3 April, 2017
The Market Misconduct Tribunal (“MMT”) has issued its first disqualification orders against officers for breaches of the disclosure requirements under section 307G(2) of the Securities and Futures Ordinance (“SFO”).
The disqualification orders were made against the CEO and the Financial Controller of Yorkey Optical International (Cayman) Limited (“Yorkey”). The MMT held that there was a 13-week delay in announcing the material losses suffered by Yorkey in late 2012, and that the delay was a result of the reckless conduct of the CEO Mr Nagai Michio and the Financial Controller Mr Ng Chi Ching.
Mr Michio and Mr Ng were disqualified from being directors or being involved in the management of any Hong Kong listed corporation for 18 and 15 months respectively. Yorkey and Mr Michio were also fined $1 million each.
Background
Yorkey had been listed on the Main Board of the Hong Kong Stock Exchange since February 2006. At the material time, Mr Michio was the CEO and Executive Director of Yorkey, and Mr Ng was the Financial Controller and Company Secretary.
On 16 August 2012, Yorkey released its unaudited 2012 interim results recording drops in both revenue and profit compared to the corresponding period in 2011. Despite this, Yorkey informed the market that it expected significantly better results in the second half of 2012:
- Under “Operational and Financial Review”, Yorkey reported that “As consumer electronic products entered the peak period in the second six months of 2012, the players in the digital still cameras industry actively expanded their sales channels of new models, it is expected that the results of Yorkey will benefit from it directly.”
- Under “Outlook”, Yorkey reported that “The Group expects that its results for the second half of the year will see significant growth over that in the first half of the year, alongside with increasing profitability.”
However, instead of significant growth and increasing profitability, Yorkey’s financial performance started to deteriorate in October 2012, which continued through to December 2012 and was reflected in monthly management accounts provided to Mr Michio in mid-December 2012.
On 25 March 2013, Yorkey announced its audited 2012 annual results, showing:
- A loss before tax of US$136,000, compared to a profit before tax of US$7.531 million in 2011.
- A net profit of US$60,000, representing a 99% decrease compared to the US$6.685 million in 2011, which is also a significant decrease compared to the first six months of 2012 (US$1.252 million).
- A drop in revenue of 5.9% and a drop in gross profit margin from 21.2% to 18.2% compared to first half of 2012.
Yorkey’s share price dropped by 13.8% on the first trading day after the release of the 2012 annual results. Over the next three days, its share price dropped a total of 21.25%, from HK$0.80 to HK$0.63.
Liability not contested
Yorkey accepted that the deterioration in its financial performance was known to it in or around mid-December 2012 when the consolidated monthly management accounts to November 2012 came to the knowledge of Mr Michio. The MMT held that the delay of 13 weeks between mid-December 2012 and 25 March 2013 in the disclosure of information about the deterioration was unreasonable and unjustified, and a breach of the disclosure requirement in section 307B of the SFO.
Mr Michio and Mr Ng accepted they were in breach of sections 307G(2)(a) and 307G(2)(b) of the SFO1.
They were aware of the deterioration well before the publication of the 2012 annual results, and both were aware of the risk that failure to make timely disclosure of the deterioration may result in Yorkey’s breach of section 307B. However, both failed to take any steps to ensure timely disclosure. Their failure amounted to reckless conduct in that they were unreasonably taking the risk of a breach of the disclosure requirement, and were in breach of section 307G(2)(a).
Further, both Mr Michio and Mr Ng accepted that they failed to put in place a system to ensure price sensitive information relating to the performance of Yorkey would be identified and disclosed in a timely manner, and were also in breach of section 307G(2)(b) of the SFO.
MMT’s sanctioning principles
Yorkey
Yorkey was ordered to pay a regulatory fine of HK$1 million. The MMT took into account the following:
- Yorkey had no system in place to ensure inside information relating to its performance would be identified and disclosed, timeously or at all.
- The breach was not intentional or deliberate. The reckless conduct of Mr Michio and Mr Ng resulted in its breach.
- The breach continued for 13 weeks. The MMT accepted that it was a first offence, but not a “one-off” offence.
- The notional loss suffered by investors amounted to an aggregate amount of HK$1,528,695.
- There was no benefit to, no profit gained or loss avoided by, Yorkey, Mr Michio or Mr Ng.
- Although Yorkey admitted liability, it did not do so at the earliest practical moment. Its admission was made 31⁄2 months after the preliminary conference and was made in the interest of saving time and costs. There was no expression of remorse.
Yorkey was also ordered to appoint an independent professional adviser to review its procedures for compliance with Part XIVA of the SFO.
Mr Michio
MMT concluded that Mr Michio had inescapable personal responsibilities to comply with the disclosure requirements.
- The consolidated monthly management accounts were provided to Mr Michio, not Mr Ng. Mr Michio headed a listed corporation in which the financial controller was plainly bypassed in respect of the consolidated monthly management accounts as if the financial controller did not exist.
- He knew of the announced forecast of “significant growth” and “increasing profitability” in the 2012 interim results and the significant drop in financial performance from October to December 2012, yet he took no steps to publish any profit warning.
Mr Michio was ordered to pay a fine of HK$1 million. In addition, a disqualification order was made against him for 18 months and he was ordered to attend a training program on compliance with Part XIVA of the SFO.
Mr Ng
A disqualification order was made against Mr Ng for 15 months and he was ordered to attend a training program on compliance with Part XIVA of the SFO. Although he was the Financial Controller and Company Secretary of Yorkey, he did not receive consolidated monthly management accounts and he was only made aware of the financial deterioration in late February 2013 when the auditors provided draft consolidated financial statements to Yorkey.
Lessons learnt – further reminder of the need for prompt disclosure
Of the three recent MMT decisions made in relation to Part XIVA of the SFO, the period of delay of 13-week in this case is the longest and the most serious.2 This is demonstrated by the MMT issuing its first disqualification orders against officers for breaches of the disclosure requirement.
Although an admission of liability is commonly seen as a mitigating factor taken into account in sanctioning, the MMT was critical of the fact that the admission of liability was made 31⁄2 months after the preliminary conference, which in the view of the MMT was not the “earliest practical moment”. Moreover, the admission was made to “save costs” and not as an expression of remorse. This is something to bear in mind when deciding whether and when to make admissions.
1 Section 307G(2) of the SFO lays down the circumstances when an officer is in breach of the disclosure requirement:
“(2) If a listed corporation is in breach of a disclosure requirement, an officer of the corporation-
(a) whose intentional, reckless or negligent conduct has resulted in the breach; or
(b) who has not taken all reasonable measures from time to time to ensure that proper
safeguards exist to prevent the breach,
is also in breach of the disclosure requirement.”
2 The MMT fined AcrossAsia Limited and its former chairman and CEO an aggregate sum of $2 million for disclosure of inside information made a week too late. The MMT found Mayer Holdings and eight of its current and former executives in breach of the disclosure requirements under Part XIVA of the SFO for a three week delay in disclosing the resignation of its auditor. A hearing on sanctions will be held on 15 March 2017.
For further information, please contact:
Melvin Sng , Partner, Linklaters
melvin.sng@linklaters.com
