May 22 (Bloomberg) -- Police began probing the Hong Kong Mercantile Exchange Ltd., owner of the failed commodities market set up by a member of the city’s cabinet, after the securities regulator found suspected financial irregularities.
The arrest of three men after the May 18 shuttering of the exchange prompted its Chairman Barry Cheung, who sits on Hong Kong’s Executive Council, to say he is taking a leave of absence from all public positions. Cheung hasn’t been accused of wrongdoing.
HKMEx lost its trading license after failing to attract sufficient volumes as it competed with rivals such as the Chicago Mercantile Exchange and the London Metals Exchange, which was bought by Hong Kong’s stock-exchange operator last year. Cheung, who ran the 2012 election campaign for the city’s Chief Executive Leung Chun-ying, is the latest in a series of prominent Hong Kong government and business figures to be affected by criminal investigations.
“This will have an impact on Hong Kong’s image of clean government,” Ivan Choy, political scientist at Chinese University of Hong Kong, said of the series of investigations involving high-profile figures.
Last week, Hong Kong’s anti-graft agency said it was investigating its former head over alleged misspending. The agency last year arrested the co-chairmen of the city’s largest property developer by market value Sun Hun Kai Properties Ltd. Thomas and Raymond Kwok have pleaded not guilty in that case.
The three men arrested aren’t current or former employees of HKMEx, Cheung told reporters today. He said he would cooperate fully with the investigation.
A former McKinsey & Co. consultant, Cheung said he is the HKMEx’s largest shareholder. EN+ Group, controlled by Russian billionaire Oleg Deripaska and China’s Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, also hold stakes in the exchange.
Leung accepted Cheung’s request to step aside as a member of his cabinet and other roles including head of the Urban Renewal Authority after the Securities and Futures Commission said it found “serious” suspected financial irregularities at the shuttered commodities market.
Leung, whose former development secretary is fighting charges of housing fraud, said yesterday the investigations into HKMEx would be impartial and he “should not comment and would not interfere.”
Cheung was the non-executive chairman of Deripaska’s United Co. Rusal, the world’s largest aluminum producer, until October, and remains on the board of the Russian commodities company. He was appointed to AIA Group Ltd., the former Asian unit of American International Group Inc., as an independent non-executive director in September.
AIA Group and Cheung’s status as a director have nothing to do with the situation, Emerald Ng, a spokeswoman for AIA in Hong Kong said via e-mail, adding that they will continue to monitor the events. A Moscow-based spokeswoman for Rusal declined to comment.
HKMEx began trading gold futures in May 2011 and silver contracts in July that year, both denominated in U.S. dollars. The exchange stopped trading and handed back its operating license because revenue wasn’t sufficient to support running costs, the SFC said on May 18.
“HKMEx was founded to bridge China’s fast-growing commodities markets with the rest of the world by providing products adhering to international standards, but tailored to local and regional market participants’ risk management needs,” Cheung said in February 2012.
He said on May 18 that HKMEx would strengthen its shareholder base and develop new products, and intended to re-apply for its license.
The closing of trading positions on the exchange went smoothly and is now complete, the SFC said yesterday. LCH.Clearnet Group Ltd., the London-based clearinghouse, has started returning collateral to clearing members, the markets regulator said.
The SFC said yesterday it began investigating HKMEx on May 15 and then referred the matter to the Hong Kong police department’s Commercial Crime Bureau.
Hong Kong police said yesterday they are investigating, on referral by the SFC, a suspected case of “using a false instrument” involving a commodities company. They said today they had arrested three men as part of their investigation of HKMEx.
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