In the mid-1990s, Hong Kong tycoon James Ting was a credit to the city.
He had enjoyed a run of success buying and reviving down-at-heel consumer brands. Through his locally listed vehicle Akai Holdings, the slight-framed, bespectacled entrepreneur sat astride a global web of companies. At its peak, Akai had 160 subsidiaries including America’s Singer Sewing Machines and Japan’s Akai Electric.
Then in 2000, Akai collapsed. It was wound up by its banks, owing creditors US$1 billion. Ting, a colourful big spender who once reportedly rode into an investor meeting in Rome on a chariot, fled his US$5 million Shek O mansion, leaving his Rolls-Royce parked on the driveway, and disappeared.
Later this month, the scandal of Hong Kong’s biggest corporate collapse will blow open again.
Akai’s liquidator, Borrelli Walsh, will sue the failed firm’s former auditor, Ernst & Young Hong Kong, for up to US$1 billion in a six-month High Court case set for hearing from September 15.
The claim, which EY Hong Kong refutes, is that the audit firm negligently failed to spot goings-on at Akai that led to its collapse.
Ting is not on trial. Police found him in Macau in 2003. He was imprisoned for false accounting in 2005. A year later, he walked free, his conviction having been overturned because of errors in the prosecution’s case.
Borrelli Walsh’s civil case, pieced together over almost 10 years of forensic examination of Akai’s books and records, will go much further than Ting’s criminal trial.
The liquidators will claim EY Hong Kong negligently failed to spot what they allege was a grand-scale theft of Akai’s cash by Ting.
Borrelli Walsh will directly accuse the failed entrepreneur of plundering US$800 million from Akai, something the police never managed to prove in the criminal courts.
According to details that have surfaced in pre-trial hearings, Borrelli Walsh will argue that Ting set up a fake bank account and a series of fake deals to steal cash and assets from Akai between 1997 and 1999. The liquidators claim EY Hong Kong should have spotted the alleged thefts from the start and prevented them.
Legal experts familiar with the case estimated that if EY Hong Kong loses, the accounting firm, one of the Big Four in the industry, will pay a total of US$2 billion in damages, interest and court costs. EY Hong Kong and Borrelli Walsh both declined to comment.
The audit firm has a strong defence. It is likely to say it is not an accountant’s job to police fraud. If Ting had stolen cash from Akai, he could have fraudulently covered this up to blindside his auditors, EY Hong Kong is likely to argue. And accountants can only work on the details their clients present to them.
Other professional services firms have fought off negligence claims in this way.
In July, British accountant Moore Stephens successfully defended a negligence case brought against it by the liquidators of its fraudulent former client.
The judge, in last month’s British High Court ruling, found Moore Stephens not liable for failing to uncover the long-running US$95 million fraud at Stone & Rolls, a commodity trader it audited from 1997 to 2001.
Akai and EY Hong Kong are both betting big on winning this case and have imported expensive legal superstars from London to argue in court for them. EY Hong Kong is fielding top-notch British barrister Mark Hapgood QC, who has successfully defended the accounting firm’s British arm against a huge £700 million (HK$8.87 billion) negligence claim brought by failed insurer Equitable Life in 2003. Lawyers say Hapgood charges HK$100,000 a day for court appearances. The liquidators have Leslie Kosmin QC, another heavyweight London barrister whose fees are similar to Hapgood’s.
The highlights of the mega-trial will be the liquidators’ accusations against Ting, whose presence will be felt daily in the courtroom, even though he is unlikely to attend hearings. The Shanghai-born former tycoon is believed to be lying low on the mainland, although Borrelli Walsh cannot find him.
Another Hong Kong tycoon whose name will come up repeatedly is Christopher Ho Wing-on, the majority owner of locally listed electronics company Grande Holdings.
Control of Akai and its subsidiaries was passed to Grande in 1999, before Akai was wound up.
The liquidators allege Ting and Ho stripped Akai of its assets, including its valuable trademark. When insolvency teams arrived on the scene after the winding-up order, they found Akai’s cupboards bare. Previously a global empire, Akai had no premises, no staff and virtually no money. A pre-trial judgment reveals there was just US$167,000 of cash left in the business.
Akai posted a US$1.8 billion loss in 1999, after slipping just US$100 million into the red the year before. The liquidators allege Ho and Ting arranged for Akai to transfer its operations to Grande when Ting’s empire was already insolvent. If true, this would be gross misconduct by Ho, the liquidators claim. Companies are not allowed to do deals when they are insolvent.
Borrelli Walsh is suing Ho and Grande in a parallel civil case in the Hong Kong High Court to try to recover Akai’s creditors’ cash. Ho and Grande refute the allegations.
The liquidators will also use the asset-stripping claims against EY Hong Kong in the negligence trial. EY provided corporate finance advice to Grande on its purchase of Akai, previous court rulings have found.
Borrelli Walsh and EY Hong Kong have squabbled, often in open court, about whether or not this case should proceed since 2002. The liquidators’ case and the audit firm’s defence are already well documented, having been aired in case management hearings and pre-trial judgments.
In open-court pre-trial hearings in December 2007 and July last year, Akai’s legal team revealed these accusations:
The liquidators claim that Ting, between 1997 and 1999, siphoned US$800 million cash from Akai’s bank accounts. To cover up the alleged theft, it is claimed, Ting inserted a fake Bankers Trust account into Akai’s ledger.
Then he made it look like cash deposits were going into the false account. Instead, the liquidators will allege, the money “deposited” into the false bank account went straight into Ting’s pocket.
Akai’s books showed money going into and leaving the Bankers Trust account. And because Ting needed to show that the money moving through the Bankers Trust account was not going to him, he then created a series of fake acquisitions and investments that Akai purportedly made through the false account.
Akai’s books showed money leaving the firm through the non-existent bank account and being spent on what seemed to be genuine deals.
One example of this surfaced in Ting’s criminal trial.
In 1998, Ting signed company papers authorising a HK$300 million investment in a US technology company named Micromain. Then in 2000, Akai wrote off its entire investment in Micromain as a loss, saying the shares had become worthless.
This was a plausible story during the dotcom boom and subsequent crash, when many companies made investments in technology firms that went bust.
But the liquidators found that the Micromain investment never happened. They passed this information to the Hong Kong police in 2001, and it became a central feature of Ting’s criminal trial.
Charles Sun, the founder of Micromain and the prosecution’s main witness, told the criminal court Akai had never invested in his firm. Sun and his wife were, and always had been, the only shareholders. Sun had agreed to sell half the business to Akai but he never received payment.
The Hong Kong appeal court said the jury failed to find Ting’s false Micromain investment was deliberately dishonest. The court overturned his false accounting conviction, saying the prosecution bungled its case.
But in the criminal appeal ruling, the judge took pains to tell the court he was certain the Micromain investment was fabricated.
The liquidators argue that EY Hong Kong should have questioned the fake deal. According to Borrelli Walsh, the auditors did not do this.
The liquidators’ claim goes further than this, however. They paint a picture of a far too cosy relationship between Ting and EY Hong Kong, which led the auditor not to listen when three other accounting firms, including two in Ernst & Young’s global network, sounded the alarm about suspicious goings-on at Akai.
Between 1992 and 1999, Akai and its television-making subsidiary, Kong Wah, were EYHK’s two largest audit clients.
Ernst & Young’s US and Canadian offices audited Ting’s Singer Sewing Machines business. They both resigned from their Singer roles in 1998, citing a “breakdown in trust” between their auditors and Ting.
Between 1996 and 1999, Ernst & Young’s German office, which audited a local subsidiary of Akai, told the accounting firm’s Hong Kong office of difficulties it had with Ting.
During this period, PricewaterhouseCoopers, the auditor of Akai’s Japanese subsidiary, Akai Electric, wrote to EY Hong Kong stating Ting needed to improve his company’s internal controls. PricewaterhouseCoopers also cited concerns about Ting’s integrity.
Despite all this, EY Hong Kong continued to rate Akai a “low risk” audit client, the liquidators’ barrister Kosmin said in the case management hearings.
Akai’s former shareholders, whose investments in Ting’s empire were wiped out in the insolvency, will undoubtedly want to hear the auditors explain that decision in court.
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Liquidators suing Akai auditors for negligence
Naomi Rovnick
05 September 2009
In the mid-1990s, Hong Kong tycoon James Ting was a credit to the city.
He had enjoyed a run of success buying and reviving down-at-heel consumer brands. Through his locally listed vehicle Akai Holdings, the slight-framed, bespectacled entrepreneur sat astride a global web of companies. At its peak, Akai had 160 subsidiaries including America’s Singer Sewing Machines and Japan’s Akai Electric.
Then in 2000, Akai collapsed. It was wound up by its banks, owing creditors US$1 billion. Ting, a colourful big spender who once reportedly rode into an investor meeting in Rome on a chariot, fled his US$5 million Shek O mansion, leaving his Rolls-Royce parked on the driveway, and disappeared.
Later this month, the scandal of Hong Kong’s biggest corporate collapse will blow open again.
Akai’s liquidator, Borrelli Walsh, will sue the failed firm’s former auditor, Ernst & Young Hong Kong, for up to US$1 billion in a six-month High Court case set for hearing from September 15.
The claim, which EY Hong Kong refutes, is that the audit firm negligently failed to spot goings-on at Akai that led to its collapse.
Ting is not on trial. Police found him in Macau in 2003. He was imprisoned for false accounting in 2005. A year later, he walked free, his conviction having been overturned because of errors in the prosecution’s case.
Borrelli Walsh’s civil case, pieced together over almost 10 years of forensic examination of Akai’s books and records, will go much further than Ting’s criminal trial.
The liquidators will claim EY Hong Kong negligently failed to spot what they allege was a grand-scale theft of Akai’s cash by Ting.
Borrelli Walsh will directly accuse the failed entrepreneur of plundering US$800 million from Akai, something the police never managed to prove in the criminal courts.
According to details that have surfaced in pre-trial hearings, Borrelli Walsh will argue that Ting set up a fake bank account and a series of fake deals to steal cash and assets from Akai between 1997 and 1999. The liquidators claim EY Hong Kong should have spotted the alleged thefts from the start and prevented them.
Legal experts familiar with the case estimated that if EY Hong Kong loses, the accounting firm, one of the Big Four in the industry, will pay a total of US$2 billion in damages, interest and court costs. EY Hong Kong and Borrelli Walsh both declined to comment.
The audit firm has a strong defence. It is likely to say it is not an accountant’s job to police fraud. If Ting had stolen cash from Akai, he could have fraudulently covered this up to blindside his auditors, EY Hong Kong is likely to argue. And accountants can only work on the details their clients present to them.
Other professional services firms have fought off negligence claims in this way.
In July, British accountant Moore Stephens successfully defended a negligence case brought against it by the liquidators of its fraudulent former client.
The judge, in last month’s British High Court ruling, found Moore Stephens not liable for failing to uncover the long-running US$95 million fraud at Stone & Rolls, a commodity trader it audited from 1997 to 2001.
Akai and EY Hong Kong are both betting big on winning this case and have imported expensive legal superstars from London to argue in court for them. EY Hong Kong is fielding top-notch British barrister Mark Hapgood QC, who has successfully defended the accounting firm’s British arm against a huge £700 million (HK$8.87 billion) negligence claim brought by failed insurer Equitable Life in 2003. Lawyers say Hapgood charges HK$100,000 a day for court appearances. The liquidators have Leslie Kosmin QC, another heavyweight London barrister whose fees are similar to Hapgood’s.
The highlights of the mega-trial will be the liquidators’ accusations against Ting, whose presence will be felt daily in the courtroom, even though he is unlikely to attend hearings. The Shanghai-born former tycoon is believed to be lying low on the mainland, although Borrelli Walsh cannot find him.
Another Hong Kong tycoon whose name will come up repeatedly is Christopher Ho Wing-on, the majority owner of locally listed electronics company Grande Holdings.
Control of Akai and its subsidiaries was passed to Grande in 1999, before Akai was wound up.
The liquidators allege Ting and Ho stripped Akai of its assets, including its valuable trademark. When insolvency teams arrived on the scene after the winding-up order, they found Akai’s cupboards bare. Previously a global empire, Akai had no premises, no staff and virtually no money. A pre-trial judgment reveals there was just US$167,000 of cash left in the business.
Akai posted a US$1.8 billion loss in 1999, after slipping just US$100 million into the red the year before. The liquidators allege Ho and Ting arranged for Akai to transfer its operations to Grande when Ting’s empire was already insolvent. If true, this would be gross misconduct by Ho, the liquidators claim. Companies are not allowed to do deals when they are insolvent.
Borrelli Walsh is suing Ho and Grande in a parallel civil case in the Hong Kong High Court to try to recover Akai’s creditors’ cash. Ho and Grande refute the allegations.
The liquidators will also use the asset-stripping claims against EY Hong Kong in the negligence trial. EY provided corporate finance advice to Grande on its purchase of Akai, previous court rulings have found.
Borrelli Walsh and EY Hong Kong have squabbled, often in open court, about whether or not this case should proceed since 2002. The liquidators’ case and the audit firm’s defence are already well documented, having been aired in case management hearings and pre-trial judgments.
In open-court pre-trial hearings in December 2007 and July last year, Akai’s legal team revealed these accusations:
The liquidators claim that Ting, between 1997 and 1999, siphoned US$800 million cash from Akai’s bank accounts. To cover up the alleged theft, it is claimed, Ting inserted a fake Bankers Trust account into Akai’s ledger.
Then he made it look like cash deposits were going into the false account. Instead, the liquidators will allege, the money “deposited” into the false bank account went straight into Ting’s pocket.
Akai’s books showed money going into and leaving the Bankers Trust account. And because Ting needed to show that the money moving through the Bankers Trust account was not going to him, he then created a series of fake acquisitions and investments that Akai purportedly made through the false account.
Akai’s books showed money leaving the firm through the non-existent bank account and being spent on what seemed to be genuine deals.
One example of this surfaced in Ting’s criminal trial.
In 1998, Ting signed company papers authorising a HK$300 million investment in a US technology company named Micromain. Then in 2000, Akai wrote off its entire investment in Micromain as a loss, saying the shares had become worthless.
This was a plausible story during the dotcom boom and subsequent crash, when many companies made investments in technology firms that went bust.
But the liquidators found that the Micromain investment never happened. They passed this information to the Hong Kong police in 2001, and it became a central feature of Ting’s criminal trial.
Charles Sun, the founder of Micromain and the prosecution’s main witness, told the criminal court Akai had never invested in his firm. Sun and his wife were, and always had been, the only shareholders. Sun had agreed to sell half the business to Akai but he never received payment.
The Hong Kong appeal court said the jury failed to find Ting’s false Micromain investment was deliberately dishonest. The court overturned his false accounting conviction, saying the prosecution bungled its case.
But in the criminal appeal ruling, the judge took pains to tell the court he was certain the Micromain investment was fabricated.
The liquidators argue that EY Hong Kong should have questioned the fake deal. According to Borrelli Walsh, the auditors did not do this.
The liquidators’ claim goes further than this, however. They paint a picture of a far too cosy relationship between Ting and EY Hong Kong, which led the auditor not to listen when three other accounting firms, including two in Ernst & Young’s global network, sounded the alarm about suspicious goings-on at Akai.
Between 1992 and 1999, Akai and its television-making subsidiary, Kong Wah, were EYHK’s two largest audit clients.
Ernst & Young’s US and Canadian offices audited Ting’s Singer Sewing Machines business. They both resigned from their Singer roles in 1998, citing a “breakdown in trust” between their auditors and Ting.
Between 1996 and 1999, Ernst & Young’s German office, which audited a local subsidiary of Akai, told the accounting firm’s Hong Kong office of difficulties it had with Ting.
During this period, PricewaterhouseCoopers, the auditor of Akai’s Japanese subsidiary, Akai Electric, wrote to EY Hong Kong stating Ting needed to improve his company’s internal controls. PricewaterhouseCoopers also cited concerns about Ting’s integrity.
Despite all this, EY Hong Kong continued to rate Akai a “low risk” audit client, the liquidators’ barrister Kosmin said in the case management hearings.
Akai’s former shareholders, whose investments in Ting’s empire were wiped out in the insolvency, will undoubtedly want to hear the auditors explain that decision in court.
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