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Naomi Rovnick

Early in 2007, private investor John Kwai bought shares in Hong Kong- listed mainland frozen seafood seller First Natural Foods Holdings. 
The 45-year-old former IT manager, who retired early to trade shares from his home in Happy Valley, thought he had done well. First Natural, which sold popular products, including abalone, from its base in Fujian, said it had 630 million yuan (HK$715.39 million) in net cash and shareholders' funds worth 1.2 billion yuan as of  June 30, 2008. 
But just months later disaster struck and in January last year  the Hong Kong High Court declared First Natural insolvent.
'Where did all the cash go?' asked an exasperated Kwai. He said he had 15 per cent of his stock portfolio in First Natural when it failed. 'How could it be there, then just months later, it is gone?' 
Because First Natural's shares are traded in Hong Kong but its assets are on the mainland, that is a mystery that may never be solved.  
On April 23, the seafood company's liquidators Ernst & Young told the Hong Kong stock exchange that following 16 months of exhaustive effort, they had not even managed to take control of the business. 
Ernst & Young said it could not find First Natural's former top executives, Yeung Chung Lung and Yang Le. Shortly after their appointment in January last year,  the accountants stated that most of the company's books and records were 'lost'. 
In its  statement, Ernst & Young's Stephen Liu and David Yen Ching Wai said Yeung and Yang were in 'illegal possession' of the company's chops, without which, on the mainland, liquidators cannot take over and restructure businesses. The liquidators have tried, mostly without success, to enlist the help of mainland  courts. 
Ernst & Young applied to the Shanghai People's Court of Pudong New District for an order against Yang, demanding he return the business licences and chops connected to a First Natural subsidiary company. The Pudong court said in  September it 'did not support' the application. 
In Ningbo , the local court barred Ernst & Young  from filing legal claims against First Natural's former chiefs. The liquidators had more luck in Fujian, where Fuzhou Intermediate People's Court has allowed them to replace the directors of one of First Natural's subsidiary companies in the city with its own staff. 
Hong Kong enjoys a reputation as a modern financial centre. So why are First Natural's private investors being forced to rely on unpredictable mainland judges to help them retrieve their lost cash? After all, the firm's shares were sold and traded here. 
A Hong Kong Securities and Futures Commission spokesman declined to answer questions on whether it was investigating First Natural. 
Still, the frozen fish firm appears to warrant some regulatory scrutiny. Last March, Ernst & Young revealed that HK$84 million had been withdrawn from one of First Natural's bank accounts in Xiamen  in November 2008, two months before the company went into liquidation. 
This transaction, Ernst & Young told the stock exchange, was 'not recorded in the books and records of the company'.
Hong Kong's securities regulator can do very little to investigate mainland companies whose shares are listed here. 'When the individuals and the assets concerned are in a different jurisdiction, this can be a challenge [for Hong Kong regulators]' Aberdeen Asset Management investment manager and head of corporate governance Peter Taylor says. 
In reality, as David Smith of corporate governance experts Riskmetrics explains, Hong Kong has 'no legal over-reach into mainland China'. 
Hong Kong and the mainland do not have a joint rendition treaty, so Hong Kong  regulators cannot cross the Shenzhen border to investigate mainland companies that sold shares here. Since 2007, the SFC has been able to call on the mainland's China Securities Regulatory Commission for help in its investigations.  But the Beijing authority  can still refuse to  help Hong Kong.  
Co-operation sometimes happens. In late 2008, the SFC and CSRC launched a joint investigation  into Citic Pacific, the Hong Kong-listed mainland commodities and property firm that racked up HK$14.6 billion of losses on unauthorised currency derivatives in 2008. 
In First Natural's case, some commentators believe the SFC should look into the seafood company, even though its liquidators have not declared they suspect accounting fraud. 
The company's accounts for the 2008 calendar year, prepared by its liquidators, showed net debt of 184 million yuan and a negative equity position of 369 million yuan. 
'There are obvious questions over the company's accounts. Was the cash [stated halfway through 2008] real?' asks shareholder activist David Webb. 
'It would be helpful for the SFC to announce whether or not it was investigating this case.' 
First Natural's shareholders are not the only ones scratching their heads over unexpected losses incurred  by mainland companies that appeared to be in rude financial health. Shanghai-based Fu Ji Foods and Catering went into provisional liquidation last October. The Hong Kong-listed company, which made the food for the 2008 Beijing Olympics, told its investors that, for the half year to September 2008, it made a 250.23 million yuan net profit. It said its business was stable. 
Fu Ji then did not update investors on its finances again until it shocked them by revealing it was insolvent. 
A KPMG report  in October  said that during last year,  Fu Ji  lost most of its big contracts and  sales staff. Under Hong Kong listing rules, Fu Ji should have disclosed such price-sensitive information immediately. 
The SFC has not announced any investigation into the catering firm. 
'When you are looking at mainland companies [listed in Hong Kong], the [Hong Kong] regulators' ability to  effect change can be zero,' Fraser Howie, a stockbroker and co-author of Privatising China, said.




Seafood trader's insolvency leaves bitter taste