Jurisdiction - Hong Kong
Hong Kong – Recent Enforcement Actions And Penalties Against Listed Companies And Their Directors.

16 March, 2015


Winding-Up Order For China Metal Recycling

On 26 February 2015, the Court of First Instance ordered that China Metal Recycling (Holdings) Limited (China Metal Recycling) be wound up on the application of the SFC with reasons for its decision to be delivered in due course. China Metal Recycling’s shares were listed on the Main Board on 22 June 2009, raising IPO proceeds of about HKD 1,685m. Trading in shares of China Metal Recycling has been suspended since 28 January 2013. This is the first time that the SFC obtained a court order to wind up a Hong Kong-listed company under section 212 of the Securities and Futures Ordinance (SFO), which permits the SFC to apply for a winding-up order against companies if it appears to the SFC that it is desirable in the public interest to do so to protect the company’s minority shareholders, creditors and the investing public, and the court may grant the order on the ground that it is just and equitable to wind up those companies. The SFC alleged that the affairs of China Metal Recycling involved a highly complex, sophisticated and dishonest scheme spanning Hong Kong, Macao, mainland China and the United States (U.S.). The scheme inflated China Metal Recycling’s performance, revenue and profit dating back to the time of its IPO prospectus in 2009 and becoming larger and more complex in the subsequent years until it was brought to an end when the SFC commenced these proceedings in July 2013. The aggregate revenue and gross profit of China Metal Recycling for the years 2007 to 2009 appears to have been overstated by around 46 percent or over HKD 8bn and 72 percent or over HKD 1bn respectively.

The scheme involved the use of China Metal Recycling’s wholly owned offshore subsidiary in Macao, Central Steel (Macao Commercial Offshore) Limited (Central Steel Macao), which was the conduit for a substantial part of the company’s annual profits between 2007 and 2012 and produced false documents and instruments by which these profits were falsified. It also involved fake shipments of scrap metal betweenthe U.S. and the mainland, false shipping documents, false accounts and highly complex round-robin transactions spanning continents. By way of illustration, Central Steel Macao made 431 payments totaling around USD 2.4bn to its purported key suppliers in the U.S. and Hong Kong in 2012. Approximately 98 percent of the funds were passed on to its purported customers and eventually circulated back to Central Steel Macao through a multitude of bank accounts, all through multiple entities set up around the world yet controlled centrally within China Metal Recycling.

Disqualification Order Against Former CEO

The Market Misconduct Tribunal (MMT) has made a disqualification order against Ms. Salina Yu Lai Si (Ms. Yu), former chief executive officer of Water Oasis Group Limited (Water Oasis), pursuant to Section 257(1)(a) of the SFO, which prohibits her from being a director or being involved in the management of any listed corporation for a period of two years, and ordered her to disgorge HKD 281,346, being the benefit she received in avoiding a loss through insider dealing, pursuant to Section 257(1)(d) of the SFO. Ms. Yu admitted to insider trading in the shares of Water Oasis when she possessed insider information regarding the imminent termination of Water Oasis’ exclusive distributorship of H2O Plus, LLC’s products in mainland China and Taiwan.

Market Misconduct Proceedings Against Author Of Allegedly False Short Seller Report

The SFC has commenced proceedings in the MMT against Mr. Andrew Left (Mr. Left), head of Citron Research, alleging market misconduct involving the publication of a research report on Evergrande Real Estate Group Limited (Evergrande), which contained false and misleading information. The report stated, among other things, that Evergrande was insolvent and had consistently presented fraudulent information to the investing public. Its share price fell sharply following the publication of the report. The SFC alleges that Mr. Left short sold 4.1 million shares of Evergrande shortly before publishing the report and realized a total profit of approximately HKD 1.7m.

Directors Ordered To Disgorge Funds

The Court of First Instance has ordered three current and former directors (Mr. Wang Wenming (Mr. Wang); current chairman, Mr. Lee Yiu Shun (Mr. Lee); and current CEO and former chairman Mr. Richard Yin Yingneng (Mr. Yin) of First China Financial Network Holdings Ltd. (First China)) to pay a total sum of RMB18,692,000 with interest as compensation to First China following findings of misconduct. Following a contested trial, the court found that Mr. Wang, Mr. Lee and Mr. Yin breached their duties to First China when they agreed to pay a special dividend of RMB 18,692,000 to Fame Treasure Ltd (Fame Treasure). First China’s announcement stated that the special dividend payment was part of a mutual understanding and arrangement with Fame Treasure at the time of First China’s acquisition of GoHi Holdings Ltd. The court found that this was not the case and there had never been such mutual understanding and arrangement.

The court held that Mr. Wang, Mr. Lee and Mr. Yin caused First China to make an unnecessary payment and ordered them to repay this amount to First China. During the trial, it was revealed that a written resolution was passed recently by a non-executive director and four independent non-executive directors of First China to provide an indemnity to Mr. Wang and Mr. Lee for all professional and legal fees incurred by them concerning the defence of SFC’s petition and all legal costs claimed by the SFC as a result. The court found that the indemnity was plainly inappropriate and a poor reflection on First China’s corporate governance. Consequently, Mr. Wang and Mr. Lee either have repaid or are in the course of repaying the legal costs First China paid on their behalf. A further hearing will be scheduled to determine whether disqualification orders pursuant to Section 214 of the SFO should be made against Mr. Wang, Mr. Lee and Mr. Yin.

Public Criticism Of Shareholder

The SFC publicly criticized Mr. Wen Yibo (Mr. Wen) for acquiring shares in Sound Global Limited (Sound Global) within six months after the close of an offer at above the offer price in contravention of Rule 31.3 of the Takeovers Code. In September 2013, Sound Global and Sound (HK) Limited (a wholly owned subsidiary of Sound Group Limited, an entity beneficially owned as to 99.83 percent by Mr. Wen and his wife) issued a joint announcement about the voluntary delisting of Sound Global from the Official List of the Singapore Exchange Securities Trading Limited. In order to facilitate the delisting, Sound (HK) Limited made a conditional cash offer for all the sharesin Sound Global at an offer price of HKD 4.37 (SGD 0.7) per share. The offer closed in January 2014. However, Mr. Wen and Sound Water (BVI) Limited (a company beneficially owned by Mr. Wen and his wife) acquired a total of 5,600,000 Sound Global shares from March to May 2014 at prices ranging from HKD 5.94 to HKD 7.55 per share in a series of on-market purchases. Mr. Wen admitted that he has breached Rule 31.3 of the Takeovers Code due to his inadvertent oversight and that he was not aware of such prohibition. He also agreed to the disciplinary action against him under s. 12.3 of the Introduction to the Takeovers Code.
Rule 31.3 of the Takeovers Code is a fundamental provision which provides shareholders with certainty that the offeror will not pay a price higher than the offer price for the shares in the offeree company in the six-month period after the close of the offer, with a view to ensuring all shareholders of the offeree company are treated even-handedly.

License Of Regulated Person Suspended

The SFC has suspended the license of Mr. Dick Ma To Fuk (Mr. Ma) in all regulated activities and approval for him to act as responsible officer for eight months pursuant to Section 194(1) of the SFO for failures relating to his role in the initial public offering of Powerlong Real Estate Holdings Limited (Powerlong) in 2009. Mr. Ma was formerly a responsible officer of ICBC International Securities Limited (ICBI Securities), which acted as one of the joint lead managers in the listing of Powerlong.

The SFC found that some of the placees for the subscription of Powerlong’s shares allotted through its listing were referred by Powerlong to ICBC International Capital Limited (one of the joint sponsors and bookrunners in the listing of Powerlong), which in turn referred them to its affiliate ICBCI Securities to open accounts for the placees’ subscription. Mr. Ma accepted the subscriptions without conducting know-your-client due diligence as required under the Code of Conduct for Persons Licensed by or Registered with the SFC (code of conduct) and failed to find out their financial situation or confirm their independence from Powerlong. Some of the placees were found to be family and friends of Powerlong. Mr. Ma also failed to perform ongoing scrutiny to ensure that the subscriptions were consistent with his knowledge of the placees’ financial situation and that any instructions from the placees indeed originated from the placees themselves. Mr. Ma also signed and filed a confirmation that the placees were all independent as required by the Stock Exchange under the Listing Rules, despite knowing that he did not have sufficient evidence to make the confirmation. Moreover, in further breach of the code of conduct, the SFC’s investigation revealed that Mr. Ma did not diligently supervise his subordinates to carry out the same due diligence procedures. The SFC’s enforcement action against Mr. Ma highlights the regulator’s focus on the behavior of senior management.

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