Corporate Integrity, Legally Speaking HKUST, September 12, 2014

1. Corporate Integrity, Legally SpeakingHKUST, September 12, 2014 Timothy Li 李焕庭Partner

2. What is corporate integrity? What?

3. What is corporate integrity? • Be truthful (walk the talk & talk the walk): no misleading statement and no misleading omission • Industry best practice • Law abiding • Ethical, moral

4. What is corporate integrity? Corporate integrity dictates relationship with: • Shareholders, investors, management, employees (within company) • Suppliers, customers, contractors, service providers, partners (outside company) • Competitors (opposite company) • Regulators (above company) • Community, environment (around company)

5. Why corporate integrity? Why?

6. Why corporate integrity? To be good rather than evil • Good: moral, ethical, respect for human decency, profit maximization with social responsibility • Evil: greedy, selfish, violation of human decency, ill-gotten gains

7. Why corporate integrity? Who defines good and evil? • Law • Social contract • Market competition • Dad or mom told me • Bible says so • Confucius teachings • Human conscience

8. Case #1: Investment • If you invest with me, I’ll pay you 50% profit within 45 days or 100% profit within 90 days

9. Case #1: Ponzi investment • To disclose or not to disclose, that is the question?

10. Case #1: Ponzi investment • Charles Ponzi: Born 1882 in Italy and died 1949 at 66 in Brazil, inventor of Ponzi Scheme • On Nov 15, 1903, he arrived at Boston aboard S.S. Vancouver with US$2.50 in his pocket, having gambled away the rest of his life savings during voyage • Ponzi later told New York Times: “I landed in this country with $2.50 in cash and $1 million in hopes and those hopes never left me”

11. Case #1: Ponzi investment • Ponzi had no profit-making business, but simply took money from people, and paid such profits out of pool of money collected • Robbery under pretense

12. Case #2: Investment • Investments with 10% profit on annual basis, for past 17 years, invested by Hollywood director, Steven Spielberg, and Abu Dhabi Investment Authority

13. Case #2: Madoff investment • Bernard Madoff, former NASDAQ chairman and chairman of Madoff Investment Securities LLC until his arrest on Dec 11, 2008 • US$65 billion Ponzi (pyramid) scheme since 1980s; pled guilty to 11 felony counts; sentenced to 150 years imprisonment in Jun 2009 and forfeiture of US$17.2 billion • For every $1 billion in his Ponzi scheme, with 5% payout rule, Madoff was effectively on the hook for about $50 million in withdrawals a year and would last 20 years without making any real investments • Fraud due to lack of disclosure to investors He admitted in his guilty plea that his scheme essentially was to deposit client money into a bank account and, upon client request, to withdraw such deposits to pay the requested funds, while he had free use of money in a lavish way

14. Case #3: Lehman investment • Lehman mini-bonds: Hong Kong investors lost US$2.5 billion on structured products offered by Lehman Brothers, which collapsed in 2008, representing recovery of 80% of their original investments from underlying collateral • Can streets help?

15. Corporate integrity: a disclosure issue? • U.S. securities law • No material misleading statements • No material omission • Materiality defined: Reasonable investors would regard as material in reaching their investment decisions • Can mandated disclosure cure unethical behavior?

16. Corporate integrity: a disclosure issue? • Hong Kong securities law • Directors collectively and individually accept full responsibility for information contained in prospectus • Having made all reasonable enquiries, to the best knowledge and belief of directors, (a) prospectus contains no untrue statement and (b) there are no other facts, the omission of which would, in the context of the issue and offering, make any statement in prospectus misleading in any material respect • Can personal liability deter fraud?

17. Multiple-choice question #1

18. Case #4: Ebola (WHO data) • Ebola breakout in West Africa killing 50% and 60% of people infected • Up to Sep 5, 2014, Ebola deaths 2,105 (probable, confirmed and suspected) with 1,089 in Liberia, 517 in Guinea, 491 in Sierra Leone, and 8 in Nigeria • Fruit bats considered to be the natural host of the Ebola virus • Several vaccines are being tested, but none are available for clinical use • No specific treatment is available • New drug therapies are being evaluated

19. Corporate integrity: a moral issue? • WHO ruled in August 2014 that untested drugs can be used to treat patients in light of the scale of the current outbreak • Experimental drug ZMapp has been used to treat several people who contracted Ebola: • Two US aid workers and a Briton have recovered • A Liberian doctor and a Spanish priest have died • When would you use incompletely tested drug on human patients?

20. Case #5: Medicine • You are sales director of GlaxoSmithKline in China • To promote GSK products as “drugs of choice” for patients, it is suggested you “pay” professionals in medical, hospital and pharmaceutical industry • To avoid direct involvement, it is suggested a travel agent be used to organize overseas trips for symposiums, with payouts to invited professionals • To defray such costs, it is suggested you increase the price for drugs sold in China • Would you do it?

21. Corporate integrity: a criminal law issue? • GSK is under criminal investigation in China for “price-fixing” and bribery • GSK is similarly investigated in US and UK for criminal offences • Is criminal law sufficient deterrent?

22. Corporate integrity: a corporate governance issue? • U.S. Foreign Corrupt Practices Act (1977): prohibits issuers from bribing officials, directly or indirectly, in order to obtain commercial interests or advantages • U.K. Bribery Act (2010): criminal offence to (i) offer, give or promise to give, or (ii) request, accept or agree to accept: “financial or other advantage” in exchange for “improperly” performing “any function of a public nature, any activity connected with a business, trade or profession, any activity performed in the course of a person's employment, or any activity performed by or on behalf of a body of persons whether corporate or unincorporated,” in both private and public industries, whether performed in or outside UK • China: has very tough anti-bribery laws, and their enforcement is visibly increasing lately

23. Case #6: Health Care • You run a hospital, and has been subject to abuses from pharma companies similar to GSK • The government wants to enter into corporate integrity agreements with you, failing which you will be excluded from participation in government health care programs • Do you think it is a good idea?

24. Corporate integrity: a contractual issue? • U.S. Office of Inspector General (OIG) negotiates corporate integrity agreements with health care providers, in order for OIG not to seek their exclusion from participation in U.S. Federal health care programs: • to hire compliance officer/appoint compliance committee • to develop written standards and policies • to implement comprehensive employee training program • to retain independent review organization to conduct annual reviews • To provide annual reports to OIG

25. Corporate integrity: a contractual issue? • December 2012, HSBC agreed to pay $1.92 billion as fine for transgressions involving money laundering • HSBC signed anti-money laundering agreement with U.S. Department of Justice (DOJ) • DOJ agreed to remedial actions for HSBC to avoid criminal indictment by DOJ • Change HSBC North America leadership team • Increase compliance resources, with personnel in compliance from 92 employees and 25 consultants in 2010 to 880 employees and 267 consultants as of May 2012 • “Claw back” compensation from senior executives • Separate compliance department from legal department, with direct reporting lines to the board • Exit 109 high risk business lines

26. Case #7: Competition • People take for granted that competition is good, and it fairly allocates resources • You run a toys factory, and want to compete as a supplier to McDonald’s by beating others with cheap costs • While adult workers overrun your cost structure, teenage children, as cheap as US$3 for 16 hours a day, can beat the competition • Would you use child labor?

27. Corporate integrity: a competition issue? • As reported, Snoopy, Winnie the Pooh, and Hello Kitty toys sold in Hong Kong with McDonald's meals were made at China sweatshops with illegal child labor as young as 14, working 16 hours a day for US$3 • Is there a bottom line for competition? The bottom is corporate integrity, morality and ethics

28. Case #8: Consumer products • You run a baby milk formula factory • If you produce fake milk powder formula with little nutritional value, you can make a lot more money • Would you do it?

29. Corporate integrity: a conscience issue? • 2004 China baby formula scandal: At least 13 infants reported dead due to fake milk powder formula with little nutritional value, produced by 141 factories across China

30. Corporate integrity: a conscience issue? • 2008 China milk scandal: milk and infant formula adulterated with melamine, an industrial chemical, causing 860 babies hospitalized and 6 dying from kidney failures and kidney damage • 2 executed, 1 suspended death penalty, 3 life imprisonment, 2 fifteen-year jail, 7 local officials and 1 central government quality control official fired

31. Case #9: Honorary awards • You graduated summa cum laude, and were presented by a corporate sponsor with a “pure gold” gadget • 20 years later, you were told that it was a fake • How do you feel as recipient, or as corporate sponsor?

32. Corporate integrity: what a spur-of-moment issue? • Jianlibao: Media reported this soft-drink maker gave a 200-gram “pure gold” can to each Chinese champion of 1992 Olympics in Barcelona and, Zhuang Xiaoyan (庄晓岩), judo champion, was told in Nov 2011 by a gold shop that it was a fake, worth Rmb 50 (rather than US$10k now); altogether 18 Barcelona champions received Jianlibao gilded cans at the Great Hall of the People in 1992 • Dishonest honoring?

33. Corporate integrity: a confidentiality issue? • Olympus corporate scandal 20 years in hiding: To defer posting losses in securities investments back in 1980s, Olympus engaged in transactions, including US$2.2 billion purchase of U.K. medical equipment maker, Gyrus, involving a massive advisory fee of US$687 million, forced into the open in 2011 by ex-CEO, Michael Woodford, a Briton • Bible: “For there is nothing hidden that will not be disclosed, and nothing concealed that will not be known or brought out into the open” (Luke 8:17); • Chinese idiom: 要得人不知，除非己莫为

34. Some scary data • 70% of the senior executives in Asia feel most vulnerable to procurement and marketing fraud • 56% of the internal auditors in Asia regard the senior management fraud as the most complicated investigation • In 2012, China disclosed 660,000 officials have been punished for corruption over past 5 years, including Bo Xilai

35. Words of wisdom • My mentor partner: Do it, if you are not shameful of coverage by Wall Street Journal on front page • Jesus Christ (to do): In everything, do to others what you would have them do to you 无论何事，你们愿意人怎样待你们，你们也要怎样待人 • Confucius (not to do): Do not do unto others what you would not do unto yourself 己所不欲勿施于人

36. Multiple-choice question #2

37. Q&A