HK watchdog targeting jailed Gome boss

PUBLISHED : Wednesday, 19 May, 2010, 12:00am
UPDATED : Wednesday, 19 May, 2010, 12:00am

Electronics billionaire Wong Kwong-yu is likely to face further fraud charges in Hong Kong after being sentenced yesterday by a Beijing court to 14 years in prison and fined 600 million yuan (HK$683 million) for 'extremely serious' financial crimes.

The 41-year-old Wong - known on the mainland as Huang Guangyu - who founded Gome Electrical Appliances and once ranked as the mainland's richest man also had 200 million yuan in assets frozen by Beijing's No 2 Intermediate People's Court after being convicted of bribery, insider trading and illegal business dealings.

The judgment concludes a chapter in one of the mainland's biggest graft cases on record. Beijing's investigation of Wong widened after his initial detention in November 2008 to implicate more than 10 prominent officials and businessmen, eventually bringing down the mayor of Shenzhen, Guangdong's top graft-buster and the chairman of the provincial Chinese People's Political Consultative Conference.

However, Wong and wife Du Juan have yet to answer allegations by Hong Kong's Securities and Futures Commission that they perpetrated stock market fraud resulting in HK$1.6 billion in losses in 2008. Last August the SFC won a High Court order freezing HK$1.66 billion in Gome shares controlled by Wong and Du. But to date it has been unable to serve a summons on the pair as their whereabouts were unknown.

Wong's formal imprisonment means he 'will be easier to find', a person familiar with the SFC's action said yesterday, and 'proper legal proceedings' can move forward.

The Beijing court also convicted a wholly owned subsidiary of Hong Kong-listed Gome, fining Gome Appliances Co five million yuan for issuing bribes.

'Gome respects the court's judgment,' the Hong Kong firm said in a statement, adding that 'the amount won't materially affect the company's business operations or financial position'.

'We will review our legal position with our legal counsel in the coming days. The court's decision eliminated most of the uncertainties that have been surrounding Gome,' it said.

The jail term and hefty fine would appear to close the book on a rags-to-riches-to-rags story. Wong, the son of Shantou peasants, started with a roadside shop in Beijing in 1987 and went on to build Gome into a nationwide chain of more than 1,000 stores. He topped most mainland rich lists from 2004 until his detention in 2008 and was known as the 'price butcher' among mainland retailers for relentlessly undercutting competitors.

But while he may have traded his pinstripes for prison garb, Wong is far from destitute. The 34 per cent stake in Gome that he still owns was worth almost HK$12 billion as of yesterday's market close.

Wong has remained a very hands-on shareholder despite being detained for the past 18 months and stepping down as Gome's chairman and executive director in January last year. Last week the two British Virgin Islands firms that hold Wong's Gome stake, Shinning Crown Holdings and Shine Group, briefly ousted three directors from Bain Capital from the electronics retailer's board.

Private equity firm Bain bought a 10.81 per cent stake in Gome last summer and was allowed to appoint three people to the board as a result. Gome, which would have been subject to a 2.4 billion yuan penalty for excluding the Bain directors from the board, reappointed them the next day and lashed out at the boardroom machinations that were somehow engineered by Wong from his jail cell in Beijing.

'We strongly believe this outcome does not represent the will of the vast majority of ordinary shareholders,' Gome said. 'It emphatically does not represent the will of the entire executive management team and board.'

In addition to the Gome bribes, the mainland court also found Wong's Beijing Pengrun Real Estate Development paid 1.2 million yuan in bribes. He was also convicted of illegally trading HK$822 million in what appears to be shares in an unnamed Hong Kong firm between September and November 2007.

Wong was also found guilty of insider trading in shares of Shenzhen-listed Beijing Centergate Technologies (Holding) while he was a substantial shareholder of the firm. Wong cleared 309 million yuan in profit by illegally dealing in more than 1.415 billion yuan worth of Beijing Centergate shares between April and September 2007, Xinhua said.

He also directly or indirectly paid 4.56 million yuan in cash and property as bribes to five government officials between 2006 and 2008.

The roster of heavyweight mainland officials caught up in the wake of Wong's graft investigations includes Xu Zongheng , the former mayor of Shenzhen; ex-Guangdong police chief and chairman of the provincial CPPCC Chen Shaoji ; and Wang Huayuan , formerly Guangdong's top graft-buster.

Lin Chiu, a main investor in Hong Kong gambling cruise operator Neptune Group, was also reportedly arrested in late 2008 on the mainland on suspicion of helping Wong to launder money.

Last December, the Shanghai Communist Party's commission for discipline inspection stripped former Shanghai deputy police chief Zhu Ying of his membership of the committee for disciplinary violations related to Wong's case.

It remains to be seen how successful Hong Kong regulators will be in pursuing their civil charges against Wong now that Beijing's criminal case against him appears to be closed.

Corporate governance activist David Webb said: 'So long as Wong is in a mainland jail, it might be difficult for the SFC to complete the civil proceedings against him, as natural justice probably gives him a right to respond, and he may not be able to do so from jail.'

Last year the SFC accused Wong and Du of organising a HK$2.2 billion share buyback by Gome in 2008 so that Wong could use the proceeds to help repay a HK$2.4 billion personal loan.

'This transaction was a fraud or deception,' the regulator said in a statement at the time. 'The share repurchase had a negative impact on Gome's financial position and was not in the best interests of the company and its shareholders.'

The HK$1.66 billion in Wong's assets that were frozen by the High Court marked the largest such injunction ever sought by the SFC. But the failure to serve Wong and Du with a Hong Kong court summons highlights the frailties of cross-border regulatory enforcement.

The SFC's standing co-operation agreement with its mainland counterpart, the China Securities Regulatory Commission, has not proved effective in handling the matter, according to a second person familiar with the issue.

If the SFC continues to be unsuccessful in serving Wong and Du with the summons it can ask the court in Hong Kong to resolve the civil matter in their absence. That could include a possible court order of the sale of the HK$1.66 billion in frozen Gome shares, in order to compensate for losses due to the alleged stock market fraud, the person said.

Deep pockets

Although his disgrace is now complete, Wong Kwong-yu is still rich

He has a 34 per cent stake in Gome that at the close of the market yesterday was worth (in HK dollars) nearly: $12b