Oct. 22 (Bloomberg) -- Citic Pacific Ltd. faced a formal investigation from the Hong Kong Securities and Futures Commission after predicting HK$15.5 billion ($2 billion) of currency losses from unauthorized trades.

A probe has been started, the commission said on its Web site, without giving details. Hong Kong Exchanges & Clearing Ltd., which runs the city's bourse, is also ``looking into'' whether the company complied with listing rules, said Henry Law, a spokesman.

Citic Pacific has slumped 66 percent in the past two days and its debt ratings were cut after the company disclosed Oct. 20 the impact of wrong-way bets on the Australian dollar. The board was criticized for the six-week delay in revealing the losses by lawmakers and shareholder activist David Webb.

``The regulator should look into whether there was a delay in Citic Pacific's disclosure, and whether the company provided information that misled investors,'' Democratic Party Chairman Albert Ho, a lawmaker, said by phone today. ``It's very important as public interest is at stake.''

Citic Pacific, a Hong Kong unit of China's largest state- owned investment company, tumbled 25 percent to HK$4.91 in Hong Kong trading today. This week's slump has slashed HK$21 billion off its market value.

`Cooperate Fully'

``We will cooperate fully with the regulators in their investigation,'' Citic Pacific said in an e-mailed statement.

The company's predicted loss, almost four times the $550 million China Aviation Oil (Singapore) Corp. incurred on jet- fuel trades in 2004, may be the largest foreign-exchange loss ever by a Chinese company, Geoffrey Cheng, an analyst at Daiwa Institute of Research, said.

Citic Pacific learnt of the currency agreements on Sept. 7. On Sept. 12 it issued a circular saying ``directors are not aware of any material adverse change in the financial or trading position of the group since 31 December 2007,'' when announcing a so-called connected transaction.

The company's shares fell 42 percent between Sept. 7, when the board learned of the exposure, and Oct. 20. The city's benchmark Hang Seng index dropped 23 percent in the same period.

`Abnormal Fluctuations'

The regulator should also study whether there was any insider-trading during the period given the ``abnormal fluctuations'' of the share prices, lawmaker Ho said.

Should the September company circular contain a misleading statement, that would be an offence for which the company and directors could be prosecuted, Webb, a former independent director at the exchange, said on his Web site. The maximum penalty is a fine of HK$10 million and 10 years jail, he said.

Citic Pacific bet that the Australian dollar would rise, incurring losses after the currency tumbled 30 percent against its U.S. counterpart from a 25-year high reached in July. The company, which makes steel and develops property, bought currency contracts to fund an A$1.6 billion ($1.1 billion) iron ore mine in Australia, it said Oct. 20.

Financial Director Leslie Chang, 54, didn't follow hedging policy and failed to seek the chairman's approval for the transactions, the company said Oct. 20.

``We were seeking to wind up those contracts once we learnt of the exposure on Sept. 7, but the outbreak of the financial turmoil made it impossible to do it as the Australian dollar was falling sharply,'' Citic Pacific's Managing Director Henry Fan said yesterday in an interview in explaining the delay.

Took Advice

Fan, 60, said the company took legal advice over the timing of its disclosure.

Fan today took leave of absence from his position as a director of the bourse, chairman of the takeovers and mergers panel, and panel member of the Securities and Futures Commission until the completion of the probe to avoid ``potential conflict of interests,'' Citic Pacific said today in the statement.

Lawmaker Ho said he would file a request to Hong Kong's financial secretary asking for an inspector to examine the disclosure delay should he get 100 shareholders to agree.

Citic Pacific's Chairman Larry Yung, 66, today flew to Beijing to seek a loan, Fan said. Beijing-based parent Citic Group, set up by Yung's father, former Vice President Rong Yiren, is arranging a standby loan of $1.5 billion.

Yung and Citic Group bought a combined three million shares yesterday, according to a stock exchange filing today.

Asset Sales

Citic Pacific yesterday also said it's in talks to sell part or all of its 56.7 percent stake in Dah Chong Hong Holdings Ltd., a car and food distributor. Citic Pacific has cash and loan facilities of HK$9 billion, said Fan. It had HK$31 billion of net debt at the end of June.

``The forex incident is definitely going to accelerate'' the sale of non-core assets by Citic Pacific, said Patrick Chow, an analyst at Everbright Securities. Citic Pacific may sell its stake in telecommunications company Citic 1616 Holdings Ltd. and power plants in China, he said.

Citic Pacific owns a 17.5 percent stake in Cathay Pacific Airways Ltd., Hong Kong's largest carrier, and a 52.6 percent stake in Citic 1616, according to its annual report. It also operates 9 power plants in China, 2 tunnels in Hong Kong, and owns properties and steel plants.

The hedges the company entered into were so-called ``accumulator'' contracts and weren't properly understood, Fan said. The company ousted Financial Director Chang, 54, and Financial Controller Chau Chi Yin, 52, for the trades.

Citic Group had cash of HK$12 billion and committed loan facilities of about HK$16 billion as of the end of September, Moody's Investors Service said in a report yesterday.

Moody's today put Citic Group's ratings on review for possible downgrade because of the Citic Pacific losses.

To contact the reporters on this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net; Chia-Peck Wong in Hong Kong at cpwong@bloomberg.net

Last Updated: October 22, 2008 07:16 EDT