Fidelity Management & Research Co.’s George Stairs believed share placement information he was given by Chaoda Modern Agriculture Holdings Ltd.’s chairman and chief financial officer was public, a Hong Kong inquiry heard.
Chaoda management said nothing to Stairs to indicate he would be precluded from trading shares of the Chinese vegetable supplier, according to a letter from Fidelity’s lawyers presented in evidence on the first day of a Market Misconduct Tribunal hearing.
Stairs, then a portfolio manager at Fidelity Management, traded Chaoda’s shares after being told on a conference call by Kwok Ho, the company’s chairman and Andy Chan, its chief financial officer, about a June 2009 share placement before the information was public, Hong Kong’s government alleges.
Stairs netted proceeds of HK$1.98 million ($255,299) for his funds by selling shares prior to the placement and then buying more in the stock sale at a lower price, according to a government notice. The call was one of six arranged by Merrill Lynch (Asia Pacific) Ltd. between Chaoda management and institutional investors.
Boston-based Fidelity Investments conducted a thorough internal review of the matter in 2009 and believes that Stairs didn’t violate any laws or regulations, according to spokesman Vincent Loporchio. “We have a zero-tolerance policy with regard to the misuse of material non-public information,” Loporchio wrote in an e-mail before the hearing.
Mark Tsang, a Hong Kong-based spokesman for Bank of America, which bought Merrill Lynch in 2009, declined to comment on the inquiry and whether the investors were asked if they were willing to receive material non-public information on condition of refraining to trade on such information, also known as wall crossing.
Chaoda abandoned a planned share placement in April 2009 and on the June conference call, Chaoda’s management showed an “apparent determination” to go through with their plans, according to a January 2010 letter from Fidelity’s lawyers to the U.S. securities regulator.
Merrill Lynch bankers would have gone through a different process to set up the call if they had material non-public information rather than expose the Fidelity staff to the information, according to the lawyers’ letter.
Rodney Tsang, a Hong Kong-based investment banker formerly at Merrill Lynch, testified today that he had floated more than one capital-raising proposal to Chaoda chairman Kwok following the aborted equity placement in April.
Institutional investors in the meantime were “interested in whether the transaction would happen” while Tsang and his colleagues sought to gauge interest in a June offering, he said.
“These fund managers are very big customers of Merrill Lynch,” Tsang said. “We wanted to take advantage of their interest to gauge their reaction.”
The civil tribunal inquiring into the allegations has the power to disgorge profits made or losses avoided. It can also ban individuals from dealing in any securities, and from serving as a director or manager of a corporation.
Other investors informed about Chaoda’s placement included Janus Capital Management, Wellington Management Company LLP and BlackRock, the government said.
Jane Ingalls, a spokeswoman for Janus, said in September that an analyst at the firm reported the information disclosed on the call to its compliance department and the firm restricted trading in the stock “immediately.”
BlackRock, Alliance Bernstein
Angela Yu of BlackRock and Matthew Sigel, formerly of Alliance Bernstein LP, are scheduled to testify from the offices of the Securities and Exchange Commission in the U.S, according to a lawyer for the government Jonathan Kwan.
Three Wellington Management employees including Sabre Mayhugh are unwilling to testify, Kwan told the tribunal today.
Founded in 1994 by Kwok, Chaoda first sold shares to the public in Hong Kong in 2000. Kwok is a member of the Chinese People’s Political Consultative Conference, China’s top political advisory body, and has a 19.6 percent stake in the company, according to data compiled by Bloomberg.
Kwok, who has denied the allegations, and Stairs, now in a research position at Fidelity, declined to comment today on the proceedings.
Chaoda fell 27 percent on Sept. 26, when the misconduct proceedings were first reported and its shares were suspended. Next Magazine also alleged in a May 26 report that the company exaggerated its farmland, which the company denied. Its shares fell 81 percent last year.