A New Ray of light on an Enigma Network case
26 October 2020
In a recent post, Webb-site reported two particularly vague "Restriction Notices" issued by the SFC on 13-Aug-2020, requiring brokers China Gather Wealth Financial Co Ltd (CGWF) and Power Securities Co Ltd (PS) to freeze the accounts of an unnamed male client holding shares in an unnamed "company listed in Hong Kong" up to unspecified "specified amounts". In the covering media release, the SFC stated that the brokers are not under investigation and that the client was "suspected of committing misconduct and breaching his duties towards a listed company". In our post, we noted:
"Our database records that both of the brokers acted as placing agents to companies in the "Enigma Network" up to 2016.
A new ray of light is now cast upon this case by a decision of the Securities and Futures Appeals Tribunal (SFAT) dated 28-Sep-2020, quietly posted on the SFAT website and not announced by the SFC. The client's name is Zhou Ling (Mr Zhou), ex-Chairman of New Ray Medicine International Holding Ltd (NRM, 6108). It is indeed a member of what we call the "Enigma Network". The stock has been suspended since 6-Oct-2017 at the direction of the SFC. That day, NRM announced that the SFC suspected that NRM's announcements on two acquisitions contained "materially false, incomplete or misleading information". These were:
- the acquisition of 50% of Saike International Medical Group Ltd announced on 20-Mar-2015 and completed on 16-Jul-2015, for CNY95m (HK$118.8m). The purported vendor was "Ms. Zhao Lei", an "independent third party"; and
- the acquisition of 15% of Eternal Charm International Ltd announced on 5-Dec-2016 with a supplemental agreement announced on 14-Mar-2017, for CNY47.25m (HK$53.4m). The purported vendor was one "Wang Wei (王威)", an "independent third party".
The "Statement of Reasons" (SoR) attached to the Restriction Notices was not published - the SFC stopped publishing SoRs some time ago after we kept figuring out who such notices were about (see this, for example). However, the SFAT quotes from the SoR that the SFC suspects that Mr Zhou committed "misconduct and obtained secret profits from certain transactions which he caused New Ray to enter into between 2015 and 2017". That period includes the two acquisitions.
Mr Zhou ceased to be a director of NRM on 27-Jun-2018 when he did not stand for re-election at the AGM. The announcement of that stated that he had confirmed to the Board that there were no matters in relation to his retirement that need to be brought to the attention of the Shareholders.
Mr Zhou owns 132,188,952 shares and his wife Yang Fang owns 29,211,048 shares, together amounting to 161.4m shares (9.65%) of NRM. At the suspended price of $0.425, these shares would be worth HK$68.595m. Despite the suspension, Mr Zhou increased his holding by 48,672,000 shares on 11-Apr-2019 at an off-market price of $0.20 per share.
On behalf of Mr Zhou, Stephen Wong Kai Ho for DLA Piper Hong Kong applied to the SFAT for a review of the Restriction Notices. The SFAT, Chaired by Michael Lunn, ruled that it had no jurisdiction to entertain the application, because the notices applied to the brokers, not the client. It noted that the client can request the SFC under s208 of the Securities and Futures Ordinance to withdraw the prohibitions, and if the SFC refuses, then it would have to give reasons under s209(3)(b) and the client could then apply to the SFAT for a review of the refusal. In a pointed remark, the Chairman wrote:
"It is to be anticipated that in such a statement... it will be necessary to provide more details of the SFC's reasoning than had been provided in the relatively unparticularised Statement of Reasons provided to the two brokers."
Webb-site notes the statutory requirement under SFO s209(6) that the SFC shall publish in the Gazette "a notice regarding" the imposition of Restriction Notices, and may, if it "considers appropriate", include an SoR. When the identity of the clients and the listed securities which are frozen are withheld from such publication, then it begs the question, what was the legislative intent of requiring publication? It really tells the public (including other brokers who might hold assets controlled by the same clients) so little as to be meaningless, and that cannot have been the legislative intent. Greater transparency is called for.
© Webb-site.com, 2020
Organisations in this story
- China Gather Wealth Financial Company Limited
- DLA Piper Hong Kong
- HKSAR Securities and Futures Appeals Tribunal
- New Ray Medicine International Holding Limited
- Power Securities Company Limited
- SECURITIES AND FUTURES COMMISSION