Largest disgorgement order amount ever imposed for disclosure of false or misleading information

Introduction

On 26 June 2017, the Market Misconduct Tribunal (“Tribunal“) ordered the former chairman and chief executive officer  (the “Former Chairman”) of Greencool Technology Holdings Limited (“Greencool“) to disgorge approximately HK$482 million of profit from his market misconduct involving disclosure of false or misleading information. 

This is the largest disgorgement order amount ever imposed by the Tribunal to date.

Market misconduct of disclosure of false or misleading information 

In late December 2016, the Tribunal found the Former Chairman, three other former executive directors and the former financial controller of Greencool (which was listed on the Growth Enterprise Market (“GEM”) of the Hong Kong Stock Exchange but is now delisted) culpable of market misconduct of disclosing false or misleading information inducing transactions contrary to section 277(1) of the Securities and Futures Ordinance by grossly overstating Greencool’s sales, profit, trade receivables, bank deposits and the company’s net asset value for the financial years ended 31 December 2000 to 2004 in Greencool’s annual reports and results announcements released between 2001 and 2005. 

The Tribunal noted that over a span of five years, a complex and sophisticated fraudulent scheme was perpetrated within some of the Greencool subsidiaries to give the impression through the group’s accounts that its results were far stronger than in truth they were by materially inflating assets and substantially understating or failing to disclose liabilities. 

The Securities and Futures Commission (”SFC”) commenced the proceedings in June 2014 following seven years of investigation, which, as the SFC said, was the most complex one during this period.  

Sanctions imposed 

Former Chairman 

The Tribunal found that the Former Chairman must have been the major, or at least one of the major, driving forces behind the fraud, and thus imposed the most severe sanctions on him, which included: 

• a disgorgement order – he shall pay to the Government an amount of approximately HK$482 million being the profit gained by him from his disposals of Greencool shares in 2001, together with interest thereon; 

• a disqualification order – he shall not, be or continue to be a director, or take part in the management of a listed corporation, or any company in which a listed company directly or indirectly has a shareholding, for five years; 

• a cold shoulder order – he shall not deal in any securities, futures contracts or leveraged foreign exchange contracts, or any interest in these products for five years; and 

• a cease and desist order – he shall not again engage in any market misconduct, or otherwise his future acts of market misconduct will be a criminal offence. 

Three other former executive directors 

The other three former executive directors were also found to have played an active role in furthering the fraudulent activities.  The Tribunal imposed on each of them: 

• a disqualification order – he shall not, be or continue to be a director, or take part in the management of a listed corporation, or any company in which a listed company directly or indirectly has a shareholding, for five years; and 

• a cease and desist order – he shall not again engage in any market misconduct, or otherwise his future acts of market misconduct will be a criminal offence. 

Former financial controller 

In respect of the former financial controller, the Tribunal accepted that he played no knowing role in the fraud.  However, he, also being the qualified accountant appointed under the GEM Listing Rules and the company secretary of Greencool, was found to be negligent as to whether the information in the accounts was false or misleading.  He was negligent in performing his professional duties as a qualified accountant by failing to supervise the implementation of a sound internal control and financial reporting system, thereby enabling the former executive directors to disseminate false and misleading information to the public.  The Tribunal imposed on him the following sanctions: 

• a disqualification order – he shall not, be or continue to be a director, or take part in the management of a listed corporation, or any company in which a listed company directly or indirectly has a shareholding, for three years; and 

• that the Hong Kong Institute of Certified Public Accountants be informed of the Tribunal’s findings and be recommended to take disciplinary action against him. 

The Tribunal also ordered the Former Chairman, the three other former executive directors and the former financial controller to pay for the SFC’s legal and investigation costs and the costs of the proceedings.  Given that the former financial controller was not part of the group of the four executive directors who were at the heart of the fraud, the Tribunal decided that he should only bear the costs in a far smaller proportion than that of the four executive directors.  The Former Chairman, the three other former executive directors each were ordered to pay approximately HK$5 million for the SFC’s legal and investigation costs and the costs of the proceedings, while the former financial controller was ordered to pay approximately HK$1 million. 

Remarks 

The SFC in recent years has stepped up its enforcement efforts on cases involving corporate fraud and misfeasance concerning listed companies.  

This case demonstrates that severe sanctions would be imposed on senior executives of listed companies who have committed market misconduct by disclosing false or misleading information inducing transactions. 

It is also noteworthy that in this case, the former financial controller, who was not a director and played no knowing role in the fraudulent scheme, was also found culpable of the market misconduct, albeit on a different basis from that of the four executive directors who were at the heart of the fraud – he was found to be negligent as to whether the information in the accounts was false or misleading.  

This should serve as a reminder to all listed companies’ senior executives (including those who are not directors) of their obligations to properly perform their obligations to protect, promote and act in the best interests of the listed companies.  In particular, they should ensure that a sound internal control and financial reporting system is put in place and effectively implemented to prevent or minimize the risk of fraud being penetrated in the listed companies.