Hong Kong regulators are seeking to freeze assets of China Forestry Holdings Ltd.’s chief executive officer after he sold HK$398.7 million ($51.2 million) of shares in the company before it disclosed accounting irregularities.
The Securities and Futures Commission asked Hong Kong’s High Court on Feb. 7 to freeze HK$398.2 million of assets belonging to Li Han Chun. The regulator also sought an order restraining Li and his company, Top Wisdom Overseas Holdings Ltd., from dealing in China Forestry shares while “in possession of unpublished information about accounting irregularities in the company.”
Shares of China Forestry fell 13 percent after it announced that Li had sold 119 million shares on Jan. 12 for HK$3.35 each. The Beijing-based private plantation forest operator suspended its shares on Jan. 26 and announced five days later that KPMG identified “possible irregularities” in an audit for the fiscal year ended Dec. 31. The SFC didn’t detail in its application the reasons it wants to freeze the assets of Li.
“The freeze order shows that Hong Kong regulators will flex their muscle where investor harm may have occurred,” said William McGovern, a Hong Kong-based partner at law firm Kobre and Kim LLP.
Moody’s Investors Service put China Forestry’s debt on review for a downgrade after the share suspension. The company, 11 percent owned by Washington-based private equity firm The Carlyle Group, sold $300 million of 7.75 percent five-year notes in November.
Li wasn’t at China Forestry’s Beijing office and couldn’t be reached for comment. “The company is operating normally and board members are actively seeking to resolve the current situation,” it said in an e-mailed statement.
Carlyle’s Beijing-based spokesman, Brian Zhou, said the firm takes the matter seriously and has been in contact with China Forestry’s management. He declined to comment further.
SFC spokesman Jonathan Li said the regulator has no further comment on the court filing. A hearing for the SFC’s application is scheduled for Feb. 11.
The SFC won a court order last March freezing the listing proceeds of Fujian province-based Hontex International Holdings Co. Its investigation of Hontex for disclosing “materially false or misleading” information in its Hong Kong listing prospectus, continues, according to a November press release.
The U.S. Securities and Exchange Commission last year launched a probe of China-based companies listed in the U.S. and their auditors amid concerns that some of those firms may be doctoring their financial statements to attract investors. SEC official Wayne Carnall said the probe has prompted some of the firms to de-register.
“As Hong Kong competes with New York for the attention of Chinese companies seeking access to the world’s investors, we will likely see the regulators in each market adopt increasingly aggressive tactics,” McGovern, a former branch chief with the U.S. Securities and Exchange Commission, said.
The SFC said last month that disclosure irregularities such as inflated asset values, misstated income statements, and false information about customers and other issues were found in 84 out of 100 applications for share flotation in Hong Kong.
China Forestry, which was listed in Hong Kong in 2009, said in its Jan. 31 statement that it had suspended persons suspected to be involved in the possible irregularities, without identifying the staff.
The company has 229,113 hectares of forests in China, and is amongst the country’s top three private operators, it said on its web site.
The China Council for the Promotion of Environment and Forestry, which it cited, couldn’t be reached for confirmation.
Shares have fallen 18.7 percent to HK$2.95 this year.
“The incident will surely have a very large impact on the company’s share prices,” said Michael Tam, a Hong Kong-based analyst at South China Finance & Management Ltd.
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