Strategy

Business fraud: Two bad pennies

A computer deal gone bad. One man's long and expensive fight to get his money back.

Entrepreneur John Hui has been trying for more than a decade to recover US$10 million lost from a computer deal gone bad. To date, he’s spent about $5 million in legal fees in an attempt to force Jay and Christina Chiang of Richmond Hill, Ont., to pay up. The Court of Appeal for Ontario calls the case one of the most contemptuous it has ever seen. But by using more than 10 aliases and moving money across continents to family members outside the court’s jurisdiction, the Chiangs haven’t paid anything. They claim to be bankrupt, despite owning a mansion and two luxury cars, and sending their two sons through Upper Canada College, where tuition and boarding costs about $50,000 a year.

Hui, for one, doesn’t believe the Chiangs are telling the truth. In January, a private investigator he hired found a trading account worth US$5 million while rooting through the Chiangs’ garbage. The court system also has its doubts. The Chiangs have been held in contempt of court for refusing to show how much money they have and for not providing a list of their assets.

Hui’s fight is an important one for Canada because it raises the question of whether people can continue to live the high life while claiming bankruptcy and ignoring their debts. Canada was dubbed the Wild West in 2004 by David Dodge, then the Bank of Canada governor, because of its lax enforcement of securities rules and regulations, and this particular case sparks a worry that the entire legal system could be further undermined if court orders can be repeatedly ignored with no fear of real penalties.

And since the total number of bankruptcies across Canada increased last year by more than 12% — to 96,774 from 86,140 in 2007 — more court orders like the ones the Chiangs have received are likely to be issued. Creditors have some protection since one purpose of Canada’s Bankruptcy and Insolvency Act is to equitably distribute assets to creditors. But, warns bankruptcy lawyer Aubrey Kauffman, things don’t always work that way. If it’s not a straightforward bankruptcy case, where the trustee can allocate assets to debtors, it can be tough to get anything.

“If you have a debtor who is out of control, who will do anything, say anything, who will disregard civilized convention, it is very difficult for the system to deal with those people in an economic way,’’ says Kauffman, a partner with Fasken Martineau DuMoulin LLP in Toronto with 30 years of experience in bankruptcy and insolvency.

Few Canadians have likely heard of the Chiangs, but most certainly know Peter Pocklington, who in March was charged by the FBI for submitting false bankruptcy declarations in the United States. The former owner of the Edmonton Oilers faces a jail sentence of up to 10 years after being accused of failing to disclose two bank accounts and the contents of two storage units when he filed for bankruptcy last August, claiming liabilities of US$19.6 million and a net worth of US$2,900. Canada’s Bankruptcy and Insolvency Act carries a similar provision to the one facing Pocklington, whereby a false claim carries a maximum penalty of $10,000 and/or three years in jail. But, as Hui says, “Unless [the Chiangs] were as famous as Pocklington, we wouldn’t have a chance for the criminal side of the law to lift a finger.”

Unfortunately, Hui’s cynicism comes from experience, and it comes with an important lesson for the rest of us: always complete your due diligence on prospective customers, suppliers and partners before you deal with them.

His tangled case, which has involved courts in five countries, could have been avoided, if he had listened to his gut in the 1990s and hadn’t struck a deal with a computer distribution business owned by Jay and his brother Julius. But that just adds further salt in the wound. The reality is that after a friend vouched for the pair, Hui’s company at the time, Korea Data Systems Co., supplied the Chiang brothers more than $10 million worth of computer monitors in 1993, a deal for which Hui has never received a single penny in return.

Hui first tried to resolve his dispute with the Chiang brothers by himself. When that failed, he turned to the courts. In 1998, a California court ruled Hui was entitled to US$9.7 million from the Chiang brothers. In response, the brothers promptly filed for bankruptcy. Jay, a.k.a. Jay Tien Chiang, and Tienchieh Chiang, now 46, filed in Ontario in 1998, and Julius a year later in California. Hui, who was raised in Hong Kong, completed his MBA at Hamilton’s McMaster University and eventually became something of a serial tech entrepreneur in California, didn’t accept the bankruptcy argument. He was the largest supplier of computer equipment to the Chiang brothers, who had built up a computer distribution business, Aamazing Technologies Inc., from zero to US$40 million in sales in less than five years in the early 1990s. Hui, who won’t say how much he is worth (news reports show he sold one of his startups, eMachines Inc., for US$266 million in 2004), felt the brothers had the means to pay up, and so he vowed to continue his fight.

Christina Chiang, 49, who was an actress and singer in Taiwan, was named in the litigation when a California judge ruled she had helped her husband hide money from Hui in 2004. In Ontario, Christina, also known as Suh Mei Tasi, Su-Mei Chiang and five other aliases, has been part of the court proceedings since 1999, a year after Hui hired a legal team from Borden Ladner Gervais LLP. They told him right from the start he would be unlikely to recover much. But Hui didn’t care. He couldn’t let someone get away with ripping him off while they enjoyed the spoils of his riches. He’s chased the Chiangs through courts in Canada, the U.S., Taiwan, Singapore and Hong Kong.

Jay and Christina have made it almost impossible for Hui to make any real progress. For instance, in October 1999 the couple was ordered to attend court, but they didn’t make it, claiming Christina suffered an injury on her way in. The injury didn’t prevent her from placing a mortgage on the family home at the time of the injury, nor from wiring $600,000 to her father-in-law’s account in Taiwan six days later. On separate occasions, Jay under oath couldn’t remember if he had purchased a Porsche and whether he was a signatory on a bank account. And that’s despite being described in 2002 by someone who did business with him as “bright and accomplished,” and someone who took “a more studied and intellectual approach to the business world.”

Hui’s case finally started to gain some traction in September 2000 when he was granted two legal orders that his lawyer, Aaron Blumenfeld, says could help others fighting bankruptcy cases. The courts handed down an Anton Piller order, essentially the right to search the Chiang mansion on 10 Cortina Court in a wealthy enclave in Richmond Hill, Ont., just north of Toronto. Despite claiming they had no income, records were found of a telecom business that generated between $15 and $20 million. The business disappeared at the time of the order. And, despite saying they had bank accounts at just one branch, evidence of 80 bank accounts and statements from multiple financial institutions were found. No wonder then that the supposedly bankrupt couple who claimed not to have an income could afford a mansion, two luxury cars and holidays to Aruba and Asia.

At the same time, the courts also granted a Mareva order, which froze the worldwide assets of the Chiangs and those of Jay’s parents, Christina’s mother and others related to the couple. On the day that order was put in place, Christina flew to Singapore to transfer $800,000 from her account there to her mother’s account in Taiwan. It was a trip she initially didn’t admit to taking when questioned under oath.

But the civil proceedings didn’t get Hui his money back, because the Chiangs stubbornly refused to provide information about their money, property and businesses that might ultimately explain the cause of Jay’s bankruptcy.

After the Chiangs had been found in contempt of court in 2003, Ontario Justice James Farley tried to persuade the couple to follow court orders by threatening to send them to jail for a week. By 2005, they still hadn’t purged their contempt nor were they in jail. When questioned about the prospect of a week in jail under cross-examination in 2007, Jay replied that his family thought the jail term was a joke.

In May 2007, Justice Joan Lax noted the Chiangs had been given many chances to follow court orders but hadn’t. Indeed, they had ignored six court orders and continued to indulge in a luxurious lifestyle. Their claim that their parents were paying for their lifestyle was discredited by the courts, which had no proof that the family was independently wealthy. Instead, about US$10 million of the Chiangs’ money has been transferred to family members who live outside the court’s jurisdiction. Fed up, Justice Lax sentenced Jay to a year in jail and Christina to eight months for contempt. Both were escorted out of the courtroom by police officers, Jay in handcuffs.

Lax’s biting and straight-to-the-point judgment brought tears to Hui’s eyes as he read it. “The overwhelming evidence of their dishonesty demonstrated, among other things, that they had lied during examinations, sworn false affidavits, transferred large sums of money from their accounts, provided no meaningful disclosure, dissipated assets by gambling, by unauthorized use of credit cards for travel, and by removal of contents of safety deposit boxes.”

Lax emphasized that although Canadian courts have traditionally been lenient on contempt cases and a jail sentence was rare for contempt, it was necessary in this particular case. “The courts do not have an army to enforce their orders. If large numbers of litigants were to disobey court orders, the court system would soon break down.” Lax also ordered the Chiangs to surrender their Canadian passports.

But after five months in jail, Jay received parole for good behaviour in September 2007. Parole is expected for criminal convictions, but it is not granted for a civil conviction of contempt where jail is used to simultaneously punish and encourage compliance. It was later found that the parole board acted on incomplete information.

With Jay out of jail, the Chiangs brought a number of complaints to the Court of Appeal for Ontario, a move that largely backfired. The judges’ panel ruled in January 2009 that the case was “one of the worst cases of civil contempt to come before this court” and that the Chiangs’ “long and unenviable track record of deliberately disobeying court orders” was done solely to frustrate Hui’s attempt to collect legitimately owed debts. The panel also concluded that the maximum sentence the Chiangs could serve was the one-week sentence Justice Farley originally threatened in 2003 but never imposed. Farley who retired in 2006 and now works at McCarthy Tétrault LLP, would not comment on the case.

Tom Curry, counsel for the Chiangs at Lenczner Slaght LLP, says the panel’s decision vindicated the Chiangs’ legal position, but admits there were a number of other issues in the appeal that didn’t go their way. The panel added that after the week-long sentence was served, a longer sentence could be put in place if the couple continued to be in contempt. “Their contempt of court remains shocking and disgraceful,” the panel stated. Christina finished her one-week sentence in March.

For Hui, the shortened jail sentence was one of the most frustrating events in his ongoing battle, and he attributes his perseverance to his principles. For him, justice will be reached if he collects even a small percentage of the money owed. He knows he can afford to fight while others in similar circumstances can’t, so he continues to pour money into the case on principle.

He recently added a private investigator to his payroll. The investigator scoured through the Chiangs’ curbside garbage in January 2009 and found shredded documents. The investigator pieced the evidence together and found an E-Trade account with US$5 million in it as of July 2008, and a $3-million balance as of November 2008. “Do you know why Jay is so sloppy in discarding his garbage?” asks Hui. “It is because nobody after 15 years still spends that kind of money to go over someone’s refuse. You and I cannot do it, because you need a PI to declare it to the judge that the garbage is found outside of his house belonging to Jay. It costs money, and it is billed by the hour.”

The E-Trade account wasn’t registered to either Chiang, but to parties who were related to Jay, including a business partner who indirectly paid him $5,000 a month to take companies public. The majority of the trades on the E-Trade account were related to these companies, which the supposedly unemployed Jay had helped take public.

Lax concluded that the account was beneficially owned and controlled by Jay and, by using a series of court orders, Hui was able to receive an order to freeze the E-Trade account and its related HSBC bank account in Hong Kong. But that wasn’t Hui’s only progress against the couple this year. Hui found out that the Chiangs had missed some mortgage payments on their 10,000-square-foot mansion and managed to take over their mortgage by assuming it from Toronto-Dominion Bank, even though it cost him about $500,000. “It was a symbol,” says Hui. “They say a man’s home is his castle, and we took his away.”

In March, the Chiangs were evicted under court order. A surveillance team hired by Hui was stationed outside the mansion while the family packed up its belongings and left. What Hui found when he took possession was shocking. Swastikas were carved into the oak study floor and drawn on the wall of a child’s bedroom, carpets were doused with gooey green liquid, and the marble floors were cracked. The damage continued outside the house, including broken stucco in several places. Chiangs’ lawyer Curry says he’s unaware of who or what may have caused damage to the house. Despite a preliminary repair estimate of at least $150,000, Hui hopes to sell the house. The listing agent expects it will sell for between $1.2 and $1.4 million, comparable with other homes in the neighbourhood.

Kauffman, for one, hasn’t stopped believing in the Bankruptcy and Insolvency Act, but he knows its limitations. “To a certain extent, the system works,” he says. “But with a scofflaw, the system does have difficulty.” In his 30 years of practice, Kauffman says a case of contempt is extremely rare. However, he warns anyone contemplating imitating the Chiangs that they eventually will lose everything and end up in jail.

Curry calls the case a very unusual and difficult one. He says that the case is still at a very preliminary stage, despite the number of years that have passed since it started. “It tests everyone’s ability, the law’s ability, to bring a sense of order to the situation,” he says. “It’s probably not satisfactory from anyone’s perspective. Now everyone waits to see what the next proceeding will bring. Will the [evidence provided by the Chiangs] be considered sufficient, or whether it’s a game of snakes and ladders and back to the bottom for another period of incarceration.”

Surprisingly, Hui can still laugh about the situation. “If you don’t laugh about it, you can stress to death about it.” He tells struggling business owners that it’s all right to legitimately claim bankruptcy. “It’s OK to make a mistake in business and not have the money to pay people back,” says Hui. “People will do business with you again. But what the Chiangs did was wrong. No one would do business with them again.”

His most frustrating experience was when the courts gave the Chiangs access to hundreds of thousands of dollars frozen in the Mareva order to pay their legal bills. He believes that money should have gone directly to him. He is also frustrated with not being able to pursue the criminal side of the case in either Canada or south of the border. In the U.S., the FBI and the IRS brushed him off when he tried to raise a criminal angle in his battle with Julius Chiang. Hui says his battle in the U.S. against Julius is moving slower than the one against Jay and Christina in Canada because he still hasn’t been able to establish that Julius has assets. Neither a house search nor an asset freeze has been allowed. Last year, Julius and family members, including Christina, but not Jay, failed in their appeal of a California court decision that they had to pay Hui US$5 million in damages for their conspiracy in moving around assets to hide them.

“I am hoping that some Crown officials will take notice and investigate Jay in bankruptcy fraud, tax evasion, insider trading, perjury, money laundering, hate crime and, of course, contempt,” he says. “Believe me, we have and we would try anything to get justice and restore people’s faith in the judicial system.”