation to two of the lawyers. Five defendants appealed against the remaining convictions affirmed by the CA to Hong Kong's highest court.
The Court of Final Appeal
In July 2011, the CFA allowed the appeals against convictions by all five of the defendants. The CFA ruled, inter alia, that the co-conspirators rule had been misused which rendered the trial on the conspiracy charges unfair. The co-conspirators rule is an approach under which what might otherwise be hearsay operates as evidence. In particular, the CFA found that the trial judge had failed to identify which of, and how the significant volume of email and documents had been used under the rule. Further, having considered the circumstances of the case, the CFA held that the proviso pursuant to s.83(1) of the Criminal Procedure Ordinance (Cap. 221) to affirm a conviction notwithstanding what had gone wrong at the trial, did not apply.
In considering the dismissal of one of the conspiracy charges against two of the lawyers, Bokhary J referred to the judgment of Ribeiro PJ in HKSAR v Egan (2010) 13 HKCFAR 314. In the Egan case, Ribeiro PJ pointed out that: "[i]n the absence of actual knowledge, a solicitor (or barrister) is bound to adopt an agnostic approach towards the client's instructions in carrying out his professional duties since it is not his business to judge their truth or falsity. The solicitor or barrister may privately harbour distinct feelings of scepticism about his client's story but that is wholly beside the point. Professionally, he is required to abstain from forming any belief one way or the other on the topic. For a court to attribute guilty knowledge or belief and criminal liability to the legal adviser in such circumstances would gravely endanger the fundamental right to legal advice and representation."
Bokhary J further added that: "[t]he duty of lawyers and other professional persons is to serve their clients' legitimate interests and do so within the bounds of the law and professional ethics. Sometimes a court is invited to find it proved beyond reasonable doubt that a lawyer or other professional person has strayed from that duty and into criminal conduct in league with his or her client. If such a finding is to be made, the evidence in proof of it must be very plain indeed. Such evidence must be seen after strict scrutiny to admit of no other reasonable conclusion. The evidence in the present case is nothing of that kind. Indeed, it points more to Ms Fan and Mr Lai being deceived than to either of them being a deceiver."
In addition, Bokhary J made some observations on the "whistle-blowing" obligations of a non-director employee: "The question of law raised is whether a non-director employee is under an obligation to act as a 'whistle-blower'. To that question, the short answer is that it is not a crime in itself for such a person not to act as a 'whistle-blower'."
The Shanghai Land case highlights the real risk corporate advisers face for material non-disclosure. As demonstrated in this case, even those of "unblemished character" may be disbelieved. Despite the initial widespread concerns about the criminalisation of disclosure failings, it should be noted that the threshold for attributing criminal liability to professional advisers is a high one and will only succeed where the evidence is unequivocal. As the CFA has observed, the duty of professional advisers is to serve their client's legitimate interests and "personal scepticism" as to their client's dealings or intentions (at least insofar as legal representatives are concerned) should not prevent them from doing so. Nonetheless, the decision of whether or not to prosecute an individual rests with the Department of Justice and the risk of prosecution for material non-disclosure remains. Corporate advisers should therefore take heed when negotiating and drafting documents to ensure, as far as possible, that matters are recorded accurately to avoid situations where the paper trail may support any unfavourable construction.