The Hong Kong Securities and Futures Commission (SFC) has instituted proceedings in both the Court of First Instance and the Market Misconduct Tribunal (MMT) against CITIC Limited (CITIC) and five of its former executive directors.
The people against whom the proceedings was started includes chairman Mr Larry Yung Chi Kin, managing director Mr Henry Fan Hung Ling, deputy managing directors Mr Leslie Chang Li Hsien and Mr Peter Lee Chung Hing, and executive director Mr Chau Chi Yin (the five directors).
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The SFC alleges CITIC and the five directors engaged in market misconduct involving disclosure of false or misleading information on CITIC’s financial position arising from the massive losses incurred by CITIC over its investment in leveraged foreign exchange contracts in 2008.
The SFC is seeking restoration or compensation orders in the Court of First Instance to restore or compensate up to 4,500 investors who purchased CITIC shares between the date on which the SFC alleges the false or misleading information was announced and the date the true financial position was disclosed. The SFC is also seeking that CITIC and the five directors be sanctioned by the MMT.
The SFC alleges that CITIC issued a circular on 12 September 2008 that contained a false or misleading statement about CITIC’s financial position.
The Circular, which concerned an unrelated transaction, disclosed that "the Directors are not aware of any adverse material change in the financial or trading position of the Group since 31 December 2007."
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By GlobalDataHowever, in a market announcement on 20 October 2008, CITIC disclosed that it suffered a massive realised and mark to market loss up to that date arising from a number of leveraged foreign exchange contracts which CITIC had entered into to manage currency risk of its Australian iron ore mining project exposure (the Profit Warning). The Profit Warning revealed that CITIC had become aware of the exposure arising from those contracts on 7 September 2008 i.e. before the Circular which contained the alleged false or misleading statement was issued.
The prices of CITIC shares, which were suspended from trading on 20 October 2008 before the Profit Warning, fell 55% from $14.52 to close at $6.52 on 21 October 2008 when trading resumed.
The SFC alleges the statement in the Circular issued on 12 September 2008 was false or misleading and that CITIC and the five directors were aware of huge financial exposure arising from the leveraged foreign exchange contracts before the Circular was issued.
The SFC alleges CITIC and the five directors are liable for issuing the Circular containing the false or misleading statement and seeks orders in the Court of First Instance under section 213 of the Securities and Futures Ordinance to restore investors who were buyers of CITIC shares after market close on 12 September 2008 and before the date of the Profit Warning, 20 October 2008, to their pre-transaction positions or be compensated for their losses.
The amount that may be required to be paid to restore these investors to their pre-transaction positions or to compensate them will need to be the subject of assessment by the Court of First Instance if liability is established. This will establish an important precedent governing the calculation of what may be required to restore a shareholder who has traded in a market affected by false or misleading information.
