SINGAPORE Aug 1 Hong Kong's securities
regulator has taken one of its most draconian actions ever and
asked the courts to liquidate a listed company, a move that
could be the first of several as the watchdog hardens its stance
against alleged market misconduct.
The Securities and Futures Commission (SFC) says it has
evidence that China Metal Recycling, a $1.43 billion
company that describes itself as China's largest recycler of
scrap metal, exaggerated its financial position when it listed
in Hong Kong in 2009.
The case, which comes up for its next hearing in Hong Kong
on Friday, underscores the SFC's resolve to restore investor
confidence to what was the world's busiest IPO market at a time
when offerings have dried up due to volatile trading conditions,
China's waning economic growth and regulatory concerns.
But the crackdown has also rattled Hong Kong's investment
bankers, who could face legal action if they are found to have
missed clear evidence of accounting frauds at companies they
helped to go public in the city.
"There's been continual hard talking from the SFC about how
it intends to crack down on any activities that cast the market
here in a bad light and it's living up to those words now," said
Gareth Hughes, a partner at Ashurst law firm in Hong Kong.
In court, the SFC will go up against China Metal Recycling's
management to argue that provisional liquidators, who have
already been appointed, should take control of the company to
try and recover as much value as possible for shareholders.
China Metal Recycling's shares were suspended in January
after concerns were first raised about accounting issues.
Lawyers say several other companies are also in a similar
situation, raising the prospect of another SFC crack down.
"There are a number of other companies in the same position
of having been suspended amid concerns over financial
irregularity and shareholders of those companies may be
concerned that similar action might be taken against those
companies," said David Lee, a partner at Norton Rose Fulbright
China Metal Recycling did not return calls asking for
comment. Wellrun Ltd, the company's largest shareholder, has
said it does not believe the SFC's winding up application is in
the interests of its shareholders.
Wellrun Ltd's beneficial owner is China Metal Recycling
Chairman and Chief Executive Chun Chi Wai.
China Metal Recycling's listing raised HK$1.55 billion ($200
million). UBS AG was the initial public offering's
sole global coordinator and a joint-sponsor with China Merchants
Securities (HK). Deloitte Touche Tohmatsu acted as auditor.
The SFC said it has found evidence the company inflated the
size of the business and the amount of revenue generated by its
UBS declined to comment on its role in the listing. China
Merchants Securities did not respond to emails seeking comment.
Deloitte said it was not at fault. "The SFC's appointment of
provisional liquidators is to take administrative control away
from the company's management and board, and there is no
suggestion of any fault on the part of the auditors," the
accounting firm said in a statement.
Lawyers say that if the provisional liquidators are allowed
to take control of the company, they will then conduct their own
investigation and could take legal action if they find evidence
that anyone involved in the listing process misled investors.
"To the extent they discover anyone guilty of improper
conduct and bringing the company down, I'm sure they will be
taking action accordingly," said Kingsley Ong, partner at
Eversheds law firm.
Bankers in Hong Kong are already cautious about how they
handle IPOs after SFC Chief Executive Ashley Alder bought in new
rules that make them liable for defective listing prospectuses.
"Are we worried? It's never good when you have a regulator
who wants to make an example or examples out of bankers that
have not done their job," said a Hong Kong-based investment
banker who declined to be named as they are not authorised to
speak to the media.
"Some banks that haven't done a good job historically
staffing analysts and associates on the execution process are
going to have to change the way to do things," the banker said.
Lawyers in the city have expressed concern that the SFC
sometimes circumvents traditional legal processes by taking
action against companies and individuals before any wrong-doing
has been formally proved by a market misconduct tribunal.
The SFC disputes this, saying they are using powers granted
to them under the city's securities law and that their approach
is the best way to ensure those who have suffered damages get at
least part of their money back.
($1 = 7.7555 Hong Kong dollars)
(Additional reporting by Elzio Barreto, Anne Marie Roantree,
Brian Yapin in HONG KONG; Editing by Denny Thomas and Miral