Hontex Fails to Stop Hong Kong Watchdog Compensation Bid

Hontex International Holdings Co. failed to stop Hong Kong’s securities regulator from seeking a court order to return HK$1 billion ($129 million) to investors in its 2009 initial public offering.

High Court Judge Jonathan Harris today rejected the Chinese fabric maker’s claim that the Securities and Futures Commission was trying to avoid proving its fraud claims beyond a reasonable doubt, ruling that criminal penalties on the company aren’t being sought.

The regulator, which has fought to establish its right to seek civil remedies from suspected rule breakers, alleges that investors were misled by inflated sales figures in Hontex’s prospectus in December 2009. Share sale arranger Mega Capital (Asia) Co. was fined a record HK$42 million in April and stripped of its corporate finance license.

Hontex lawyer Charles Manzoni asked for the trial to be halted while the company appeals today’s ruling. Harris rejected the request.

Hontex was suspended from trading in March 2010, leaving nearly 8,000 individual investors in the lurch, Simon Westbrook, a lawyer for the SFC, told the court on June 5.

“The SFC would like to give them the opportunity to engage in a share repurchase offer,” Westbrook said.

Manzoni had argued that Hontex is only liable for any losses suffered by investors in its IPO as a result of the prospectus misstatements, and not to anyone who purchased shares in the secondary market.

Mega Capital

Westbrook will make opening statements for the SFC’s case tomorrow and present evidence from 25 witnesses, including Hontex directors and employees of Mega Capital, as well as lawyers and accountants from Sidley Austin LLP and KPMG who worked on the IPO.

Harris today asked the SFC to hire an agent to locate an unresponsive Mega Capital associate director, Chen Ying, who conducted due diligence for the IPO and spoke with the SFC on earlier occasions.

The SFC said today it revoked the license of Hong Hui Lung, a former managing director at the securities firm, for failing to “properly and adequately supervise” the work on Hontex’s listing. Hong had denied he was in charge of the transaction team.

Harris ruled last year in the SFC’s insider trading case against Tiger Asia Management LLC that the regulator must obtain a civil or criminal finding of culpability before asking a court to order refunds or other kinds of remedies.

The Court of Appeal reversed Harris’ ruling in February, giving the regulator the power to sue independently. SFC Chief Executive Ashley Alder said last month that the regulator is seeking civil remedies from 22 companies or individuals such as the unwinding of transactions or compensation of investors.

New York-based hedge fund firm Tiger Asia is appealing the case to Hong Kong’s highest court.

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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