Hong Kong Banker under Fire in Dow Jones Case

The chairman of Hong Kong's third largest lender, David Li, has been castigated for indiscretions in the past. An affair he was having with a Hong Kong socialite several years ago was famously discovered by the press when he left his monogrammed shoes outside a Paris hotel room where he was ensconced with the woman.

Now Li is in the spotlight over allegations of insider trading, an affair that has cost him $8.1 million and earned him a harsh rebuke from the US Securities and Exchange Commission (SEC).

This is a considerable blow to the reputation of a man who is head of one of Hong Kong's most high-profile families. Li is a powerful figure. He sits on the executive council (Exco), Hong Kong's cabinet which advises Hong Kong's chief executive on policy, and is also a member of Hong Kong's Legislative Council (Legco). In addition, he sits on numerous government committees and advisory bodies and is a non-executive director for a number of listed companies both in Hong Kong and overseas. Li was also chairman of chief executive Donald Tsang's election committee both in 2005 and 2007.

Last week the SEC announced that insider trading charges against Li had been settled with the payment of an $8.1 million fine, though as is usual with these cases, Li has neither admitted nor denied the charges. Last year Li denied he had broken any laws in respect of the enquiry and told reporters, "I will defend myself vigorously."

His office said he did not want to comment on the case.

The SEC's complaint papers, submitted in a civil suit to the southern district court of New York, state that Li as a board member of Dow Jones was told on April 12 of plans by Rupert Murdoch's News Corporation to launch a bid for Dow Jones at $60 a share. The next day Li told his friend and business associate, Michael Leung, during a flight to Shanghai, about the bid.

That same day Leung started buying Dow Jones shares and over the next five days bought 200,000 shares at prices ranging between $34.83-$36.58 per share. He was using the Merrill Lynch account of his son-in-law, KK Wong. Wong also bought 2,000 shares for his own account. When the Dow Jones deal was made public in early May, Dow Jones stock rocketed more than 50% enabling Leung to make an $8.1 million profit and Wong $40,076. Wong and Leung have agreed to disgorge their profits and were fined an equivalent sum.

The SEC complaint papers say: "David Li knew, or was reckless in not knowing, that he conveyed material non-public information to Michael Leung regarding the offer by News Corporation to acquire Dow Jones." And further say that: "David Li knew, or was reckless in not knowing, that Michael Leung would try to profit from this material non-public information."

Linda Chatman Thomsen, director of the SEC's Division of Enforcement, said in a comment that accompanied the SEC announcement: "We hope this case sends a forceful reminder to corporate insiders that they need to exercise careful discretion when discussing important business matters outside the boardroom and executive suite."

Bank of East Asia issued a statement to the Hong Kong stock exchange about the settlement on February 6, saying that its board fully supports Li in continuing as the chairman and chief executive of the bank. Despite the fact that the statement initially went largely unnoticed as it was published during the Chinese New Year holidays, pressure is now mounting on Li to step down from his public offices.

Legislative councillor Albert Chan said the government should consider Li's position on Exco. "Since his credibility has been called into question, he may not be fit to continue as an executive councillor," he told FinanceAsia.

Asked if Li would be stepping down from Exco, a spokesman for the Chief Executive's office said: "We note the Securities and Exchange Commission's announcement of the settlement and we will study it before commenting."

Shareholder rights activist David Webb says that Li should do the honourable thing and resign from both Exco and Legco.

"If a member of George Bush or Gordon Brown's cabinet entered a settlement in such a case, he would surely resign.

If a member of the US Senate or House of Representatives were involved, he would also resign. As a cabinet member, Mr Li is privy to all sorts of confidential and potentially price-sensitive information about Hong Kong affairs, and he also has input in shaping policy. He has a duty of confidentiality, which the SEC claims he had trouble keeping in the Dow Jones case. Mr Li should do the honourable thing, and avoid undermining the reputation of Hong Kong's cabinet and legislature. He should resign," says Webb.

Webb is conducting a poll of the readers who have signed-up to his website as to whether they think Li should step down. He says this has been by far his most popular poll and so far 93.2% of the 1,149 that have voted believe that Li should resign from Exco, 89% that he should resign from Legco and 67% that he should step down as chairman of the Bank of East Asia.

Webb maintains that the issue hits at the heart of the credibility of the Hong Kong system of governance. "If we don't have political accountability and if people don't react to public opinion and continue to serve or are allowed to serve, then the system isn't working. We have had resignations over other issues in the past. This case is certainly up there in terms of severity if not higher" he told FinanceAsia.

Webb also notes that under the Banking Ordinance the Hong Kong Monetary Authority (HKMA) has a duty to review, in the light of the SEC's allegations, whether Li is a fit and proper person to be chairman and chief executive of a licensed bank.

The HKMA's Guide to Authorisation, which covers the issue of fit and proper persons, notes that "The probity of the person concerned is very important—it is essential that a person with responsibilities in relation to a banking or deposit taking business is of high integrity."

"The MA gives particular weight to whether the person has contravened any provision of banking, insurance, securities or other legislation designed to protect members of the public against financial loss due to dishonesty, incompetence or malpractice. Persons who are known to the MA to have been involved in any business practices that appear to be deceitful or oppressive or otherwise improper or which otherwise reflect discredit on his method of conducting business are unlikely to qualify under these criteria," the guide says.

A spokesman for the HKMA said the body was forbidden under the terms of the banking ordinance from speaking about individual cases.

In addition to his membership of Exco, Legco, and company directorships, Li continues to be a member of the HKSAR Banking Advisory Committee, he is chairman of the Hong Kong Management Association, chairman of the Chinese Banks Association, and pro-chancellor of the University of Hong Kong.