Hontex Asks Court to Halt Hong Kong Regulator’s IPO Case

Hontex International Holdings Co. sought to halt a lawsuit seeking compensation for investors who, Hong Kong’s securities regulator said, were misled by the Chinese fabric maker in its listing prospectus.

The Securities and Futures Commission’s fraud case against the company should be tried under a criminal and not civil burden of proof if it proceeds, Hontex’s lawyer Charles Manzoni told the city’s High Court today.

“We don’t want to adduce all the evidence that we say is inadmissible,” Manzoni said, referring to witnesses that weren’t warned about self-incrimination and potentially privileged communications with lawyers.

The Securities and Futures Commission wants to use HK$997 million ($128 million) of Hontex’s frozen assets to compensate investors in its 2009 share sale, after saying the company is criminally liable for misstatements in its prospectus. In April the SFC revoked the license of an arranger of the sale and last year a KPMG accountant was cleared of taking a bribe for his work on the Fujian province-based company’s prospectus.

“The Hontex case illustrates what can happen when things go wrong,” SFC Chief Executive Ashley Alder said on May 22, two weeks after the regulator proposed more stringent due diligence requirements for bankers as well as extending civil and criminal liability to them for prospectus information.

Test Case

Alder said the case also will be a test of whether Hong Kong investors have recourse when a listed company’s business, directors, and legal incorporation all exist outside of Hong Kong’s legal jurisdiction. Hontex manufactures goods in mainland China; its directors are in Taiwan and the company is incorporated in the Cayman Islands.

High Court Judge Jonathan Harris, who in July ordered the Hontex trial to proceed, ruled in a separate case that the regulator must obtain a civil or criminal finding of culpability before the court can order refunds.

The Court of Appeal reversed Harris’ ruling over the use of assets of New York-based hedge fund Tiger Asia Management LLC in February. Tiger Asia, which the SFC accused of trading on inside information, is appealing to the city’s highest court.

Simon Westbrook, a lawyer for the regulator, said today that criminal prosecution of Hontex directors isn’t possible because they aren’t in Hong Kong, and that prosecuting the company for a fine would only decrease the amount of funds available to compensate investors.

Standard of Proof

Harris said today he would rule this week on whether it’s appropriate for him to hear the case and to what standard of proof the SFC must prove its allegations.

Hontex was suspended from trading in March 2010 after the SFC made its allegations. The company’s board in August of that year concluded that investors should be compensated after its audit committee found the listing prospectus to be unreliable.

Hontex’s IPO sponsor Mega Capital (Asia) Co., in addition to losing its corporate finance license, was fined a record HK$42 million for failing to highlight the misleading information in the prospectus. The KPMG accountant was cleared in April 2011 of the bribery charges after a trial.

The case is Securities and Futures Commission and Hontex International Holdings Co., HCMP630/2010 in the Hong Kong Court of First Instance.

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