In this side story to Part 3, we look at the scandals which surrounded Sino-Tech International Holdings Ltd in 2004, the subsequent convictions, possible options abuse and the missing deposit on a failed Vietnamese chromium mining project.

The Semtech saga
23 June 2009

This is a side-piece to our story on B M Intelligence, now known as China Bio-Med Regeneration Technology (8158).

As we explain in our main article, China Bio-Med Regeneration Technology Ltd (CBRT, 8158, formerly known as "B M Intelligence International Ltd") was originally in the business of providing pre-IPO advice and structuring for companies applying for listing. One of these clients was Sino-Tech International Holdings Ltd (SIH, 0724), listed on 3-Jul-00 as "Millennium Sense Holdings Ltd" and later notoriously known as "Semtech International Holdings Ltd".

On 24-Nov-03, Smart Number Investments Ltd (BVI, Smart Number) bought 66.67% of SIH for HK$34m or $0.34 per share. Smart Number was 40% owned by Derek Kanjanapas/Wong Chong Kwong (Derek Wong), 40% by Ms Lam Pik Wah and 20% by her younger brother Lam Hung Kit. The deal triggered a general offer, made by Altus Capital Ltd. The stock price took off, the offer closed on 2-Jan-04 with minimal acceptances.

On 5-Jan-04, SIH granted options to 13 non-director employees to subscribe 15m shares (equal to the maximum 10% of existing shares) at $0.347, which were all exercised that day.

On 13-Jan-04 there was a top-up placing of 30m shares (exhausting the general mandate) at $0.63 via Kingston Securities Ltd. On 24-Feb-04 SIH convened a meeting to refresh the share option scheme and the general issue mandate, which was held on 11-Mar-04.

On 15-Mar-04 SIH announced the proposed acquisition of Key Legend Ltd (Key Legend) from its only director Mr Wan Bin Hung for $46.4m, satisfied by issuing 58m shares (22.9% of enlarged) at $0.80 (the market price). Key Legend had only commenced operations in Jan-2003 and was "engaged in the manufacturing and distribution of high-ends (sic) electronic parts and components" with a factory in Dongguan. The 2004 net profit of Key Legend was warranted at $25m and it had net tangible assets of $44.2m. The acquisition of Key Legend was approved in a general meeting on 20-Apr-04.

On 1-Apr-04, SIH granted options to non-director employees to subscribe 19.5m shares (equal to the maximum 10% of issued shares) at $1.014, which were all exercised that day. This was the second time in 3 months that SIH had blown its 10% option scheme in one go and then seen all the options almost instantly exercised.

Note to regulators: It is difficult to believe that the purpose of diluting shareholders by 20% in 3 months is to motivate employees, particularly when they exercise the options immediately, thereby forfeiting the time value of the options. It is more likely that the option scheme is being used as a back-door placing mechanism to indirectly issue shares to third parties. We have seen several other companies using the same method. In cases such as this, regulators should be investigating whether the employees actually received the benefit of the options. We note that there is a pending ICAC court case involving Pacific Challenge Holdings Ltd (now New Times Group Holdings Ltd) where it is alleged that the employees were just fronts for someone else.

On 12-May-04 there as another top-up placing of 20m shares at $1.13 via VC Brokerage Ltd, and on 2-Jul-04 a third placing of 19m shares at $1.30, also via VC Brokerage. On 5-Jul-04 there was a conditional agreement to issue a convertible note to a fund managed by Value Partners Ltd for $25.87m, convertible into 19.9m shares at $1.30, bearing interest at 3-month HIBOR+2%, with 2.5 year maturity. Value Partners was a big-name investor which would add endorsement value but which was also insuring its downside by taking a bond rather than equity.

The shares were suspended on 12-Jul-04, because the ICAC had arrested nine people, including Derek Wong and another "senior executive" of SIH, as well as Derek Wong's secretary. $1.5m in suspected bribe cash was seized. The convertible note agreement with Value Partners was terminated on 15-Jul-04, and the third placing agreement lapsed on 1-Aug-04. Derek Wong resigned from SIH on 8-Sep-04, and the stock resumed trading the next day. On 15-Oct-04, he exchanged his 40% share of Smart Number for 40% of the 86m SIH shares it held, leaving Smart Number with 51.6m shares and owned 2/3 by Lam Pik Wah and 1/3 by Lam Hung Kit.

On 24-Jul-07, Derek Wong was convicted of two counts of offering an advantage to an agent in relation to a share placement of SIH. He wasn't in court to hear the verdict though - he had done a runner, and is still a fugitive (call 25 266 366 if you've seen him). Meanwhile Earnest Leung Chi Wah (Earnest Leung), who was a director of American Express Bank Ltd, was convicted of accepting an advantage of $400,000 for procuring the bank to purchase shares of SIH for clients, while Mr Yung Ka Tim (K T Yung), who was a divisional managing director of VC Brokerage, was convicted of receiving money to influence an investment analyst of VC Brokerage to put out a buy note on SIH. Earnest Leung and K T Yung were each was sentenced to 23 months in jail. However, on appeal, their convictions were quashed on 23-Oct-08, and a retrial was not ordered, because both had substantially served their sentences.

The transcripts of the original verdict are not available online - this is a deficiency in the judiciary's web site - an analyst who does not have time to attend court hearings can usually only find out what happened if there is an appeal. So from the appeal judgment, here's what happened...

Earnest Leung

The appeal judgment outlined the prosecution's case:

"On 9 July 2004, [Derek Wong] and [Earnest Leung] each drove their cars along Supreme Court Road to a turning circle at the end of that road in the vicinity of the High Court where [Derek Wong] left his vehicle carrying an envelope containing $400,000 and got into [Earnest Leung]'s vehicle. There he remained for 30 seconds or so before alighting and returning to his own vehicle leaving the envelope and the cash it contained on the passenger seat of [Earnest Leung]'s vehicle. [Earnest Leung] drove off but was almost immediately intercepted by ICAC officers who had been alerted to the meeting.

After [Earnest Leung]'s vehicle was stopped, a number of ICAC officers got into it. They introduced themselves and instructed [Earnest Leung] to drive his car to a place next to the nearby Conrad Hotel to allow other traffic to pass. There [Earnest Leung] was questioned about the envelope and its contents which had been found on the vehicle's passenger seat. [Earnest Leung] replied that the envelope had been "thrown" into the car by [Derek Wong]. The ICAC officers decided to direct [Earnest Leung] to drive his car back to the scene of the interception where by now [Derek Wong] had also been arrested, and [Earnest Leung] did so by a somewhat circuitous route around Admiralty and via Harcourt Road. Once back at the scene and after the money had been counted and found to total $400,000, [Earnest Leung] was asked why [Derek Wong] had given it to him. [Earnest Leung] said that it had been a loan to him from [Derek Wong] to allow him to pay for renovations to his flat.

A record of these events and of [Earnest Leung]'s statements was made in the notebook of an ICAC officer while still at the scene. [Earnest Leung] refused to sign the notebook entry and he was then taken to the ICAC offices in Central."

The appeal judges said regarding the defence:

"[Earnest Leung]'s case revolved around the evidence of his witness [Norman Koo]. It was to the effect that at the material time [Derek Wong] and [Earnest Leung] together with [Norman Koo] were involved in starting up a cosmetics business which, pursuant to the terms of what was said to be the business plan for the venture (a copy of which was produced by [Norman Koo] as Exhibit D2-22), required $200,000 to be injected by [Earnest Leung] and $400,000 to be injected by [Derek Wong] as at 1 July 2004.

[Earnest Leung]'s case was, on the basis of [Norman Koo]'s evidence and as put in submissions, that the $400,000 cash placed in his car by [Derek Wong] could well have been the funds to be injected by [Derek Wong] in the new business. That being a possibility, it was argued on behalf of [Earnest Leung], there must have been, on the facts established, a doubt as to whether the $400,000 was a ...reward for... [Earnest Leung] showing or having shown favour to [Derek Wong] in relation to... the shares of Semtech." The judge, as matters transpired, rejected the evidence of [Norman Koo] and the contents of Exhibit D2-22 as being of any assistance to [Earnest Leung] ...and proceeded to infer, in the manner set out above, that the $400,000 was a bribe as charged. In doing so, and for the reasons he gave, he applied the principles of Li Defan on the basis that [Earnest Leung] had failed himself to give evidence in circumstances where the judge had rejected the evidence of [Norman Koo]."

The principle they are referring to was in the Court of Final Appeal case of Li Defan v HKSAR (2002):

"there are sometimes cases in which the prosecution case on a particular issue may be strengthened by the failure of the accused to put forward any contradiction or explanation in circumstances in which he could be expected to know the truth and be willing, if innocent, to testify under oath... The absence of a denial or explanation by the accused is still not treated as an independent admission but may in particular circumstances give the prosecution evidence greater probative force than it would gain from being merely uncontradicted."

Later the appeal judges said:

"We anxiously considered in the present case whether the judge's reasoning in the application of the principle could be restricted to an absence of explanation by [Earnest Leung] as to why the payment was in the form of cash, and provided in a brown envelope at an unusual meeting in Supreme Court road. If it had been so restricted there may well have been a more arguable justification for the application of the principle.

However the terms of the judge's reasoning referred quite clearly and simply to the general payment of the sum of $400,000 by [Derek Wong] to [Earnest Leung] and were not restricted to either the form or manner of the payment. In those circumstances it seems to us that the judge's reasoning failed to take into account that [Earnest Leung] had called a considerable body of evidence which went to the central issue in [Earnest Leung]'s case in offering an explanation consistent with innocence as to why the payment may have been made.

The appeal judges concluded:

"the judge was in error in applying the principle in Li Defan and particularly so on the basis that he had rejected the evidence of Norman Koo and that there was as a result no evidence given or called by [Earnest Leung] in support of his case."

because the defendant could not have known what evidence would be eventually accepted or rejected when he decided not to testify. So the conviction was quashed. Earnest Leung is now gainfully employed by Vision Tech International Holdings Ltd (0922), which appointed him as ED on 4-Jun-09 and as CEO on 10-Jun-09.

K T Yung

The appeal judgment outlined the prosecution's case regarding K T Yung:

"On 10 June 2004, [Derek Wong] instructed his secretary [Becky Wong Pui Sze] to collect money from the offices of Carl Gouw and to deliver it to [K T Yung]. She did so, collecting the money in an envelope given to her by Carmen Cheung who was [Carl Gouw]'s secretary. She had been provided with the mobile telephone number of [K T Yung] and arranged to meet him at the Mandarin Hotel coffee shop. She had never met [K T Yung] but when she arrived at the coffee shop, a man answering his description was there and she approached him. She told him she was [Derek Wong]'s secretary and gave him the envelope containing the money. Her evidence was that she knew there was money inside the envelope as she had looked inside and seen banknotes. She was able to do so as the envelope was unsealed.

Following the arrest of [Derek Wong] and [Earnest Leung], a month later [K T Yung] was also arrested. He said nothing under caution."

However, after K T Yung was arrested, no identification parade was held, and the prosecutor gave no reason for that. Also the appeal judges said:

"[Becky Wong] collected the money from [Carmen Cheung], the secretary of [Carl Gouw], a member of the family which also happened at this time to be selling a large block of [SIH] shares. There were contradictions between the evidence of [Becky Wong] and [Carmen Cheung] as to the collection of this money. [Becky Wong] said she collected an unsealed envelope from [Carmen Cheung], looked inside and saw there was a sum of money. She did not count the money and could not say what amount it was though she was told by [Carmen Cheung] that there was $170,000 in the envelope. [Carmen Cheung] on the other hand gave evidence to the effect that the envelope she handed to [Becky Wong] on 10 June 2004 was sealed and that she did not know what was in it, and had not told [Becky Wong] that there was $170,000 in the envelope. She had been told there were documents inside the envelope..."

[K T Yung]'s case at trial was based simply on an attack upon the reliability of [Beck Wong]'s evidence as to there being money in the envelope provided by her to the man in the coffee shop, and to submitting that the circumstantial nature of the prosecution's evidence identifying [K T Yung] as that man was such that it was simply insufficient to prove that to be so...

In our view the approach taken by [K T Yung] in his own case was simply to attack the fundamentals of the prosecution case. It was not the exceptional sort of case where the stage had been reached that the prosecution case against [K T Yung] could be said to have required some answer or explanation from him."

So as with Earnest Leung, they concluded:

"the strengthening of any prosecution inference sought against [K T Yung] by the application of the principles expressed in Li Defan was inappropriate. This ground [of appeal] as with [Earnest Leung], must succeed."

The other case

The Semtech case also spun off a much higher profile case involving an alleged conspiracy to pervert the course of public justice, namely, after Becky Wong was arrested, she became an ICAC protected witness and was granted immunity from prosection, and there was an alleged conspiracy amongst Derek Wong, his lover Mandy Chui Man Si, his solicitor Andrew Lam Ping Cheung and a barrister, Kevin Barry Egan, to spring her, culminating in a writ of Habeas Corpus. Kevin Egan was convicted and sentenced to 30 months in jail, but his conviction was overturned by a 2:1 majority ruling in the Court of Appeal on 12-Feb-09. The convictions against the other three were upheld, Mandy Chui's sentence was 2.5 years, and in the other two cases the sentences were increased by the Court of Appeal - Andrew Lam's sentence went from 4 years to 6 years and Derek Wong's from 3 years to 5 years (if they ever catch him).

More options

As mentioned above, SIH was a heavy issuer of options, having exhausted the limit (equal to 10% of existing shares) twice in 3 months in 2004. On 26-Oct-05 it granted 29.25m options (equal to the maximum 10% of existing shares) to 11 "customers and suppliers" at $0.71, which were all exercised by 31-Dec-05.

On 10-May-06 SIH launched a placing of 58m shares at $0.90 via OSK Asia Securities Ltd, raising $52.2m gross ($51m net).

On 5-Aug-06, SIH granted 26.575m options to "customers, suppliers and other eligible persons" and 11.4m options to employees at an exercise price of $1.246 ($0.1246 split-adjusted). The total number of 37.975m options (379.75m split-adjusted) granted to 11 participants again exhausted the 10% limit under the option scheme. None was exercised in 2006, 2007 or 2008. 2m (split-adjusted: 20m) employee options lapsed in 2008.

Failed Vietnam chromium mining project

On 16-Jul-07, after the stock closed at $5.09, up 233% since 7-Jun-07, SIH announced that it didn't know why the price was up, but it was in negotiations to invest in a Vietnamese chromium mine. On 17-Jul-07, the stock hit a record daily high of $5.64 ($0.564 split-adjusted), up 268% since 7-Jun-07, and was suspended after the morning session. At this point SIH had a market value of $2,141m.

A month later, it was announced that on 17-Jul-07 SIH conditionally agreed to buy 80% of Trung Hai Investment Co Ltd (Vietnam, Trung Hai) from Li Tianmin (Mr Li), who owned 100% of it, for HK$300m, comprising $88m in cash and 42.4m shares at $5. Three days earlier, Trung Hai had signed a JV with Viet Nam Aditives Mine Joint Stock Co to establish a 49:51 JV called Vinaminco Vietnam Mineral Exploiting-Processing Group Ltd Co (Vinaminco), the operations of which were expected to be "exploiting, refining and export of chromium". Vinaminco "expected to be granted" mining rights to 1.5m tonnes of unrefined chromite with an estimated 450,000 tonnes of refined chromite in two mines over 500 hectares, amounting to HK$31.5bn in value of refined chromite at a market price of HK$70,000 per tonne, according to SIH. It was unclear how much it would cost to develop the mine, but Trung Hai was to "arrange financing" of US$10.82m (HK$84.4m) in the form of a loan on normal commercial terms, secured by the mining rights.

Trung Hai was newly-incorporated on 18-May-07 and had net assets of just US$1m. So at HK$300m (US$38.5m) SIH was apparently paying a huge 48-fold mark-up for its 80% share. A deposit of US$2.5m (HK$19.5m) was paid to Mr Li within 30 days of signing, apparently without any security. We know nothing about him.

On 31-Oct-07 SIH announced a 10:1 stock split and a bonus issue of 1 warrant for every 5 shares held, exercisable at $0.48 per split share for 2 years. The stock split took effect on 19-Dec-07. On that date, SIH announced that Vinaminco was still waiting for an exploration permit, so the estimated reserves could not be verified, and completion of the acquisition would be delayed to 31-Mar-08 or earlier.

On 27-Mar-08, SIH announced that it had received a letter from Mr Li dated 26-Mar-08, terminating the deal. SIH "consulted with Mr Li" and understood that he had "met with representatives of the Vietnam government" and "the investment permit in respect of the...mines for Vinaminco will likely be revoked due to lack of progress in the project." Mr Li had agreed to return the US$2.5m deposit without interest within 3 months.

In its 2008 results announced on 15-Apr-09, SIH finally admitted that Mr Li had not refunded the deposit, and booked an impairment loss on the entire $19.6m amount "due to the uncertainty in its recoverability", reducing net profit to just $6.4m. Bizarrely, they categorised this loss within the "electronic components" segment of the group. The earlier interim results for the six months to 30-Jun-08 contained no mention of Mr Li's failure to repay on time. Investors should not have been kept in the dark for so long. SIH has not said what steps, if any, are being taken to pursue Mr Li.

©, 2009

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