Hong Kong’s securities regulator has initiated proceedings against Citic and five of its former executives.
The Securities and Futures Commission (SFC) alleges they engaged in market misconduct involving disclosure of false or misleading information on the company’s financial position arising from the massive losses it incurred over its investment in leveraged foreign exchange contracts in 2008.
Named in the action were former chairman Larry Yung Chi-Kin, managing director Henry Fan Hung-Ling, deputy managing directors Leslie Chang Li-Hsien and Peter Lee Chung-Hing, and executive director Chau Chi-Yin.
The SFC has initiated proceedings in the Court of First Instance and Market Misconduct Tribunal.
The regulator alleges that Citic (formerly Citic Pacific) and the five individuals engaged in market misconduct prior to a profit warning being issued in October 2008.
It also alleges that the securities firm had issued a circular on September 12, 2008, containing false or misleading information. It included the statement “the Directors are not aware of any adverse material change in the financial or trading position of the Group since 31 December 2007”.
However, on October 20, 2008 Citic issued a profit warning announcement, in which it disclosed a massive realised and mark-to-market loss on leveraged FX contracts, sending the share price down about 55%.
The SFC said the warning revealed that Citic had become aware of the exposure arising from those contracts on September 7, before the circular was issued.
It further alleges the firm and the directors were liable for issuing the circular containing false or misleading information.
The losses had arisen from leveraged FX contracts Citic had entered into to manage the currency risk of its Australian iron ore mining project exposure.
From 1 July to 17 October 2008, Citic incurred an aggregate realised loss of $807.7 million on the contracts. As at October 17, 2008, the mark-to-market loss amounted to $14.7 billion.
The target redemption forward contracts were like accumulator contracts and required Citic Pacific to purchase a multiple amount of the Australian dollar if it fell below designated strike rates. By late August 2008, the Aussie dollar had fallen significantly against the designated strike prices in the contracts.
Simon Chui Wing-Nin, a former Citic Pacific employee, was jailed in November 2012 for 15 months and fined more than HK$1 million after being convicted of two counts of insider dealing in the company’s shares prior to the warning.
The SFC is seeking orders to restore investors who were buyers of Citic shares after market close on September 12, 2008 and before the date of the profit warning to their pre-transaction positions or for them to be compensated for their losses.
During that period, some 4,500 investors bought around HK$1.9 billion worth of shares at various acquisition prices between HK$14.26 and HK$24.5 with an average acquisition price of HK$18.97.
Citic shares were suspended from trading on October 20 before the profit warning, and fell 55% from HK$14.52 to close at HK$6.52 on October 21, when trading resumed.
“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,” the SFC said.