Innocent until proven guilty ... or is it the other way around?

PUBLISHED : Sunday, 04 April, 2010, 12:00am
UPDATED : Sunday, 04 April, 2010, 12:00am

'The Securities and Futures Commission has applied for a court order to recoup HK$1 billion raised by mainland sportswear-fabric maker Hontex International Holdings in its initial public offering three months ago...'

SCMP, April 1

Gung-ho stuff indeed. I'm beginning to wonder whether they didn't actually intend it as an April Fool's joke. It would certainly have fit the bill.

To start with, the SFC is apparently taking this action because it believes Hontex contravened sections of the Securities and Futures Ordinance covering deception and fraud. Now stop me if I have this wrong, but isn't fraud an offence in more than the securities regulation alone? I believe we have it down on the books elsewhere as a crime.

And, if so, then our securities regulators were under an obligation to report to the police immediately they found compelling evidence that a crime had been committed. Assuming they did so, we have a matter of the rule of law to consider. In Hong Kong we still take the view that anyone accused of a crime is innocent until and unless proven guilty. I don't believe Hontex or its directors have yet been proven guilty or even charged with fraud. But already we have the SFC putting the wheels into motion to recall the listing, unwind all trades in the stock and freeze the company's bank accounts. Those are drastic moves, company killing moves, the sorts of things normally reserved to a judge in pronouncing sentence.

Thus, I must have had it wrong after all. In this town we start with punishing people, then we put them on trial and afterwards we decide on what charge we first punished and tried them. I believe there was a fellow named Gulliver who once travelled to places like this.

But now think of the mechanics of what the SFC is trying to do here. The stock was listed at an issue price of HK$2.15 more than three months ago (with no peep of protest from the SFC at the time) and it has since traded between HK$1.89 and HK$2.63 before it was suspended from trading.

Let's say that you were one of the lucky people who bought it low and sold it high. You bought it in the original issue at HK$2.15 and you sold it at HK$2.63 for a profit of 48 cents a share. Along come the SFC people to tell you that they are unwinding all the trades. Will you give them back that 48 cents for the benefit of someone who timed his buying and selling badly or will you tell them to get lost in words that a family newspaper cannot print?

Right then, to unwind all trades that will be unwound (and yours won't) will cost more than the proceeds of the original issue. Who is to pay it? The company will be out of business by then or hanging in by its fingernails and what law can force the directors (who will mostly be safely back across the border) to pay?

The whole thing is a shambles. Even assuming that three months worth of trading can really be unwound, and that's a very big assumption, what says that the whims of our regulators should be allowed to override contracts properly constituted and executed by willing buyers and willing sellers of legal securities that were not stolen or forged and had earlier been approved by the SFC?

If this goes through, what investor on the Hong Kong market can have any security in his securities? Let the SFC develop a case of bad feelings about a stock and suddenly the holder has just that much paper that he can roll up and put in the loo. If it can be done more than three months after the listing of a stock it can be done at any time.

There is only one way to do these things and it is the established conventional way that respects the rule of law. It is for the SFC to report its suspicions to the police who can then decide whether to press charges and apply to freeze the assets. If the charges are proven in court the convicts can be clapped into jail and the creditors, including shareholders, can line up in order of their claims.

That may mean that some people will still lose their money. So be it. This is not a kindergarten. If you can't bear the risk of losing money don't deal in the market.

But the approach that the SFC is now proposing is so odd that I wonder whether there isn't more on its agenda. Empire building is obviously there. It always has been. But I wonder whether this isn't perhaps a little smoke to obscure the minibond scandal again.