Are disclosure filings on HKEx website reliable?
In Hong Kong, the place you go for information about the buying and selling of shares in a listed company by its major shareholders and directors is the disclosure-of-interest filings on the stock exchange's website.
Reporters and analysts monitor the filings closely. Since parties are required by law to file, we assume that is the most reliable source of information.
Well, it isn't.
The fact is major shareholders and directors are free to change the public record by refiling without letting the public know. You won't even find any indication that a 'correction' has been made.
I learned this the hard way. On February 28, I wrote a piece titled 'China.com special dividend payout raises many questions'. The column told how the internet firm gave a profit warning. Its major shareholder, CDC Corp, bought 312,000 shares the day after, as the share price dived, I wrote. One trading day after that, China.com announced a generous special dividend.
It was a pretty straightforward story, and I pulled every number in it from public records at the time of publication.
Yet five weeks after the column, CDC executive director Sammy Cheng e-mailed me a request for a correction. The core complaint was that CDC did not buy 312,000 shares but only 29,000, 0.027 per cent of China.com, the day after the profit warning.
The difference in size did not reduce the validity of my question: Did CDC know China.com would soon announce a special dividend payout when it increased its stake in the firm?
But a complaint is a complaint. Naturally, I pulled up the filings from Hong Kong Exchanges and Clearing's website to support my article. I was shocked to find that the official record now said CDC bought 29,000 shares on the date in question.
Something was wrong. Had I clicked on a pirate website in February, or had the record been revised? I searched the website and found nothing. I asked HKEx for a clarification.
After searching through its internal records, the exchange replied: 'CDC Corp submitted to the stock exchange a disclosure of interests filing on February 9, 2009, reporting that 312,000 shares were acquired on February 5, 2009, at an average price of $4.427 and the highest purchase price was $5.20. Since the filing came after the cut-off time on February 9, 2009, the information was posted on the HKExnews website on February 10, 2009.
'On March 2, 2009, CDC Corp, citing errors in the previous filing, submitted to the exchange a revised filing to supersede the one submitted on February 9, 2009. In the revised filing, the number of shares acquired by CDC Corp was changed from 312,000 shares to 29,000 shares. The average purchase price was also changed to $4.526 and the highest purchase price was changed to $4.60. The new information was updated on the HKExnews website on the same day ...
'Parties are not required to explain to the Exchange their reasons for making revisions.'
(Actually, CDC did acquire a total of 312,000 shares, but the other 283,000 shares were acquired before the profit warning. The law does not require it to report these purchases, because they did not cross the one per cent threshold.)
Relieved is too weak a word to express how I felt. I wasn't wrong.
But wait a minute. Something more important is at stake here. Investors rely heavily on the exchange's filing system to try to anticipate a company's future prospects and place their bets.
Yet this reliance is built upon sand.
Interested parties can revise the information at any time, without letting the public know, without giving any reason and without leaving any public trace.
There is no reason to believe that in CDC's case this was anything more than a technical mistake.
But imagine how the system could be abused.
Let's say the controlling shareholder of a listed firm makes a filing a month before its results announcement, saying he has raised his holdings 1 per cent. In a market where people believe the privileged few would not hesitate to fatten their wallets, the share price goes up. Friends of the controlling shareholder who are in on the plan then sell, making a profit.
A month passes and the company releases poor earnings results. The share price dives. At the same time, the controlling shareholder makes a refiling, stating he had in fact raised his holding only by 0.1 per cent, not the 1 per cent previously reported. Therefore, he neither significantly increased his stake, nor did he lose much money when the shares tanked, as the market assumed.
He does not even have to explain the mistake, and nobody will ask, at least not until someone complains of price manipulation to the regulators.
But given that none of the victims who have lost a fortune in this stock will even be aware of the revision, who is there to complain?
What is the chance of this happening? I cannot possibly tell, because a refiling automatically supersedes the previous one. In short, every trace of a correction is automatically removed from the HKEx website and therefore the public eye.
The question is if the law requires a major shareholder or director to inform the public of his or her dealings in a company's shares, why isn't he or she required to make public any subsequent correction and to give a reason?
If a notice of correction and explanation is not required, what incentive is there for the interested parties to ensure accurate filing in the first place?
To these questions, the exchange says its role 'is restricted to the provision and manning the platform for receiving and displaying' the information, and its mode of operations follows strictly the requirements of the Securities and Futures Commission, which administers the disclosure-of-interest regime.
The SFC promised in May 2005 to add a code to indicate a correction had been made to a previous filing. Nothing has happened so far.
Back to the correction made by CDC. I did manage to get an explanation. In an e-mail, the company's spokesman said it was 'a mistake made by our company secretary'.