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May 29, 2017

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Former ROCCOC head sentenced to 7.5 years for breach of trust violations

TAIPEI, Taiwan -- The Taiwan High Court yesterday dealt heavy sentences to Chang Pen-tsao (張平沼), former chairman of the General Chamber of Commerce of the R.O.C. (ROCCOC, 商總), and his wife Chen Shu-chu (陳淑珠) for breach of trust violations as stipulated under the Securities and Exchange Act (證交法).

Chang and his associates are accused of participating in a breach of trust violation in 2005, when he served as the chairman of Taiwan International Investment Management (TIIM, 金鼎投信), a securities investment trust and consulting company he founded.

The Taiwan High Court stated that Chang and his associates are guilty of laying the burden of losses exceeding NT$130 million onto TIIM's brokerage arm headed by his wife Chen, as part of efforts to cover up mounting losses incurred by the parent company's fund product tied to structured notes.

Chang was sentenced to seven years and six months, while Chen received eight years and six months. In addition, Fung Gwan-bao (房冠寶), who served as the vice president of TIIM's brokerage arm received a sentence of eight years and four months. The case may still be appealed at the Taiwan Supreme Court as yesterday's sentencing was the result of the first trial at the high court. The high court stated that as the violation involved sums of money exceeding NT$100 million, minimum sentences of seven years were doled out, with Fung and Chen receiving sentences exceeding seven years on account of separate charges.

Fung and Chen were charged with misappropriating NT$250 million worth of company funds in 2006, during China Development Financial's (開發金) bid to acquire TIIM's brokerage arm. Fung and Chen used the misappropriated funds to purchase enough shares to secure enough seats on the company's board of directors to effectively retain managerial control of the company in the takeover bid.

Case Dates Back to Structured Note Scare of 2004

The case dates back to the structured note scare of 2004, following reports of exorbitant losses incurred by United Securities Investment Trust (聯合投信). The Financial Supervisory Commission (FSC) at the time tallied the total exposure to structured notes-based funds at around NT$2.4 trillion across the sector. In order to stave off anticipated impacts, the FSC ordered all financial institutions to liquidate all structured notes-related holdings by the end of 2005.

Concurrently, Chang discovered that TIIM was facing losses of NT$500 million to NT$600 million if the company unloaded its NT$8.56 billion worth of structured notes holdings. To cover up the losses, Chang instructed his associates to sell TIIM's structured notes holdings to five investment companies operated by members of his family, which were not equipped to absorb the high amount of unrealized losses. Chang also arranged repurchase agreements to have TIIM's brokerage arm buy back the beleaguered derivatives. As a result, TIIM's brokerage arm was compelled to take on a loss burden of NT$130 million.

Meanwhile, Chang's case is similar to the recent sentencing of Yuanta Financial Holding Co. (元大金控) founder Rudy Ma (馬志玲) and his wife, former Yuanta Securities Co. (元大證券) Chairwoman Judy Tu (杜麗莊) over attempts to cover up losses derived from structured notes.

With the approval of regulators, TIIM changed its registered corporate name in 2011 and again changed its name following its acquisition by AllianceBerstein in 2012.

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