The 2006 Asian Roundtable on Corporate Governance
Implementation and Enforcement of
Corporate Governance Rules
Lawrence Liu
Executive Vice President and Chief Strategies Officer,
China Development Financial Holding Corporation
Chinese Taipei
Day 1 – Part III
Procomp：A Case in Chinese Taipei
Bangkok, Thailand
14-15 September 2006
2006
ARCG
Contents
 Background
 " Facts" of Procomp Case
 Legal Liabilities of Procomp Case
 Enforcement of Procomp Case
 Securities and Futures Investors Protection Center
 Procomp’s Impact on Corporate Governance
 Appendix
1
2006
ARCG
Background - 1
 Timing

High-tech industry boom in the 90s and electronics stocks
reigned

Post-crisis " landmine" cases in traditional sectors in
Chinese Taipei

Regulations inadequate


No Investors Protection Act and information disclosure
limited
Enron case occurred in 2001
2
2006
ARCG
Background - 2
 Procomop Case

12/2003:material downward adjustment in its financial forecast

6/2004:applied for reorganization after defaulting on NT$3.07
billion (US$96mm) DCB

2H/2004:Other High-Tech " landmine" cases : such as Infodisc
Technology, Summit Computer Technology, etc.
Date on
which SFIPC
filed civil suit
No. of
plaintiffs
Claims
(in NT$ mm/US$ mm)
Company name
Event
time
Procomp
06/2004
Misrepresentations in financial statements
Misrepresentations prospectus
11/2004
10,056
5,825 ($182)
Infodisc Tech.
09/2004
Misrepresentations in financial statements
Insider Trading
09/2005
10,498
3,050 ($95)
Summit
Computer Tech.
09/2004
Misrepresentations in financial statements
02/2006
1,590
364 ($11)
Wrongful activity
3
2006
ARCG
" Facts" of Procomp Case - 1
 The Company







Products : Motherboards, IA products, semiconductor such as GaAs
EPI-wafers
Chairperson : Ms. Sophie Yeh
Her husband :" Financial Iacocca in Chinese Taipei" Mr. Walter
Lin, former Chairman of Waterland Financial Holdings
12/1999 : IPO with price of NT$85.5 (US$2.7)/share (P/E=28)
The highest trading price : NT$368 (US$11.5)/share (P/E=82)
In 2000 & 2001 : Made NT$5.9 billion (US$188 mm) cash injection
In 2001 : Issued NT$ 3.5 billion (US$109 mm) DCB
In 2003 : Issued NT$1.7 billion (US$50 mm) OCB
Totally raised NT$ 11.1 billion (US$ 347mm) funds from capital
markets
4
2006
ARCG
" Facts" of Procomp Case - 2
 Trick I – 1.1

Repeated fabricated sales cycle
Procomp
Sold back to Procomp
Domestic Coconspirators /
Suppliers
‧A
‧B
‧C
‧D
‧E
‧F
‧G
False Sales
Repacked and
exported
commodities
Buyers
(Dummy companies in HK.
Representative was
Procomp’s Employee)
‧Marksman
‧Emperor
‧Farstream
‧Kingdom
‧Fasson
5
2006
ARCG
" Facts" of Procomp Case - 3
 Trick I – 1.2
Fabricated

deals to window dress financial statements
Created NT$16 billion (US$504mm) fabricated A/R and NT$5.6
billion (US$175mm) fabricated A/P
Procomp
Payment for goods
Payment for goods
Domestic Coconspirators / Suppliers
‧ Partial funds were
paid for related import
declaration tax and as
rewards to suppliers
Remaining funds remitted to
Dummy Companies in HK
Buyers
(Dummy companies in HK.
Representative was
Procomp’s Employee)
‧ Partial funds were
diverted by Sophie Yeh
and disappeared without
a trace
6
2006
ARCG
" Facts" of Procomp Case - 4
 Trick II – 2.1.1

US$85mm Fabricated Deposit with Metropolitan Bank & Trust
Company
‧Using fabricated sales cycle to transfer funds to dummy companies in
HK
‧Dummy companies in HK deposit US$ 85mm in Procomp’s account at
Metropolitan Bank & Trust Company as partial payments for goods
‧Authorized Metropolitan Bank & Trust Company to buy US$ 85mm
CLN issued by SGA
Procopm
Deposit contract / buy CLN
Metropolitan Bank & Trust
Company
7
2006
ARCG
" Facts" of Procomp Case - 5
 Trick II – 2.1.2
‧Authorized Metropolitan Bank & Trust Company to buy US$ 85mm CLN
with credit link to North Asia Financial Company issued by SGA. The CLN
was put under Metropolitan Bank & Trust Company’s custody
‧The North Asia Financial Company borrowed US$ 85mm from SGA
Metropolitan Bank & Trust Company
$
Credit Link Note
CLN
SGA HK branch
$
North Asia Financial Company
(Dummy company in BVI. Representative was Procomp’s Employee)
‧Procomp announced reorganization proposal. Metropolitan Bank & Trust
Company transferred CLN to Procomp and terminated the deposit contract
with Procomp
Procomp
buy CLN
 US$85mm deposit evaporated
 Money went to dummy company
Metropolitan Bank &
Trust Company
8
2006
ARCG
" Facts" of Procomp Case - 6
 Trick II – 2.2

US$45mm Fabricated Deposit in Australian Commonwealth Bank
Commonwealth
Procomp
Bank
1. Sold account
receivables (A/R)
2. Payment of A/R
were remitted to
Procomp
(Booking as deposit)
CTB ( subsidiary of
Commonwealth Bank)
4. Procomp’s
deposit was used
to buy zero-coupon
bond issued by
AIM based on A/R
3. Sold A/R
AIM Global Finance Ltd.
(Dummy company in BVI.
Controlled by Sophie Yeh)
 After Procomp announced reorganization proposal, US$45mm deposit
was offset by the zero-coupon bond
9
2006
ARCG
" Facts" of Procomp Case - 7
 Trick III

US$50mm Fabricated Deposit in Rabobank and Metropolitan Bank
Procomp
4. Abide by
agreement,
deposit all
OCD
proceeds
to banks
1. Set up dummy companies
Best Focus Assets Ltd.
Fernvale Assets Ltd.
(Dummy companies in BVI.
Controlled by Sophie Yeh’s friends)
2. Borrowed US$ 50mm
Rabobank Singapore Branch
Metropolitan Bank & Trust Company
Underwriter is the HK subsidiary
of a financial institution in
Chinese Taipei
3. Dummy companies
acquired all the
OCB issued by
Procomp
5. Procomp announced stock
buyback plan. When the
stock rallied, dummy
companies converted all
the OCB into stocks to
earn capital gains
 After Procomp announced reorganization
proposal, US$50mm deposit was offset by loans
 Dummy companies earned capital gains from the stock market
10
2006
ARCG
" Facts" of Procomp Case - 8
 Trick IV

Guaranteed dummy companies to transfer cash US$10 mm
1. Deposited US$10 million
Procomp
Bank under a financial
holding corp.
3. Deposits as guarantee
for Addie’s borrowing
Addie
(Dummy company in BVI.
Representative was
Procomp’s Employee)
2. Lent to Addie
US$10 million
Grand Capital
(Overseas subsidiary of
the same financial holding corp.)
 After Procomp announced reorganization proposal, US$10mm
deposit was offset by loan. Money went to dummy company
 From Trick II–IV, about NT$ 6 billion (US$190 mm) deposit
evaporated after Procomp announced reorganization proposal
11
2006
ARCG
Legal Liabilities of Procomp Case
 Directors/Supervisors and Employees

Misrepresentations in financial statements

Misappropriation of company assets

Making of false statements on the application materials
 Accounting Firms/CPA (KPMG and Deloitte Touche Tohmatsu)

Omission in the certification
 Underwriters (Yuanta、Fubon、Hua Nan、TIS)

Misrepresentations in underwriting report
12
2006
ARCG
Enforcement of Procomp Case-1
 Investigation and Enforcement

7/2004 : Financial Supervisory Commission immediately began
investigations

10/2004 : Prosecutors brought charges against 31 related company
officials

6/2005 :Walter Lin forced out from the chairmanship of
Waterland Financial holdings for NT$1.95 billion (US$61mm)
abnormal inflows from his wife

12/2005 : Sophie Yeh was sentenced to a 14-year prison term and
NT$180 million (US$5.6mm) criminal fine

5/2006 : Prosecutors petitioned for appeal, seeking a 20-year
prison term and NT$ 500 million (US$16 mm) criminal fine
13
2006
ARCG
Enforcement of Procomp Case-2
 Liabilities of CPAs and Underwriters

CPAs : suspension from practice for 6 months

Underwriters : received warnings
 Investors’ Protection

The Securities and Futures Investors Protection Center (SFIPC)
representing 10,056 investors and asked for NT$5.8 billion
(US$181mm) compensation

Managers, board directors and supervisors, accounting
firms/accountants and underwriters are also defendants in these
lawsuits

Settled with 4 underwriters for NT$78.1 million (US$2.4mm)

Settled with 2 accounting Firms for about NT$90 million
(US$2.8mm)
14
2006
ARCG
Securities and Futures Investors
Protection Center
 Established in accordance with the Protection Act in 2003
 Handles consultation, mediation, investor complaints, files
class-action lawsuits
 Currently has 41 cases for securities fraud
Representing over 57,000 investors
Claiming for NT$ 23.6 billion (US$738 m) compensation
 The largest case : the Pacific Electric Wire & Cable case

more than 25,000 investors

seeking over NT$8 billion (US$250m) in damages
15
2006
ARCG
Procomp’s Impact on Corporate
Governance - 1
 The SFIPC became an important enforcement arm of
government
 CPA and underwriter liabilities and deterrence increased

Increased damages

fewer IPOs, more SPOs
 The information disclosure on IPO & SPO enhanced
 Financial forecast mechanism changed to voluntary in 2005
 Key modifications of Company Law

Shares held by subsidiaries have no voting rights

1% shareholders to make shareholders proposals in AGM
16
2006
ARCG
Procomp’s Impact on Corporate
Governance - 2
 Key modifications of Securities and Exchange Law

Independent board directors / audit committees

Integrity and honesty for company representative

Damage compensation

Issuers and their responsible persons : strict liability

Employees & CPAs : proportionate liability

Close relatives may not constitute half of the boards

Juristic persons may not be selected as the director and supervisor
at the same time

Enhanced penalties
17
2006
ARCG
Appendix
18
2006
Ongoing cases of Class-Action
Litigation or Arbitration-1
ARCG
Status
Status of criminal case
2
3
1
1
1
1
Dec.16, 2005 Supreme Court
reversed High Court ruling.
1998.10
Taipei District
Court
14,983
33 1999.08
1
1
1
May 15, 2004 Supreme Court
reversed High Court ruling.
2000.03
Taipei District
Court
1,924,074
1,154 1999.11
1
1
1
Feb. 19, 2004 Supreme Court
reversed High Court ruling.
2000.09
Taipei District
Court
1
621,298
1,431 1999.11
1
1
1
Jun. 2, 2006 opening
argument began at High Court.
2003.07
Taipei District
Court
1
59,348
130 1999.11
1
1
2001.06
Taichung
District Court
1
4,939
100 2000.02
1
Chinese Automobile Co.
1998
Ltd.
1
3
Kuo Yang Construction
Co. Ltd.
1998
1
4
Tong Lung Metal
Industry Co. Ltd.
19971998
1
5
Tai Yu Products
19971998
6
Ban Yu Paper Mill Co.
Ltd.
1998
7
Master Home Furniture
1998
1
152,648
145 2000.06
1
1
8
Tah Chung Steel Corp.
1998
1
156,457
566 2000.07
1
1
9
Tai Yu Products
1998
1
152,042
393 2000.08
1
1
10
Taiwan Pineapple
19971998
231,424
215 2000.12
1
1
11
Hsin Ju Chun Group
1998
1
48,599
252 2000.12
1
1
1
12
Kuei Hung Co.
19982000
1
29,193
82 2001.01
1
1
1
1
1
1
1
1
Court date
334 1998.10
2
1
Latest development of case
69,824
1
1
Civil Case
Court
Reverse
Confirm
Confirm
Not guilty
Guilty
Confirm
Guilty
Not guilty
Date on which the Center
filed civil suit
Compensations
demanded (in
NT$1,000)
Insider trading
Price manipulation
1995
Misrepresentations
prospectus
Cheng I Food Co. Ltd.
Misrepresentations in
financial statements
1
Company Nome
Date of activity in
question
No.
Number of plaintiffs
Type of activity
1
1
Feb. 15, 2006 High Court
1 convicted Mr. Tseng to a 15year prison term.
Oct. 28, 2005 opening
argument began at High Court.
1
1
Jul. 21, 2005 Supreme Court
reversed High court ruling.
Jun. 14, 2005 High Court
convicted Mr. Liu to a 2-year
1
prison term, probation 5 years,
appeal exhausted.
Jun. 8, 2004 High Court
convicted defendant to a 11year prison term.
Mar. 9, 2006 Supreme Court
1
reversed High court ruling.
－
Yunlin District
Court
2003.03
Changhua
District Court
2001.08
Taichung
District Court
2001.06
Taichung
District Court
2003.05
Taipei District
Court
Dec. 29, 2005 Supreme Court
reversed High court ruling.
2003.09
Taipei District
Court
Dec. 18, 2003 Supreme Court
reversed High court ruling.
2002.03
Tainan District
Court
19
2006
Ongoing cases of Class-Action
Litigation or Arbitration-2
ARCG
China Container
Terminal Corp.
1999
17
Lee Tah Farm Industries
Co., Ltd.
1999
18
Hung Fu Construction
Co., Ltd.
1998
1
1
1
117 2001.02
1
1
8,600
65 2001.07
1
1
385
36 2001.07
1
9,030
70 2002.04
1
20,511
11 2002.05
20,537
77 2003.04
1998
New Sun Metal Industry
Co.
1998
1
393,825
759 2003.08
Yang Iron Works Co.,
21 Ltd & Nan Kang Rubber
Tire Co. Ltd.
1998
1
22,592
80 2003.12
27,523
103 2004.01
20
22
Taiwan Fertilzer Co.,
Ltd.
1999
1
23,647
19 Hwa-Hsia Leasing Corp.
1
1
1
1
1
Latest development of case
Nov. 10, 2005 District Court
adjudicated Not Guilty. Case
appealed to High Court.
Dec. 8, 2004 High Court
convicted defendant to a 10year prison term. Case
appealed to Supreme Court.
Nov. 17, 2005 Supreme Court
convicted defendant to a 5month prison term.
Dec. 15, 2005 District Court
convicted defendant to a 2year prison term. Case
appealed to High Court.
Aug. 17, 2005 High Court
convicted defendant to a 41
year prison term. Case
appealed to Supreme Court.
Jun. 22 & 29, 2006 opening
argument began at District
Court.
Jun. 15, 2004 District Court
adjudicated Not Guilty. Oct.
27, 2005 opening argument
began at High Court.
May 6, 2004 opening argument
began at District Court.
1
1
1
Civil Case
Court
Reverse
16
1
252 2001.02
Confirm
1998
129,171
Confirm
Kert World Co., Ltd
Not guilty
15
Guilty
1
Confirm
1997
Not guilty
Fong An Steel
Status
Status of criminal case
2
3
1
Guilty
14
1
Date on which the Center
filed civil suit
1
Compensations
demanded (in
NT$1,000)
19971998
Insider trading
Taiwan Fluorescent
Lamp
Price manipulation
13
Misrepresentations
prospectus
Misrepresentations in
financial statements
Company Nome
Date of activity in
question
No.
Number of plaintiffs
Type of activity
Apr. 15, 2004 District Court
adjudicated Not Guilty. Nov.
21, 2005 opening argument
began at High Court.
Jul. 1, 2004 High Court
adjudicated Guilty. Dec. 8,
2005 Supreme Court overruled
judgment in part.
Court date
－
Taipei District
Court
2003.12
Kaohsiung
District Court
2002.04
Taipei District
Court
2005.12
Taipei District
Court
2002.04
Kaohsiung
District Court
－
Taipei District
Court
－
Taipei District
Court
2003.08
Kaohsiung
District Court
2003.12
Taipei District
Court
2004.07
Taiwam High
Court
20
2006
Ongoing cases of Class-Action
Litigation or Arbitration-3
ARCG
27
DAHIN Co., Ltd.
1999
28
Royal Information
Electronics Co., Ltd.
2000
29
Tung Zong Textile
Co.,Ltd
2001
30
Aceland-Dynasty Co.
2004
31
Procomp Informatics
Ltd. I
2004
32
Procomp Informatics
Ltd. II
2004
1
1
196 2004.07
128,786
119 2004.07
1
2,809
28 2004.08
1
60,309
87 2004.08
1
1
1,441
18 2004.11
1
1
5,824,779
10,038 2004.12
1
1
1
1
Mar. 24, 2005 Supreme Court
adjudicated Guilty.
Court date
2004.03
Bahchiao
District Court
2005.08
Taipei District
Court
Hsinchu District
Court
No indictment, appeal
exhausted.
15,328
1
Latest development of case
Aug. 24, 2005 District Court
adjudicated Guilty on
Misrepresentation in financial
statements. Apr. 10, 2006
opening argument began at
High Court.
No indictment, appeal
exhausted.
King Yuan I
and II
defendants are
same as
jointly and
2004.06
above
severally
liable for
damages.
1
1
1
Civil Case
Court
Reverse
2001
55 2004.06
1
Confirm
King Yuan Electronics
Co., Ltd. II
25,351
Confirm
26
1
577 2004.03
Not guilty
2001
292,857
1
Guilty
King Yuan Electronics
Co., Ltd. I
1
Confirm
25
1
2,070 2004.03
1
Guilty
1999
373,017
Status
Status of criminal case
2
3
Not guilty
DAHIN Co., Ltd.
1
Date on which the Center
filed civil suit
2000
24
Compensations
demanded (in
NT$1,000)
Insider trading
Price manipulation
Misrepresentations
prospectus
Infodisc Technology
Co., Ltd. I
Misrepresentations in
financial statements
23
Company Nome
Date of activity in
question
No.
Number of plaintiffs
Type of activity
1
1
1
1
1
Feb. 25, 2004 Court convicted
defendant to a 3-month prison
term. Appeal exhausted.
Apr. 26, 2006 High Court
adjudicated Not Guilty.
Jan. 27, 2004 Court convicted
defendant to a 10-month prison
term. Case appealed to
Supreme Court.
Taipei District
Court
2004.07
－
2004.08
Taipei District
Court
Banciao District
Court
Tainan District
Court
Taipei District
Court
ShihLin District
2004.11
Court
Confirm Guilty.
2004.10
Dec. 12, 2005 District Court
convicted defendant to a 14year prison term, plus a fine of
NT$ 180 million.
2004.12
ShihLin District
Court
21
2006
Ongoing cases of Class-Action
Litigation or Arbitration-4
ARCG
Reverse
Confirm
Confirm
Not guilty
Jun. 21, 2005 High Court
adjudicated Not Guilty. Case
appealed to Supreme Court.
Aug. 8, 2006 opening
argument began at District
Court.
May 26, 2006 opening
argument began at District
Court.
Jun. 12, 2006 opening
argument began at District
Court.
Court date
2005.02
Taipei District
Court
2005.04
Taipei District
Court
2005.09
Banciao District
Court
No indictment
2006.02
Taipei District
Court
241 2006.02
Jun. 7, 2006 opening argument
began at District Court.
2006.02
Taipei District
Court
455,677
781 2006.04
Oct. 28, 2005 indicted
2006.04
Banciao District
Court
457,902
1,112 2006.04
2006.04
Taipei District
Court
1
542,110
484 2005.02
2004
1
8,073,312
25,159 2005.04
Infodisc Technology
Co., Ltd. II
2004
1
2,677,309
8,429 2005.09
37
Summit Computer
Technology Co.
2004
1
364,468
1,590 2006.02
38
Well Communication
Co.
2004
1
126,956
39
Power Quotient
International Co., Ltd.
2005
1
40
National Aerospace
Fasteners Corporation
2005
1
41
Taiwan Sakura Corp.
2004
1
Court
Latest development of case
Taipei District
Court
29 2004.12
1
Civil Case
2004.12
39,574
1
Guilty
36
Confirm
Pacific Electric Wire &
Cable Co., Ltd.
Not guilty
35
Status
Status of criminal case
2
3
1
Guilty
2004
1
Date on which the Center
filed civil suit
Chou Chin Industrial
Company
Compensations
demanded (in
NT$1,000)
34
Insider trading
2004
Price manipulation
Greatsun Development
Technology Co, Ltd
Misrepresentations
prospectus
33
Misrepresentations in
financial statements
Company Nome
Date of activity in
question
No.
Number of plaintiffs
Type of activity
1,690
117
1
1
1
1
Dec. 14, 2005 Court convicted
defendant to a 14-month prison
term.
Feb. 15, 2006 Court convicted
defendant to a 16-month prison
term.
Taichung
District Court
Total
23
10 12
9 23,584,325 57,535
26 5 1 18 1 2 4 11
* Chart arranged by the date on which the Center filed the civil suit.
* The said company is "fuilty" if the main defendant receives a "guilty" verdict, regardless whether the act for which the defendant is convicted involves the violation of the Securityies Transaction
Law (he might be convicted only for greach of contract or illegal proprietorship of property) or whether other defendants are convicted.
Source：Securities and Futures Investors Protection Center, Chinese Taipei (August 2006).
22