The 2006 Asian Roundtable on Corporate Governance Implementation

The 2006 Asian Roundtable on Corporate Governance Implementation and Enforcement of Corporate Governance Rules Lawrence Liu Executive Vice President and Chief Strategies Officer, China Development Financial Holding Corporation Chinese Taipei Day 1 – Part III Procomp：A Case in Chinese Taipei Bangkok, Thailand 14 -15 September 2006

2006 ARCG Contents w Background w " Facts" of Procomp Case w Legal Liabilities of Procomp Case w Enforcement of Procomp Case w Securities and Futures Investors Protection Center w Procomp’s Impact on Corporate Governance w Appendix 1

2006 ARCG Background - 1 w Timing Ø High-tech industry boom in the 90 s and electronics stocks reigned Ø Post-crisis " landmine" cases in traditional sectors in Chinese Taipei Ø Regulations inadequate n Ø No Investors Protection Act and information disclosure limited Enron case occurred in 2001 2

2006 ARCG Background - 2 w Procomop Case Ø 12/2003: material downward adjustment in its financial forecast Ø 6/2004: applied for reorganization after defaulting on NT$3. 07 billion (US$96 mm) DCB Ø 2 H/2004: Other High-Tech " landmine" cases : such as Infodisc Technology, Summit Computer Technology, etc. Wrongful activity Date on which SFIPC filed civil suit No. of plaintiffs Claims (in NT$ mm/US$ mm) 06/2004 Misrepresentations in financial statements Misrepresentations prospectus 11/2004 10, 056 5, 825 ($182) Infodisc Tech. 09/2004 Misrepresentations in financial statements Insider Trading 09/2005 10, 498 3, 050 ($95) Summit Computer Tech. 09/2004 Misrepresentations in financial statements 02/2006 1, 590 364 Company name Event time Procomp ($11) 3

2006 ARCG " Facts" of Procomp Case - 1 w The Company Ø Ø Ø Ø Products : Motherboards, IA products, semiconductor such as Ga. As EPI-wafers Chairperson : Ms. Sophie Yeh Her husband : " Financial Iacocca in Chinese Taipei" Mr. Walter Lin, former Chairman of Waterland Financial Holdings 12/1999 : IPO with price of NT$85. 5 (US$2. 7)/share (P/E=28) The highest trading price : NT$368 (US$11. 5)/share (P/E=82) In 2000 & 2001 : Made NT$5. 9 billion (US$188 mm) cash injection In 2001 : Issued NT$ 3. 5 billion (US$109 mm) DCB In 2003 : Issued NT$1. 7 billion (US$50 mm) OCB Totally raised NT$ 11. 1 billion (US$ 347 mm) funds from capital markets 4

2006 ARCG " Facts" of Procomp Case - 2 w Trick I – 1. 1 Ø Repeated fabricated sales cycle Procomp Sold back to Procomp Domestic Coconspirators / Suppliers ‧A ‧B ‧C ‧D ‧E ‧F ‧G False Sales Repacked and exported commodities Buyers (Dummy companies in HK. Representative was Procomp’s Employee) ‧Marksman ‧Emperor ‧Farstream ‧Kingdom ‧Fasson 5

2006 ARCG " Facts" of Procomp Case - 3 w Trick I – 1. 2 ØFabricated n deals to window dress financial statements Created NT$16 billion (US$504 mm) fabricated A/R and NT$5. 6 billion (US$175 mm) fabricated A/P Procomp Payment for goods Domestic Coconspirators / Suppliers ‧ Partial funds were paid for related import declaration tax and as rewards to suppliers Remaining funds remitted to Dummy Companies in HK Buyers (Dummy companies in HK. Representative was Procomp’s Employee) ‧ Partial funds were diverted by Sophie Yeh and disappeared without a trace 6

2006 ARCG " Facts" of Procomp Case - 4 w Trick II – 2. 1. 1 Ø US$85 mm Fabricated Deposit with Metropolitan Bank & Trust Company ‧Using fabricated sales cycle to transfer funds to dummy companies in HK ‧Dummy companies in HK deposit US$ 85 mm in Procomp’s account at Metropolitan Bank & Trust Company as partial payments for goods ‧Authorized Metropolitan Bank & Trust Company to buy US$ 85 mm CLN issued by SGA Procopm Deposit contract / buy CLN Metropolitan Bank & Trust Company 7

2006 ARCG " Facts" of Procomp Case - 5 w Trick II – 2. 1. 2 ‧Authorized Metropolitan Bank & Trust Company to buy US$ 85 mm CLN with credit link to North Asia Financial Company issued by SGA. The CLN was put under Metropolitan Bank & Trust Company’s custody ‧The North Asia Financial Company borrowed US$ 85 mm from SGA Metropolitan Bank & Trust Company $ Credit Link Note CLN SGA HK branch $ North Asia Financial Company (Dummy company in BVI. Representative was Procomp’s Employee) ‧Procomp announced reorganization proposal. Metropolitan Bank & Trust Company transferred CLN to Procomp and terminated the deposit contract with Procomp buy CLN w US$85 mm deposit evaporated w Money went to dummy company Metropolitan Bank & Trust Company 8

2006 ARCG " Facts" of Procomp Case - 6 w Trick II – 2. 2 Ø US$45 mm Fabricated Deposit in Australian Commonwealth Bank Commonwealth Procomp Bank 1. Sold account receivables (A/R) 2. Payment of A/R were remitted to Procomp (Booking as deposit) CTB ( subsidiary of Commonwealth Bank) 4. Procomp’s deposit was used to buy zero-coupon bond issued by AIM based on A/R 3. Sold A/R AIM Global Finance Ltd. (Dummy company in BVI. Controlled by Sophie Yeh) w After Procomp announced reorganization proposal, US$45 mm deposit was offset by the zero-coupon bond 9

2006 ARCG " Facts" of Procomp Case - 7 w Trick III Ø US$50 mm Fabricated Deposit in Rabobank and Metropolitan Bank Procomp 4. Abide by agreement, deposit all OCD proceeds to banks 1. Set up dummy companies Best Focus Assets Ltd. Fernvale Assets Ltd. (Dummy companies in BVI. Controlled by Sophie Yeh’s friends) 2. Borrowed US$ 50 mm Rabobank Singapore Branch Metropolitan Bank & Trust Company Underwriter is the HK subsidiary of a financial institution in Chinese Taipei 3. Dummy companies acquired all the OCB issued by Procomp 5. Procomp announced stock buyback plan. When the stock rallied, dummy companies converted all the OCB into stocks to earn capital gains w After Procomp announced reorganization proposal, US$50 mm deposit was offset by loans w Dummy companies earned capital gains from the stock market 10

2006 ARCG " Facts" of Procomp Case - 8 w Trick IV Ø Guaranteed dummy companies to transfer cash US$10 mm 1. Deposited US$10 million Procomp Bank under a financial holding corp. 3. Deposits as guarantee for Addie’s borrowing Addie (Dummy company in BVI. Representative was Procomp’s Employee) 2. Lent to Addie US$10 million Grand Capital (Overseas subsidiary of the same financial holding corp. ) w After Procomp announced reorganization proposal, US$10 mm deposit was offset by loan. Money went to dummy company w From Trick II–IV, about NT$ 6 billion (US$190 mm) deposit evaporated after Procomp announced reorganization proposal 11

2006 ARCG Legal Liabilities of Procomp Case w Directors/Supervisors and Employees Ø Misrepresentations in financial statements Ø Misappropriation of company assets Ø Making of false statements on the application materials w Accounting Firms/CPA (KPMG and Deloitte Touche Tohmatsu) Ø Omission in the certification w Underwriters (Yuanta、Fubon、Hua Nan、TIS) Ø Misrepresentations in underwriting report 12

2006 ARCG Enforcement of Procomp Case-1 w Investigation and Enforcement Ø 7/2004 : Financial Supervisory Commission immediately began investigations Ø 10/2004 : Prosecutors brought charges against 31 related company officials Ø 6/2005 : Walter Lin forced out from the chairmanship of Waterland Financial holdings for NT$1. 95 billion (US$61 mm) abnormal inflows from his wife Ø 12/2005 : Sophie Yeh was sentenced to a 14 -year prison term and NT$180 million (US$5. 6 mm) criminal fine Ø 5/2006 : Prosecutors petitioned for appeal, seeking a 20 -year prison term and NT$ 500 million (US$16 mm) criminal fine 13

2006 ARCG Enforcement of Procomp Case-2 w Liabilities of CPAs and Underwriters Ø CPAs : suspension from practice for 6 months Ø Underwriters : received warnings w Investors’ Protection Ø The Securities and Futures Investors Protection Center (SFIPC) representing 10, 056 investors and asked for NT$5. 8 billion (US$181 mm) compensation Ø Managers, board directors and supervisors, accounting firms/accountants and underwriters are also defendants in these lawsuits Ø Settled with 4 underwriters for NT$78. 1 million (US$2. 4 mm) Ø Settled with 2 accounting Firms for about NT$90 million (US$2. 8 mm) 14

2006 ARCG Securities and Futures Investors Protection Center w Established in accordance with the Protection Act in 2003 w Handles consultation, mediation, investor complaints, files class -action lawsuits w Currently has 41 cases for securities fraud Representing over 57, 000 investors Claiming for NT$ 23. 6 billion (US$738 m) compensation w The largest case : the Pacific Electric Wire & Cable case Ø more than 25, 000 investors Ø seeking over NT$8 billion (US$250 m) in damages 15

2006 ARCG Procomp’s Impact on Corporate Governance - 1 w The SFIPC became an important enforcement arm of government w CPA and underwriter liabilities and deterrence increased Ø Increased damages Ø fewer IPOs, more SPOs w The information disclosure on IPO & SPO enhanced w Financial forecast mechanism changed to voluntary in 2005 w Key modifications of Company Law Ø Shares held by subsidiaries have no voting rights Ø 1% shareholders to make shareholders proposals in AGM 16

2006 ARCG Procomp’s Impact on Corporate Governance - 2 w Key modifications of Securities and Exchange Law Ø Independent board directors / audit committees Ø Integrity and honesty for company representative Ø Damage compensation n Issuers and their responsible persons : strict liability n Employees & CPAs : proportionate liability Ø Close relatives may not constitute half of the boards Ø Juristic persons may not be selected as the director and supervisor at the same time Ø Enhanced penalties 17