Directors of Pearl Oriental disqualified over failure of timely disclosure of information

The Securities and Futures Commission (SFC) has today obtained orders in the High Court to disqualify Mr Li Xinggui and Mr Zheng Yingsheng, both former executive directors of Pearl Oriental Innovation Ltd (Pearl Oriental), and Mr Zhou Li Yang, current executive director of the company, for failing to disclose material information to the company’s shareholders (Notes 1 and 2).

The Honourable Mr Justice Au granted the orders to disqualify Li, Zheng and Zhou from being a director or being involved in the management of any corporation, without the leave of court, for one year.

The SFC alleged that Li, Zheng and Zhou were involved in the misuse of about RMB64.5 million, representing about 25% of the Pearl Oriental’s total assets, in August and September 2005.

An SFC investigation found evidence that a fourth director of the company paid out RMB64.5 million without any approval by the board in August 2005, and that a month later, Li, Zheng and Zhou purported to ratify the payment by reference to an acquisition of a logistics business in the Mainland.

Despite the size of the transaction, the suspicions that should have been raised by the use of 25% of the company’s assets without board approval and the materiality of the amount involved, neither Li, Zheng, nor Zhou took any reasonable steps to verify information about the proposed acquisition or inform the market.

In the end, the transaction to buy the logistics business never proceeded and the company eventually incurred a substantial impairment loss of the RMB64.5 million.

The SFC alleges the RMB64.5 million had been paid to two companies in the Mainland connected to the fourth director who initially organised the unauthorized payment. Moreover, the SFC alleges when the company demanded a return of the money, the repayment was funded by Pearl Oriental by way of a round robin.

The allegations about the use of the money and the round robin are part of separate, yet to be heard proceedings against the fourth director.

SFC’s Executive Director of Enforcement, Mr Mark Steward said, “These directors went along with a transaction that by any standards was very odd and suspicious. They should have asked questions. They should have stopped it. This case again demonstrates the high cost caused to the investing public through the misconduct of some listed company directors. The SFC will continue to bring these cases before the court to ensure the investing public is protected.”

End

Notes:

1. The company was known as China Merchants DiChain (Asia) Limited at the material times. It listed on the main board of the Stock Exchange of Hong Kong Limited in April 1993. The company was principally engaged in provision of logistics services in the Mainland at the material times.
2. Under section 214 of the Securities and Futures Ordinance, the court may make orders disqualifying a person from being a company director or being involved, directly or indirectly, in the management of any corporation for up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs having been conducted in a manner involving defalcation, fraud or other misconduct.
3. A summary of the material events and the allegations is posted on the SFC website (www.sfc.hk).