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The SFC is suing Citic and five former directors. Photo: Reuters

Under-fire Citic seeks legal advice on SFC's HK$1.9 billion lawsuit

Mainland conglomerate seeking legal advice following HK$1.9 billion lawsuit as critics demand action on corporate governance

Citic

State-backed conglomerate Citic is seeking legal advice on a HK$1.9 billion lawsuit brought by the Securities and Futures Commission (SFC) against it and five former directors for their failure to disclose massive forex losses in 2008.

Meanwhile, analysts called for action to address the serious corporate governance "problems" revealed in the case.

Citic was "in the process of considering the SFC's allegations and claim, and seeking legal advice", company chairman Chang Zhenming said in a statement issued yesterday morning. Its share price dropped by as much as 5.14 per cent yesterday before closing at HK$14.78, down 4.06 per cent from Thursday's close.

A writ filed by the SFC to the Court of First Instance on Thursday revealed a chaotic picture of the boardroom of the then Citic Pacific in 2008, with then chairman Larry Yung Chi-kin allegedly claiming he signed an important shareholder circular without reading it and then director Leslie Chang Li-hsien allegedly saying the forex investment he had made was "out of control".

"Something must be done to address the corporate governance problem as revealed in the case," said Clement Chan, president of the Hong Kong Institute of Certified Public Accountants.

"Investors rely on senior executives of the listed companies to have internal controls in place to prevent the firm from taking excessive risks. It would not be acceptable for someone as senior as a chairman to claim that he had not read a document before signing it."

The SFC is suing Citic and five former directors - Yung, Chang, managing director Henry Fan Hung-ling, deputy managing director Peter Lee Chung-hing and executive director Chau Chi-yin - for HK$1.9 billion in compensation for 4,500 investors who suffered losses due to its failure to report its massive loss in forex trading in a circular on September 12, 2008.

The SFC alleges the circular, about a subsidiary, was false or misleading when it said "the directors are not aware of any adverse material change in the financial or trading position of the group since 31 December 2007."

Six weeks later, on October 20, 2008, the company issued a profit warning as it reported HK$15.5 billion in losses from forex trading when hedging currency risks for its Australian iron ore mining project. Its share price dived 55 per cent the following day, from HK$14.52 to HK$6.52.

According to the SFC writ, Yung learned about the forex loss from Fan on September 3, before he signed the circular on September 5. Yung, however, "claimed that he did not read the draft circular before approving it and signing the responsibility letter" and never revisited the draft to make any change to include the forex loss.

Chang was responsible for approving the forex contract investment, amounting to A$500 million, and the SFC writ said that in an email on August 30, he wrote that he was "really concerned about the position we are in" and noted the exposure "far exceeded the A$500 million target long ago. Obviously, this was out of control".

In another email, on September 6, Chang said "the situation is very serious, much worse than I anticipated. We are facing billions of potential loss and I am deeply worried".

The three other directors also allegedly learned about the loss either in late August or before September 3 but none had considered adding the information to the circular, which had led it to be misleading, the SFC writ said.

This article appeared in the South China Morning Post print edition as: Under-fire Citic takes advice on SFC suit
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