Public Prosecutor v Cheong Hock Lai and Other Appeals

• Jurisdiction: Singapore
• Judge: Yong Pung How CJ
• Judgment Date: 15 June 2004
• Neutral Citation: [2004] SGHC 122
• Docket Number: Magistrate's Appeals Nos 27 to 29 of 2004
• Date: 15 June 2004
• Year: 2004
• Published date: 24 June 2004
• Plaintiff Counsel: James Lee (Deputy Public Prosecutor)
• Citation: [2004] SGHC 122
• Defendant Counsel: Subhas Anandan (Harry Elias Partnership) and Howard Cheam Heng Haw (Rajah and Tann)
• Court: High Court (Singapore)
• Subject Matter: Criminal Procedure and Sentencing,Appeals,Whether district judge erred in referring to cases involving other market misconduct where no direct sentencing precedent existed,Sentencing,Whether deterrent sentence ought to take form of custodial sentence

15 June 2004

Yong Pung How CJ:

1 This was the Prosecution’s appeal against sentence only. The respondents were Cheong Hock Lai (“Cheong”), Low Li Meng (“Low”) and Chow Foon Yuong (“Chow”). Four days into their trial in the District Court, they pleaded guilty to one charge each of engaging in a practice which operated as a deceit upon one MIL Corporate Services (Singapore) Ltd (“MIL”), an offence under s 102(b) of the Securities Industry Act (Cap 289, 1985 Rev Ed) (“SIA”). Each respondent had another charge under s 201(b) of the Securities and Futures Act (Cap 289, 2002 Rev Ed) (“SFA”) taken into consideration for sentencing purposes. Low and Chow also each had an additional charge under s 102(b) of the SIA taken into consideration for sentencing purposes. The district judge sentenced the respondents to pay fines in the following amounts:

(a) Cheong: $100,000, in default ten months’ imprisonment;

(b) Low: $50,000, in default five months’ imprisonment;

(c) Chow: $30,000, in default three months’ imprisonment.

I dismissed the Prosecution’s appeal against the sentences imposed on all three respondents, and now set out my reasons.

Background

2 The evidence in the court below was led by way of an agreed statement of facts. At the material time, the respondents were employees of Alliance Capital Management (Singapore) Ltd (“ACMS”), a subsidiary of Alliance Capital Management Limited Partnerships, a company listed on the New York Stock Exchange. Cheong was the regional financial controller, and the person ultimately in charge of the day-to-day administration of ACMS funds. Low was a unit trust administrative manager. Chow was a unit trust administrative officer. Both reported directly to Cheong on administrative matters pertaining to ACMS funds.

The unit trust funds

3 The principal activity of ACMS is to provide fund management and marketing of fund management services to retail and institutional clients. Among other funds, ACMS manages the Global Growth Trends Portfolio Class A and the International Health Care Portfolio Class A. These are both feeder funds that invest solely in their respective parent funds, the Global Growth Trends Portfolio and the International Health Care Portfolio (“the parent funds”).

4 The parent funds are registered with Alliance Capital Management Global Investor Services SA Luxembourg (“ACM Luxembourg”). They are managed by portfolio managers based in New York. ACMS manages the feeder funds, but much of the marketing of these funds is performed by distributors, which are banks and financial institutions. Investors who wish to apply for units in the feeder funds submit their applications to these distributors, who then submit them to ACMS for processing.

5 The trustee of the feeder funds is Bermuda Trust (Singapore) (“BT”). BT calculates the feeder funds’ daily net asset value per unit (termed “the price” herein for convenience). MIL is an affiliated company of BT, and the agent of the feeder funds’ registrar. As the registrar’s agent, MIL’s functions include processing subscriptions, redemptions, transfers and switches with respect to the funds.

How the price of the feeder funds is derived

6 The New York-based portfolio managers invest the parent funds primarily in US and European equities. The price of the parent funds is therefore determined by the performance of their component equities on the US and European stock exchanges.

7 On any given trading day (“T”), the price of the feeder funds is directly derived from that of their respective parent funds for the previous trading day (“T-1”). This is done in the following manner.

8 After 3.00pm Singapore time (9.00am Luxembourg time) on T, ACM Luxembourg calculates the T-1 price of the parent funds. This figure is received by BT and ACMS at about 6.00pm Singapore time (12.00 noon Luxembourg time). The next morning (“T+1”), BT calculates the T price of the feeder funds, based on the T-1 market price of the parent funds supplied by ACM Luxembourg, and the prevailing foreign exchange rate. After 1.00pm, ACMS and MIL receive the T market price of the feeder funds from BT.

The 5.00pm trading deadline

9 To qualify for the feeder funds’ T price, all investors wishing to buy, sell or switch units have to submit their application forms to the distributors by 5.00pm on T. Then the distributors would submit the forms to ACMS. This 5.00pm deadline is prescribed in the feeder funds’ prospectuses, but not in the Operating Memorandum (“OM”). The OM is a document signed by ACMS and BT, which sets out their internal guidelines and specifies the 5.00pm deadline only for transactions involving Central Provident Fund (“CPF”) and Supplementary Retirement Scheme funds. There was no such prescription for cash transactions, which are how the respondents carried out their trades on the feeder funds. Specifically, the OM only provided that all subscriptions, redemptions or switches from distributors were to be consolidated by ACMS and forwarded to MIL by 1.00pm on T+1.

The late trading

10 As employees of ACMS, the respondents could purchase units in the feeder funds directly. They did not need to go through a distributor, and were not required to pay the 5% service charge.

11 Between July and October 2002, the respondents traded in the feeder funds using their own accounts with MIL. They would submit their applications on the morning of T+1, but backdate their applications so that it appeared that they were dated on T. This was done so that they could qualify for the T price. The backdated application forms would then be placed together with all the other investors’ applications made on T. After that, the package would be forwarded to MIL for processing. MIL was thereby deceived into believing that the respondents’ applications were made on the dates stated on the application forms.

12 The backdating allowed the respondents to determine the movement of the feeder funds with considerable accuracy. It enabled them to subscribe for units only when they had predicted an increase in their T+1 price. If they determined that the T+1 price would be higher than the T price, they would put in their backdated applications, thereby qualifying for the T price. Then they would redeem their units within 24 hours so as to take advantage of the higher T+1 price. This guaranteed a profit on every trade.

13 During the material time, the respondents made profits through late trading amounting to:

(a) Cheong: $62,931.90;

(b) Low: $19,671.51;

(c) Chow: $3,792.81.

If the profits made on the charges taken into consideration are added to those figures, the respondents made total profits of:

(a) Cheong: $107,925.29;

(b) Low: $46,556.05;

(c) Chow: $16,162.32.

The respondents had already made full restitution before their trial commenced in the District Court.

The decision below

14 In his grounds of decision ([2004] SGDC 37), the district judge observed that this was “the first case of its kind locally”. While there had previously been prosecutions under s 102(b) of the SIA, there had been none specifically for the practice of late trading. As such, he could look only to sentencing precedents in cases of other types of market misconduct, which he recognised to be “somewhat helpful though not directly on point”.

15 In approaching the question of sentence, the district judge first considered the case law to determine the sentencing norm in market misconduct cases. Then, he considered whether there were any special reasons in this case to depart from the norm.

The sentencing norm in market misconduct cases

16 The district judge examined cases of three types of market misconduct. These were cited to him by the Defence. They were:

(a) other offences under s 102(b) of the SIA, involving the fraudulent and deceitful use of others’ accounts to trade;

(b) market rigging; and

(c) insider trading under s 103 of the SIA.

17 In his judgment, the respondents’ acts of deceit were not of the same degree as those offenders who were given custodial sentences for abusing others’ accounts to trade for their own benefit. Those offenders’ acts were clearly more aggravating in nature than late trading. The degree of tangibility of harm in the case before him was low, compared to cases in which the counter actually had to be suspended from trading. The district judge therefore concluded that it was “abundantly clear” from those cases that the respondents ought not to be given custodial sentences under the current sentencing benchmarks for market misconduct offences.

No special reasons to depart from the sentencing norm

18 The Prosecution submitted that there were three reasons why custodial sentences should be imposed on the respondents.

19 First, the Prosecution argued that there was a strong public interest element in this case. The respondents’ conduct was the type to “cause consternation” among the investing public. The district judge rejected this argument since it was characteristic of any form of market misconduct. He also noted that s 104 of the SIA had been amended with effect from 6 March 2000 to increase the maximum fine from $50,000 to $250,000. This enhanced sentencing range allowed the court to impose a severe fine as a deterrent sentence in appropriate cases without having to resort to a custodial sentence.

20 Second, the Prosecution contended that the respondents had abused their position in committing the offences. The district judge rejected this argument since it also applied to practically all market misconduct cases. Late trading and other forms of market misconduct could only happen if the offender was in some position of authority or privilege vis-à-vis other investors. The district judge emphasised that “in such offences, abuse of position is not a unique factor that makes a custodial sentence almost automatic”.

21 Finally, the Prosecution submitted that the nature of these offences was such that they were difficult to detect. The...