Hong Kong’s Securities And Futures Commission Commences MMT Proceedings Against China Forestry’s Former Chairman And CEO For Suspected Disclosure Of False Or Misleading Information And Former CEO For Suspected Insider Dealing

The Securities and Futures Commission (SFC) 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 (1) China Forestry’s IPO prospectus, (2) its annual results announcement and annual report for the year ended 31 December 2009 (2009 AR) and (3) 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 (Notes 1, 2 & 3).

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 (Note 4).

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 (Note 5).                                                                                                                  

Notes:

1. China Forestry was listed on the Main Board of the SEHK on 3 December 2009.  On 26 January 2011, trading in the shares of China Forestry was suspended after discovery of serious irregularities by its then auditors KPMG.  Pursuant to an Order of the Grand Court of the Cayman Islands dated 18 June 2015, China Forestry was wound-up in accordance with the law of the Cayman Islands and joint official liquidators were appointed.  On 24 February 2017, the listing of China Forestry’s shares was cancelled.
2. At all material times since 21 December 2007, Li Kwok Cheong had been the chairman and one of the two executive directors of China Forestry.  He was also a substantial shareholder of China Forestry, holding (via his wholly-owned company) approximately 51.17% of the company’s issued shares upon listing.  Meanwhile, Li Han Chun was the CEO and the other executive director of China Forestry at all material times until being removed as CEO and executive director with effect from 14 February 2011 and 17 February 2012, respectively.  Li Han Chun was also a substantial shareholder of China Forestry, holding (via Top Wisdom) approximately 6.47% of the company’s issued shares upon listing.
3. A copy of the SFC’s Notice in regard to the commencement of the MMT proceedings is available on the MMT’s website (www.mmt.gov.hk).
4. The SFC has commenced proceedings in the CFI against Li Kwok Cheong and Li Han Chun under section 213 of the SFO in January 2017.  The proceedings are currently stayed until 28 days after the MMT issues a written report in the above MMT proceedings. The SFC will seek final court orders against the pair if the MMT makes a finding of market misconduct against them for disclosure of false or misleading information inducing transactions.
5. On 2 February 2011, the SFC commenced proceedings in the CFI under section 213 of the SFO against Li Han Chun and Top Wisdom and obtained an interim injunction order prohibiting them from removing, disposing of or dealing with their assets in Hong Kong for up to the value of $398,219,458. Please refer to the SFC press releases dated 11 February 2011 and 4 March 2011 for details. The proceedings are currently stayed until 28 days after the MMT issues a written report in the above MMT proceedings.  The SFC will seek final court orders against Li Han Chun and Top Wisdom if the MMT makes a finding of market misconduct against them for insider dealing.