CITIC Pacific woes continue
22 October 2008
After Monday's piece on CITIC Pacific's "unauthorised" currency speculation, here are a few more observations.
Material adverse change
In a circular dated 16-Sep-08, which quoted a "Latest Practicable Date" for information in the circular of 9-Sep-08, it states (page 43):
"Save as disclosed in this Circular, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2007, the date to which the latest published audited accounts of the Company were made up."
But according to Monday's profit warning, the Company was "aware of the exposure arising from these contracts on 7 September 2008". That's 2 days before the Latest Practicable Date in the circular. Even on 9-Sep-08, the AUD was trading at about US$0.80, which is $0.07 below the average price on the FX contracts, with a principal value of AUD9.34bn, so they were, in simple terms, looking at a mark-to-market loss of USD654m, which nobody could seriously argue is not materially adverse.
So it appears that the circular contained a false and misleading statement. If it did, then this is an offence under section 298 of the Securities and Futures Ordinance, for which a company and its directors are liable to prosecution under the Securities and Futures Ordinance (SFO). The maximum penalty for conviction on indictment is a fine of $10m and 10 years in the slammer.
This morning, the SFC has announced an investigation into the affairs of the Company, presumably under section 179 of the SFO.
Larry Yung's huge option from CITIC HK cancelled?
On 5-Dec-05, CITIC Hong Kong (Holdings) Ltd (CITIC HK), which owns about 29% of CP, granted to CITIC Pacific Chairman Larry Yung Chi-kin (Mr Yung) five-year options to purchase 100m existing shares, or about 4.56% of the company, at an exercise price of $20.50, exercisable between 5-Dec-08 and 4-Dec-10. On 5-Dec-05, the market price closed at $21.55, so the options were already in-the-money, and including time value they were worth several hundred million Hong Kong dollars.
CITIC HK is a wholly state-owned company held by CITIC Group, the PRC parent. Why CITIC HK was so generous to Mr Yung is anyone's guess - it is not as if he was under-incentivised at CP, where he owns 18% of the company and was paid HK$67m last year. Mr Yung is Vice Chairman of CITIC HK, while Henry Fan Hung-ling, Managing Director of CP, is Deputy MD of CITIC HK. Mr Leslie Chang Li-hsien and Mr Chau Chi-yin, who resigned as from CP on Monday, are or were directors of CITIC HK, as is Mr Liu Jifu, an executive director of CP.
Anyway, on 16-Jul-08, Mr Yung ceased to have an interest in these 100m shares - it appears that the option was cancelled. That day, CP closed at $28.20 per share, so the options, which still had 2 years and 5 months to run, had an intrinsic value of HK$770m plus time value. It seems unlikely that anyone would have given up so much value voluntarily - but we cannot find any disclosure on why the options were granted or why they vanished. We wonder whether someone higher up intervened.
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