Chee Keong Low, Associate Professor in Corporate Law at the CUHK Business School in Hong Kong and Tak Hay Low of the University College London have had another look at a case familiar to most Hong Kong investors.
[For those not familiar here’s a quick synopsis. China Forestry Holdings listed in Hong Kong in 2009. It was a scam. So called ‘biological assets’ (trees!) didn’t exist and the company was subsequently suspended, wound up and de-listed. It’s especially memorable as the banditry was so brazen. Management simply lied about assets which, given their very er, nature, should have been an easy spot for auditors, arrangers and INEDs to check.]
As a fraud in plain sight was perpetrated on the investing public those with direct responsibility i.e. auditors, arrangers, underwriters, Directors of the company and etcetera, should have all been held to account, right?
So far only two of the arrangers, UBS (full disclosure, I was an employee at the time) and Standard Chartered, have been publicly ticked-off (and fined) by the local regulator the Securities and Futures Commission. and only two of the Directors have been the subject of separate investigation for Market Misconduct for the grosser part of the falsification.
The researchers thus proceed to discuss the obvious-to-the-laity point that “..such inaction does not bode well for the development of the capital markets in Hong Kong as it ignores the important gate keeping role assumed by all [My bold and italics] directors during the initial public offering process ..”
The body of the paper contains the researchers longer argument about precedent and potential remedy and I’ll leave that for legal wonks to critique and just skip to the conclusion (you can access the paper in full via this link Directors’ Responsibility for Prospectuses).
Two recent spectacular failures of gatekeeping, Luckin Coffee and Wirecard, are highlighted which also involved frauds in plain sight and highlight the point that an ecosystem of trust surrounds listed companies and when the integrity of that ecosystem is in question the whole market suffers.
The researchers also raise another obvious-to-the-laity issue as to why, when such an in-your-face fraud has been committed, does it take nearly a decade to prosecute any of the guilty parties and why, when some miscreants are brought to book are they the ones with the deepest pockets for whom the effects of penalties will be written off as a cost of doing business?
Not only does punishment not appear to fit the crime but for those who have been ‘punished’ sentences are unlikely to have a meaningful effect thus the issue of deterrence seems also to have been swerved in this process.
Good points all.
Happy Sunday.