Updates

On 7 August 2024, Hong Kong’s Market Misconduct Tribunal (MMT) found Mr. Li Kwok Cheong and Mr. Li Han Chun, the former chairman and chief executive officer of China Forestry Holdings Company Limited, guilty for the disclosure of false or misleading information in the company’s IPO prospectus, as well as its annual results announcement and annual report for the year ending 31 December 2009. These misleading disclosures were found to have induced transactions in the China Forestry’s shares, contributing to the financial misrepresentation of the company.

The Tribunal’s findings reveal that China Forestry’s IPO prospectus, along with its 2009 annual results and report, were inaccurate. The company’s reported turnover was overstated by 91.56% for the year ending 31 December 2008 and by 99.99% for the year ending 31 December 2009. The MMT also observed that many of China Forestry’s purported customers were non-existent and their documents like forestry rights certificates, logging permits, and bank statements were fabricated.

Insider dealing, as articulated under sections 270 and 291 of the Hong Kong’s Securities and Futures Ordinance (SFO), constitutes the unlawful practice of trading in the securities of a listed company while in possession of material, non-public information that, if disclosed, would impact the company’s share price. This misconduct occurs when an individual, cognizant that such information has not been made available to the public, exploits it to secure an undue advantage, typically by executing trades before the information is released to the broader market.

Under section 277 of the SFO, it is prohibited for any individual to knowingly disseminate information that is materially false or misleading, with the intent to induce others to engage in the trading of securities or to manipulate the price of those securities. This provision is designed to uphold market integrity, ensuring that all participants engage in transactions based on accurate and truthful information, thereby preventing deceptive practices that could distort market fairness.

Background

On 28 June 2018, the SFC initiated proceedings in the MMT against the former chairman and CEO of China Forestry. The investigation revealed that China Forestry, which was listed on the Main Board of The Stock Exchange of Hong Kong on 3 December 2009, had raised approximately HK$1.6776 billion through its initial public offering (IPO). However, the company’s financial reports were found to be grossly misleading. The falsification of documents and financial statements began to surface when KPMG, China Forestry’s auditors at the time, discovered irregularities during their audits, leading to the suspension of trading in China Forestry’s shares on 26 January 2011.

The MMT found that Mr. Li Han Chun, through his investment vehicle Top Wisdom Overseas Holdings Limited, engaged in insider dealing. In January 2011, just prior to the public disclosure of the company’s financial reality, Li sold 119 million shares of China Forestry, to avoid a loss estimated at approximately HK $353 million. The Tribunal concluded that Li, aware of the impending danger to the company’s shares due to the discovery of falsified documents, acted on insider information to mitigate his losses.

The SFC had commenced proceedings in the Hong Kong’s Court of First Instance (CFI) under section 213 of the SFO, seeking court orders to compel the former chairman and CEO to take necessary steps to restore China Forestry’s independent minority shareholders to their original financial positions, prior to the transactions that had been induced by the misleading information. Additionally, the SFC had secured an interim injunction from the CFI, on an ex parte basis, to freeze assets up to HK $398,219,458, to restrain Mr. Li Han Chun and his investment vehicle, Top Wisdom, from disposing of or dealing with their assets in Hong Kong, to protect the interests of the affected shareholders during the ongoing legal proceedings.

Proceedings and Evidence

Throughout the Tribunal proceedings, the SFC presented several evidences to substantiate its allegations against the former executives of China Forestry.

The Tribunal was shown falsified financial statements to prove that China Forestry had overstated its reported turnover for the years 2008 and 2009. Additionally, the company’s assets were inflated, and cash balances were found to be entirely fabricated.

Further, the SFC exposed the fabrication of documents, including forestry rights certificates, logging permits, and bank statements. These documents were employed to support the company’s false financial statements and to mislead both investors and auditors.

The investigation uncovered that China Forestry maintained secret accounting records that more accurately reflected the company’s true financial state. These undisclosed records revealed a far smaller scale of operations in contradiction with the publicly released statements. Moreover, the SFC provided evidence of insider trading by Mr. Li Han Chun, who, through his investment vehicle, Top Wisdom Overseas Holdings Limited, disposed of 119,000,000 shares of China Forestry in January 2011. This transaction occurred shortly after a pre-audit meeting with KPMG in December 2010, during which significant audit issues were highlighted. The Tribunal determined that Mr. Li Han Chun, aware of the imminent risk posed by the impending audit, acted to sell the shares in order to preempt a substantial financial loss.

Findings

The MMT’s report provides a detailed examination of the breaches of financial regulations. The disclosure of false or misleading information in the IPO prospectus, annual reports, and financial statements constitutes a violation under the SFO. In this case, the extensive falsification of China Forestry’s financials, including overstated turnover and fabricated customer transactions, was carried out with the knowledge and authorization of the company’s top executives, Li Kwok Cheong and Li Han Chun.

The MMT has concluded its investigation and issued a report on 2 August 2024 regarding the misconduct involving China Forestry Holdings Company Limited. The report revealed misconduct by the company’s former chairman, Mr. Li Kwok Cheong, and former CEO, Mr. Li Han Chun. The MMT found that both individuals were culpable for disclosing materially false and misleading information in the company’s IPO prospectus, as well as in its 2009 annual results announcement and report. The Tribunal concluded that these actions had induced transactions in the company’s shares under false pretenses. Additionally, Mr. Li Han Chun was found guilty of insider trading, as he sold shares in January 2011 with knowledge of the impending audit issues.

What’s Next?

As per the directions dated 2 August 2024 of the Tribunal, the parties involved i.e. the former chairman, CEO, and the investment vehicle, Top Wisdom Overseas Holdings Limited, are required to submit written submissions regarding the potential penalties under section 257(1) of the SFO. These submissions, in a maximum of 5,000 words, must be filed with the Tribunal and served to all other parties by 30 August 2024. Following this, the parties will have the opportunity to reply to each other’s submissions in a maximum of 3,000 words by 20 September 2024.

The Tribunal will then consider these submissions before deciding on the final sanctions, which could include financial penalties, disqualification orders, or other appropriate measures as provided under the SFO.