Hong Kong Watchdog Seeks to Liquidate China Metal Recycling

Hong Kong’s securities regulator said it’s seeking to liquidate China Metal Recycling Holdings Ltd., once ranked the nation’s biggest scrap metal recycler, after finding evidence the company fabricated sales.

The Hong Kong-based company, which counted China’s biggest steelmaker among its customers, inflated the size of its business to gain a listing in 2009, the Securities and Futures Commission said yesterday in a statement. The regulator said it obtained court orders to appoint provisional liquidators.

China Metal adds to a rash of accounting scandals at Chinese companies that have shaken investor confidence, sent stocks tumbling and drawn scrutiny from regulators. The company, accused of falsifying data by short-seller Glaucus Research Group, is the first to be targeted for liquidation as the SFC steps up efforts to toughen enforcement and share-sale rules.

“This is good for Hong Kong,” said Francis Lun, chief economist at GE Oriental Financial Group. “The SFC is really not taking any rubbish from this listed company.”

China Metal shares have been suspended from trading since January after Glaucus alleged the company was “a blatant fraud that has deceived the market about the size of its business.”

“The SFC’s decisive action will allow shareholders some measure of recovery and will protect many more investors from future losses,” Matt Wiechert, Glaucus’s founder, said in a statement today.

Two Arrests

Two people were arrested on July 26 in connection with the case and both are currently on bail, according to Hong Kong’s police. Officers obtained documents after searching the company’s office and other locations on July 26 and July 27, the police said in a statement. It identified the two as a 46 year-old man surnamed Lam and a 42 year-old woman surnamed Lai.

China Metal’s chief financial officer is Kenneth Lam Po-kei, age 46, and Lai Wun-yin, age 42, is a board member, according to data compiled by Bloomberg.

Alan Fung, China Metal’s group finance director, didn’t answer calls to his office and e-mailed requests for comment.

China Metal, which first sold shares in June 2009, suspended trading on Jan. 28 after Glaucus Research made its allegations against the company and rated it a “strong sell.” The company called the claims groundless and said at the time its chairman planned legal action against the short-seller.

Drawing Scrutiny

Chinese companies seeking listings in the U.S. have drawn scrutiny in recent years. In June, China MediaExpress Holdings Inc., which obtained a U.S. stock listing without an initial public offering by buying a listed company, was sued by U.S. regulators for allegedly falsifying financial statements. The Securities and Exchange Commission has filed fraud cases against more than 60 U.S.-listed Chinese companies and executives.

Short-seller Muddy Waters LLC, founded and led by Carson Block, has been a critic of Chinese firms, with a mixed track-record. Tree-plantation operator Sino-Forest Corp. slumped 74 percent before eventually filing for bankruptcy protection in March 2012 after Muddy Waters claimed the company overstated its assets. Shares of New Oriental Education & Technology Group Inc. and Focus Media Holding Ltd. rebounded after initial slumps when Block questioned their accounting. Both companies have denied any wrongdoing.

Court Hearing

Hong Kong’s regulator has appointed two provisional liquidators from Borrelli Walsh Ltd. to China Metal, in an application made on July 26, according to a statement yesterday from the company. They have the power to take over the company’s operations and assets and investigate its affairs.

“The provisional liquidators will be undertaking an urgent assessment of the operations of the company and its subsidiaries in consultation with the management of the company,” according to the company’s statement. The shares will remain suspended.

The court will hear the case on Aug. 2 on the continuation of appointment of provisional liquidators, where China Metal will have the chance to address the allegations, the SFC statement yesterday said.

Wellrun Ltd., the company’s largest shareholder, objects to the SFC’s application and believes it’s not beneficial to shareholders, it said yesterday in a statement. Wellrun’s sole beneficial owner is China Metal’s Chairman and Chief Executive Officer Chun Chi Wai.

New Deadline

On Jan. 25, Chun said he would sell 29 percent of the company’s stock under his ownership for at least HK$3.41 billion ($440 million) to China Energy Conservation and Environmental Protection Group, a state-owned company. The sale would leave Chun with 23.1 percent of the company and make the buyer its largest shareholder. On July 1, the company said the sale had yet to occur and that new conditions had been attached to its completion, including a deadline of Dec. 31.

“There is ample opportunity for the purchaser to get out of the deal once officials at the state-owned enterprise review the publicly available evidence,” Glaucus said in its January report.

Zhang Chao, China Energy Conservation’s Beijing-based spokesman, did not answer three calls to his office line seeking comment.

The company raised HK$1.55 billion when it sold shares in June 2009. Wong Hok-leung, a former chief financial officer, resigned in November 2009 after saying he was denied proper access to the company’s financial information. The company called Wong’s allegations unfounded.

False Statements

Angel Yeung, a Hong Kong-based spokeswoman for UBS AG, which managed the 2009 share sale, declined to comment on the SFC’s statement.

The SFC has proposed making banks criminally liable for false statements in initial public offering documents. Hontex International Holdings Co. agreed in June 2012 to pay shareholders $133 million to end a lawsuit that the SFC brought against it for misleading investors in its prospectus.

China Metal said on July 1 it was again delaying its 2012 annual results announcement as its auditors needed more time. Shanghai Baosteel Group Corp., which controls the country’s biggest listed steelmaker, is one of the company’s customers.

The case is Securities and Futures Commission and China Metal Recycling Holdings Limited, HCCW 210/2013, Hong Kong’s Court of First Instance.

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