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Judicial Reform

Former Philips Exec Fights the Strong Arm of the Law


Once a board member of Philips Electronics Taiwan, Y.C. Luo is now scrounging for cash to survive, after his assets were provisionally seized, an action that casts doubt on a legal system that may be guilty of overkill.



Former Philips Exec Fights the Strong Arm of the Law

By Yi-Shan Chen
From CommonWealth Magazine (vol. 414 )

In the middle of December 2008, the wife of former Philips Electronics Taiwan president and CEO Y.C. Luo paid a routine visit to her Mega International Commercial Bank branch at the foot of Yangmingshan to withdraw money. The bank teller blindsided her with some startling news. "Mrs. Luo, your account has been provisionally seized, so you can't make a withdrawal."

"I was shocked. Y.C. never had this kind of thing happen to him before. He has been law-abiding and disciplined his whole life. He never goes to bars or nightclubs or indulges in after-dinner entertainments. I never thought that this kind of thing would happen," said Mrs. Luo in an interview she and her husband gave CommonWealth Magazine on Jan. 6, still obviously perturbed by her husband's ordeal.

Only after frantically asking others did Y.C. Luo realize his predicament traced back to his role five years ago as an outside board member of a company, Global Sun Technology, that falsified its financial statements. The Securities and Futures Investors Protection Center (SFIPC) believes the cooked books cost shareholders money and has filed a civil suit on their behalf against Luo and the company's 13 other board members at the time.

To ensure the board members would be able to meet compensation claims, the SFIPC filed a petition with the Taipei District Court to provisionally seize the board members' assets, a request the court approved. Y.C. Luo had no knowledge of the process as it was being conducted.

Little did Luo know that this was just the opening scene of a horror movie in which he was playing a starring role. One afternoon, a man introducing himself as a clerk of the Taiwan District Court working in cooperation with the SFIPC, appeared at Luo's front door and announced his intention to seal the house. Luo, a native Taiwanese who had been a board member of Philips Electronics N.V., was furious.

"I forbid you to seal my house. I will only accept a writ of execution sent by double-registered mail," he snapped.

Starting on Dec. 23, the Luo household began receiving a writ of execution from the Taipei District Court on a nearly daily basis, declaring that his bank accounts, home, book royalties, and compensation as a board member of Feng Chia University and Delta Electronics would all be provisionally seized. Even more daunting, the same writs of execution had been delivered two weeks earlier to Delta, Feng Chia University, Mega Bank and Luo's publisher, making him the last person to know about the court action. The court defends the practice on the grounds that prior knowledge of a provisional seizure would enable defendants to dispose of their assets.

"My reputation has been destroyed," the 69-year-old Luo says angrily. Because the court seized the one bank account he has in Taiwan, he now relies on others to lend him cash to survive.

With a bitter laugh, Luo recounts how he even overheard his maid quietly telling the gardener, "It seems like Mr. Luo's family is in trouble," but was left with no way to defend himself.

Doubt No. 1: Can Board Members Uncover Falsified Accounts?

Luo was sued because the financial statements compiled by Global Sun Technology's board for the first half of 2003 were untruthful. The suit alleges that the falsified statements, issued in August 2003, convinced investors to buy Global Sun Technology shares that later plunged in value after the company's annual report, released in April 2004, revealed problems in the company's finances.

According to a brief obtained from the Ministry of Economic Affairs' Department of Commerce by the SFIPC, Luo served on Global Sun Technology's board from May 29, 2002 to June 15, 2004. The brief acknowledges that Luo tendered his resignation at the beginning of 2004, sensing that the company's management was inappropriately paying too much attention to the firm's share price.

But as a favor to the venture capital company he was representing on the board, he stayed on until mid-June. Local statutes stipulate that the board of directors is responsible for compiling the company's financial statements, and the SFIPC was therefore seeking compensation from Luo, among others.

"The indictment says these were accounts put together by the board of directors. The problem is, is it really possible for the board to determine whether the financial statements are accurate or not?" Luo explains in voicing one of his main doubts about the case.

Financial statements are generally first compiled by the company internally and then audited by a certified professional accountant. Once the audited statements have been reviewed and approved by the board's supervisors, they are sent to the board of directors for final certification. Luo argues that the board is only capable of confirming that proper legal procedures were followed in compiling the statements and that no steps were omitted. He wonders how he, as the board member responsible for technical and commercial strategy, could have been able to discern that the company's financial statements were falsified.

In response to Luo's bewilderment, director of the SFIPC's legal department Michael Shun-Sheng Chao stresses that the board of directors is responsible for a company's financial statements. When the statements are found to have been falsified, all board directors, as a matter of law, share joint responsibility. Chao also indicated that compared to other countries, the responsibilities of local board directors and supervisors under Taiwan's legal code are not particularly stringent.

The SFIPC treats all board members equally when filing suit to seek compensation from board directors and supervisors, "and there are different opinions on whether that has a ‘chilling effect' on people's desire to become board directors," Chao says. "From the investors' point of view, directors and supervisors are compensated for serving on the board to oversee the management of the company on behalf of shareholders. If they don't fulfill their responsibilities, it will lead to even greater shareholder losses."

Doubt No. 2: The Accused Has No Say in Asset Seizures

Whether the legal definition of an outside director's responsibility is too exacting is a question of law. But what angered Luo even more is that he was left completely out of the loop in the process that resulted in the freezing of his assets and the tarnishing of his reputation.

Luo said that based on his understanding, the SFIPC determined that Global Sun Technology falsified its financial statements and petitioned the court for a provisional seizure based on a criminal court ruling. Yet he was completely unaware of what was happening throughout the entire process and did not receive a copy of the court's provisional seizure ruling. In other words, his assets had been frozen without his being informed of the court's decision.

Particularly absurd to Luo is that the writs of execution were carried out before he was notified. With every court order, another asset was frozen, but Luo never received a detailed statement of the assets the court was impounding.

"How can I know what's going on if you don't give me a statement?" he complains. "In the future, will my assets and property be fully restored? The entire process was not at all transparent."

Even more absurd, Luo says, is something he only found out about after his lawyer began inquiring into the case. His lawyer discovered that although the SFIPC is seeking only NT$13 million in total compensation, it asked that the assets of all 14 board members be provisionally seized. Yet the value of Luo's seized assets alone exceeded NT$13 million.

"The law says that judges should determine appropriate amounts," Luo says after sifting through legal statutes. But having not received a copy of the court's ruling, he had no idea of the standards on which the judge based his ruling. "The feeling I've gotten from the entire process is that I don't know how the court reviewed the case, and it didn't notify me during its review. You can, in fact, be concerned that I will dispose of my assets, but you have to let me participate."

The SFIPC's Chao disagrees.

"Provisional seizures are confidential in nature. They're supposed to be handled quickly and take people by surprise," he retorts.

Chao also asserts that ways exist for individuals to fight provisional seizures, such as filing an appeal with the court. But one member of the SFIPC's board who spoke on condition of anonymity acknowledged that going through the legal system to seek redress has plenty of pitfalls.

"In practice, the process can drag on for a long time, and if all of your assets have been frozen, you won't be able to put up the financial guarantee needed to file the appeal. So practically speaking, it's difficult," the SFIPC board member says.

This board member also indicates that in previous cases where board chairpersons have deliberately embezzled the assets of their enterprises, they generally began disposing of their assets the day they started falsifying the company's accounts. In those cases, provisional seizures only ended up hurting unlucky board members like Y.C. Luo.

"It's unfortunate that to bring criminals to justice, Taiwan is too often guilty of killing the innocent," the source concedes.

Lack of Transparency Leads to Problems

During his interview with CommonWealth Magazine, Luo repeatedly stressed that he would take responsibility for resolving his own case, but that was not the main issue. The real concern, he says, is that Taiwan's legal system essentially treats board members as thieves and lacks transparency when judging them. Such a system will only deter individuals from becoming outside board directors, he contends.

"All the problem areas are those where there is no transparency," Luo says.

He believes that Taiwan's judiciary is growing increasingly independent, but if the process lacks transparency, it will go from one extreme to another, where judges are given complete freedom to determine cases based on their own subjective thinking. Making the system more transparent, Luo says, is the responsibility of the president of the Judicial Yuan, the country's judicial branch of government, and the justices on Taiwan's Constitutional Court.

"You people at the highest level have to take action," he says. "If laws are outdated, then amendments should be proposed. If you feel things under you are not normal, then say something. Otherwise, what's the point of having a Judicial Yuan president and Constitutional Court justices?"

Having people who only passively obey the law rather than actively solve problems is of even greater concern to Luo.

In the second half of December, the former CEO of Philips Electronics Taiwan discussed his predicament with friends, some of whom were incumbent Cabinet ministers and other officials in positions of authority, to see if anything could be done. Those officials contacted refused to get involved because it was a legal matter, and they were not willing to look more deeply into the question of whether existing law was deterring talented individuals from becoming board directors.

"This is really scary. Taiwanese society is no longer interested in right and wrong. It is only concerned with looking for short-term solutions to problems," Luo says.

As a board director, Y.C. Luo should bear the legal responsibility required of a member of a corporate board for not recognizing the potential perils of his position. No matter how independent the legal system is, however, when the law is enforced in an extremely crude manner, it not only makes it hard in practice to punish slippery criminals, but also takes an immeasurable toll on the country's future.

Translated from the Chinese by Brian Kennedy

Chinese Version: 羅益強驚魂記