The SFC seeks disqualification of 2 ex-directors, but fails to seek any recovery of Luxey's HK$350m, 7-fold overpayment in an acquisition from an alleged nominee of then Chairman Joseph Lau. We first documented this case and numerous other suspicious transactions involving Luxey and other listed companies in a series of articles in 2012. This is the only one to see any action, and it falls far short of what is needed to provide a deterrent.

SFC action is too little, too late for minority shareholders of Luxey (8041)
14 April 2019

On 7-Mar-2019, the SFC announced that it is seeking orders from the Court of First Instance to disqualify 2 former directors of Luxey International (Holdings) Ltd (Luxey, 8041), namely Joseph Lau Chi Yuen (Mr Lau) and Chung Man Wai (Mr Chung) in relation to an acquisition 8 years ago. This is an incredibly disappointing step given the level of alleged wrong-doing and the time it has taken to bring this action, which follows an investigation by over 7 years ago. Too little, too late. The SFC should have done more, as we shall explain.

Mr Lau was Chairman of Luxey from 2008 until 25-Feb-2019 when he resigned "due to his other business commitments". Mr Chung was CEO of Luxey from 2008 to 30-Jun-2014.

In a 6-part series of articles titled "Raking muck" in 2012, Webb-site documented numerous suspicious transactions involving Luxey and other listed companies. Luxey was then known as "China Post E-Commerce (Holdings) Ltd" (CPEC). In Part 2 of that series on 27-Feb-2012, we wrote about the acquisition by CPEC on 6-Jan-2011 of Easy Time Trading Ltd (Easy Time) from Big Good Management Ltd (Big Good), wholly-owned by Frankie Ma Hoi Cheuk (Mr Ma), for HK$390m. Easy Time owned 99% of Ratio Knitting Factory Ltd (Ratio), and Mr Ma owned the other 1% directly. We noted that the acquisition circular revealed that Mr Ma only paid HK$50.08m to acquire Ratio Knitting in Sep-2010 - so 3 months later, he was flipping it to CPEC at about 8 times the price.

We also documented a series of connections between Mr Lau and Mr Ma, including internet domain records connecting the two. The article ended with a set of 9 questions for investigation by the SFC, only one of which is partially addressed by the recent announcement, specifically:

Over 7 years later, the SFC alleges that:

In seeking disqualification orders, the SFC will need to satisfy the civil standard of proof (the balance of probabilities). Given the serious allegations that the two directors caused Luxey to overpay by $350m for Ratio, that Mr Lau made a secret profit, and that this amounted to "fraud, misfeasance or other misconduct", we assume that the SFC has evidence to support its claims. Why then, don't they go for something more meaningful that would actually benefit the minority shareholders of Luxey rather than just disqualify the 2 former directors from being directors? For most potential fraudsters, the risk of being prohibited from managing a public company is not a meaningful deterrent.

In our view, the SFC should also have brought a court order under Section 214 of the SFO that Luxey should bring an action against Mr Lau and Mr Ma seeking recovery of the $350m overpayment, assuming the two are not bankrupt. Any recovery would benefit Luxey and its shareholders.

We wonder whether the SFC is now literally too late to do this though: the Limitation Ordinance puts a limit of 6 years on civil claims, but under Section 26 of that ordinance, the clock "shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it". The SFC must be getting close to that point if they haven't passed it already.

There is a precedent for such action. A compensation order under section 214 was obtained for the first time by the SFC in 2012, following action commenced in 2008, following our 3-part investigative reporting in 2002 about transactions in 1999-2001 by Styland Holdings Ltd (Styland, 0211). So that took a while too, but they got there in the end. The court ordered that the former Chairman and his wife should pay HK$85m to Styland and disqualified both for 12 years.

There are still numerous unanswered questions raised in our 2012 articles about other transactions involving Luxey and other listed companies. We're not holding our breath waiting for action on those.

©, 2019

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