Auston International Group Ltd v Public Prosecutor

• Jurisdiction: Singapore
• Judge: Lee Seiu Kin J
• Judgment Date: 12 December 2007
• Neutral Citation: [2007] SGHC 219
• Citation: [2007] SGHC 219
• Defendant Counsel: Leong Wing Tuck (Attorney-General's Chambers)
• Published date: 21 December 2007
• Plaintiff Counsel: N Sreenivasan (Straits Law Practice LLC)
• Date: 12 December 2007
• Docket Number: Magistrate's Appeal No 38 of 2007
• Court: High Court (Singapore)
• Subject Matter: Financial and Securities Markets,Regulatory requirements,Sections 253 and 255 Securities and Futures Act (Cap 289, 2002 Rev Ed),Company's prospectus containing false and misleading information,Factors to consider in sentencing,Whether fine was manifestly excessive,Company giving free rein to director to run company

12 December 2007 Judgment reserved.

Lee Seiu Kin J

1 In the District Court on 27 February 2007, the appellant company pleaded guilty to the following charge under s 253(1) read with s 253(4)(a) of the Securities and Futures Act (Cap 289, 2002 Rev Ed) (“the Act”):

You, Auston International Group Ltd, …, are charged that you, on or around 14 April 2003, in Singapore, made an invitation to the public to subscribe for or purchase your shares, accompanied by a prospectus which contained a false and misleading statement which was materially adverse from the point of an investor, to wit, your financial report for the financial year ended 31 July 2002 which stated that your profit before taxation was $2,467,000 when it was not, and which figure was an overstatement of the actual profit before taxation by $374,000, and you have thereby committed an offence under section 253(1) read with section 253(4)(a) of the Securities and Futures Act (Chapter 289, 2002 Revised Edition).

2 The company agreed to a second charge under the same provisions of the Act being taken into consideration for the purposes of sentencing under s 178 of the Criminal Procedure Code (Cap 68, 1985 Rev Ed). This charge read as follows:

You, Auston International Group Ltd, …, are charged that you, on or around 14 April 2003, in Singapore, made an invitation to the public to subscribe for or purchase your shares, accompanied by a prospectus which contained a false and misleading statement which was materially adverse from the point of an investor, to wit, the following statement in the independent auditor’s report contained in the said prospectus –

‘In our opinion, the abovementioned consolidated financial statements of the Group present fairly in all material respects, the financial positions of the Group as at 31 July 2000, 2001 and 2002 and of the results of operations, changes in equity and cash flows for each of the financial years ended 31 July 2000, 2001 and 2002 in accordance with Singapore Statements of Accounting Standard’,

which statement was not true, and you have thereby committed an offence under section 253(1) read with section 253(4)(a) of the Securities and Futures Act (Chapter 289, 2002 Revised Edition).

3 The district judge convicted the company of the charge and imposed a fine of $90,000. The company appealed against the quantum of the fine on the ground that it is manifestly excessive.

Statement of Facts

4 The following statement of facts, to which the company agreed without reservation, was placed before the court:

1 The Accused is Auston International Group Ltd (“Auston”), a company listed on the SGX-SESDAQ.

2 Auston was incorporated in Singapore on 3 April 1998 as Auston International Pte Ltd. They changed their name to Auston on 24 March 2003 in connection with their conversion into a public company limited by shares. Auston is a holding company with several subsidiary education companies under its wings. Auston is in the education business. They provide amongst other courses, tertiary and post graduate education courses endorsed by their university partners.

3 Sometime in early 2002, Auston’s holding company and majority shareholder Auston Technology Group Pte Ltd (“ATG”) had wanted Austonto be listed on the SGX-SESDAQ. The IPO for Auston took place subsequently between 15 April 2003 and 23 April 2003. A total of 2,400,000 shares at $0.28 per share were offered by way of public offer. The underwriter for the exercise was UOB Asia Ltd. The auditors and reporting accountants was Ernst & Young. Auston was listed on SESDAQ on 25 April 2003.

COMPLAINT

4 On 8 December 2004, a legal representative acting for Austonlodged a report with the Commercial Affairs Department (‘CAD’) regarding irregularities in Auston’s accounts. CAD then initiated investigations pursuant to the complaint.

5 Investigations revealed that there were accounting irregularities within Auston pertaining to the treatment of university fees payable by Auston to its university partners.

BACKGROUND

6 Sometime in April 2003, Auston received several late invoices from one of its university partners, the University of Wollongong, for outstanding university fee expenses.

7 University fees are student enrolment fees due from Auston to its university partners. Auston would enrol students and run classes for the said tertiary and post graduate education courses conducted by these university partners. Auston would also collect course fees from students who had enrolled for the said courses. Auston’s university partners would in turn invoice Auston for their fees based on the number of students enrolled.

8 Auston’s main expense was the university fee expenses it was due to pay to these university partners. These university fees would have to be expensed off as a one-off amount in Auston’s accounts for the relevant financial period.

9 Following receipt of the said late invoices from the University of Wollongong, Auston’s Chief Financial Officer (‘CFO’) at that time, one Chua Peck Wee (‘Chua’) surfaced the matter to Auston’s Chief Executive Officer (‘CEO’), Yeo Poh Siah Ken (‘Yeo’). It was eventually established that part of these invoices should have been accounted for as expenses incurred in FY2002 as they pertained to students enrolled during the relevant period. By the time of receipt of the invoices in April 2003, however, Auston’s accounts for FY2002 had been closed.

10 Following discussions with Chua, Yeo then decided to resolve the problem by recognising the expense as academic cooperation fees (for FY2003) instead, which could then be amortised over a period of 3 to 5 years.

11 When there is an intangible asset with a finite useful life, and the company has paid for it upfront, the cost of the asset may be amortised over the time period the company enjoys the benefit. Development costs (ie academic cooperation fee) involved in the creating of new programmes or new relationships with other educational institutions, if legitimately paid, would have been amortised according to Auston’s accounting policy. The university fees in issue here are, however, outright expenses and amortisation would not have been permissible under Auston’s accounting policy and would have been fraudulent.

DISGUISE OF PAYMENT

12 In order to fraudulently disguise the expenses pursuant to the said late invoices from University of Wollongong as ‘academic cooperation fees’, fictitious documents were created by Yeo and subsequently forwarded by Chua with the relevant instructions to Auston’s accounts department to record these expenses as ‘academic cooperation fees’ for another of Auston’s university partner, the Upper Iowa University and amortised over 56 months at S$4,795/mth. These amortised payments were subsequently reflected in Auston’s accounts from FP2003 onwards.

13 The above resulted in a false entry being made in the accounts of Auston. Yeo was fully aware of the circumstances of the matter and the true nature of the entry, and had acted wilfully and with intent to defraud in causing the false entry to be made.

FACTS RELATING TO PS 870 OF 2006

14 On or around 14 April 2003, pursuant to its IPO (see paragraph 3 above) Auston made an invitation to the public to subscribe for or purchase its shares, accompanied by a prospectus. The prospectus was lodged with the Monetary Authority of Singapore on 14 April 2003.

15 The prospectus contained, amongst other information, Auston’s financial statement for FY2002 which stated that Auston’s profit before taxation was $2,467,000. The said financial statement, however, did not include the expenses in the late invoices from University of Wollongong which Auston had received prior to 14 April 2003 and which should have been accounted for as expenses in the financial statement for FY2002 (see paragraphs 6 to 13 above). There were also no adequate provisions made in the financial statement for these expenses.

16 This resulted in an overstatement of Auston’s pre-tax profits by $374,000 for FY2002.

17 The said financial statement for FY2002 contained in Auston’s prospectus was thus false and misleading. The false and misleading financial statement was also materially adverse from the point of view of the investor.

18 As the legal person making the offer of shares to the public, Auston is thus liable for an offence under section 253(1) of the Securities & Futures Act (Cap 289) by virtue of section 253(4)(a) of the said Act.

19 CAD’s investigation revealed that Auston’s board of directors at the material time had left it entirely to Yeo, who was the founder of Auston as well as its CEO at the material time, to manage and run Auston. Besides Yeo, none of the other directors of Auston at that time were involved in Auston’s operations.

20 Yeo was also the only director involved, together with Auston’s auditors, in the preparation of the financial statements for the IPO prospectus.

21 Yeo, therefore, represented the mind and will of Auston in respect of the false and misleading financial statement for FY2002 contained in the said IPO prospectus.

22 The defences set out in section 255 of the Securities & Futures Act (Cap 289) are, as such, not applicable to Auston in the present case by virtue of the fact that Yeo had wilfully and with intent to defraud caused the expenses in the said late invoices from University of Wollongong to be omitted from Auston’s financial statement for FY2002, which he knew would be contained in Auston’s prospectus for the IPO in April 2003. Yeo also knew that by omitting the said expenses, it would result in Auston’s financial statement for FY2002 being false and misleading.

23 Auston is hereby charged accordingly.

Mitigation plea

5 The following mitigation plea was made by counsel for the company on its behalf:

Brief Facts

1 Auston International Group Limited initially faced two charges. The Prosecution is proceeding on the First Charge, PS 870 of 2006. The Second Charge, PS 871 of 2006 is being taken into...