The Hong Kong Securities and Futures Commission (SFC) has informed that it has commenced proceedings in the Market Misconduct Tribunal (MMT) against Mr Li Kwok Cheong and Mr Li Han Chun, former chairman and chief executive officer (CEO) of China Forestry Holdings Company Limited (China Forestry), respectively, for suspected disclosure of false or misleading information in
- China Forestry’s IPO prospectus,
- its annual results announcement and annual report for the year ended 31 December 2009 (2009 AR) and
- interim results announcement and interim report for the six months ended 30 June 2010 (2010 IR), which induced transactions in the shares of China Forestry.
The SFC alleges that various types of information relating to China Forestry’s business operations and financial information as disclosed in its IPO prospectus, the 2009 AR and 2010 IR were materially false or misleading, and both the former chairman and CEO were aware of, or were reckless or negligent, as to whether the disclosed information was materially false or misleading.
The scope of the allegedly false or misleading information as disclosed by China Forestry was extensive, covering the company’s turnover generating activities, profit, plantation assets and cash balances, etc. Among these, China Forestry’s turnover appeared to have been overstated by at least 92% while its plantation assets, purportedly accounting for over 79% of its net assets, appeared to have been overstated by at least 87%.
The SFC also alleges that China Forestry’s purported supporting documents such as bank statements, forestry right certificates, and insurance contracts were falsified.
The SFC’s case is that China Forestry maintained a separate set of accounting records which was different from the set of accounting records provided to its then auditors KPMG for auditing purposes but appeared to reflect its true state of affairs. This separate set of accounting records revealed a much smaller scale of operation compared to what had been disclosed in the company’s IPO prospectus, 2009 AR and 2010 IR. The SFC alleges that China Forestry, in its true state of affairs, was not suitable to be listed on the Stock Exchange of Hong Kong (SEHK).
The SFC will also seek court orders in the proceedings in the Court of First Instance (CFI) under section 213 of the Securities and Futures Ordinance (SFO) requiring the former chairman and CEO to take steps to restore China Forestry’s independent minority shareholders who traded in China Forestry shares as a result of their misconduct to the positions they were in before the transactions.
The SFC has also commenced proceedings in the MMT against Li Han Chun and his investment vehicle Top Wisdom Overseas Holdings Limited (Top Wisdom) for suspected insider dealing in the shares of China Forestry in 2011.
The SFC alleges that at the material times, Li Han Chun knew that the information disclosed by China Forestry was materially false or misleading and that KPMG had already identified various audit issues and irregularities which could reveal other false and misleading disclosures that had been made by China Forestry. With this knowledge, Li Han Chun procured Top Wisdom to execute a placement of 119,000,000 China Forestry shares to avoid a loss.